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  • 2012

    • 12-58 SEC No-Action Guidance Expanding the Definition of "Ready Market" for Certain Foreign Equity Securities

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      Foreign Equity Securities

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Legal
      Margin Department
      Operations
      Regulatory Reporting
      Risk Management
      Senior Management
      Key Topics

      FTSE World Index
      Net Capital
      Foreign Equity Securities
      Foreign Margin Stock
      "Ready Market"
      Referenced Rules & Notices

      FINRA Rule 4210
      Regulation T
      SEA Rule 15c3-1
      Securities Exchange Act of 1934

      Executive Summary

      The staff of the Division of Trading and Markets of the Securities and Exchange Commission (SEC staff) has issued a no-action letter1 setting forth conditions under which broker-dealers may treat certain foreign equity securities as having a "ready market" under SEA Rule 15c3-1(c)(11)(i) and subject to the haircuts under SEA Rule 15c3-1(c)(2)(vi)(J) (the no-action letter). This expands the number of foreign securities eligible as foreign margin stock under Regulation T of the Board of Governors of the Federal Reserve System.2

      The text of the SEC staff's no-action letter is located on the SEC's website.

      Questions concerning this Notice should be directed to:

      •   Rudolph R. Verra, Managing Director, Risk Oversight and Operational Regulation (ROOR), at (646) 315-8811;
      •   Glen Garofalo, Director, Credit Regulation, at (646) 315-8464;
      •   Steve Yannolo, Project Manager, Credit Regulation, at (646) 315-8621; or
      •   Yui Chan, Managing Director, ROOR, at (646) 315-8426.

      Background & Discussion

      SEA Rule 15c3-1(c)(2)(vii) requires a broker-dealer to deduct 100 percent of the carrying value of securities it holds in its proprietary account for which there is no ready market, as defined in paragraph (c)(11) of the rule, or which cannot be publicly offered or sold because of statutory, regulatory or contractual arrangements or other restrictions. SEA Rule 15c3-1(c)(11)(i) provides that the term "ready market" includes "a market in which there exists independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined for a particular security almost instantaneously and where payment will be received in settlement of a sale at such price within a relatively short time conforming to trade custom."

      Currently under SEA Rule 15c3-1, broker-dealers may treat foreign equity securities that are listed on the FTSE World Index as having a "ready market," and subject to the haircut requirements under paragraph (c)(2)(vi)(J) of the rule.3 The FTSE World Index is currently limited to approximately 2,300 securities. FINRA member firms have expressed interest in expanding the criteria for recognizing foreign equity securities as having a "ready market" under SEA Rule 15c3-1 to include more than those that are listed on the FTSE World Index. Member firms have suggested that there are many more issuers of a substantial size for which there is a ready market within the meaning of SEA Rule 15c3-1. In response to such member firm interest, FINRA requested, and the SEC staff has granted, no-action relief to expand the definition of "ready market" regarding foreign equity securities. The SEC staff's no-action letter states that foreign equity securities will be deemed as having a "ready market" under SEA Rule 15c3-1(c)(11) and subject to haircuts under paragraph (c)(2)(vi)(J) of the rule if the following conditions are met:

      1. The security is listed for trading on a foreign securities exchange located within a country that is recognized on the FTSE World Index, where the security has been trading on that exchange for at least the previous 90 days;
      2. Daily quotations for both bid and ask or last sale prices for the security provided by the foreign securities exchange on which the security is traded are continuously available to broker-dealers in the United States, through an electronic quotation system;
      3. The median daily trading volume (calculated over the preceding 20 business day period) of the foreign equity security on the foreign securities exchange on which the security is traded is either at least 100,000 shares or $500,0004; and
      4. The aggregate unrestricted market capitalization in shares of such security exceeds $500 million over each of the preceding 10 business days.

      The no-action letter states that any foreign equity security that ceases to meet one or more of the conditions set forth above will continue to be considered to have a "ready market" for five business days from the date the security ceases to meet the conditions. After the end of this five business day period, the security will be considered to have a "ready market" only if and when it again meets all of the conditions.

      The SEC staff's no-action letter further provides:

      •   Broker-dealers may utilize the provisions of SEC Rule 15c3-1(c)(2)(vi)(J) to calculate the haircuts for foreign equity securities that meet all of the conditions set forth in the letter. However, a broker-dealer should perform this calculation independent of the haircut calculation for other securities subject to the provisions of SEA Rule 15c3-1(c)(2) (vi)(J).5
      •   Broker-dealers that choose to utilize the no-action relief would need to demonstrate, upon examination or inquiry, that any foreign equity security used as collateral for a margin loan met all of the conditions set forth in the letter, and to make and keep current, and maintain all relevant records in accordance with SEA Rules 17a-3 and 17a-4.

      The no-action letter notes that FINRA expects that broker-dealers relying on the no-action relief will maintain appropriate risk management systems to monitor for concentration, volatility, and liquidity when extending credit secured by foreign securities, and should consider imposing higher "house" maintenance margin requirements as warranted. Measurements for computing such exposure should be reviewed at the individual account level as well as across all accounts held at the broker-dealer.

      Finally, the no-action letter states that, pursuant to SEA Rule 15c3-1, if markets can absorb only a limited number of shares of an equity security for which a ready market exists, the non-marketable portion in the proprietary or other accounts of a broker-dealer is subject to a 100 percent deduction to net capital and is treated as a non-allowable asset consistent with current interpretations.6

      The no-action letter addresses foreign equity securities. FINRA notes that member firms should be aware that options on such securities remain subject to the initial and maintenance margin requirements as set forth in FINRA Rule 4210(f)(2)(E)(iii).


      1 See Letter from Michael A. Macchiaroli, Associate Director, Division of Trading and Markets, Securities and Exchange Commission, to Grace B. Vogel, Executive Vice President, Member Regulation, FINRA (November 28, 2012).

      2 Federal Reserve Regulation T (17 CFR 220.2) defines a foreign margin stock as a "foreign security that is an equity security that: (1) [ajppears on the Board's periodically published List of Foreign Margin Stocks; or (2) [i]s deemed to have a 'ready market' under [SEA] Rule 15c3-1... or a 'no-action' position issued thereunder."

      3 See Letter from Michael A. Macchiaroli, Associate Director, Division of Market Regulation, Securities and Exchange Commission, to Dominic A. Carone, Chairman, Capital Committee, Securities ndustry Association (August 13, 1993) (the 1993 Letter). The no-action letter states that the terms and conditions of the 1993 Letter with respect to foreign equity securities listed on the FTSE World index will continue to apply after the issuance of the no-action letter. See also /02 of SEA Rule 15c3-1(c)(2)(vii) in the FINRA Interpretations of Financial and Operational Rules.

      4 The no-action letter states that shares purchased by the computing broker-dealer during the preceding 20 business day period are to be excluded when determining the median trading volume. See also footnote 6 below.

      5 The no-action letter states that a broker-dealer may combine foreign equity securities listed on the FTSE World Index under the conditions of the 1993 Letter and those foreign equity securities meeting the conditions of the no-action letter for purposes of calculating the haircuts specified under SEA Rule 15c3-1(c)(2)(vi)(J).

      6 See Letter from Michael A. Macchiaroli, Assistant Director, Division of Market Regulation, Commission, to Edward Kwalwasser, Senior Vice President, New York Stock Exchange, and Thomas R. Casella, Vice President, National Association of Securities Dealers (October 5, 1987) (the 1987 Letter). The no-action letter notes that, in the 1987 Letter, the SEC issued relief to a broker-dealer if, when faced with a blockage in securities, it treats as readily marketable securities that portion of the block which equals the aggregate of the most recent four-week, inter-dealer trading volume. The number of shares exceeding this amount should be considered non-marketable and subject to a 100 percent deduction from net capital and is treated as a non-allowable asset, unless the broker-dealer demonstrates to the satisfaction of its Designated Examining Authority that a ready market exists for these excess shares. The shares purchased by the computing broker-dealer during the most recent four-week period are to be excluded when determining trading volume. See also /01 of SEA Rule 15c3-1(c)(2)(vii) in the FINRA Interpretations of Financial and Operational Rules.

    • 12-57 SEC Approves Amendments to FINRA Dispute Resolution, Inc. By-Laws to Classify Mediators as Public Members if They Are Not Otherwise Disqualified From Being Classified as Public Members; Effective Date: January 22, 2013

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      Mediator Classification

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topics

      Mediators
      Mediations
      Industry Members
      Public Members
      Referenced Rules & Notices

      Dispute Resolution By-Laws, Article I(s)
      Dispute Resolution By-Laws, Article I(x)

      Executive Summary

      The SEC approved amendments to the FINRA Dispute Resolution, Inc. By-Laws to clarify that services provided by mediators, when acting in such capacity and not representing parties in mediation, should not cause the individuals to be classified as industry members under the By-Laws.1

      The amendments are effective on January 22, 2013, and apply to nominations of mediators by the FINRA Dispute Resolution, Inc. Board for membership on the National Arbitration and Mediation Committee submitted on or after this date. The text of the amendments is set forth in Attachment A.

      Questions concerning this Notice should be directed to:

      •    Kenneth L. Andrichik, Senior Vice President, Chief Counsel and Director of Mediation and Strategy, Dispute Resolution, at (212) 858-3915 or ken.andrichik@finra.org; or
      •    Mignon McLemore, Assistant Chief Counsel, Dispute Resolution, at (202) 728-8151 or mignon.mclemore@finra.org.

      Background and Discussion

      Mediators are neutrals who guide parties toward a joint solution to resolve their disputes. Mediators are retained only by agreement of all parties to a dispute rather than by any one party, and the parties compensate mediators jointly pursuant to that agreement. Further, mediators do not represent any party in the mediation and have no power to decide the outcome of the dispute. In light of the unique role mediators play in FINRA's forum, FINRA does not believe the services mediators provide should cause these individuals to be classified as industry members under the By-Laws, thus, making them ineligible to serve as a public member of the National Arbitration and Mediation Committee (NAMC).2 FINRA has, therefore, amended the definitions of industry members3 and public members4 in the By-Laws so that services provided by mediators, while acting in such capacity and not representing parties in mediation, would not cause these individuals to be classified as industry members.

      FINRA has amended two parts of the definition of industry member.5 First, Article I(s)(4) of the By-Laws defines an industry member as a committee member who provides professional services to brokers or dealers, and such services constitute 20 percent or more of the professional revenues received by the member or 20 percent or more of the gross revenues received by the member's firm or partnership.6 As amended, the definition exempts any services provided in the capacity as a mediator of disputes involving a broker or dealer and not representing any party in such mediations from being considered professional services provided to brokers or dealers.

      Second, Article I(s)(5) of the By-Laws defines an industry member as a committee member who provides professional services to a director, officer or employee of a broker, dealer or corporation that owns 50 percent or more of the voting stock of a broker or dealer, and such services relate to the director's, officer's or employee's professional capacity and constitute 20 percent or more of the professional revenues received by the member or 20 percent or more of the gross revenues received by the member's firm or partnership.7 Similar to the change in Article I(s)(4), FINRA has amended the definition to exempt any services provided in the capacity as a mediator of disputes involving a director, officer or employee as described in this definition and not representing any party in such mediations from being considered professional services provided to such individuals.

      FINRA has also amended the definition of public member under the By-Laws. A public member is defined as a committee member who has no material business relationship with a broker or dealer or a self-regulatory organization registered under the Securities Exchange Act (other than serving as a public director or public member on a committee of such a self-regulatory organization). As amended, the definition clarifies that acting 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 amendments prevent mediation activity from automatically classifying the mediator as an industry member under the By-Laws. The amendments do not, however, shield a mediator from being classified as an industry member because of activities that would otherwise cause the mediator to be considered an industry member. For example, if a mediator was an employee of a broker or dealer within the prior year, FINRA would classify the mediator as an industry member under the By-Laws.

      Effective Date Provisions

      The amendments are effective on January 22, 2013, and apply to nominations of mediators by the FINRA DR Board for membership on the National Arbitration and Mediation Committee submitted on or after this date.


      1 See Securities Exchange Act Rel. No. 68142 (Nov. 2, 2012), 77 FR 67038 (Nov. 8, 2012) (Order Approving Proposed Rule Change to Amend the By-Laws of FINRA Dispute Resolution, Inc. to Clarify That Services Provided by Mediators Should Not Cause Them to Be Classified as industry Members Under the By-Laws) (File No. SR-FINRA-2012-040).

      2 The NAMC is a committee appointed by the Board of Directors of FINRA Dispute Resolution, Inc. (FINRA DR). It is comprised of a majority of public members and advises the FINRA DR Board on the development and maintenance of FINRA's Dispute Resolution forum. See Plan of Allocation and Delegation of Functions by FINRA to Subsidiaries—NASD Dispute Resolution, § III(C)(1)(b). See also Rules 12102(a) and 12102(a)(1) of the Code of Arbitration Procedure for Customer Disputes and Rules 13102(a) and 13102(a)(1) of the Code of Arbitration Procedure for Industry Disputes.

      3 See Dispute Resolution By-Laws, Article I(s) (Definitions—Industry Member).

      4 See Dispute Resolution By-Laws, Article I(x) (Definitions—Public Member).

      5 The By-Laws define an industry member using six criteria. The proposal would amend two of them, subsections (4) and (5). See note 3, supra.

      6 The amendments in this definition would also apply to classifications for directors, defined as members of the Board, under the By-Laws. See Dispute Resolution By-Laws, Article I(j) (Definitions—Director).

      7 Id.


      ATTACHMENT A

      New language is underlined; deleted language is in brackets.

      By-Laws of FINRA Dispute Resolution, Inc.

      ARTICLE I DEFINITIONS

      When used in these By-Laws, unless the context otherwise requires, the term:

      (a)–(r) No change;
      (s) "Industry Member" means a committee member who (1) is or has served in the prior year as an officer, director, employee or controlling person of a broker or dealer, excluding an independent director, an outside director, or a director not engaged in the day-to-day management of a broker or dealer; (2) is an officer, director (excluding an outside director), or employee of an entity that owns more than ten percent of the equity of a broker or dealer, and the broker or dealer accounts for more than five percent of the gross revenues received by the consolidated entity; (3) owns more than five percent of the equity securities of any broker or dealer, whose investments in brokers or dealers exceed ten percent of his or her net worth, or whose ownership interest otherwise permits him or her to be engaged in the day-to-day management of a broker or dealer; (4) provides professional services to brokers or dealers, and such services constitute 20 percent or more of the professional revenues received by the Director or member or 20 percent or more of the gross revenues received by the Director's or member's firm or partnership (except that any services provided in the capacity as a mediator of disputes involving a broker or dealer and not representing any party in such mediations shall not be considered professional services provided to brokers or dealers); (5) provides professional services to a director, officer, or employee of a broker, dealer, or corporation that owns 50 percent or more of the voting stock of a broker or dealer, and such services relate to the director's, officer's, or employee's professional capacity and constitute 20 percent or more of the professional revenues received by the Director or member or 20 percent or more of the gross revenues received by the Director's or member's firm or partnership (except that any services provided in the capacity as a mediator of disputes involving a director, officer, or employee as described in this subsection (5) and not representing any party in such mediations shall not be considered professional services provided to such individuals); or (6) has a consulting or employment relationship with or provides professional services to a self regulatory organization registered under the Act, or has had any such relationship or provided any such services at any time within the prior year;
      (t)–(w) No change;
      (x) "Public Member" means a committee member who has no material business relationship with a broker or dealer or a self regulatory organization registered under the Act (other than serving as a public director or public member on a committee of such a self regulatory organization or acting in the capacity as a mediator of disputes involving a broker or dealer and not representing any party in such mediations);
      (y) No change.

    • 12-56 SEC Approves Amendments to TRACE Rules and Dissemination Protocols to Disseminate Specified Pool Transactions and SBA-Backed ABS Transactions and to Reduce the Time to Report Such Transactions; Effective Date: July 22, 2013

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      Trace Reporting and Compliance Engine (TRACE)

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Fixed Income
      Legal
      Operations
      Systems
      Trading
      Training
      Key Topics

      Agency Pass-Through Mortgage-Backed Securities
      Asset-Backed Securities
      Dissemination
      SBA-Backed ABS
      Specified Pool Transactions
      To Be Announced (TBA)
      Transaction Reporting
      Referenced Rules & Notices

      FINRA Rule 6710
      FINRA Rule 6730
      FINRA Rule 6750

      Executive Summary

      The SEC approved amendments to FINRA Rule 6700 Series and TRACE dissemination protocols that provide for the dissemination of transactions that are agency pass-through mortgage-backed securities traded in specified pool transactions and asset-backed securities1 backed by loans guaranteed as to principal and interest by the Small Business Administration (SBA-backed ABS) and traded in specified pool transactions or to be announced (TBA), and reduce the time to report such transactions.2 The effective date is July 22, 2013.

      The amended rule text is available at www.finra.org/notices/12-56.

      Questions regarding this Notice may be directed to:

      •    Elliot Levine, Associate Vice President and Counsel, Transparency Services, at (202) 728-8405; or
      •    Sharon Zackula, Associate Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-8985.

      Background and Discussion

      FINRA amended the TRACE rules and dissemination protocols to provide for the dissemination of agency pass-through mortgage-backed securities that are traded in specified pool transactions (MBS specified pool transactions) and SBA-backed ABS that are traded either in specified pool transactions or TBA (collectively, SBA-backed ABS transactions). FINRA also reduced the reporting periods for MBS specified pool and SBA-backed ABS transactions to improve the timeliness of the transaction information to be disseminated, and incorporated certain other amendments. The substantive amendments to the FINRA rules are as follows:

      •   Dissemination. FINRA amended Rule 6750(b)(4) to provide for the dissemination of MBS specified pool and SBA-backed ABS specified pool transactions and SBA-backed ABS transactions traded TBA immediately upon receipt of a transaction report.
      •   FINRA modified the dissemination protocols for MBS and SBA-backed ABS specified pool transactions. In lieu of disseminating the CUSIP, FINRA will disseminate transaction information using reference data elements, in ranges (after truncating and rounding), that describe the characteristics of the traded pool. For example, for MBS specified pool transactions, FINRA will disseminate the coupon and weighted average coupon (WAC), the original maturity and weighted average maturity (WAM), the original loan-to-value (original LTV) and the average loan size (ALS), and the weighted average loan age (WALA), subject to display ranges. In addition, to identify the type of security traded, FINRA will disseminate the agency or government-sponsored-enterprise (GSE), product type and amortization type. Additional details regarding the information that will be disseminated initially, including sample values and display ranges, is set forth on Attachment A.
      •   SBA-backed ABS transactions traded TBA will be subject to the same dissemination protocols established for MBS transactions traded TBA (e.g., the CUSIP will be disseminated).3
      •   The dissemination cap for MBS specified pool transactions and SBA-backed ABS transactions will be $10 million.
      •   Reporting Time Periods. FINRA amended Rule 6730 to establish requirements for reporting MBS specified pool and SBA-backed ABS transactions.
      •   FINRA Rule 6730(a)(3)(F)(i) and FINRA Rule 6730(a)(3)(G)(i) provide that for a pilot program that will expire on January 24, 2014, MBS specified pool transactions and SBA-backed ABS transactions, respectively, must be reported no later than 120 minutes from the time of execution, subject to minor exceptions to the general requirement for transactions executed shortly before the TRACE system closes and when the TRACE system is closed.4
      •   After January 24, 2014, FINRA Rule 6730(a)(3)(F)(ii) and FINRA Rule 6730(a) (3)(G)(ii) provide that MBS specified pool transactions and SBA-backed ABS transactions, respectively, must be reported no later than 60 minutes from the time of execution, subject again to exceptions to the reporting time frames for transactions executed shortly before the TRACE system closes and when the TRACE system is closed.5
      •   Definitions. FINRA adopted a definition of SBA-backed ABS in FINRA Rule 6710(bb). FINRA amended Rule 6710(u), the definition of "TBA," and FINRA Rule 6710(x), the definition of "specified pool transaction," to include references to transactions in SBA-backed ABS. FINRA incorporated minor, technical changes to the definition of "agency pass-through mortgage-backed security" in FINRA Rule 6710(v).

      Attachment A

      Dissemination of MBS Specified Pool Transactions and SBA-Backed ABS Specified Pool Transactions

      Information regarding the data elements and display details, including sample values and display ranges (after truncating and rounding), that FINRA will disseminate initially for MBS specified pool transactions and SBA-backed ABS specified pool transactions is set forth below.

      Data Element to be Disseminated MBS Specified Pool Transaction Dissemination SBA-Backed ABS Specified Pool Transaction Dissemination Sample Values6
      Product Type The type of properties (or real-estate projects) subject to the mortgage underlying the MBS. For example, single family residential dwelling mortgage loans, multi-family residential dwelling mortgage loans or project loans. Not Applicable. Single Family
      Multi-Family
      Project
      Amortization Type Identification of the underlying mortgage types. For example, level payment, adjustable rate mortgages (ARM) or balloon payment. Identification of the underlying loan type. For example, level payment or variable interest rate. Level Payment
      ARM
      Balloon
      Issuing Agency The agency or GSE that issues the certificate and guaranteed the payment of principal and interest of the MBS: Fannie Mae, Freddie Mac or Ginnie Mae. Small Business Administration. Fannie Mae
      Freddie Mac
      Ginnie Mae
      Small Business Administration
      Coupon The stated annual percentage rate of interest. The stated annual percentage rate of interest. Coupon will be disseminated after rounding down to the nearest quarter percentage point. For example, an interest rate of 5.12 percent will be disseminated as 5 percent.
      Original Maturity The original stated term after which the principal amount of the security is due to be repaid in full, or the end of the life of the MBS. The original stated term after which the principal amount of the security is due to be repaid in full, or the end of the life of the SBA-backed ABS. Original maturity is expressed in months and rounded up to the nearest 10. For example, an original maturity of 358 months will be disseminated as 360 months.
      Weighted Average Coupon (WAC) WAC is the weighted average interest rate of the underlying mortgage loans or pools that serve as collateral for a mortgage security, weighted by the size of the principal loan balances. It is calculated by weighting the interest rate of each mortgage loan in the pool by the amount of the mortgage outstanding. WAC is the weighted average interest rate of the underlying SBA loans or pools that serve as collateral for the security, weighted by the size of the principal loan balances. It is calculated by weighting the interest rate of each SBA loan in the pool by the amount of the loan outstanding. WAC will be disseminated after truncating to a single decimal. For example, a WAC of 7.13 percent will be disseminated as 7.1 percent.
      Weighted Average Maturity (WAM) WAM is the weighted average number of months to the final payment of each loan backing an MBS, weighted by the size of the principal loan balances. WAM is calculated by weighting the remaining number of months to maturity for each mortgage loan in the pool by the amount of the mortgage outstanding. WAM is the weighted average number of months to the final payment of each loan backing an SBA-backed ABS, weighted by the size of the principal loan balances. WAM is calculated by weighting the remaining number of months to maturity for each loan in the pool by the amount of the loan outstanding. WAM will be disseminated rounded down to the nearest 10. For example, a WAM of 87 months will be disseminated as 80 months.
      Weighted Average Loan Age (WALA) WALA is the weighted average number of months since the date of the loan origination of the mortgages (i.e., the age of the loans) backing an MBS, weighted by the size of the principal loan balances. WALA is the weighted average number of months since the date of the loan origination of the loans (i.e., the age of the loans) backing an SBA-backed ABS, weighted by the size of the principal loan balances. WALA will be disseminated rounded up to the nearest 10. For example, a WALA of 163 months will be disseminated as 170 months.
      Average Loan Size (ALS) Current ALS is calculated by dividing the current mortgage loan outstanding principal balance by the number of loans that remain outstanding. Not Applicable. ALS will be rounded down to the nearest 25. For example, an ALS of 113 (i.e., $113,000 average loan size) will be disseminated as 100.
      Original Loan-to-Value (original LTV) Original LTV ratio expresses the amount of a first mortgage lien as a percentage of the total appraised value of the real property for which the mortgage was made. Not Applicable. Original LTV will be rounded down to the nearest 25. For example, an original LTV of 92 percent will be disseminated as 75 percent.

      1 The terms agency pass-through mortgage-backed security, specified pool transaction and asset-backed security are defined in FINRA Rule 6710(v), FINRA Rule 6710(x) and FINRA Rule 6710(m), respectively.

      2 See Securities Exchange Act Release No. 68084 (October 23, 2012), 77 FR 65436 (October 26, 2012) (SEC Approval Order of File No. SR-FINRA-2012-042).

      3 In addition to CUSIP, other standard data elements disseminated for such transactions include the price, time of transaction, size (subject to dissemination caps), counterparty type (customer or dealer) and buy/sell indicator.

      4 See FINRA Rule 6730(a)(3)(F)(i) and FINRA Rule 6730(a)(3)(G)(i), each of which incorporates by reference FINRA Rule 6730(a)(3)(E)(i)a. through d.

      5 See FINRA Rule 6730(a)(3)(F)(ii) and FINRA Rule 6730(a)(3)(G)(ii), each of which incorporates by reference FINRA Rule 6730(a)(3)(E)(ii)a. through d.

      6 The sample values are for illustration purposes only. TRACE technical specifications will include more specific descriptions of the fields and the values to be disseminated.

    • 12-55 Guidance on FINRA's Suitability Rule

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      Guidance on FINRA's Suitability Rule

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topics

      Customer
      Investment Strategies
      Outside Business Activities
      Recommendation
      Suitability
      Supervision
      Referenced Rules & Notices

      FINRA Rule 0160
      FINRA Rule 2010
      FINRA Rule 2020
      FINRA Rule 2090
      FINRA Rule 2111
      FINRA Rule 2210
      FINRA Rule 3270
      FINRA Rule 4512
      NASD Rule 2210
      NASD Rule 3010
      NASD Rule 3040
      NTM 05-50
      NTM 04-89
      NTM 04-72
      NTM 01-23
      NTM 99-45
      Regulatory Notice 12-25
      Regulatory Notice 11-25
      Regulatory Notice 11-02
      Regulatory Notice 10-22
      Regulatory Notice 10-06
      Regulatory Notice 08-35
      SEA Rules 17a-3 and 17a-4

      Executive Summary

      In November 2010, the Securities and Exchange Commission (SEC) approved FINRA Rule 2111 (Suitability), which became effective on July 9, 2012.1 In May 2012, FINRA issued Regulatory Notice 12-25, which provides guidance on the rule in a "frequently asked questions" (FAQ) format.2 This Notice addresses two issues discussed in Regulatory Notice 12-25: the scope of the terms "customer" and "investment strategy." In addition, FINRA has created a suitability Web page that, among other things, will locate in one place questions and answers regarding FINRA Rule 2111.

      Questions regarding this Notice should be directed to:

      •   James S. Wrona, Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8270; or
      •   Matthew E. Vitek, Assistant General Counsel, OGC, at (202) 728-8156.

      Discussion

      FINRA Rule 2111 requires, in part, that a broker-dealer or registered representative "have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer" based on the customer's investment profile.3 In Regulatory Notice 12-25, FINRA addressed the scope of the terms "customer" and "investment strategy" in FAQ 6, 7 and 10. The answers to those questions are superseded by the answers provided below in this Notice.

      Customer

      Question 6 from Regulatory Notice 12-25 is now 6(a) with a new answer

      Q6(a). What constitutes a "customer" for purposes of the suitability rule?

      A6(a). The suitability rule applies to a broker-dealer's or registered representative's recommendation of a security or investment strategy involving a security to a "customer." FINRA's definition of a customer in FINRA Rule 0160 excludes a "broker or dealer."4 In general, for purposes of the suitability rule, the term customer includes a person who is not a broker or dealer who opens a brokerage account at a broker-dealer or purchases a security for which the broker-dealer receives or will receive, directly or indirectly, compensation even though the security is held at an issuer, the issuer's affiliate or a custodial agent (e.g., "direct application" business,5 "investment program" securities,6 or private placements7), or using another similar arrangement.8

      New question and answer 6(b)

      Q6(b). Does the suitability rule apply when a broker-dealer or registered representative makes a recommendation to a potential investor?

      A6(b). The suitability rule would apply when a broker-dealer or registered representative makes a recommendation9 to a potential investor who then becomes a customer. Where, for example, a registered representative makes a recommendation to purchase a security to a potential investor, the suitability rule would apply to the recommendation if that individual executes the transaction through the broker-dealer with which the registered representative is associated or the broker-dealer receives or will receive, directly or indirectly, compensation as a result of the recommended transaction.10 In contrast, the suitability rule would not apply to the recommendation in the example above if the potential investor does not act on the recommendation or executes the recommended transaction away from the broker-dealer with which the registered representative is associated without the broker-dealer receiving compensation for the transaction.11

      Investment Strategy

      Question 7 from Regulatory Notice 12-25 with a new answer

      Q7. The new suitability rule requires that a recommended investment strategy involving a security or securities must be suitable. Can you provide some examples of what would and would not be considered an "investment strategy" under the rule?

      A7. Rule 2111 states that the term "investment strategy" is to be interpreted "broadly."12 However, FINRA would not consider a broker-dealer's or registered representative's recommendation that a customer generally invest in "equity" or "fixed income" securities to be an investment strategy covered by the rule, unless such a recommendation was part of an asset allocation plan not eligible for the safe-harbor provision in Rule 2111.03 (discussed in FAQ 8).13 The "investment strategy" language would apply to recommendations to customers to invest in more specific types of securities, such as high dividend companies or the "Dogs of the Dow,"14 or in a market sector, regardless of whether the recommendations identify particular securities.15 It also would apply to recommendations to customers generally to use a bond ladder, day trading, "liquefied home equity,"16 or margin strategy involving securities, irrespective of whether the recommendations mention particular securities.

      In addition, the term would capture an explicit recommendation to hold a security or securities or to continue to use an investment strategy involving a security or securities.17 The rule would apply, for example, when a registered representative meets (or otherwise communicates) with a customer during a quarterly or annual investment review and explicitly advises the customer not to sell any securities in or make any changes to the account or portfolio or to continue to use an investment strategy. However, as explained in FAQ 3, the rule would not cover an implicit recommendation to hold.

      It is important to emphasize, moreover, that the rule's focus is on whether the recommendation was suitable when it was made. A recommendation to hold securities, maintain an investment strategy involving securities or use another investment strategy involving securities—as with a recommendation to purchase, sell or exchange securities—normally would not create an ongoing duty to monitor and make subsequent recommendations.

      Question 10 from Regulatory Notice 12-25 is now 10(a) with a new answer

      Q10(a). Does the new rule's "investment strategy" language cover a registered representative's recommendation involving both a security and a non-security investment?

      A10(a). The new suitability rule would continue to cover a broker-dealer's or registered representative's recommendation of an "investment strategy" involving both a security and a non-security investment.18 Suitability obligations apply, for example, to a broker-dealer's or registered representative's recommendation of an investment strategy to use home equity to purchase securities19 or to liquidate securities to purchase an investment-related product that is not a security.20

      However, where a broker-dealer's or registered representative's recommendation does not refer to a security or securities, the suitability rule is not applicable. The suitability rule would not apply, for instance, if a registered representative recommends a non-security investment as part of an outside business activity and the customer separately decides on his or her own to liquidate securities positions and apply the proceeds toward the recommended non-security investment.21 Where a customer, absent a recommendation by a registered representative, decides on his or her own to purchase a non-security investment and then asks the registered representative to recommend which securities he or she should sell to fund the purchase of the non-security investment, the suitability rule would apply to the registered representative's recommendation regarding which securities to sell but not to the customer's decision to purchase the non-security investment.

      New question and answer 10(b)

      Q10(b). What are a broker-dealer's supervisory responsibilities for a registered representative's recommendation of an investment strategy involving both a security and a non-security investment?

      A10(b). FINRA's supervision rules do not dictate the exact manner in which a broker-dealer must supervise its registered representatives' recommendations of investment strategies involving a security and a non-security investment. A broker-dealer's supervisory system must be reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules.22 The reasonableness of a supervisory system will depend on the facts and circumstances. As FINRA has stated previously, "FINRA appreciates that no two [broker-dealers] are exactly alike. [Broker-dealers] have different business models; offer divergent services, products and investment strategies; and employ distinct approaches to complying with applicable regulatory requirements."23 A broker-dealer can consider a variety of approaches to identifying and supervising its registered representatives' recommendations of investment strategies involving both a security and a non-security component.

      A broker-dealer may use a risk-based approach to supervising its registered representatives' recommendations of investment strategies with both a security and non-security component. For instance, as long as the supervisory system is reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules, a firm could focus on the detection, investigation and follow-up of "red flags" indicating that a registered representative may have recommended an unsuitable investment strategy with both a security and non-security component.24 A registered representative's recommendation that a customer with limited means purchase a large position in a security might raise a "red flag" regarding the source of funds for such a purchase. Similarly, a registered representative's recommendation that a "buy and hold" customer with an investment objective of income liquidate large positions in blue chip stocks paying regular dividends might raise a "red flag" regarding whether that recommendation is part of a broader investment strategy.

      Once a broker-dealer identifies a recommended investment strategy involving both a security and a non-security investment, the broker-dealer's suitability obligations apply to the security component of the recommended strategy25 but its suitability analysis also must be informed by a general understanding of the non-security component of the recommended investment strategy. In the context of a recommended investment strategy involving a security and an outside business activity, the broker-dealer's general understanding of the outside business activity would be based on the information and considerations required by FINRA Rule 3270.26

      Finally, broker-dealers must keep in mind that, in addition to suitability and supervisory responsibilities, firms have other regulatory obligations to investigate unusual activity.


      1 See 75 Fed. Reg. 71479 (Nov. 23, 2010) (Order Approving Proposed Rule Change; File No. SR-FINRA-2010-039); Regulatory Notice 11-25. In addition, the SEC's order approved FINRA Rule 2090 (Know Your Customer), which also became effective on July 9, 2012. Id.

      2. For purposes of this Notice, a reference to a numbered FAQ means the FAQ from Regulatory Notice 12-25.

      3 FINRA Rule 2111(a).

      4 See FINRA Rule 0160(b)(4) (Definition of Customer).

      5 See Notice to Members 04-72, at 846 ("The BD of record refers to the broker-dealer identified on a customer's account application for accounts held directly at a mutual fund or variable insurance product issuer. Accounts held in this manner are sometimes referred to as 'check and application,' 'application way,' or 'direct application'... business.").

      6 Regulatory Notice 08-35, at 2 (stating that direct participation programs (DPPs) and unlisted realestate investment trusts (REITs) are referred to as "investment programs").

      7 Regulator Notice 10-22 (discussing broker-dealer obligations for certain private placements).

      8 Nothing in this guidance shall be construed as altering a broker-dealer's obligations under applicable federal laws, regulations and rules or other FINRA rules, including, but not limited to, Sections 9,10(b) and 15(c) of the Securities Exchange Act of 1934, Section 17(a) of the Securities Act of 1933, the Bank Secrecy Act, 31 U.S.C. §§ 5311, et seq. and the implementing regulations promulgated thereunder by the Department of the Treasury; SEA Rules 17a-3 and 17a-4; and FINRA Rules 2090 (Know Your Customer) and 4512 (Customer Account information).

      9 FINRA reiterates that the suitability rule applies only if a broker-dealer or registered representative makes a "recommendation." FINRA previously has provided guiding principles that firms and registered representatives could consider when determining whether a particular communication could be viewed as a recommendation for purposes of the suitability rule. See, e.g., FAQ 2 (discussing the term "recommendation" and citing various resources that explain the guiding principles that firms could use when analyzing whether a communication constitutes a recommendation); Regulatory Notice 11-02, at 2-3 (discussing FINRA's guiding principles); Regulator Notice 10-06, at 3-4 (providing guidance on recommendations made on blogs and social networking websites); Notice to Members 01-23 (announcing the guiding principles and providing examples of communications that likely do and do not constitute recommendations); Michael F. Siegel, Exchange Act Rel. No. 58737, 2008 SEC LEXIS 2459, at *21-27 (Oct. 6, 2008) (applying the guiding principles to the facts of the case to find a recommendation), aff'd in relevant part, 592 F.3d 147 (D.C. Cir.), cert. denied, 130 S.Ct. 3333 (2010).

      10 In the example above regarding a recommendation to a potential investor, suitability obligations attach when the transaction occurs, but the suitability of the recommendation is evaluated based on the circumstances that existed at the time the recommendation was made. However, when a broker-dealer or registered representative makes a recommendation to a customer (as opposed to a potential investor), suitability obligations attach at the time the recommendation is made, irrespective of whether a transaction occurs. See Regulatory Notice 11-25, at 6; Regulatory Notice 11-02, at 3.

      11 Depending on the facts and circumstances, a registered representative's recommendation to a potential investor also could raise concerns under, among other rules, FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade); FINRA Rule 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices); Rule 2210 (Communications with the Public); and NASD Rule 3040 (Private Securities Transactions of an Associated Person); see also Dep't of Enforcement v. Salazar, No. 20100224056, 2012 FINRA Discip. LEXIS 22 (Mar. 12, 2012) (finding that registered representative violated NASD Rules 2310 and 3040 when he recommended unsuitable private securities transactions to investors who were not his firm's customers, received compensation in relation to the transactions and failed to notify his firm of such activity); Maximo J. Guevara, 54 S.E.C. 655, 2000 SEC LEXIS 986 (2000) (holding that registered representative violated NASD Rules 2310 and 3040 where he recommended unsuitable securities that were sold away from the firm with which he was associated without providing his firm prior notice of such activities).

      12 See FINRA Rule 2111.03.

      13 See id. As described in greater detail in FAQ 8, there is a safe harbor for certain types of educational information and asset allocation models that otherwise could be considered investment strategies captured by the new rule.

      14 The "Dogs of the Dow" strategy is premised on investing "equal dollar amounts in the ten constituents of the Dow Jones industrial average with the highest dividend yields, hold[ing] them for twelve months and then switching] to a new group of dogs." Vincent Apicella, Stock Focus: "Dogs of the Dow" Companies, Forbes.com (May 29, 2001).

      15 The rule would apply, for instance, to a registered representative's recommendation to a customer to purchase shares of high dividend companies even though the registered representative does not mention a particular high dividend company.

      16 See Notice to Members 04-89 (discussing liquefied home equity).

      17 See FINRA Rule 2111.03.

      18 While the suitability rule applies only to recommendations involving a security or securities, other FINRA rules potentially apply, depending on the facts of the particular case, to broker-dealers' or registered representatives' conduct that does not involve securities. See, e.g., FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade); FINRA Rule 3270 (Outside Business Activities of Registered Persons); Rule 2210 (Communications with the Public); see also laleggio v. SEC, No. 98-70854, 1999 U.S. App. LEXIS 10362, *4-5 (9th Cir. May 20,1999) (holding that FINRA's requirement that registered representatives act in a manner consistent with just and equitable principles of trade applies to all unethical business conduct, regardless of whether the conduct involves securities); Vail v. SEC, 101 F.3d 37, 39 (5th Cir. 1996) (same); Robert L. Wallace, 53 S.E.C. 989, 995,1998 SEC LEXIS 2437, at *13 (1998) (emphasizing, in an action involving viatical settlements, that Rule 2210 is "not limited to advertisements for securities, but provide[s] standards applicable to all [broker-dealer] communications with the public").

      19 FINRA made similar points regarding recommended investment strategies on several occasions under the predecessor suitability rule. FINRA explained in one instance under the predecessor rule that "recommending liquefying home equity to purchase securities may not be suitable for all investors. [Broker-dealers or registered representatives] should consider not only whether the recommended investments are suitable, but also whether the strategy of investing liquefied home equity in securities is suitable." Notice to Members 04-89, at 3. See also Donna M. Vogt, AWC No. EAF0400730002 (Feb. 21, 2007) (barring registered representative for, among otherthings, recommending to ten customers, many of whom were nearing retirement, that they obtain home equity loans and use the proceeds to purchase securities, without considering whether such recommendations were suitable for such customers in light of their financial situation and needs); James A. Kenas, AWC No. C3B040001 (Jan. 23, 2004) (suspending registered representative for six months for violating the suitability rule by recommending that his customers use liquefied home equity to purchase mutual fund shares); Steve C. Morgan, AWC No. C3A040016 (Mar. 9, 2004) (suspending registered representative for six months and ordering him to pay restitution of more than $15,000 for recommending that a retired couple use liquefied home equity to purchase a variable annuity).

      20 See Notice to Members 05-50, at 5 ("[Recommendations to liquidate or surrender a registered security such as a mutual fund, variable annuity, or variable life contract must be suitable, including where such liquidations or surrenders] are for the purpose of funding the purchase of an unregistered [equity indexed annuity].").

      21 FINRA Rule 3270.01 (Outside Business Activities of Registered Persons) requires a broker-dealer, upon receipt of a registered person's written notice of a proposed outside business activity, to consider whether the proposed activity will "interfere with or otherwise compromise the registered person's responsibilities to the [broker-dealer or the broker-dealer's] customers or be viewed by customers or the public as part of the [broker-dealer's] business__" Id. In addition, the broker-dealer "must evaluate the advisability of imposing specific conditions or limitations on a registered person's outside business activity, including!,] where circumstances warrant, prohibiting the activity." Id. A broker-dealer "also must evaluate the proposed activity to determine whether the activity properly is characterized as an outside business activity or whether it should be treated as an outside securities activity subject to the requirement of NASD Rule 3040" (Private Securities Transactions of an Associated Person). Id. Furthermore, a broker-dealer "must keep a record of its compliance with these obligations with respect to each written notice received and must preserve this record for the period of time and accessibility specified in SEA Rule 17a-4(e)(1)." Id.

      22 See NASD Rule 3010 (Supervision).

      23 Regulatory Notice 12-25, at 2.

      24 In Notice to Members 99-45, FINRA said that the supervision rule "requires that a [firm's] supervisory system be reasonably designed to achieve compliance with applicable laws and regulations. This standard recognizes that a supervisory system cannot guarantee firm-wide compliance with all laws and regulations. However, this standard does require that the system be a product of sound thinking and within the bounds of common sense, taking into consideration the factors that are unique to a member's business." Id. at 295.

      25 For example, in supervising an identified recommended investment strategy involving a security and a non-security component, a broker-dealer may need to consider, in addition to the customer's investment profile, whether a recommended securities liquidation causes an over concentration in particular securities or types of securities remaining in the account, changes the composition of the customer's remaining securities investments to an extent that the customer's portfolio no longer matches his or her investment profile, subjects the customer to early withdrawal fees or penalties, exposes the customer to losses because of the lack of a ready market for the securities at the time of the liquidation, or results in potential adverse tax treatment.

      26 See also supra note 21 and discussion therein.

    • 12-54 Reporting Relief Relating to Customer and PAIB Reserve Formula Computations and Required Deposits Around the December 2012 Month-End Holidays

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      Financial Reporting Relief

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Capital and Accounting Staff
      Compliance
      Chief Financial Officer
      Executive Representative
      Legal
      Senior Management
      Key Topics

      Customer Reserve Formula Computation
      FOCUS Filing
      PAIB Reserve Formula Computation
      Reserve Bank Account Deposit
      Referenced Rules & Notices

      SEA Rule 15c3-3

      Executive Summary

      FINRA is notifying firms that staff of the Division of Trading and Markets of the Securities and Exchange Commission (SEC staff) is granting an optional one-day extension—around the December 2012 month-end holidays—to firms for making the deposit of amounts required to be reserved pursuant to SEA Rule 15c3-3. These reserved amounts are based on the Customer and PAIB reserve formula computations prescribed by SEA Rule 15c3-3(e)(3) and computed as of Friday, December 21 and Friday, December 28, 2012.1

      Questions regarding this Notice may be directed to:

      •   Kris Dailey, Vice President, Risk Oversight & Operational Regulation, at (646) 315-8434; or
      •   Yui Chan, Managing Director, Risk Oversight & Operational Regulation, at (646) 315-8426.

      Background and Discussion

      Weekly Reserve Formula Computation Deposit Requirement

      Because the 2012 Christmas Day and 2013 New Year's Day holidays occur on Tuesdays, SEC staff is granting an optional one-day extension to firms for making the requisite SEA Rule 15c3-3 Reserve Bank Account deposit(s) based on the Friday, December 21 and Friday, December 28 weekly Customer and PAIB reserve formula computations. This extension recognizes that many firm employees may take off Monday, December 24 and Monday, December 31.

      The revised deadlines are noted below:

      Revised Weekly Reserve Formula Computation Deposit Requirement

      Week Ending Original Deadline Date Extension Date
      Friday, December 21 Wednesday, December 26 Thursday, December 27
      Friday, December 28 Wednesday, January 2 Thursday, January 3

      Month-End Reserve Formula Computation Deposit Requirement

      Firms that report their financials and file a FOCUS report as of the last business day of each month would be required to compute their month-end Customer and PAIB reserve formula calculations as of Monday, December 31, 2012, and to make any requisite SEA Rule 15c3-3 Reserve Bank Account deposit(s) on Thursday, January 3, 2013. Further, pursuant to SEA Rule 15c3-3(e)(3)/01 (Weekly Computation), firms that prepare the month-end Customer and PAIB reserve formula computations as of Monday, December 31, would not be required to prepare the weekly Customer and PAIB reserve formula computations as of the following Friday, January 4, 2013.

      As a result of the optional one-day extension on the weekly computations, firms that report their financials as of the last business day of the month and also elect to use the one-day extension may be subject to double deposit(s) on Thursday, January 3, 2013. The double deposit(s) would result from the weekly and month-end Customer and PAIB reserve formula computations required to be computed as of Friday, December 28 and Monday, December 31, respectively. To avoid this duplication, firms may elect to prepare their Friday, January 4, weekly Customer and PAIB reserve formula computation in lieu of the Friday, December 28, weekly computations. This option is only available for December 2012 for firms that report their financials as of the last business day of the month.


      1. Paragraph (e)(3) of SEA Rule 15c3-3 requires a broker-dealer to prepare the reserve formula computations, necessary to determine the amount required to be deposited as specified in paragraph (e)(1) of SEA Rule 15c3-3, to be made weekly, as of the close of the last business day of the week, and the deposit so computed to be made no later than one hour after the opening of banking business on the second following business day.

    • 12-53 FINRA Waives Certain Trade Reporting and Compliance Engine (TRACE) Late Trade Reporting Fees in Connection With Hurricane Sandy

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      Regulatory Relief Related to Hurricane Sandy

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Fixed Income
      Legal
      Operations
      Systems
      Key Topics

      TRACE Fee Waiver
      Late Transaction Reporting
      Referenced Rules & Notices

      FINRA Rule 6730
      FINRA Rule 7730

      Due to significant disruptions in normal business operations as a result of Hurricane Sandy, which made landfall along the mid-Atlantic Coast on October 29, 2012, FINRA will waive1 TRACE late trade reporting fees2 if a firm in an area affected by Hurricane Sandy3 reported certain transactions in TRACE-eligible securities late.4 The late trade reporting fee will be waived for transactions that were executed on Monday, October 29, 2012, or Tuesday, October 30, 2012, by firms located in the affected areas (or that have their fixed income operations in the affected areas), provided that the affected firms reported the transactions no later than Wednesday, October 31, 2012, by the TRACE system closing.

      FINRA has identified a number of transactions that qualify for the waiver of the late trade reporting fee of $3.00, and will credit those firms with identified relevant transactions on their TRACE invoices for November 2012. However, upon receipt of the November invoice, if a firm has not received credit for transaction(s) it believes qualify for the fee waiver because its fixed income operations are located in one of the affected areas, the firm should contact TRACE Data Services by emailing TRACEDataServices@finra.org or calling (888) 507-3665, and provide a list of the transactions and the reason the transactions qualify for the waiver.

      Questions regarding this Notice may be directed to:

      •   Nils Ola Persson, Vice President, Transparency Services, at (212) 858-4796; or
      •   Kathryn M. Moore, Assistant General Counsel, Office of General Counsel, at (202) 974-2974.

      1. See Securities Exchange Act Release No. 68325 (November 30, 2012) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2012-051).

      2. See FINRA Rule 7730(b)(3).

      3. An affected area means any area, such as a state or a county, that the President declared a major disaster or for which the President signed a federal emergency declaration as a result of Hurricane Sandy (e.g., the state, or certain counties, of Connecticut, New York, New Jersey, Delaware, District of Columbia, Maryland, Massachusetts, New Hampshire, Pennsylvania, Rhode Island, Virginia and West Virginia) (the "affected areas").

      4. See FINRA Rule 6730(a).

    • 12-52 SEC Approves Consolidated Front Running Rule; Effective Date: June 1, 2013

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      Front Running

      Regulatory Notice
      Notice Type

      Consolidated Rulebook
      New Rule
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Systems
      Trading
      Key Topics

      Customer Order Protection
      Front Running
      Referenced Rules & Notices

      FINRA Rule 0150
      FINRA Rule 2010
      FINRA Rule 5270
      FINRA Rule 5320
      FINRA Rule 6730
      NASD IM-2110-3
      NTM 05-51
      NTM 97-57
      NTM 96-66
      NTM 87-69
      Regulatory Notice 10-24

      Executive Summary

      Effective June 1, 2013, FINRA Rule 5270 addressing the front running of block transactions will replace NASD IM-2110-3 in the Consolidated FINRA Rulebook.1 Among other changes, Rule 5270 applies to a broader range of securities than IM-2110-3, includes new Supplementary Material regarding permitted transactions, and codifies that front running of a customer order may violate other FINRA rules or the federal securities laws.

      The text of the new rule is available in the online FINRA Manual.

      Questions concerning this Notice should be directed to Brant K. Brown, Associate General Counsel, Office of General Counsel at (202) 728-6927.

      Update: May 3, 2013: The effective date for compliance with FINRA Rule 5270 has been extended to September 3, 2013. Original Effective Date: June 1, 2013.

      Background & Discussion

      On September 4, 2012, the SEC approved FINRA's proposal to adopt NASD IM-2110-3, with the changes discussed below, as FINRA Rule 5270 in the Consolidated FINRA Rulebook.2 Rule 5270 provides that no member or person associated with a member shall cause to be executed an order to buy or sell a security or a related financial instrument when the member or person associated with the member causing the order to be executed has material, non-public market information3 concerning an imminent block transaction4 in that security, a related financial instrument or a security underlying the related financial instrument prior to the time information concerning the block transaction has been made publicly available or has otherwise become stale or obsolete.5 The rule applies to orders caused to be executed for (1) any account in which the member or person associated with the member has an interest, (2) any account with respect to which the member or person associated with the member exercises investment discretion, and (3) any account of customers or affiliates of the member when the customer or affiliate has been provided such material, non-public market information by the member or any person associated with the member.6

      Rule 5270 differs from IM-2110-3 in several important ways. First, the trading restrictions in Rule 5270 apply to a broader range of securities than IM-2110-3. Second, Rule 5270 includes new Supplementary Material .04 regarding permitted transactions that replaces the exceptions in IM-2110-3. Finally, new Supplementary Material .05 codifies that the front running of any customer order, not just imminent block transactions, that places the financial interests of the firm ahead of those of its customer or the misuse of knowledge of an imminent customer order may violate other FINRA rules, including FINRA Rules 2010 and 5320, or the federal securities laws.7 Each of these changes is discussed below.

      Expansion of Transactions

      The front running prohibitions in Rule 5270 address trading in significantly more types of securities than IM-2110-3.8 Rule 5270 covers trading in an option, derivative or other financial instrument overlying a security that is the subject of an imminent block transaction if the value of the underlying security is materially related to, or otherwise acts as a substitute for, such security, as well as any contract that is the functional economic equivalent of a position in such security (individually or collectively a "related financial instrument").9 The reverse is also true: When the imminent block transaction involves a related financial instrument, Rule 5270 prohibits trading in the underlying security. Rule 5270 also applies to trading in the same security or related financial instrument that is the subject of an imminent block transaction.

      Like IM-2110-3, the trading restrictions imposed by Rule 5270 generally apply until information about the imminent customer block transaction "has been made publicly available," which the rule defines as having been disseminated to the public in trade reporting data.10 However, because Rule 5270 includes related financial instruments that may not result in publicly available trading information being made available, the prohibitions in the rule are in place until the material, non-public market information is either publicly available or "otherwise becomes stale or obsolete."11

      Permitted Transactions

      Supplementary Material .04 sets forth three broad categories of permitted transactions: (1)transactions that a firm can demonstrate are unrelated to the customer block order, (2)transactions that are undertaken to fulfill or facilitate the execution of the customer block order, and (3) transactions that are executed, in whole or in part, on a national securities exchange and comply with the marketplace rules of that exchange.12

      Supplementary Material .04(a) permits transactions that a firm can demonstrate are unrelated to the material, non-public market information received in connection with the customer block order. The Supplementary Material provides examples of transactions that, depending upon the circumstances, may be considered to be unrelated to the customer block order and, therefore, permitted under the rule. These transactions could include transactions where the firm has effective information barriers established to prevent internal disclosure of customer order information,13 transactions in the security that is the subject of the customer block order that are related to a prior customer order in that security, transactions to correct bona fide errors and transactions to offset odd-lot orders. For each of these types of transactions, the firm must be able to demonstrate that the transaction at issue was unrelated to the customer block order. Thus, for example, if the firm can demonstrate that transactions occurring in a security (or a related financial instrument) that is the subject of an imminent customer block order were undertaken by a desk that is walled off from the desk handling the customer block order by the use of effective information barriers, the trading activity would be unrelated to the customer block order and would not violate the rule.14

      The second category of permitted transactions involves transactions that are undertaken to fulfill or facilitate the execution of the customer block order. FINRA has acknowledged that firms are permitted to trade ahead of a customer's block order when the purpose of the trading is to fulfill the customer order and when the customer has authorized the trading, including that the firm has disclosed to the customer that it may trade ahead of, or alongside, the customer's order.15 Supplementary Material .04(b) states that Rule 5270 does not preclude transactions undertaken for the purpose of fulfilling, or facilitating the execution of, a customer's block order.16 However, when engaging in trading activity that could affect the market for the security that is the subject of the customer block order, the firm must minimize any potential disadvantage or harm in the execution of the customer's order, must not place the firm's financial interests ahead of those of its customer and must obtain the customer's consent to the trading activity.17

      The third, and final, category of permitted transactions is addressed in Supplementary Material .04(c) and concerns transactions that are executed, in whole or in part, on a national securities exchange and comply with the marketplace rules of that exchange. This provision states that the prohibitions in Rule 5270 shall not apply if the firm's trading activity is undertaken in compliance with the marketplace rules of a national securities exchange and at least one leg of the trading activity is executed on that exchange.

      Other Rules

      Rule 5270 does not provide an exhaustive list of prohibited front running activity, and Supplementary Material .05 clarifies that the front running of other types of orders that may not be "imminent block transactions" may nonetheless be considered conduct inconsistent with just and equitable principles of trade and may violate other FINRA rules or provisions of the federal securities laws.18


      1 See Securities Exchange Act Release No. 67774 (September 4, 2012), 77 FR 55519 (September 10, 2012) (Order Approving File No. SR-FINRA-2012-025). The current FINRA rulebook consists of: (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules).While the NASD Rules generally apply to all FINRA members, the Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (Dual Members). The FINRA Rules apply to all FINRA members, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process, see Information Notice 03/12/08 (Rulebook Consolidation Process).

      2 Securities Exchange Act Release No. 67774 (September 4, 2012), 77 FR 55519 (September 10, 2012).

      3 The violative practices in Rule 5270 may include transactions that are executed based upon knowledge of less than all of the terms of the block transaction, so long as there is knowledge that all of the material terms of the transaction have been or will be agreed upon imminently. See Rule 5270.01. This provision, which remains substantively the same as the standard in IM-2110-3, is intended to make clear that a firm need not know every detail of a potential block order for the front running prohibitions to attach. FINRA has also provided similar guidance in the past in the context of volume-weighted average price transactions. See Notice to Members 05-51 (stating that a duty to refrain from trading may exist "before a member is awarded an order for execution [and] will turn on, among other factors, the type of order and the specifics of the order known by the member," which may include the security, the size of the order, the side of the market, the weighting of a basket order, and the timing for completion of the order). Exactly when the front running prohibitions may attach depends upon the facts and circumstances of the communications between the firm and its customer.

      4 Supplementary Material .03 retains the genera scope of the term block transaction from IM-2110-3. It provides that, for purposes of equity securities, a transaction involving 10,000 shares or more of a security, an underlying security, or a related financial instrument overlying such number of shares, is generally deemed to be a block transaction; however, a transaction of fewer than 10,000 shares could be considered a block transaction in some cases. Supplementary Material .03 also notes that a block transaction that has been agreed upon does not lose its identity as such by arranging for partial executions of the full transaction in portions which themselves are not of block size if the execution of the full transaction may have a material impact on the market.

      5 The term "related financial instrument" is defined as any option, derivative, security-based swap or other financial instrument overlying a security, the value of which is materially related to, or otherwise acts as a substitute for, the security, as well as any contract that is the functional economic equivalent of a position in such security. See Rule 5270(c).

      6 See Rule 5270(b).

      7 Although "not held" orders are not subject to the restrictions in FINRA Rule 5320, front running a "not held" order that is not of block size may nonetheless violate FINRA Rule 2010. See Securities Exchange Act Release No. 63895 (February 11, 2011), 76 FR 9386 (February 17, 2011) (Order Approving File No. SR-FINRA-2009-090). If the "not held" order is of block size, Rule 5270 would apply to trading activity ahead of the order.

      8 IM-2110-3 is limited to transactions in equity securities and options that are required to be reported on a last sale reporting system and to any transaction involving a security future, regardless of whether the transaction is reported.

      9 FINRA Rule 5270 does not apply to orders or transactions involving government securities. FINRA Rule 0150(c) lists the rules applicable to transactions in, and business activity relating to, "exempted securities," which include government securities. Rule 5270 is not included in the list of rules applicable to transactions in, and business activities relating to, "exempted securities" and therefore does not apply to orders or transactions involving "exempted securities." The term "exempted securities" for purposes of Rule 0150 has the same meaning as that in Section 3(a)(12) of the Securities Exchange Act of 1934 ("Act"). See FINRA Rule 0150(a). Section 3(a)(12) of the Act defines "exempted security" or "exempted securities" to include, among other things, government securities. See 15 U.S.C. 78c(a)(12), (a)(42). FINRA notes, however, that actions for similar front running conduct occurring in the exempted securities markets, including the government securities market, continue to be covered by FINRA Rule 2010.

      10 Supplementary Material .02 retains the analysis of when information is considered "publicly available" from IM-2110-3 and states that "[t]he requirement that information concerning a block transaction be made publicly available will not be satisfied until the entire block transaction has been completed and publicly reported."

      11 Whether information has become "stale or obsolete" for purposes of Rule 5270 will depend upon the particular facts and circumstances involved, including specific information the member firm has regarding the transaction, but could include factors such as the amount of time that has passed since the member earned of the block transaction, subsequent trading activity in the security, or a significant change in market conditions. The "stale or obsolete" standard supplements the dissemination standard; it does not replace it. Consequently, where there is a transparency regime in place with respect to the security or financial instrument (i.e., transactions are subject to prompt reporting requirements and the transaction reports are disseminated) the trading restrictions in Rule 5270 are linked to actual reporting and dissemination rather than by invoking the "stale or obsolete" standard. This would include debt securities subject to TRACE reporting requirements, even though the TRACE reporting requirements generally allow for up to 15 minutes to report transactions in corporate and agency debt securities. See FINRA Rule 6730(a). FINRA notes that there should generally be minimal, or no, delay between the execution of an order and the reporting of the trade. See, e.g., Regulatory Notice 10-24 (April 2010). Where there is no reporting and dissemination regime in place for a security or related financial instrument, once the customer's order is executed and the risk of the transaction has transferred from the customer to the firm, there would be no trading restrictions imposed by Rule 5270.

      12 Supplementary Material .04 replaces the provisions in IM-2110-3 excepting transactions executed in automatic execution systems and positioning activity when a firm receives an order of block size relating to both an option or security future and the underlying security. Any trading activity that fell within the exceptions in IM-2110-3 would need to meet one of the exceptions in Supplementary Material .04 to comply with Rule 5270.

      13 In addition to more traditional information barriers, such as those in place to prevent communication between trading units, this provision could also include the use of automated systems (e.g., trades through a "black box") where the orders placed into the automated system are handled without the knowledge of a person associated with the member who may be trading in the same security. However, a person associated with a member who places an order into a "black box" or other automated system, or otherwise has knowledge of the order or the ability to access information in the system, may not then trade in the same security or a related financial instrument solely because the order ultimately was being handled by the automated system rather than by the person. Traders who have no knowledge of the order, due to the presence of an information barrier or otherwise, could continue to trade in the security or a related financial instrument. Automated systems may serve as a means by which orders are handled and information regarding those orders is unavailable to other trading units; however, the use of an automated system does not permit trading by those persons who may know the terms of the order placed into the automated system.

      14 This approach is compatible with the existing provisions concerning customer order protection in Rule 5320 and its accompanying Supplementary Material concerning protection of customer limit and market orders and the implementation of effective information barriers.

      15 See Notice to Members 05-51 (August 2005); Notice to Members 97-57 (September 1997). Hedging and positioning activity around a customer block order was discussed in coordinated guidance published by both NASD and NYSE in 2005 with respect to volume-weighted average price transactions. See Notice to Members 05-51; NYSE Information Memo 05-52 (August 2005).

      16 These transactions may include, for example, hedging or other positioning activity undertaken in connection with the handling of the customer order.

      17 The Supplementary Material provides that a firm may obtain its customers' consent through affirmative written consent or through means of a negative consent letter. The negative consent letter must clearly disclose to the customer the terms and conditions for handling the customer's orders, and if the customer does not object, then the firm may reasonably conclude that the customer has consented and may rely on the letter. In addition, a firm may provide clear and comprehensive oral disclosure to, and obtain consent from, the customer on an order-by-order basis, provided the firm documents who provided the consent and the consent evidences the customer's understanding of the terms and conditions for handling the customer's order.

      18 IM-2110-3 also did not provide an exhaustive list of prohibited front running trading. See Notice to Members 87-69 (October 1987); Notice to Members 96-66 (October 1996).

    • 12-51 FINRA Changes the Effective Date of the Minimum Quotation Size Pilot for OTC Equity Securities in FINRA Rule 6433 From November 5, 2012, to November 12, 2012; Revised Effective Date: November 12, 2012

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      OTC Equity Quotation Size

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Operations
      Systems
      Trading and Market Making
      Key Topics

      Minimum Quotation Size
      Private Placement Memorandum
      Quotations
      Referenced Rules & Notices

      FINRA Rule 6433
      FINRA Rule 6460

      On August 3, 2012, in Regulatory Notice 12-37 (August 2012), FINRA announced that amendments to FINRA Rule 6433 (Minimum Quotation Size Requirements for OTC Equity Securities), which simplifies the existing tier structure, facilitates the display of customer limit orders pursuant to FINRA Rule 6460 (Display of Customer Limit Orders), and expands the scope of the rule to encompass quotations displayed by non-market-makers,1 would become effective on November 5, 2012. Due to disruptions in normal business operations related to Hurricane Sandy, FINRA has changed the effective date of this amendment from November 5, 2012, to November 12, 2012. The revised end date of the pilot is November 12, 2013.

      The text of the rule can be found in the online FINRA Manual.

      Questions regarding this Notice should be directed to Racquel Russell, Assistant General Counsel, Office of General Counsel, at (202) 728-8363.


      1 See Securities Exchange Act Release No. 67208 (June 15, 2012), 77 FR 37458 (June 21, 2012) (Order Approving Amendments to Minimum Quotation Size Requirements for OTC Equity Securities).

    • 12-50 SEC Approves Amendments Relating to Stop Orders; Effective Date: January 21, 2013

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      Stop and Stop Limit Orders

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Systems
      Trading and Market Making
      Training
      Key Topics

      Handling of Customer Orders
      Stop Orders
      Stop Limit Orders
      Referenced Rules & Notices

      FINRA Rule 5350
      FINRA Rule 6140
      FINRA Rule 6420
      SEC Regulation NMS

      Executive Summary

      The SEC approved new FINRA Rule 5350 (Stop Orders), which replaces the stop order provisions of FINRA Rule 6140(h).1 The rule provides that any order labeled as a "stop order" or a "stop limit order" must be triggered based upon a transaction at the stop price, but permits firms to offer alternative order types with different triggers (e.g., a stop order triggered by a quotation at the stop price) so long as the order type is not labeled as a stop order and is clearly distinguishable from a stop order.

      The text of the rule can be found in the online FINRA Manual.

      Questions regarding this Notice may be directed to:
      •   Racquel L. Russell, Assistant General Counsel, Office of General Counsel, at (202) 728-8363; or
      •   Scott B. Trilling, Director, Market Regulation, at (240) 386-5113.

      Update on January 9, 2013: The effective date for compliance with Rule 5350 has been extended to March 4, 2013.

      Background & Discussion

      New FINRA Rule 5350, which applies to orders in NMS stocks2 and OTC Equity Securities,3 provides that a firm may, but is not obligated to, accept a stop order or stop limit order. Similar to former Rule 6140(h), which is replaced by Rule 5350, Rule 5350(a) states that a "stop order" is an order to buy (or sell) that becomes a market order to buy (or sell) when a transaction occurs at or above (below) the stop price, and a "stop limit order" is an order to buy (or sell) that becomes a limit order to buy (or sell) at the limit price when a transaction occurs at or above (below) the stop price.4

      Rule 5350.01 further provides that firms may accept order types that activate as a market or limit order using an event other than a transaction at the stop price as the trigger (e.g., using a quotation at the stop price). However, in such cases, the order cannot be labeled a "stop order" or a "stop limit order" and must be clearly distinguishable from a "stop order" or a "stop limit order" (e.g., an alternative order type that triggers using a quotation at the stop price may be labeled a "stop quotation order" or "stop quote order"). If a firm chooses to offer such an alternative order type, it must disclose to the customer, in paper or electronic form, prior to the time the customer places the order (e.g., at account opening), a description of that order type including the triggering event.5

      A firm that routes to another broker-dealer or exchange other order types using an alternative trigger in accordance with Rule 5350.01 must take reasonable steps to ensure that the order is handled or executed by the other broker-dealer or exchange in accordance with the terms of the order as communicated to the customer placing the order.

      New Rule 5350 becomes effective on January 21, 2013.


      1. See Securities Exchange Act Release No. 67778 (September 4, 2012), 77 FR 55517 (September 10, 2012) (Order Approving SR-FINRA-2012-026).

      2. "NMS stock" means any "NMS security" other than an option. "NMS security" means any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan or an effective national market system plan for reporting transactions in listed options. See Rule 600(b)(46) and (47) of SEC Regulation NMS.

      3. "OTC Equity Security" means any equity security that is not an "NMS stock" as that term is defined in Rule 600(b)(47) of SEC Regulation NMS; provided, however, that the term "OTC Equity Security" shall not include any Restricted Equity Security. See FINRA Rule 6420 (Definitions). "OTC Equity Security" does not include options.

      4. Rule 5350 does not apply to "not held" stop or stop limit orders.

      5. Where a firm permits customers to engage in securities transactions online, the firm also must post the required disclosures on the its website in a clear and conspicuous manner.

    • 12-49 SEC Approves Amendments to NASD Rule 2711 and Incorporated NYSE Rule 472 to Conform to JOBS Act Requirements; Effective Dates: April 5, 2012, and October 11, 2012

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      Research Analysts and Research Reports

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Investment Banking
      Legal
      Research
      Senior Management
      Key Topics

      JOBS Act
      Quiet Periods
      Research
      Solicitation
      Referenced Rules & Notices

      NASD Rule 2711
      Incorporated NYSE Rule 472

      Executive Summary

      The SEC approved amendments to NASD Rule 2711 and Incorporated NYSE Rule 472 to conform to the requirements of the Jumpstart Our Business Startups Act (JOBS Act) and make certain additional changes to quiet period restrictions consistent with the policies underlying the JOBS Act. Most of the changes to NASD Rule 2711 and Incorporated NYSE Rule 472 are effective retroactively to April 5, 2012; changes to those rules regarding quiet periods after secondary offerings and after the expiration, termination or waiver of a lock-up agreement became effective upon approval by the Securities and Exchange Commission (SEC) on October 11, 2012.

      The text of the amended rules is available at www.finra.org/notices/12-49.

      Questions regarding this Notice may be directed to:
      •   Philip Shaikun, Associate Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-8451.

      Background & Discussion

      The JOBS Act, which was signed into law on April 5, 2012, is intended to, among other things, help facilitate capital formation for "emerging growth companies" (EGCs) by improving the information flow about EGCs to investors. To that end, Section 105(b) of the JOBS Act amended Section 15D of the Securities Exchange Act (Exchange Act) to prohibit the SEC or any national securities association from adopting or maintaining any rule or regulation in connection with an initial public offering (IPO) of an EGC that:

      •   restricts, based on functional role, which associated persons of a broker, dealer or member of a national securities association, may arrange for communications between an analyst and a potential investor; or
      •   restricts a securities analyst from participating in any communication with the management of an EGC that is also attended by any other associated person of a broker, dealer or member of a national securities association whose functional role is other than as securities analyst.

      Section 105(d) further amends the Exchange Act to prohibit the SEC or any national securities association from adopting or maintaining any rule or regulation that prohibits a broker or dealer from publishing or distributing any research report or making a public appearance, with respect to the securities of an EGC either:

      •   within any prescribed period of time following the initial public offering date of the emerging growth company; or
      •   within any prescribed period of time prior to the expiration date of any agreement between the broker, dealer, or member of a national securities association and the emerging growth company or its shareholders that restricts or prohibits the sale of securities held by the emerging growth company or its shareholders after the initial public offering date.

      These provisions became effective upon signature of the president on April 5, 2012. On August 22, 2012, the SEC's Division of Trading and Markets provided guidance on these provisions in the form of Frequently Asked Questions. The amendments approved by the SEC conform the applicable provisions of NASD Rule 2711 to the JOBS Act requirements in accordance with the SEC staff guidance.1

      Arranging and Participating in Communications

      NASD Rule 2711(c)(4)2 prohibits a research analyst from participating "in efforts to solicit investment banking business," including any "pitches" for investment banking business or other communications with companies for the purpose of soliciting investment banking business. The SEC staff guidance interprets the JOBS Act to now allow, in connection with an IPO of an EGC, research analysts to attend meetings with issuer management that are also attended by investment banking personnel, including pitch meetings, but not "engage in otherwise prohibited conduct in such meetings," including "efforts to solicit investment banking business." The guidance further explains that a research analyst that attends a pitch meeting "could, for example, introduce themselves, outline their research program and the types of factors that the analyst would consider in his or her analysis of a company, and ask follow-up questions to better understand a factual statement made by the emerging growth company's management." Accordingly, the amendments create an exception to NASD Rule 2711(c)(4) to reflect this guidance.3

      The SEC staff guidance states that under Section 105(b) of the JOBS Act, an associated person of a broker-dealer, including investment banking personnel, may arrange communications between research analysts and investors in connection with an IPO of an EGC. As an example, the guidance states that an investment banker could forward a list of clients to a research analyst "that the analyst could, at his or her own discretion and with appropriate controls, contact." The guidance acknowledges that FINRA does not have a rule that directly prohibits this activity and further states that such activity, without more, would not constitute conduct by investment banking personnel to directly or indirectly direct a research analyst to engage in sales or marketing efforts related to an investment banking services transaction, in violation of NASD Rule 2711(c)(6).4 As such, this JOBS Act provision required no conforming rule change.

      Quiet Periods

      Section 105(d) of the JOBS Act expressly permits publication of research and public appearances any time after the IPO of an EGC or prior to the expiration of any lock up agreement. While the JOBS Act refers only to the "expiration" of a lock-up agreement, the guidance states that Congress intended for the JOBS Act provisions to apply equally to the period before a "waiver" or "termination" of a lock-up agreement. Thus, in accordance with SEC staff guidance on this JOBS Act provision, the rule change amends NASD Rule 2711 to eliminate the following quiet periods with respect to an IPO of an EGC:

      •   NASD Rule 2711(f)(1)(A),5 which imposes a 40-day quiet period after an IPO on a member that acts as a manager or co-manager of such IPO;
      •   NASD Rule 2711(f)(2),6 which imposes a 25-day quiet period after an IPO on a member that participates as an underwriter or dealer (other than manager or co-manager) of such an IPO; and
      •   NASD Rule 2711(f)(4)7 with respect to the 15-day quiet period applicable to IPO managers and co-managers prior to the expiration, waiver or termination of a lock-up agreement, or any other agreement that such member has entered into with a subject company or its shareholders that restricts or prohibits the sale of securities held by the subject company or its shareholders after the completion of an IPO.

      The SEC staff guidance notes that the JOBS Act makes no reference to quiet periods after a secondary offering or during a period of time after expiration of a lock-up agreement. Accordingly, the guidance concludes that NASD Rule 2711(f)(1)(B),8 which imposes a 10- day quiet period on managers and co-managers following a secondary offering and the remaining portion of NASD Rule 2711(f)(4)9 relating to quiet periods after the expiration, termination or waiver of a lock up agreement, remain fully in effect. Nonetheless, the guidance expresses the SEC staff's belief that the policies underlying the JOBS Act are equally applicable to quiet periods during these other times. FINRA agreed that elimination of those quiet periods would advance the policy objectives of the JOBS Act and therefore NASD Rules 2711(f)(1)(B) and (f)(4) have been amended accordingly.10

      Effective Dates

      The changes to NASD Rules 2711(c)(4), (f)(1)(A), (f)(2) and (f)(4) (with respect to the 15-day quiet period before the expiration, termination or waiver of a lock-up agreement) and the corresponding changes to Incorporated NYSE Rule 472 are effective retroactively to April 5, 2012. The changes to NASD Rules 2711(f)(1)(B) and (f)(4) (with respect to the 15-day quiet period after the expiration, termination or waiver of a lock-up agreement) and the corresponding changes to Incorporated NYSE Rule 472 became effective upon SEC approval of the rule change on October 11, 2012.


      1. FINRA notes that the SEC staff guidance interprets the JOBS Act provisions as applicable to Incorporated NYSE Rule 472 to the same extent as NASD Rule 2711. As such, the proposed rule change makes corresponding amendments to Incorporated NYSE Rule 472.

      2. See also Incorporated NYSE Rule 472(b)(5).

      3. A corresponding exception is created for Incorporated NYSE Rule 472(b)(5).

      4. See also Incorporated NYSE Rule 472(b)(6)(ii).

      5. See also Incorporated NYSE Rule 472(f)(1).

      6. See also Incorporated NYSE Rule 472(f)(3).

      7. See also Incorporated NYSE Rule 472(f)(4).

      8. See also Incorporated NYSE Rule 472(f)(2).

      9. See also Incorporated NYSE Rule 472(f)(4).

      10. A corresponding change is made to Incorporated NYSE Rule 472(f).

    • 12-48 FINRA Changes the Effective Date for Amendments to TRACE Rules Relating to the Reporting and Dissemination of Agency Pass-Through Mortgage-Backed Securities Traded To Be Announced and Related TRACE Fees in FINRA Rule 7730 from November 5, 2012, to November 12, 2012

      Revised Effective Date: November 12, 2012

      View PDF

      Trace Reporting and Compliance Engine (TRACE)

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Fixed Income
      Legal
      Operations
      Systems
      Trading
      Training
      Key Topics

      Agency Pass-Through Mortgage-Backed Securities Traded To Be Announced (TBA)
      Asset-Backed Securities
      Dissemination
      TRACE Fees
      Transaction Reporting
      Referenced Rules & Notices

      FINRA Rule 6710
      FINRA Rule 6730
      FINRA Rule 6750
      FINRA Rule 7730

      Executive Summary

      On May 21, 2012, in Regulatory Notice 12-26 (May 2012), FINRA announced that amendments to FINRA Rule 6700 Series and TRACE dissemination protocols regarding the reporting and dissemination of transactions in TRACE-eligible securities that are agency pass-through mortgage-backed securities that are traded to be announced (TBA) (TBA transactions) and related amendments to FINRA Rule 7730 regarding TBA transaction data fees would become effective on November 5, 2012.1 Due to disruptions in normal business operations related to Hurricane Sandy, FINRA has changed the effective date of these TRACE rule amendments from November 5, 2012, to November 12, 2012.2

      Similarly, the expiration dates of the pilot programs in FINRA Rules 6730(a)(3) (D)(i) and 6730(a)(3)(E)(i) regarding the reduction in reporting times for TBA transactions have changed from May 10, 2013, to May 17, 2013. The amended rule text with the updated pilot program expiration dates is available at www.finra.org/notices/12-48.

      Questions regarding this Notice may be directed to:
      •   Patrick Geraghty, Director, Market Regulation, at (240) 386-4973; or
      •   Elliot Levine, Associate Vice-President and Counsel, Transparency Services, at (202) 728-8405.

      1. See Securities Exchange Act Release No. 66829 (April 18, 2012), 77 FR 24748 (April 25, 2012) (SEC Approval Order of File No. SR-FINRA-2012-020).

      2. All the amendments in SR-FINRA-2012-020, including all technical amendments that are not described specifically above, will become effective on November 12, 2012.

    • 12-47 FINRA and ISG Extend Effective Date for Certain Electronic Blue Sheet Data Elements; Effective Date: May 1, 2013

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      Electronic Blue Sheet Submissions

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Key Topics

      Blue Sheets
      Referenced Rules & Notices

      FINRA Rule 8211
      FINRA Rule 8213
      Notice to Members 05-58
      Regulatory Notice 11-56
      Regulatory Notice 12-36
      SEA Rule 13h-1

      Executive Summary

      FINRA and the other U.S. members of the Intermarket Surveillance Group (ISG members)1 have extended the effective date for compliance with certain new data elements for Electronic Blue Sheets (EBS) identified in Regulatory Notice 12-36 to May 1, 2013.

      FINRA and the other ISG members note the following:

      •   Required fields added to EBS record layout. The fields identified in Regulatory Notice 12-36 as modified below must be added to the EBS record layout by November 30, 2012, as currently required. However, the name and description of the Entering Firm Identifier and Executing Firm Identifier fields are being renamed as Primary Party Identifier and Contra Party Identifier fields, respectively, but the technical format specifications will remain the same. As noted below, for EBS requests from FINRA and the other ISG members, these fields are not required to be populated until May 1, 2013, and for SEC Large Trader EBS requests, these fields are not required to be populated, but at any time firms may voluntarily submit the values to the SEC and they will be accepted.
      •   SEC EBS Requests. For Large Trader EBS requests from the SEC, the November 30, 2012, and May 1, 2013, effective dates and their respective requirements to populate the EBS remain unchanged.2
      •   FINRA and the other ISG member EBS Requests. For EBS requests from FINRA and other ISG members, the Order Execution Time, Primary Party Identifier and Contra Party Identifier fields are not required to be populated until May 1, 2013. Firms may voluntarily submit Large Trader 1–3 and Large Trader Qualifier values to FINRA and other ISG members and they will be accepted.

      Attachment A to this Notice sets forth additional modifications from Regulatory Notice 12-36 regarding changes to the EBS record layout and Attachment B outlines modifications to the Transaction Type Identifiers.

      Questions concerning the EBS enhancements should be directed to ebsfaq@finra.org.

      Updated April 30, 2013: The effective date for compliance with certain elements identified in this Notice has been extended to November 1, 2013. See Regulatory Notice 13-16. Effective Dates: May 1, 2013 and November 1, 2013.

      Updated November 4, 2013: The effective date for compliance with certain elements identified in this Notice has been extended to May 1, 2014. See Regulatory Notice 13-38.

      Discussion

      FINRA and the other ISG members have extended the effective date for compliance with certain new data elements identified in Regulatory Notice 12-36 to May 1, 2013, to allow broker-dealers additional time to implement changes to comply with the new requirements.3

      The fields identified in Regulatory Notice 12-36 as modified as set forth below and in Attachment A must be added to the EBS record layout by November 30, 2012, as currently required. However, the Entering Firm Identifier and Executing Firm Identifier fields are renamed as the Primary Party Identifier and Contra Party Identifier fields, respectively, and the firm must identify the party to the trade that is represented by the Submitting Broker or Opposing Broker of an EBS, respectively. The technical format specifications for these fields will remain the same as previously announced. The firm may submit a Market Participant Identifier (MPID), Central Registration Depository (CRD) Number or Option Clearing Corporation (OCC) Clearing Number for such fields. For example, if Firm A cleared through Firm B, Firm A's MPID, CRD or OCC number would be provided in the Primary Party Identifier field and Firm B's NSCC clearing number would appear in the Submitting Broker Number field. For the other side of the trade, if Firm C clears through Firm D, Firm C's MPID, CRD or OCC number would be provided in the Contra Party Identifier field and Firm D's NSCC clearing number would appear in the Opposing Broker Number field.

      For Large Trader requests from the SEC, the November 30, 2012, and May 1, 2013, effective dates and their respective requirements remain unchanged.4 By November 30, 2012, broker-dealers must be in EBS reporting compliance for the Order Execution Time, Large Trader Identification Number 1–3 and Large Trader Identification Qualifier fields as such fields may apply to all NMS securities and for all transactions effected directly or indirectly by or through:

      •   Any proprietary account of a U.S. registered broker-dealer; or
      •   Any account used by a customer that trades through a "sponsored access" arrangement.

      By May 1, 2013, all broker-dealers, regardless of limitations noted above, must be in compliance with SEC Large Trader requirements, including EBS requirements. The Primary Party Identifier and Contra Party Identifier fields are not required to be populated in response to SEC Large Trader EBS requests, but at any time firms may voluntarily submit the values to the SEC and they will be accepted.

      For EBS requests from FINRA and other ISG members, the Order Execution Time, Primary Party Identifier and Contra Party Identifier fields are not required to be populated until May 1, 2013. Firms may voluntarily submit the values before May 1 and they will be accepted. Firms may also voluntarily submit Large Trader Identification Number 1–3 and Large Trader Identification Qualifier values to FINRA at any time and other ISG members and they will be accepted.

      The required EBS fields are set forth below. Also see Attachment A for details.

      Order Execution Time, Record Sequence Number Five, Field Position 72 to 77
      Firms should use this record to submit the order execution time in 24-hour format and in Eastern Time formatted as HHMMSS. This information is not limited to the blue sheet transactions relating to the SEC Large Trader Reporting Rule (SEA Rule 13h-1). Please note that all firms must synchronize their time clocks to the atomic clock to maintain an accurate audit trail in connection to the reported execution time.
      Large Trader Identification Number 1, Record Sequence Number Seven, Field Position 2 to 14
      Firms should use this record to submit the Large Trader Identification Number. This information is requested under the approved SEC Large Trader Reporting Rule (SEA Rule 13h-1) requirements.
      Large Trader Identification Number 2, Record Sequence Number Seven, Field Position 15 to 27
      Firms should use this record to submit the Large Trader Identification Number. This information is requested under the approved SEC Large Trader Reporting Rule (SEA Rule 13h-1) requirements.
      Large Trader Identification Number 3, Record Sequence Number Seven, Field Position 28 to 40
      Firms should use this record to submit the Large Trader Identification Number. This information is requested under the approved SEC Large Trader Reporting Rule (SEA Rule 13h-1) requirements.
      Large Trader Identification Qualifier, Record Sequence Number Seven, Field Position 41
      Firms should use this record to submit the Large Trader Identification Qualifier. If more than three LTIDs exist for a transaction, then firms should mark the field "Y" for Yes. Otherwise it should be marked "N" for No. This information is requested under the approved SEC Large Trader Reporting Rule (SEA Rule 13h-1) requirements.
      Primary Party Identifier, Record Sequence Number Seven, Field Positions 42 to 49
      Firms should use this record to submit the Primary Party Identifier, which provides the identity of the party to the trade that is represented by the Submitting Broker of an EBS. The firm may submit a Market Participant Identifier, Central Registration Depository Number or Option Clearing Corporation Clearing Number for this field. Please note that the Primary Party Identifier field replaces the previous Entering Firm Identifier field.
      Contra Party Identifier, Record Sequence Number Seven, Field Positions 50 to 57
      Firms should use this record to submit the Contra Party Identifier, which provides the identity of the contra party to the trade that is represented by the Opposing Broker of an EBS, if applicable.5 The firm may submit a Market Participant Identifier, Central Registration Depository Number or Option Clearing Corporation Clearing Number for this field. Please note that the Contra Party Identifier field replaces the previous Executing Firm Identifier field.

      Consistent with Regulatory Notice 12-36, the Employer SIC Code field has been withdrawn as an EBS requirement.

      The following modifications were also made to Attachment A of this Notice:

      •   As noted above, the Entering Firm Identifier field has been renamed as the Primary Party Identifier field. The Primary Party Identifier provides the identity of the party to the trade that is represented by the Submitting Broker of an EBS. The firm may submit a Market Participant Identifier, Central Registration Depository Number or Option Clearing Corporation Clearing Number. The field remains in Record Sequence Number Seven, Position 42 through 49.
      •   As noted above, the Executing Firm Identifier field has been renamed as the Contra Party Identifier field. The Contra Party Identifier provides the identity of the contra party to the trade that is represented by the Opposing Broker of an EBS. The firm may submit a Market Participant Identifier, Central Registration Depository Number or Option Clearing Corporation Clearing Number. The field remains in Record Sequence Number Seven, Position 50 through 57.
      •   For the Strike Decimal field, the Justify column has been changed to left-justification of data.
      •   For the Order Execution Time field, the Field format column has been changed to alpha-numeric.

      The following modifications were made to Attachment B of this Notice:

      •   The values of "M", "N", "W", "B", "O", "T", "R", "E", "F", "H", "L", "X" and "Z" have been removed as Transaction Type Identifiers. Please see NYSE Information Memorandum 12-25 for further details.
      •   The value of "S" has been renamed to Designated Market Makers.
      •   The value of "J" has been added to the Options column to represent Joint Back Office account that clears in the firm range at OCC.

      Broker-dealers are reminded that failure to properly fill out the EBS fields is a violation of FINRA Rule 8211 and/or 8213.

      Blue Sheet Submission Methodology

      Currently, EBS requests are made under specific security symbols and option symbology. As noted in Regulatory Notice 12-36, firms will be required to submit EBS, when requested, using three additional formats:

      1. account number and date;
      2. account number, symbol and date; or
      3. date range and Primary Party Identifier (a change from the Executing Firm Identifier).

      Compliance with this requirement is similarly extended to May 1, 2013. As outlined in Regulatory Notice 12-36, the request by account number would require firms to identify the account number of a specific account at a firm, e.g. John Doe at CC Clearing Co. The request would cover all transactions under the John Doe account number at CC Clearing Co. To reduce data submission size, an EBS request may also ask for a specific symbol and date in connection with the account number. Additionally, EBS requests may be made for a specific review period under a primary party identifier. This request would require a firm to identify a clearing firm client's blue sheets for a set number of days, weeks or months, e.g. Firm ABC for the month of January 2011.

      In addition, beginning on November 30, 2012, in response to a request from the SEC for large trader transaction records, broker-dealers must be prepared to submit blue sheet data, when requested, by large trader status, including LTID number(s).

      Blue Sheet Testing

      Starting on November 1, 2012, FINRA will open its customer test website to allow firms to test their enhanced blue sheets data file before submitting it to production. Firms that already have entitlement to FINRA's Regulation Filing Application can proceed with testing their EBS modifications by submitting their test data to https://regfilingtest.finra.org. To access the customer test website, firms should enter the same user ID and password they use to access the production website. Firms that do not have entitlement to FINRA's Regulation Filing Application should contact (800) 321-6273.

      The Securities Industry Automation Corporation (SIAC) will also be open to receiving blue sheet test files by November 1, 2012. Firms can obtain initial testing instructions from SIAC by contacting Eugene Chernovetsky at (212) 656-2867 or echernovetsky@nyx.com or David Savage at (212) 383-3410 or dsavage@nyx.com.

      Frequently Asked Questions

      FINRA provides answers to frequently asked questions (FAQ) on its website. The FAQs will be updated from time to time. Please see FINRA's website for the most recent version. Questions concerning the EBS enhancements should be directed to ebsfaq@finra.org.


      1 The U.S. members of the ISG include the following exchanges and self-regulatory organizations (SROs): BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Board Options Exchange, Inc., C2 Options Exchange, Inc., CBOE Stock Exchange, LLC, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., FINRA, International Securities Exchange, LLC, The NASDAQ Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, National Stock Exchange, Inc., New York Stock Exchange, LLC, NYSE MKT, LLC, NYSE Arca, Inc., and BOX Options Exchange, LLC.

      2 The Securities and Exchange Commission extended the compliance date for the broker-dealer recordkeeping, reporting and monitoring requirements of Rule 13h-1 to November 30, 2012, and May 1, 2013. Please see Securities Exchange Release No. 34-66839 (April 20, 2012), 77 FR 25007 (April 26, 2012) for further details.

      3 Id.

      4 Id.

      5 If a transaction is an internalized trade and there is no Opposing Broker, then the Opposing Broker Number and the Contra Party Identifier fields would be populated with their default values.


      Attachment A

      Record Layout for Submission of Trading Information

      Field Position Field Length Field Name/Description/Remarks Field Format Justify Picture Clause Default Value
      From To
        ***This record must be the first record of the file***  
      1 3 3 FILLER A LJ X(3) HDR
      4 5 2 FILLER A LJ X(2) .S
      6 10 5 DTRK-SYSID N LJ 9(5) 12343
      11 12 2 FILLER A LJ X(2) .E
      13 14 2 FILLER N LJ 9(2) 00
      15 16 2 FILLER A LJ X(2) .C
      17 20 4 DTRK-ORIGINATOR
      Please call SIAC for assignment (212) 383-2210.
      A LJ X(4)
      21 22 2 FILLER A LJ X(2) .S
      23 26 4 DTRK-SUB-ORIGINATOR Please call SIAC for assignment (212) 383-2210. A LJ X(4)
      27 27 1 FILLER A LJ X(1) B
      28 33 6 DTRK-DATE
      Contains submission date.
      N LJ 9(6) MMDDYY
      34 34 1 FILLER A LJ X(1) B
      35 59 25 DTRK-DESCRIPTION Required to identify this file. A LJ X(25) FIRM TRADING INFORMATION
      60 80 21 FILLER A LJ X(21) B
      1 1 1 HEADER RECORD CODE Value: Low Values OR ZERO A X
      2 5 4 SUBMITTING BROKER NUMBER If NSCC member use NSCC clearing number.
      If not a NSCC member, use clearing number assigned to you by your clearing agency.
      A–R LJ X(4) B
      6 40 35 FIRM'S REQUEST NUMBER Tracking number used by the firm to record requests from an organization. A X(35) B
      41 46 6 FILE CREATION DATE Format is YYMMDD A X(6)
      47 54 8 FILE CREATION TIME Format is HH:MM:SS A X(8)
      55 55 1 REQUESTOR CODE Requesting Organization Identification Values: A X
            A = New York Stock Exchange        
            B = NYSE MKT, LLC        
            C = Chicago Stock Exchange        
            D = NASDAQ OMX        
            E = NYSE Arca        
            F = NASDAQ OMX BX, Inc.        
            G = National Stock Exchange        
            H = BATS Exchange, Inc.        
            I = International Securities Exchange        
            J = Direct Edge (EDGA Exchange and EDGX Exchange)        
            K = Chicago Board Options Exchange, C2 Options Exchange and CBSX (CBOE Stock Exchange)        
            R = FINRA        
            U = BOX Options Exchange, LLC        
            X = U.S. Securities and Exchange Commission        
            Y = BATS Y-Exchange, Inc.        
            Z = Other        
      56 70 15 REQUESTING ORGANIZATION NUMBER
      Number assigned by requesting organization.
      A LJ X(15) B
      71 80 10 FILLER A X(10) B
      1 1 1 RECORD SEQUENCE NUMBER ONE The first record of the transaction. Value: 1 A X
      2 5 4 SUBMITTING BROKER NUMBER Identical to Submitting Broker Number in Header Record A–R LJ X(4)
      6 9 4 OPPOSING BROKER NUMBER The NSCC clearing house number of the broker on the other side of the trade. A–R LJ X(4) B
      10 21 12 CUSIP NUMBER
      The cusip number assigned to the security.

      Left justified since the number is nine characters at present (8+ check digit) but will expand in the future.
      A LJ X(12) B
      22 29 8 TICKER SYMBOL The symbol assigned to this security. For options (pre-OSI), the OPRA option symbol (space), OPRA expiration month symbol and OPRA strike price symbol should be used. (Ex. Maytag May 20 call option series would be reported as MYG ED. This example uses six spaces in the field with a space between the OPRA symbol and the OPRA expiration month.)

      Post OSI this field must contain OPTIONXX and a Record Sequence Number Six must be completed.
      A–R LJ X(8) B
      30 35 6 TRADE DATE
      The date this trade executed. Format is YYMMDD.
      A–R   X(6) B
      36 41 6 SETTLEMENT DATE
      The date this trade will settle.
      Format is YYMMDD.
      A X(6) B
      42 53 12 QUANTITY
      The number of shares or quantity of bonds or option contracts.
      N–R RJ 9(12) Z
      54 67 14 NET AMOUNT
      The proceeds of sales or cost of purchases after commissions and other charges.
      N RJ S9(12) V99 Z
      68 68 1 BUY/SELL CODE
      Values: 0 = Buy, 1 = Sale, 2 = Short Sale, 3 = Buy Open, 4 = Sell Open, 5 = Sell Close, 6 = Buy Close. A = Buy Cancel, B = Sell Cancel, C = Short Sale Cancel, D = Buy Open Cancel, E = Sell Open Cancel, F = Sell Close Cancel, G = Buy Close Cancel. Values 3 to 6 and D to G are for options only.
      A–R X B
      69 78 10 PRICE
      The transaction price.
      Format: $$$$ CCCCCC.
      N–R RJ 9(4)V(6) Z
      79 79 1 EXCHANGE CODE Exchange where trade was executed. Values: A–R X B
            A = New York Stock Exchange        
            B = NYSE MKT, LLC        
            C = Chicago Stock Exchange        
            D = NASDAQ OMX PHLX        
            E = NYSE Arca        
            F = NASDAQ OMX BX, Inc.        
            G = National Stock Exchange        
            H = BATS Exchange, Inc.        
            I = International Securities Exchange        
            J = C2 Options Exchange        
            K = Chicago Board Options Exchange        
            L = London Stock Exchange        
            M = Toronto Stock Exchange        
            N = Montreal Stock Exchange        
            O = TSX Venture Exchange        
            P = Direct Edge (EDGA Exchange)        
            Q=FINRA ADF        
            R = NASDAQ OMX/NASDAQ OMX Options Market        
            S = Over-the-Counter        
            T = Tokyo Stock Exchange        
            U = BOX Options Exchange, LLC        
            V = Direct Edge (EDGX Exchange)        
            W = CBSX (CBOE Stock Exchange)        
            X = NASDAQ OMX PSX        
            Y = BATS Y-Exchange, Inc.        
            Z = Other        
      80 80 1 BROKER/DEALER CODE
      Indicate if trade was done for another Broker/Dealer. Values: 0 = No; 1 = Yes
      A–R X B
      1 1 1 RECORD SEQUENCE NUMBER TWO Value: 2 A X
      2 2 1 SOLICITED CODE
      Values: 0 = No; 1 = Yes
      A–R X B
      3 4 2 STATE CODE
      Standard Postal two character identification.
      A–R X(2) B
      5 14 10 ZIP CODE/COUNTRY CODE
      Zip Code — five or nine character
      (zip plus four)
      Country code — for future use.
      A–R LJ X(10) B
      15 22 8 BRANCH OFFICE/REGISTERED
      REPRESENTATIVE NUMBER
      Each treated as a four-character field.
      Both are left justified.
      A–R LJ X(8) B
      23 28 6 DATE ACCOUNT OPENED
      Format is YYMMDD
      A–R X(6) B
      29 48 20 SHORT NAME FIELD
      Contains last name followed by comma (or space) then as much of first name as will fit.
      A LJ X(20) B
      49 78 30 EMPLOYER NAME A LJ X(30) B
      79 79 1 TIN 1 INDICATOR
      Values: 1 = SS#; 2 = TIN
      A–R X B
      80 80 1 TIN 2 INDICATOR
      Values: 1 = SS#; 2 = TIN — for future use.
      A X B
      1 1 1 RECORD SEQUENCE NUMBER
      THREE Value: 3
      A X
      2 10 9 TIN ONE
      Taxpayer Identification Number
      Social Security or Tax ID Number.
      A–R LJ X(9) B
      11 19 9 TIN TWO
      Taxpayer Identification Number #2
      Reserved for future use.
      A LJ X(9) B
      20 20 1 NUMBER OF N&A LINES A X B
      21 50 30 NAME AND ADDRESS LINE ONE A–R LJ X(30) B
      51 80 30 NAME AND ADDRESS LINE TWO A–R LJ X(30) B
      1 1 1 RECORD SEQUENCE NUMBER FOUR Value: 4 A X
      2 31 30 NAME AND ADDRESS LINE THREE A–R LJ X(30) B
      32 61 30 NAME AND ADDRESS LINE FOUR A–R LJ X(30) B
      62 62 1 TRANSACTION TYPE IDENTIFIERS
      See Attachment B for current codes.
      A–R X B
      63 80 18 ACCOUNT NUMBER
      Account number
      A–R LJ X(18) B
      1 1 1 RECORD SEQUENCE NUMBER FIVE Value: 5 A X(1)
      2 31 30 NAME AND ADDRESS LINE FIVE A–R LJ X(30) B
      32 61 30 NAME AND ADDRESS LINE SIX A–R LJ X(30) B
      62 65 4 PRIME BROKER
      Clearing number of the account's prime broker.
      A–R LJ X(4) B
      66 66 1 AVERAGE PRICE ACCOUNT
      1= recipient of average price transaction.
      2= average price account itself.
      N–R 9(1) Z
      67 71 5 DEPOSITORY INSTITUTION
      IDENTIFIER
      Identifying number assigned to the account by the depository institution.
      A–R LJ X(5) B
      72 77 6 ORDER EXECUTION TIME

      HHMMSS — Time format will be in Eastern Time and 24 hour format.
      A–R LJ
      78 80 3 FILLER A X B
      1 1 1 RECORD SEQUENCE NUMBER SIX Value: 6 A  
      2 9 8 DERIVATIVE SYMBOL
      The symbol assigned to the derivative.
      A–R LJ B
      10 15 6 EXPIRATION DATE
      The date the option expires.
      Format is YYMMDD.
      A–R B
      16 16 1 CALL/PUT INDICATOR C = Call, P = Put A–R B
      17 24 8 STRIKE DOLLAR
      The dollar amount of the strike price.
      N–R RJ Z
      25 30 6 STRIKE DECIMAL
      The decimal amount of the strike price.
      N–R LJ Z
      31 80 50 FILLER A LJ B
      1 1 1 RECORD SEQUENCE NUMBER
      SEVEN
      Value: 7
      A  
      2 14 13 LARGE TRADER IDENTIFICATION 1 A–R LJ Z
      15 27 13 LARGE TRADER IDENTIFICATION 2 A–R LJ Z
      28 40 13 LARGE TRADER IDENTIFICATION 3 A–R LJ Z
      41 41 1 LARGE TRADER IDENTIFICATION QUALIFIER A–R LJ Z
      42 49 8 PRIMARY PARTY IDENTIFIER

      Identity of the party to the trade that is represented by the Submitting Broker of an EBS. Acceptable values include MPID, CRD or OCC Clearing Number.
      A–R LJ B
      50 57 8 CONTRA PARTY IDENTIFIER

      Identity of the contra party to the trade that is represented by the Opposing Broker of an EBS. Acceptable values include MPID, CRD or OCC Clearing Number.
      A–R LJ B
      58 80 23 FILLER A LJ B
      1 1 1 TRAILER RECORD DATE
      One record per submission. Must be the last record on the file. Value: High Values or "9"
      A X
      2 17 16 TOTAL TRANSACTIONS
      The total number of transactions. This total excludes Header and Trailer Records.
      N RJ 9(16) B
      18 33 16 TOTAL RECORDS ON FILE
      The total number of 80 byte records. This total includes Header and Trailer Records, but not the Datatrak Header Record (i.e., it does not include the first record on the file).
      N RJ 9(16) Z
      34 80 47 FILLER A X(47) B
            Field Format
      A = Alphanumeric (all caps)
      N = Numeric
      P = Packed
      B = Binary
      R = Validation Required
      Default Values
      B =Blanks
      Z= Zero
      Justify
      RJ = Right Justification of Data
      LJ = Left
      Justification of Data
         

      Attachment B

      Record Layout for Submission of Trading Information

      Transaction Type Security Type
        Equity* Options
      Non-Program Trading, Agency A C
      Non-Index Arbitrage, Program Trading, Proprietary C  
      Index Arbitrage, Program Trading, Proprietary D  
      Index Arbitrage, Program Trading, Individual Investor J  
      Non-Index Arbitrage, Program Trading, Individual Investor K  
      Non-Program Trading, Proprietary P F
      Non-Program Trading, Individual Investor I  
      Non-Index Arbitrage, Program Trading, Agency Y  
      Index Arbitrage, Program Trading, Agency U  
      Designated Market Makers S S
      Market-Maker   M
      Non-Member Market-Maker/Specialist Account   N
      Stock Specialist — Assignment   Y
      Customer Range Account of a Broker/Dealer   B
      Registered Trader G  
      Error Trade Q  
      Amex Option Specialist/Market Maker Trading Paired Security V  
      Registered Trader Market Maker Transaction Regardless of the Clearing Number   P
      Transactions cleared for a NASDAQ market maker that is affiliated with the clearing member that resulted from telephone access to the specialist. Amex Only. 3  
      Transactions cleared for a member's NASDAQ market maker that is not affiliated with the clearing member that resulted from telephone access to the specialist. Amex Only. 4  
      Transactions cleared for a non-member NASDAQ market maker that is not affiliated with the clearing member that resulted from telephone access to the specialist. Amex Only. 5  
      Voluntary Professional   W
      Joint Back Office   J

      * Equity securities include those securities that trade like equities (e.g., ETFs and structured products).

    • 12-46 Broker-Dealer, Investment Adviser Firm, Agent and Investment Adviser Representative, and Branch Renewals for 2013; Payment Deadline: December 13, 2012

      View PDF

      BD and IA Renewals for 2013

      Regulatory Notice
      Notice Type

      Renewals
      Suggested Routing

      Compliance
      Legal
      Operations
      Registration
      Senior Management
      Key Topics

      IARDTM
      Registration
      Renewals
      Web CRD®
      Referenced Rules & Notices

      NTM 02-48
      Regulatory Notice 12-32

      Executive Summary

      The 2013 Renewal Program begins on November 12, 2012, when FINRA makes the online Preliminary Renewal Statements available to all firms on Web CRD/ IARD.

      Firms should note the following key dates in the renewal process:

      November 1, 2012 Firms may begin submitting post-dated Form U5, BR Closing/Withdrawal, BDW and ADV-W filings via Web CRD/IARD.

      Please Note: Post-dated filings submitted by 11 p.m., Eastern Time (ET), November 9, 2012, do not appear on the firm's Preliminary Renewal Statement. The only allowed date for post-dated termination filings is December 31, 2012.
      November 12, 2012 Preliminary Renewal Statements are available on Web CRD/IARD.
      December 13, 2012 Full payment of Preliminary Renewal Statements is due.
      January 2, 2013 Final Renewal Statements are available on Web CRD/ IARD.
      February 1, 2013 Full payment of Final Renewal Statements is due.

      FINRA advises FINRA-registered firms that failure to remit full payment of their Preliminary Renewal Statements to FINRA by December 13, 2012, may cause the firm to become ineligible to do business in the jurisdictions where it is registered, effective January 1, 2013. FINRA-registered firms will also be subject to a late fee if payment is not received by this deadline.

      In addition to this Notice, firms should review the renewal instructions, especially the Renewal Program Bulletin, the IARD Renewal Program Bulletin (if applicable) on the Investment Adviser Registration Depository (IARD) website, and any information mailed to ensure continued eligibility to do business as of January 1, 2013.

      Please direct questions concerning this Notice to the FINRA Gateway Call Center at (301) 869-6699.

      Background & Discussion

      Preliminary Renewal Statements

      Beginning November 12, 2012, Preliminary Renewal Statements are available for viewing and printing on Web CRD/IARD. The statements include the following fees:

      •   Web CRD system processing fees;
      •   FINRA branch office fees;
      •   FINRA branch renewal processing fees;
      •   NYSE MKT LLC (AMEX), BATS Y-Exchange, Inc. (BATS-YX), BATS Z-Exchange, Inc. (BATS-ZX), BOX Options Exchange, LLC (BOX), NASDAQ OMX BX, Inc. (BX), C2 Options Exchange, Incorporated (C2), Chicago Board Options Exchange (CBOE), Chicago Stock Exchange (CHX), EDGA Exchange, Inc. (EDGA), EDGX Exchange, Inc.(EDGX), International Securities Exchange (ISE), NASDAQ Stock Exchange (NQX), National Stock Exchange (NSX), New York Stock Exchange (NYSE), NYSE Arca, Inc. (ARCA), and NASDAQ OMX PHLX, Inc. (PHLX) maintenance fees;
      •   state agent renewal fees;
      •   state BD renewal fees;
      •   state BD branch fees;
      •   investment adviser firm and representative renewal fees, if applicable; and
      •   broker-dealer and/or investment adviser branch renewal fees.

      FINRA must receive full payment of the Preliminary Renewal Statement fees no later than December 13, 2012.

      If payment is not received by December 13, 2012, FINRA-registered firms will be assessed a Renewal Payment Late Fee. FINRA includes this late fee as part of the Final Renewal Statement and calculates the fee as follows: 10 percent of a member firm's cumulative final renewal assessment or $100, whichever is greater, with a cap of $5,000. Please see Notice to Members (NTM) 02-48 for details. In addition, if FINRA fails to receive payment by the deadline, firms also risk becoming ineligible to do business in the jurisdictions where their registrations are not renewed.

      Fees

      FINRA assesses a fee of $45 for each individual who renews his/her registration with any regulator through Web CRD. Firms can access a listing of agents assessed this fee by requesting the Renewals—Firm Renewal Roster.

      In addition, any investment adviser (IA) fees assessed by the North American Securities Administrators Association (NASAA) for state-registered investment adviser firms and investment adviser representatives (RA) who renew through IARD will also be included on the Preliminary Renewal Statement.

      Based on the number of active FINRA branches, FINRA assesses each firm a branch office annual registration renewal fee per branch. FINRA waives one branch office annual registration renewal fee per firm. In June 2012, the SEC approved FINRA fee changes, which included implementation of a tiered regressive rate structure to the branch office annual registration fee as detailed in Regulatory Notice 12-32. These fee changes are applicable to this renewal assessment.

      Based on the number of active FINRA branches, FINRA assesses each firm a FINRA branch system processing renewal fee of $20 per branch. FINRA waives one branch system processing renewal fee per firm.

      Please Note: FINRA does not assess the personnel assessment fees through the annual Renewal Program. FINRA will mail all FINRA-registered firms a separate invoice for these fees. Firms can obtain a listing of agents for whom the firms will be assessed the personnel assessment fee by requesting the Renewals—Firm Renewal Roster.

      Web CRD/IARD assesses renewal fees for AMEX, ARCA, BATS-YX, BATS-ZX, BOX, BX, C2, CBOE, CHX, EDGA, EDGX, ISE, NQX, NSX, NYSE, PHLX and state registrations on the Preliminary Renewal Statement. The system displays any applicable fees for the number of individuals registered with each SRO and jurisdiction.

      Web CRD/IARD assesses branch office renewal fees for those regulators that choose to renew branches registered with them in Web CRD/IARD.

      Some participating jurisdictions may require steps beyond the payment to FINRA of renewal fees to complete the BD or IA renewal process. Firms should contact each jurisdiction directly for further information on state renewal requirements. A Regulator Directory is located on the NASAA website.

      For detailed information regarding investment adviser renewals, you may also visit the IARD website. A matrix of investment adviser renewal fees for states that participate in the IARD Renewal Program is also posted on the IARD website.

      Renewal Payment

      Firms have four payment methods available to pay renewal fees:

      1. Web CRD/IARD E-Pay
      2. Wire Transfer
      3. Automatic Daily Account-to-Renewal Account Transfer
      4. Check

      Web CRD/IARD E-Pay

      The Web CRD/IARD E-Pay application is accessible from both the Preliminary and Final Renewal Statements and the FINRA (www.finra.org/crd) or IARD (www.iard.com) websites. This application allows a firm to make an electronic payment from a designated bank account to the firm's Renewal Account with FINRA. Please note that in order for funds to post to your firm's Renewal Account by December 13, 2012, you must submit payment electronically no later than December 10, 2012.

      Wire Payment

      Firms may wire full payment of their Preliminary Renewal Statements by requesting their banks to initiate wire transfers to: "BNY Mellon Financial, Philadelphia, PA." Firms should provide their banks with the following information:

      Transfer funds to: BNY Mellon Financial, Philadelphia, PA
      ABA Number: 031000037
      Beneficiary: FINRA
      FINRA Account Number: 8-234-353
      Reference Number: Firm CRD number and "Renewal"

      To ensure prompt processing of a renewal payment by wire transfer, remember to:

      •   Inform the bank to credit funds to the FINRA bank account.
      •   Provide the firm's CRD number and "Renewal" as reference only.
      •   Record the confirmation number of the wire transfer provided by the bank.

      Automatic Daily Account-to-Renewal Account Transfer

      FINRA will automatically transfer funds from a firm's Daily Account to its Renewal Account to facilitate payment of renewal fees beginning on December 13, 2012, and through December 21, 2012, if a firm has sufficient funds available in its Daily Account to cover the total renewal fees due. Please Note: If a firm does not want funds automatically transferred, the firm should send FINRA an electronic payment using Web CRD/IARD E-Pay or a wire transfer to deposit payment directly into its Renewal Account by the deadline. Separately, if a firm wishes to transfer funds between affiliated firms, the firm should submit a Web CRD/IARD Account Transfer Form available on the FINRA website.

      Check

      Please note that the separate renewal check payment address has been eliminated and all Web CRD/IARD check payments sent to FINRA are now only deposited into firms' Daily Accounts. If a firm mails a check to pay its renewal fee, payment will not be applied to the firm's Renewal Account until December 13, 2012, when FINRA begins the automatic Daily Account-to-Renewal Account transfer previously noted. For inclusion in the automatic transfer, a firm must have sufficient funds in its Daily Account to cover the total renewal fees due. If a firm would like its renewal payment to be applied before December 13, 2012, then the firm must pay using Web CRD/IARD E-Pay or with a wire transfer directly into the firm's Renewal Account.

      The check must be drawn on the FINRA-registered firm's account and include the firm's CRD number and "Renewal" in the memo line. Firms paying by check should account for U.S. mail delivery and payment processing time. To ensure prompt processing of checks:

      •   Include a print-out of the first page of your Preliminary Renewal Statement with payment.
      •   Do not include any other forms or fee submissions.
      •   Make the check payable to FINRA and write your firm's CRD number and "Renewal" on the check memo line.

      If your firm's accounting software (e.g., Quicken, Quickbooks) stores vendor addresses, please update them for Web CRD/IARD check payments to the addresses shown below. Send payment in the blue, pre-addressed renewal payment envelope mailed to your firm in early November or write the address on an envelope exactly as noted in this Notice:

      U.S. Mail Overnight or Express Delivery
      FINRA
      P.O. Box 7777-9995
      Philadelphia, PA 19175-0001

      Note: This box will not accept courier or overnight deliveries.
      FINRA
      Attention: 9995
      500 Ross Street 154-0455
      Pittsburgh, PA 15262

      Telephone: (301) 869-6699

      Renewal Reports

      Beginning November 12, 2012, firms can request, print and/or download renewal reports via Web CRD/IARD. Three reports are available for reconciliation with the Preliminary Renewal Statement:

      •   Firm Renewal Report—This report lists individuals included in the Renewal Program and includes billing codes (if supplied by the firm).
      •   Branches Renewal Report—This report lists each branch registered with FINRA and/or with any other regulator that renews branches through Web CRD/IARD and for which the firm is being assessed a fee. Firms should use this report to reconcile their records for renewal purposes.
      •   Approved AG Reg Without FINRA Approval Report—This report contains all individuals who are not registered with FINRA, but are registered with one or more jurisdictions. Firms should request this report as soon as possible to determine if it needs to request any FINRA registrations or terminate jurisdiction registrations.

      Post-Dated Form Filings

      Firms can file termination forms with a termination date of December 31, 2012. If a Form U5, BDW, BR Closing/Withdrawal or ADV-W filing indicates a termination date of December 31, 2012, an agent (AG), investment adviser representative, broker-dealer and/or investment adviser (firm) and the branch may continue doing business in that jurisdiction until the end of the calendar year without being assessed renewal fees. December 31, 2012, is the only date allowed for a post-dated form filing.

      Firms can begin filing post-dated Form U5, BR Closing/Withdrawal, BDW and ADV-W filings via Web CRD/IARD on November 1, 2012. Firms that submit post-dated termination filings by 11 p.m., ET, on November 9, 2012, will not be assessed renewal fees for the terminated registrations on their Preliminary Renewal Statements. Firms that submit post-dated termination filings on, or after, November 12, 2012, will not be assessed renewal fees for the terminated jurisdictions on their Final Renewal Statements in January 2013. Those firms should see a credit balance on their Final Renewal Statements if the firm has not requested additional registrations during that time period to offset the credit balance.

      After submitting any termination filing, firms should query individual, branch and/or firm registrations to ensure that Form U5, BR Closing/Withdrawal, BDW and ADV-W filings process by the renewal filing deadline date of 6 p.m., ET, on December 21, 2012.

      Firms should exercise care when submitting all post-dated filings. Web CRD/IARD processes these forms when they are submitted and FINRA cannot withdraw a post-dated termination filing. A firm that submits a post-dated termination filing in error will have to file a new Form U4, BD, Form BR or Form ADV when Web CRD/IARD resumes normal processing on January 2, 2013, and Web CRD/IARD will assess new registration fees.

      Filing Form BDW

      The CRD Phase II Program allows firms requesting broker-dealer termination (either full or partial) to file their Forms BDW via Web CRD. Firms that file either a full or partial Form BDW by 11 p.m., ET, November 9, 2012, avoid the assessment of the applicable renewal fees on their Preliminary Renewal Statements, provided that the regulator is a CRD Phase II participant. Currently, only five regulators participate in Web CRD renewals for agent fees, but do not participate in CRD Phase II:

      •   NYSE MKT LLC
      •   Chicago Stock Exchange
      •   National Stock Exchange
      •   NYSE Arca, Inc.
      •   NASDAQ OMX PHLX, Inc.

      Firms requesting termination with any of those five regulators must submit a paper Form BDW directly to that regulator, as well as submit one electronically via Web CRD.

      The deadline for electronic filing of a Form BDW for any firm that wants to terminate a registration before year-end is 6 p.m., ET, December 21, 2012. This same date applies to the filing of any Form BDW with regulators that are not Phase II participants.

      Filing Forms ADV to Cancel Notice Filings or Forms ADV-W to Terminate Registrations

      Firms that file either a Form ADV Amendment, unmarking a state (generating the status of "Removal Requested at End of Year") or a Form ADV-W by 11 p.m., ET, November 9, 2012, avoid the assessment of applicable renewal fees on their Preliminary Renewal Statements. The deadline to file Form ADV Amendments or Form ADV-W for firms that want to cancel a notice filing or terminate a state registration before year-end is 6 p.m., ET, December 21, 2012.

      Removing Open Registrations

      Throughout the year, firms have access to the "Approved AG Reg Without FINRA Approval Report" via Web CRD. This report identifies agents with an approved jurisdiction registration but who do not have an approved FINRA registration. Firms should use this report to terminate obsolete jurisdiction registrations through the submission of a Form U5 or reinstate the FINRA positions through the filing of a Form U4 Amendment. Firms should request this report as soon as possible so they can identify individuals to terminate by November 9, 2012, to avoid renewal charges for those individuals on their Preliminary Renewal Statements. This report also advises the firm if there are no agents at the firm within this category.

      Final Renewal Statements

      On January 2, 2013, FINRA makes available all Final Renewal Statements on Web CRD/ IARD. These statements reflect the status of broker-dealer, agent (AG), investment adviser firm and investment adviser representative (RA) registrations, exempt reporting, or notice filings as of December 31, 2012. Any adjustments in fees owed resulting from registration terminations, approvals, notice filings or transitions after the Preliminary Renewal Statement appear on the Final Renewal Statement in Web CRD/IARD.

      •   Web CRD/IARD reflects an amount owed if a firm has more individuals, branch offices or jurisdictions registered and/or notice filed on Web CRD/IARD at year-end than it did when the Preliminary Renewal Statement was generated.
      •   Web CRD/IARD issues a refund if a firm has fewer individuals, branch offices or jurisdictions registered or notice filed at year-end than it did on the Preliminary Renewal Statement. Note that FINRA transfers overpayments to the firms' Daily Accounts on January 2, 2013. Firms that have a credit balance in their Daily Accounts may submit a written and signed refund request by mail to: FINRA, Finance Department, 9509 Key West Avenue, Rockville, MD 20850; or by fax to: (240) 386-5344. The request should include a print-out of the firm's credit balance as reflected on Web CRD/IARD.

      On or after January 2, 2013, FINRA-registered firms and joint BD/IA firms should access the Web CRD reports functionality for the Firm Renewal Report, which will list all individuals renewed with FINRA, AMEX, ARCA, BATS-YX, BATS-ZX, BOX, BX, C2, CBOE, CHX, EDGA, EDGX, ISE, NQX, NSX, NYSE, PHLX and each jurisdiction. Agents and RAs whose registrations are "approved" in any of these jurisdictions during November and December will be included in this roster. "Pending" and "deficient" registrations at year's end are not included in the Renewal Program. Firms will also be able to request the Branches Renewal Report that lists all branches for which they have been assessed renewal fees. Versions of these reports will also be available for download.

      Firms have until February 1, 2013, to report any discrepancies on the renewal reports. This is also the deadline for receipt of final payment. Specific information and instructions concerning the Final Renewal Statement and renewal reports will be available in a January 2013 Regulatory Notice.

    • 12-45 Guidance to Members Affected by Hurricane Sandy

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      Regulatory Relief

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Executive Representative
      Institutional
      Internal Audit
      Legal
      Operations
      Registration
      Senior Management
      Systems
      Key Topics

      Continuing Education
      Customer Communication
      Disaster Recovery
      Emergency Office Relocation
      Form U4
      Membership Applications
      Military Personnel &
      National Guard
      Regulatory Filings and Inquiries
      Referenced Rules & Notices

      Exchange Act Rules 17a-3 and 17a-4
      FINRA Rule 4510 Series
      Interpretive Material 1000-2
      NASD Rule 3012

      Executive Summary

      Due to the impact from Hurricane Sandy, FINRA is providing guidance on a number of regulatory and compliance issues, including emergency office relocations, continuing education requirements for registered personnel, registered personnel engaged in active military duty, regulatory filings and inquiries, membership applications and customer communications. In addition to the guidance discussed in this Notice, firms also are reminded that FINRA's website contains a dedicated page for other advisories issued by FINRA as a result of Hurricane Sandy.

      Questions

      Questions or comments concerning this Notice may be directed to:

      •   Daniel M. Sibears, Executive Vice President, Member Regulation Programs, at (202) 728-6911; or
      •   the FINRA Call Center at (301) 590-6500.

      Discussion

      FINRA recognizes that members need relief from many regulatory requirements as a result of the dislocation caused by Hurricane Sandy.

      Emergency Office Relocations

      To relocate displaced personnel, firms not impacted by Hurricane Sandy are encouraged to make office space available and to otherwise assist those who have been recently displaced. If a firm relocates displaced personnel to a temporary location that is not currently registered as a branch office or identified as a regular non-branch location, the firm should use its best efforts to provide written notification to its FINRA Regulatory Coordinator as soon as possible after establishing a new temporary office or space-sharing arrangement, to include at minimum: the office address, the entities involved, the names of registered personnel, a contact telephone number and, if possible, the expected duration. The notification should also indicate the type of business that the firm providing the space is engaged in (e.g., sharing arrangement is with an organization in a securities or some other kindred business).

      Regulatory Filings and Responses to FINRA Inquiries, Matters and Investigations

      Due to area power outages and network unavailability, some firms may have difficulty making timely regulatory filings and responding to regulatory inquiries or investigations. In some instances, there is currently no estimated date or time for power or servers to be restored. As a result, some firms may need extensions for open inquiries, investigations or upcoming filings, such as filings related to customer complaints that were received just prior to and in the days immediately following Hurricane Sandy. Firms that require extra time to comply with open requests or that may be delayed with required filings are to contact their Regulatory Coordinators or FINRA department making the request to seek extensions.

      Form U4

      FINRA is temporarily suspending the requirement to maintain updated Form U4 information (e.g., office of employment address) for registered employees affected by the referenced relocations associated with this event. In addition, it is not necessary to submit branch office applications for any newly opened temporary office locations or spacesharing arrangements established as a result of recent events.

      Customer Communication

      In instances where registered representatives are unavailable to service their customers, firms are encouraged to promptly place a notice on their websites indicating to affected customers who they may contact concerning their accounts, access to funds or securities.

      Qualifications Examinations and Continuing Education

      FINRA is extending the continuing education requirements and qualifications examination windows for candidates who reside in the Mid-Atlantic and North Eastern Regions of the United States declared a "major disaster" by the federal or state governments. Registered representatives who have a qualifications examination or a continuing education window due to expire between October 29, 2012, and November 9, 2012, will have their windows extended to December 10, 2012. As more information becomes available, FINRA may provide additional extensions. Please contact FINRA Field Support Services at (800) 999-6647 with any questions or if you require additional information on test center status in these areas.

      Information for Applicants for FINRA Membership and Existing Member Firms

      FINRA is currently unable to access its offices in New York City where its membership staff is primarily located. FINRA remains committed to working through membership applications so that decisions on applications may be issued as quickly as possible. FINRA staff may not have received application materials submitted electronically or via hard copy mail on or around Monday, October 29, 2012. Please contact FINRA's Membership Application Program staff to confirm that materials submitted during the week of October 29, 2012, were received.

      Military Personnel and National Guard

      We are aware the the National Guard has a substantial presence in the areas impacted by the storm to provide assistance. As such, please be reminded that FINRA By-Laws provide specific relief to FINRA registered persons engaged in the investment banking and securities business who volunteer or are called into active military duty. Under Interpretive Material 1000-2, such persons will be placed in a specially designated "inactive" status once FINRA is notified of their military call-up, but will remain registered for FINRA purposes. Such persons will remain eligible to receive transaction-related compensation, including continuing commissions, because they remain registered with a firm while on inactive status. Also, an employing firm may allow a registered person on inactive status to enter into an arrangement with another person registered with the employing firm to service his or her accounts and to share in commissions generated by those accounts. However, such a person on inactive status may not perform any duties of a registered person. In addition, dues and assessments identified in Article VI of the FINRA By-Laws will be waived for such persons. Firms should notify FINRA of such events by mailing or faxing to the Registration and Disclosure Department a letter (on firm letterhead) identifying the name and CRD number of the person called into active duty, the name and CRD number of the firm (or firms) with whom the person is associated, the date the firm received notification from the individual and a copy of the official call-up notification. Firms should mail letters notifying FINRA of military call-ups to FINRA Registration and Disclosure Department, P.O. Box 9495, Gaithersburg, MD 20898-9495 or fax them to (240) 386-4751. If you have questions about this process, please call the Gateway Call Center at (301) 590-6500. For more information view our Active Military Leave Guidance Web page.

    • 12-44 SEC Approves Amendments to FINRA Rule 4210 (Margin Requirements); Effective Dates: October 26, 2012, and January 23, 2013

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      Margin Requirements

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Margin Department
      Operations
      Regulatory Reporting
      Risk Management
      Senior Management
      Systems
      Key Topics

      Day Trading
      Designated Accounts
      Exempt Accounts
      Free-Riding
      Maintenance Margin
      Margin Requirements
      Non-Margin Eligible Equity Securities
      Option Spread Strategies
      Portfolio Margin
      Referenced Rules & Notices

      FINRA Rule 4110
      FINRA Rule 4210
      Regulation T
      Regulatory Notice 11-16
      Regulatory Notice 11-30
      SEA Rule 15c3-1

      Executive Summary

      The SEC approved amendments to FINRA Rule 4210 (Margin Requirements)1 related to option spread strategies, maintenance margin requirements for non-margin eligible equity securities, free-riding, "exempt accounts" and stress testing in portfolio margin accounts. The amendments related to option spread strategies become effective on October 26, 2012. All other amendments to FINRA Rule 4210 described in this Notice will become effective on January 23, 2013.

      The amended rule text is available at www.finra.org/notices/12-44.

      Questions concerning this Notice should be directed to:

      •   Rudolph Verra, Managing Director, Risk Oversight and Operational Regulation, at (646) 315-8811;
      •   Glen Garofalo, Director, Credit Regulation, at (646) 315-8464;
      •   Steve Yannolo, Project Manager, Credit Regulation, at (646) 315-8621; or
      •   Kathryn Moore, Assistant General Counsel, Office of General Counsel, at (202) 974-2974.

      Background and Discussion

      Option Spread Strategies

      In general, option spread strategies allow investors to realize limited reward in exchange for limited risk, and consist of combinations of "long" and "short" call option contracts or put option contracts or combinations of call and put option contracts. Option spreads can be paired in such ways that they offset each other in terms of risk. The total risk of the combined spreads is less than the sum of the risk of such spread positions if viewed as stand-alone strategies. FINRA amended the definition of a spread in FINRA Rule 4210(f)(2)(A)(xxxii) to mean a "long" and "short" position in different call option series, different put option series, or a combination of call and put option series, that collectively have a limited risk/reward profile. These must meet the following conditions:

      1. all options must have the same underlying security or instrument;
      2. all "long" and "short" option contracts must be either all American-style or all European-style;2
      3. all "long" and "short" option contracts must be either all listed or all OTC;3
      4. the aggregate underlying contract value of "long" versus "short" contracts within option type(s) must be equal; and
      5. the "short" option(s) must expire on or before the expiration date of the "long" option(s).

      FINRA amended the definitions for the specific option spread strategies currently recognized in the rule, along with the specific margin requirements associated with each spread, with the exception of a "long" box spread consisting of European-style options.4 The amendments retain this strategy in FINRA Rule 4210 with a maintenance margin requirement equal to 50 percent of the aggregate difference in the exercise prices.5

      The revised margin requirements are set forth in FINRA Rule 4210(f)(2)(H) and require that the "long" option contracts within such spreads must be paid for in full. The margin required for the "short" option contracts within such spreads is the lesser of: (1) the margin requirements pursuant to FINRA Rule 4210(f)(2)(E); or (2) the maximum potential loss. The maximum potential loss is determined by computing the intrinsic value (i.e., the in-the-money amount) of the options at price points for the underlying security or instrument that are set to correspond to every exercise price present in the spread. The intrinsic values are netted at each price point, and the maximum potential loss is the greatest loss, if any. The proceeds of the "short" options may be applied towards the cost of the "long" options and any margin requirement. FINRA Rule 4210(f)(2)(H)(iv) also makes clear that OTC option contracts that compose a spread must be issued and guaranteed by the same carrying broker-dealer and the carrying broker-dealer must also be a FINRA member. If the OTC option contracts are not issued and guaranteed by the same carrying broker-dealer, or if the carrying broker-dealer is not a FINRA member firm, then the "short" option contracts must be margined separately pursuant to FINRA Rule 4210(f)(2)(E)(iii) or (E)(iv).

      In addition, FINRA amended paragraph (f)(2)(N) of FINRA Rule 4210 to similarly conform the margin requirements for spreads that are permitted in a cash account.

      The following example illustrates how the maximum loss is determined:

      Option Type Quantity Expiration Exercise Price Stock Price
      50 55 60 65
      Call 10 Dec-2012 50 0 5,000 10,000 15,000
      Call -10 Dec-2012 55 0 0 -5,000 -10,000
      Call -10 Dec-2012 55 0 0 -5,000 -10,000
      Call 10 Dec-2012 65 0 0 0 0
      Maximum loss: 5,000

      Non-Margin Eligible Equity Securities

      The amendments also clarify the maintenance margin requirement for non-margin eligible equity securities. FINRA amended FINRA Rule 4210(c)(1) regarding securities held "long" to clarify that the maintenance margin requirement of 25 percent of the current market value would apply only to margin securities as defined in Regulation T.6 In addition, consistent with the requirement outlined in Regulatory Notice 11-16, FINRA Rule 4210(c)(6) specifies that the maintenance margin requirement for non-margin eligible equity securities held "long" is equal to 100 percent of the current market value.7

      However, FINRA notes that the amendments supersede two provisions of Regulatory Notice 11-16. Firms may no longer extend maintenance loan value on non-margin eligible equity securities either to satisfy maintenance margin deficiencies or when used to collateralize non-purpose loans, except as otherwise provided by FINRA in writing. To this end, FINRA will allow a firm to extend credit on a non-margin eligible equity security only to the extent: (1) the equity security is collateralizing a non-purpose loan debit; and (2) such equity security can be liquidated in a period not exceeding 20 business days, based on a rolling 20 business day median trading volume.

      The maintenance loan value for the non-margin eligible equity security will be calculated based on the applicable maintenance margin requirements for a margin eligible equity security. If the equity security fails to meet the trading volume requirement, then the equity security would no longer be entitled to maintenance loan value, and a 100 percent maintenance margin requirement would be applied together with a deduction to net capital pursuant to SEA Rule 15c3-1 and, if applicable, FINRA Rule 4110(a). Notwithstanding the foregoing, FINRA will allow, in the case of offshore mutual funds, a firm to extend maintenance loan value, based on a 25 percent maintenance margin requirement, to collateralize a non-purpose loan, provided that the fund has an affiliation with a U.S.-based fund registered with the SEC under the Investment Company Act of 1940, and the fund shares can be liquidated or redeemed daily.

      Similar to the treatment above, FINRA amended FINRA Rule 4210(f)(8)(B)(iii) to clarify that the special maintenance margin requirement for day traders, based on the cost of all day trades made during the day, is equal to 25 percent of the current market value for margin eligible equity securities, and 100 percent of current market value for non-margin eligible equity securities.8

      In addition, FINRA adopted FINRA Rule 4210(g)(7)(E) for non-margin eligible equity securities held "long" and "short" in a portfolio margin account. Consistent with the margin treatment above, the maintenance margin requirement for non-margin eligible equity securities held "long" in a portfolio margin account is equal to 100 percent of the current market value at all times.9 The maintenance margin requirement for non-margin eligible equity securities held "short" in a portfolio margin account is equal to 50 percent of the current market value at all times.10

      FINRA also amended FINRA Rule 4210(g)(7)(D) to clarify that, although non-margin eligible equity securities are not eligible for portfolio margin treatment, such securities may be carried in a portfolio margin account, provided that the member firm applies strategy-based margin requirements, unless such securities are subject to other provisions of paragraph (g). For example, non-margin eligible equity securities may be carried in a portfolio margin account, but the amendment clarifies that they would be subject to the margin treatment set forth in FINRA Rule 4210(g)(7)(E), rather than FINRA Rule 4210(c).

      Free-Riding

      FINRA amended FINRA Rule 4210(f)(9) (Free-Riding in Cash Accounts Prohibited) to eliminate the exemption for a "designated account"11 consistent with Regulation T.

      Exempt Accounts

      FINRA amended FINRA Rule 4210(f)(2)(E)(iv) to eliminate an outdated definition of "exempt account" that specifies reduced maintenance margin requirements for OTC put and call options on certain U.S. Government and U.S. Government Agency debt securities. An "exempt account" must satisfy the definition in FINRA Rule 4210(a)(13) to qualify for the reduced margin on such securities.

      Stress Testing

      FINRA deleted the monitoring requirement in FINRA Rule 4210(g)(1)(D) to stress test portfolio margin accounts in the aggregate. Firms must continue to stress test each individual portfolio margin account.

      Technical Changes

      Finally, FINRA amended FINRA Rule 4210 to make non-substantive technical and stylistic changes to encourage consistency throughout the rule and enhance readability.


      1 See Securities Exchange Act Release No. 67751 (August 29, 2012), 77 FR 54636 (September 5, 2012) (SEC Order Approving File No. FINRA-2012-024).

      2 American-style options can be exercised or assigned at anytime during the life of the contract. European-style options can only be exercised or assigned at the time of expiration.

      3 Listed (defined in FINRA Rule 4210(f)(2)(A) (xxiv)) as used with reference to a call or put option contract means an option contract that is traded on a national securities exchange and issued and guaranteed by a registered clearing agency. OTC (defined in FINRA Rule 4210(f)(2) (A)(xxvii)) as used with reference to a call or put option contract means an over-the-counter option contract that is not traded on a national securities exchange and is issued and guaranteed by a carrying broker-dealer.

      4 A box spread (defined in FINRA Rule 4210(f) (2)(A)(vi)) means an aggregation of positions in a "long" call and "short" put with the same exercise price ("buy side") coupled with a "long" put and "short" call with the same exercise price ("sell side") structured as: (A) a "long box spread" in which the sell side exercise price exceeds the buy side exercise price, or (B) a "short box spread" in which the buy side exercise price exceeds the sell exercise price, all of which have the same contract size, underlying component or index and time of expiration, and are based on the same aggregate current underlying value.

      5 See FINRA Rule 4210(f)(2)(H)(v)e.

      6 See Section 220.2 of Regulation T for the definition of margin security.

      7 See Regulatory Notice 11-16 (April 2011) and Regulatory Notice 11-30 (June 2011), which delayed the effective date of Regulatory Notice 11-16 until October 3, 2011.

      8 The special maintenance margin requirement for non-margin eligible equity securities for day traders is consistent with the margin requirements outlined in Regulatory Notice 11-16.

      9 The maintenance margin requirement for non-margin eligible equity securities held "long" in a portfolio margin account is consistent with the margin requirements outlined in Regulatory Notice 11-16. In addition, this margin treatment is consistent with current interpretation 4210(g) (6)(B)(i)/01, which will be deleted in light of the amended rule text.

      10 The maintenance margin requirement for "short" non-margin eligible equity securities held in a portfolio margin account supersedes the maintenance margin requirement for such securities specified in Regulatory Notice 11-16.

      11 See FINRA Rule 4210(a)(4) for the definition of designated account.

    • 12-43 Securities Industry/Regulatory Council on Continuing Education Issues Firm Element Advisory Update

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      Continuing Education

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Continuing Education
      Legal
      Registration
      Senior Management
      Key Topics

      Continuing Education
      Firm Element
       

      The Securities Industry/Regulatory Council on Continuing Education (Council) has released its Fall 2012 Firm Element Advisory (FEA). The Council produces the FEA to identify regulatory and sales practice topics that firms should consider in their Firm Element training plans. Topics updated or added since the prior FEA are indicated in the document as such.

      The updated FEA is available at: http://www.cecouncil.com/Documents/FEA_Semi_Annual_Update.pdf.

      The FEA topics are not exhaustive and are intended as a guide to firms when they determine what to include in their training plans. Firms should consider the specific nature of their business, clients, products and services when creating their training plans.

      Previous editions of the FEA, as well as a matrix indicating the topics covered in those editions, are available at the Council's website at www.cecouncil.com.

      Questions concerning this Notice should be directed to:

      •    Roni Meikle, Director, Continuing Education, FINRA, at (212) 858-4084.

    • 12-42 FINRA Requests Comment on a Revised Proposal to Identify and Manage Conflicts Involving the Preparation and Distribution of Debt Research Reports; Comment Period Expires: December 20, 2012

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      Debt Research

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Fixed Income
      Investment Banking
      Legal
      Research
      Senior Management
      Trading
      Key Topics

      Conflicts of Interest
      Fixed Income
      Research
      Trading
      Referenced Rules & Notices

      FINRA Rule 2111
      FINRA Rule 4512
      NASD IM-2440-2
      NASD Rule 2711
      Regulatory Notice 11-11
      Regulatory Notice 12-09

      Executive Summary

      FINRA seeks comment on a revised proposal addressing debt research conflicts of interest that includes amended exemptions for research distributed to certain institutional investors and for firms with limited principal debt trading activity. The revised proposal also includes other changes in response to comments on the prior proposal set forth in Regulatory Notice 12-09.

      The text of the proposed rule can be found at www.finra.org/notice/12-42.

      Questions concerning this Notice should be directed to:

      •    Philip Shaikun, Associate Vice President, Office of General Counsel (OGC), at (202) 728-8451; and
      •   Racquel Russell, Assistant General Counsel, OGC, at (202) 728-8363.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by December 10, 2012.

      Member firms and other interested parties can submit their comments using the following methods:

      •   Emailing comments to pubcom@finra.org; or
      •   Mailing comments in hard copy to:

      Marcia E. Asquith
      Office of the Corporate Secretary
      FINRA
      1735 K Street, NW
      Washington, DC 20006-1506

      To help FINRA process and review comments more efficiently, persons should use only one method to comment on the proposal.

      Important Notes: The only comments that FINRA will consider are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the FINRA website. Generally, FINRA will post comments as they are received.1

      Before becoming effective, a proposed rule change must be authorized for filing with the Securities and Exchange Commission (SEC) by the FINRA Board of Governors, and then must be filed with the SEC pursuant to Section 19(b) of the Securities Exchange Act of 1934 (SEA).2

      Update on November 8, 2012: Due to the disruption of normal business operations relating to Hurricane Sandy, FINRA is extending the deadline to provide comment to December 20, 2012.

      Background and Discussion

      In February 2012, FINRA requested comment on a proposal to address debt research conflicts of interest. That proposal, set out in Regulatory Notice 12-09, generally provided retail customers with the same extensive protections provided to recipients of equity research, while exempting debt research distributed solely to eligible institutional investors (institutional debt research) from many of those structural protections, as well as prescriptive disclosure requirements.

      The proposal defined "institutional investor" as an "institutional account" in FINRA Rule 4512(c).3 Eligible institutional investors were required to affirmatively notify a member firm in writing if they wished to receive institutional debt research and forego the "retail" protections of the rule.

      The proposal also included an exemption from the review, supervision, budget and compensation provisions for broker-dealers that engage in limited investment banking activity. The Notice further asked for input on a potential exemption for firms with limited principal trading activity or revenues generated from debt trading.

      In response to comments and other industry feedback, FINRA has revised the proposed exemptions as detailed below. FINRA invites comment on the scope and content of each of the proposed exemptions and specifically requests cost/benefit data to help assess the appropriateness of those exemptions or any alternatives.

      Institutional Debt Research Exemption

      Several commenters raised issues regarding the provision that requires otherwise eligible institutional investors to affirmatively elect to receive institutional debt research. These commenters asserted that the provision is unnecessarily burdensome and may result in excluding a significant number of institutional investors from receiving the debt research that they receive today.

      In response, FINRA is proposing to establish a higher tier of institutional investors that could receive institutional debt research without their written agreement. Instead, the broker-dealer could obtain agreement by way of negative consent, if the institutional investor chose not to notify the firm that it wishes to be treated as a retail investor. The higher tier exemption would be available to an institutional investor that:

      1. meets the definition of Qualified Institutional Buyer (QIB);4 and
      2. satisfies the new FINRA Rule 2111 institutional suitability standards that require that:
      i. the member firm has a reasonable basis to believe that the institutional investor is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies involving a "debt security" or "debt securities," as defined in the proposed debt research rules; and
      ii. the QIB has affirmatively indicated that it is exercising independent judgment in evaluating the firm's recommendations pursuant to the suitability rule, provided such affirmation covers transactions in debt securities.

      The affirmation need not specify transactions in debt securities but must be broad enough to fairly encompass such transactions.

      Other institutional investors that meet the definition of FINRA Rule 4512(c) but do not satisfy the higher tier requirements could still affirmatively elect in writing to receive institutional debt research. Retail investors could not choose to receive institutional debt research.

      FINRA believes that this approach responds to commenters' concerns by maintaining the flow of debt research to a substantial number of institutional investors and allowing firms to leverage existing compliance efforts, while ensuring that those investors who receive institutional debt research through negative consent have a high level of sophistication and experience in evaluating transactions involving debt securities. FINRA notes that its current mark-up policy exempts transactions with a QIB that is purchasing or selling a non-investment-grade debt security when the dealer has determined that the QIB has the capacity to evaluate independently the investment risk and in fact is exercising independent judgment in deciding to enter into the transaction.5

      FINRA requests comment on this approach. In particular, FINRA asks the following:

      •   To what extent can firms use existing compliance systems and procedures to identify and track persons that meet the proposed higher tier requirements?
      •   Is there another higher tier standard that strikes a more appropriate balance between (1) protecting potentially vulnerable investors in debt securities and (2) maintaining information flow—and minimizing the burdens and costs of distributing debt research—to sophisticated institutional investors?
      •   For example, should FINRA instead adopt a higher tier consisting of persons that satisfy both the definition of Rule 4512(c) and the institutional suitability requirements in Rule 2111 as applied to debt securities without needing to satisfy the QIB standard? If so, why is that a more appropriate standard?
      •   What would be the advantages and disadvantages and costs and benefits associated with FINRA's proposed approach or an alternative? How would it affect competition among firms and among institutional investors? How would it affect investment performance? How effectively would it protect investors from the negative effects of conflicts in debt research?

      Exemption for Firms With Limited Principal Debt Trading Activity

      The revised proposal includes for the first time an exemption for firms with limited principal debt trading activity. The exemption extends to firms that have (1) gains or losses (in absolute value) of less than $15 million from principal debt trading activity on average over the previous three years and (2) fewer than 10 debt traders. Firms that satisfy these criteria would be exempt from provisions that require separation between debt research analysts and those engaged in sales and trading and principal trading activities with respect to pre-publication review of debt research, supervision and compensation of debt research analysts and debt research budget determination.

      In crafting the exemption, FINRA sought a rational principal debt trading revenue threshold for small firms where the conflicts addressed by the proposal might be minimized. FINRA further considered the ability of firms with limited personnel to comply with the provisions that require effective separation of principal debt trading and debt research activities.

      To those ends, FINRA reviewed and analyzed available TRACE and FOCUS data, particularly with respect to small firms (150 or fewer registered representatives). FINRA supplemented its analysis with survey results from 72 geographically diverse small firms that engage in principal debt trading in varying magnitudes. The survey sought more specific information on the nature of the firms' debt trading—the breakdown between trading in corporate versus municipal securities (which are excepted from the proposal) and the amount of "riskless principal" trading—as well as the number of debt traders, whether any of those traders write research or market commentary, and the prospective ability of firms to comply with the proposal's structural separation requirements.

      Based on the data, FINRA analyzed the range of principal debt revenues generated by small firms and determined that $15 million would be a reasonable threshold for the exemption.6 However, because the revenue figure represents a net gain or loss (in absolute terms) from principal debt trading activity, the potential exists that a firm with substantial trading operations could have an anomalous year that yields net revenues under the threshold. Therefore, FINRA added as a backstop the second criterion of having fewer than 10 debt traders to ensure the exemption applies only to firms with modest debt trading activity. Furthermore, based on our assessment, firms with 10 or more debt traders are more capable of dedicating a debt trader to writing research. FINRA notes that only eight of the 72 responding survey firms indicated that they have debt traders that write either research or market commentary—which is excepted from the definition of "debt research report" under the proposal—on debt securities.

      For the purposes of the exemption, a debt trader is defined as "a person, with respect to transactions in debt securities, who is engaged in proprietary trading or the execution of transactions on an agency basis." Firms that rely on the exemption must document the basis for their eligibility and maintain for a period of not less than three years records of any communication that, but for this exemption, would be subject to the prohibitions regarding pre-publication review by sales and trading and principal trading personnel.

      FINRA requests comment on this proposed exemption. In particular, FINRA asks the following:

      •   Are gains and losses (in absolute value) from principal debt trading and number of debt traders the appropriate criteria to establish an exemption from the provisions that require separation of debt research and sales and trading and principal trading activities?
      •   Are the thresholds of less than $15 million in principal debt trading revenues and fewer than 10 debt traders the appropriate metrics to be eligible for the exemption?
      •   What would be the advantages and disadvantages and costs and benefits associated with FINRA's proposed approach or an alternative? How would it affect competition among firms? To what extent would investors dealing with exempt firms be harmed by receiving unreliable conflicted research? We request quantifications of impacts described by commenters where available.

      Exemption for Firms With Limited Investment Banking Activity

      The revised proposal maintains an exemption imported from the equity research rules for firms that engage in limited investment banking activity. Specifically, it excludes those firms that during the previous three years, on average per year, have participated in 10 or fewer investment banking services transactions as manager or co-manager and generated $5 million or less in gross investment banking revenues from those transactions. The proposal exempts eligible firms from provisions that require separation between debt research analysts and investment banking personnel with respect to pre-publication review of debt research, supervision and compensation of debt research analysts and debt research budget determination.

      FINRA reviewed and analyzed deal data for calendar years 2009 through 2011 to determine whether it should make any adjustments to these exemption standards. The review included firms that either managed or co-managed deals and earned underwriting revenues from those transactions during the review period. The analysis found that 155 such firms—or 49 percent—would have been eligible for the exemption. The data further suggested that incremental upward adjustments to the exemption thresholds would not result in a significant number of additional firms eligible for the exemption. As such, FINRA believes the current exemption produces a reasonable and appropriate universe of exempted firms.

      FINRA requests comment on this proposed exemption. In particular, FINRA asks the following:

      •   Are the criteria and thresholds appropriate?
      •   What would be the advantages and disadvantages and costs and benefits associated with maintaining FINRA's proposed approach or an alternative? How would it affect competition among firms? To what extent would investors dealing with exempt firms be harmed by receiving unreliable conflicted research? We request quantifications of impacts described by commenters where available.

      Other Changes

      The revised proposal also makes clarifying and conforming changes in response to comments received on the proposal in Regulatory Notice 12-09. These include:

      •   Definition of "debt research report"—conforms the definition of "debt research report" to the SEC's Regulation Analyst Certification definition and clarifies that the definition covers an analysis of either a debt security or an issuer and excludes reports on types or characteristics of debt securities. The proposal also includes all of the exceptions to the definition in the rule text.
      •   Disclosure of Conflicts—requires disclosure of material conflicts that are known or should have been known by the member firm or debt analyst at the time of publication or distribution of the report. This standard replaces the requirement in the previous proposal to disclose "all conflicts that reasonably could be expected to influence the objectivity of the debt research report."
      •   Compensation Disclosure for Foreign Sovereign Debt—provides that, in lieu of disclosing investment banking compensation received by a non-U.S. affiliate from foreign sovereigns, firms may instead implement information barriers between that affiliate and the debt research department to prevent direct or indirect receipt of such information. However, disclosure still is required if the debt analyst has actual knowledge of receipt of investment banking compensation by the non-U.S. affiliate.
      •   Road Show Prohibition—clarifies that the prohibition applies only with respect to road shows and other marketing activities on behalf of an issuer "related to an investment banking services transaction."
      •   Prohibition on Joint Due Diligence—deletes the provision that prohibited joint due diligence by debt research analysts and investment banking personnel, conforming to the equity research rules and a change to the Global Settlement.
      •   Valuation Method Disclosure—requires explanation of "valuation method used" only where a specific valuation method has been employed.
      •   Research Analyst Interactions with Sales and Trading—adds clarifying language to the rule text that, in determining what is inconsistent with an analyst's published research, firms may consider the context, including that the investment objectives or time horizons being discussed differ from those underlying the analyst's published views.7

      Request for Comment

      FINRA requests comments on the revised proposal. We specifically request comments on the economic impact and expected beneficial results of the entire proposal, including the portions proposed previously and not amended in this proposal. Are the proposals well designed to reduce conflicts arising in current preparation of debt research? Are the costs imposed by the rule justified by the concerns arising from the potential for debt research? How will the rule change business practices and competition among firms underwriting and trading debt instruments, whether U.S. or non-U.S. based? What second order impacts could result? We request quantified comments where possible.


      1 FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Persons should submit only information that they wish to make publicly available. See Notice to Members 03-73 (November 2003) (NASD Announces Online Availability of Comments) for more information.

      2 See SEA Section 19 and the rules thereunder. After a proposed rule change is filed with the SEC, the proposed rule change generally is published for public comment in the Federal Register. Certain limited types of proposed rule changes, however, take effect upon filing with the SEC. See SEA Section 19(b)(3) and SEA Rule 19b-4.

      3 Thus, the proposed definition would cover: (a) a bank, savings and loan association, insurance company or registered investment company; (b) an investment adviser registered either with the SEC under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or any agency or office performing like functions); or (c) any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million.

      4 A QIB includes an entity acting for its own account or that of another QIB, that owns and invests on a discretionary basis at least $100 million in the securities of unaffiliated entities. It also includes: a dealer that owns or invests on a discretionary basis at least $10 million in unaffiliated securities; a dealer acting in a riskless principal capacity on behalf of a QIB; a registered investment company that is part of a family that owns at least $100 million in unaffiliated securities; and a bank, savings and loan association or foreign bank that owns or invests $100 million in unaffiliated securities and has audited net worth of at least $25 million. See Rule 144A of the Securities Act of 1933.

      5 See NASD IM-2440-2.

      6 FINRA made reasoned assumptions regarding principal debt trading revenues where data was unavailable or incomplete. For example, many small firms report trading revenues on FOCUS Part IIA, which has a single line item for combined debt and equity trading. Many of the firms surveyed provided an actual or estimated breakdown of their debt and equity trading revenues. In other circumstances, FINRA assumed for the purposes of the analysis that all of the reported revenues on that line item came from debt trading. This underestimates the population of firms eligible for the exemption.

      7 See Regulatory Notice 11-11 (FINRA Requests Comment on Concept Proposal to Identify and Manage Conflicts Involving the Preparation and Distribution of Debt Research Reports) at note 12.

    • 12-41 FINRA Amends the TAF Rate for Transactions in Covered Security Futures; Effective Date: October 1, 2012

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      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Finance
      Internal Audit
      Legal
      Operations
      Senior Management
      Systems
      Trading
      Key Topics

      Security Futures
      Trading Activity Fee
      Referenced Rules & Notices

      FINRA By-Laws, Schedule A, Section 1
      NTM 02-75
      NTM 02-63
      Regulatory Notice 12-31
      Regulatory Notice 10-56

      Executive Summary

      Effective October 1, 2012, the Trading Activity Fee (TAF) rate for transactions in covered security futures will decrease from $0.04 for each security futures contract traded on a round-turn basis carried in a securities account to $0.00008, with a minimum fee of $0.01 per round-turn transaction.1 The new rate applies to round-turn transactions in security futures subject to the TAF occurring on or after October 1, 2012.

      The text of the new rule is available in the online FINRA Manual.

      Questions concerning this Notice should be directed to:

      •    FINRA Finance at (240) 386-5397; or
      •    The Office of General Counsel at (202) 728-8071.

      Background & Discussion

      FINRA's primary member fee structure consists of the Personnel Assessment, the Gross Income Assessment and the TAF. Revenue from these fees funds FINRA's regulatory activities, including examinations, financial monitoring, and FINRA's policymaking, rulemaking and enforcement activities.2 Currently, the TAF is generally assessed on round-turn transactions in security futures held in securities (as opposed to futures) accounts.3 For transactions in covered security futures, member firms must pay to FINRA a fee for each round-turn transaction (treated as including one purchase and one sale of a contract of sale for future delivery) of a security future.4 The current TAF rate for security future transactions is $0.04 per contract for each round-turn transaction.5

      Effective September 1, 2012, the National Futures Association (NFA) amended its assessment fee on diminutive notional value contracts and security futures products from $0.04 for each security futures contract traded on a round-turn basis carried in a commodity futures account to $0.00008 per round-turn transaction with a minimum fee of $0.01 per round-turn transaction.6 To ensure there is no disincentive to hold security futures in securities accounts because of the TAF rate, FINRA has amended the TAF rate for round-turn security future transactions from $0.04 per contract for each round-turn transaction to $0.00008 per contract for each round-turn transaction, with a minimum fee of $0.01 per round-turn transaction.7

      Beginning with round-turn transactions in covered security futures occurring on or after October 1, 2012, the TAF rate for such transactions is $0.00008 per contract, with a minimum fee of $0.01 per round-turn transaction. The new rate will apply to any round-turn transaction in a covered security future subject to the TAF occurring on or after October 1, 2012. The TAF Self-Reporting Form8 will reflect this new rate beginning with TAF Self-Reporting Forms due on November 15, 2012,9 which reflect trades subject to the TAF occurring in October 2012.10


      1. See SR-FINRA-2012-044.

      2. See FINRA By-Laws, Schedule A, § 1(a).

      3. See FINRA By-Laws, Schedule A, § 1(a), (b)(2)(J).

      4. See FINRA By-Laws, Schedule A, § 1(b)(3)(C).

      5. See FINRA By-Laws, Schedule A, § 1. This rate has been in place since October 1, 2002. See Notice to Members 02-75 (November 2002).

      6. See NFA Notice to Members I-12-15 (July 20, 2012); see also NFA Filing from Thomas W. Sexton, Senior Vice President and General Counsel, NFA, to David A. Stawick, Office of the Secretariat, CFTC, dated June 1, 2012.

      7. Since the TAF was adopted, FINRA has charged trades in security futures that result in delivery of the underlying securities based on the TAF equity rate structure rather than the rate for round-turn transactions in security futures. See Notice to Members 02-63, Question 10 (Sept. 2002); see also TAF Frequently Asked Question 500.4. FINRA is not changing this guidance. As of July 1, 2012, the TAF rate on covered equity securities is $0.000119 per share, with a per-transaction cap of $5.95. See Regulatory Notice 12-31 (June 2012).

      8. FINRA maintains a TAF page on its website that provides firms with additional guidance on the TAF, including Frequently Asked Questions (FAQ), as well as applicable forms. See Regulatory Notice 10-56 (October 2010).

      9. The TAF is self-reported by firms on a monthly basis. See TAF FAQ 100.5. TAF Self-Reporting Forms should be submitted to FINRA by the tenth business day following the end of the month. See TAF FAQ 100.7.

      10. The TAF is calculated based on trade date, not settlement date. See TAF FAQ 100.8.

    • 12-40 SEC Approves New FINRA Rule 5123 Regarding Private Placements of Securities; Effective Date: December 3, 2012

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      Private Placements of Securities

      Regulatory Notice
      Notice Type

      New Rule
      Suggested Routing

      Compliance
      Corporate Finance
      Legal
      Operations
      Senior Management
      Key Topics

      Institutional Accounts
      Private Placement Memorandum
      Private Placements
      Regulation D
      Referenced Rules & Notices

      FINRA Rule 5110
      FINRA Rule 5122
      FINRA Rule 5123
      Regulatory Notice 09-27
      Regulatory Notice 10-22

      Executive Summary

      The SEC approved new FINRA Rule 5123 to require each FINRA member firm that sells an issuer's securities in a private placement, subject to certain exemptions, to file with FINRA a copy of any private placement memorandum, term sheet or other offering document the firm used within 15 calendar days of the date of the sale, or indicate that it did not use any such offering documents.1 Firms must file the required offering documents electronically with FINRA through the FINRA Firm Gateway.2 The rule becomes effective December 3, 2012, and applies prospectively to private placements that begin selling efforts on or after that date.

      In addition, effective December 3, 2012, firms must submit filings regarding member firm private offerings (MPOs), as required by FINRA Rule 5122 (Private Placements of Securities Issued By Members), through the Firm Gateway.3

      The text of Rule 5123 is set forth in Attachment A.

      Questions regarding this Notice should be directed to:

      •    Joseph E. Price, Senior Vice President, Corporate Financing/Advertising Regulation, at (240) 386-4623;
      •    Paul Mathews, Director, Corporate Financing Department, at (240) 386-4623;
      •    Lisa Jones Toms, Associate Director and Senior Counsel, Corporate Financing Department, at (240) 386-4661; or
      •    Stan Macel, Assistant General Counsel, Office of General Counsel (OGC), at (202) 728-8056.

      Background & Discussion

      FINRA Rule 5123 is part of a multi-pronged approach to enhance oversight and investor protection in private placements. In Rule 5122, FINRA established standards on disclosure, use of proceeds and a filing requirement for private placements issued by a member firm or a control entity. FINRA also has previously provided guidance on the scope of a firm's responsibility to conduct a reasonable investigation of private placement issuers in Regulatory Notice 10-22.

      Rule 5123 will provide FINRA with more timely and complete information about the private placement activities of firms on behalf of other issuers. Under the rule, each firm that sells a security in a private placement, subject to certain exemptions, must file a copy of the offering document with FINRA within 15 calendar days of the date of the first sale.4 If a firm sells a private placement without using any offering documents, then the firm should indicate that it did not use any such offering documents. The rule requires firms to file any materially amended versions of the documents originally filed.

      The rule exempts some private placements sold solely to qualified purchasers, institutional purchasers and other sophisticated investors.

      Private Placement Filing System

      FINRA is developing a private placement filing system to receive the offering documents that firms must file under the new rule. The filing system, which firms will access through the Firm Gateway, will provide an efficient way for firms to electronically submit the filings in searchable Portable Document Format (PDF) to FINRA. In response to comments during the rulemaking process, the filing system will allow a firm to submit a filing on behalf of other firms involved in the sale of the private placement. A firm that makes a filing on behalf of itself and other firms must identify the other firms as part of its submission.

      Notice Filings

      On December 3, 2012, when the new filing system becomes operational, firms that file offering documents pursuant to Rule 5122 must use the new filing system. Firms are reminded that filings under Rules 5123 and 5122 are "notice" type filings. As such, FINRA will not respond to the filings with a comment letter or provide a clearance letter.

      Confidential Treatment and Exemptions

      Similar to Rule 5122, FINRA will accord confidential treatment to all documents and information filed pursuant to Rule 5123. The rule also provides firms with a method to apply for an exemption from its provisions for good cause pursuant to the Rule 9600 Series.


      1 See Securities Exchange Act Release No. 67157 (June 7, 2012), 77 FR 35457 (June 13, 2012) (Notice of Filing of Amendments No. 2 and No. 3 and Order Granting Accelerated Approval of File No. SR-FINRA-2011-057).

      2 Firm Gateway is an online compliance too that provides consolidated access to FINRA applications and allows firms to submit required filings electronically to meet their compliance and regulatory obligations.

      3 Offering documents for MPOs are currently filed with the Corporate Financing Department via email. See Regulatory Notice 09-27, which announced the effective date for Rule 5122 and provided details concerning the filing requirements for the private placement memoranda or other offering documents.

      4 This 15-day time period tracks the filing requirement for issuers under SEC Form D. See SEC Form D (Notice of Exempt Offering of Securities) General Instructions ("An issuer must file a new notice with the SEC for each new offering of securities no later than 15 calendar days after the "date of first sale" of securities in the offering...).


      Attachment A

      5100. SECURITIES OFFERINGS, UNDERWRITING AND COMPENSATION

      * * * * *

      5120. Offerings of Members' Securities

      * * * * *

      5123. Private Placements of Securities

      (a) Filing Requirements

      Each member that sells a security in a non-public offering in reliance on an available exemption from registration under the Securities Act ("private placement") must: (i) submit to FINRA, or have submitted on its behalf by a designated member, a copy of any private placement memorandum, term sheet or other offering document, including any materially amended versions thereof, used in connection with such sale within 15 calendar days of the date of first sale; or (ii) indicate to FINRA that no such offering documents were used.
      (b) Exemptions

      The following private placements are exempt from the requirements of this Rule:
      (1) offerings sold by the member or person associated with the member solely to any one or more of the following:
      (A) institutional accounts, as defined in Rule 4512(c);
      (B) qualified purchasers, as defined in Section 2(a)(51)(A) of the Investment Company Act;
      (C) qualified institutional buyers, as defined in Securities Act Rule 144A;
      (D) investment companies, as defined in Section 3 of the Investment Company Act;
      (E) an entity composed exclusively of qualified institutional buyers, as defined in Securities Act Rule 144A;
      (F) banks, as defined in Section 3(a)(2) of the Securities Act;
      (G) employees and affiliates, as defined in Rule 5121, of the issuer;
      (H) knowledgeable employees as defined in Investment Company Act Rule 3c-5;
      (I) eligible contract participants, as defined in Section 3(a)(65) of the Exchange Act; and
      (J) accredited investors described in Securities Act Rule 501(a)(1), (2), (3) or (7).
      (2) offerings of exempted securities, as defined in Section 3(a)(12) of the Exchange Act;
      (3) offerings made pursuant to Securities Act Rule 144A or SEC Regulation S;
      (4) offerings of exempt securities with short term maturities under Section 3(a)(3) of the Securities Act and debt securities sold by members pursuant to Section 4(2) of the Securities Act so long as the maturity does not exceed 397 days and the securities are issued in minimum denominations of $150,000 (or the equivalent thereof in another currency);
      (5) offerings of subordinated loans under SEA Rule 15c3-1, Appendix D (see NASD Notice to Members 02-32 (June 2002)); 11-01 January 2011 11-04
      (6) offerings of "variable contracts," as defined in Rule 2320(b)(2);
      (7) offerings of modified guaranteed annuity contracts and modified guaranteed life insurance policies, as referenced in Rule 5110(b)(8)(E);
      (8) offerings of non-convertible debt or preferred securities that meet the transaction eligibility criteria for registering primary offerings of non-convertible securities on Forms S-3 and F-3;
      (9) offerings of securities issued in conversions, stock splits and restructuring transactions that are executed by an already existing investor without the need for additional consideration or investments on the part of the investor;
      (10) offerings of securities of a commodity pool operated by a commodity pool operator, as defined under Section 1a(11) of the Commodity Exchange Act;
      (11) business combination transactions as defined in Securities Act Rule 165(f);
      (12) offerings of registered investment companies;
      (13) standardized options, as defined in Securities Act Rule 238; and
      (14) offerings filed with FINRA under Rules 2310, 5110, 5121 and 5122, or exempt from filing thereunder in accordance with Rule 5110(b)(7).
      (c) Confidential Treatment

      FINRA shall accord confidential treatment to all documents and information filed pursuant to this Rule and shall utilize such documents and information solely for the purpose of review to determine compliance with the provisions of applicable FINRA rules or for other regulatory purposes deemed appropriate by FINRA.
      (d) Application for Exemption

      Pursuant to the Rule 9600 Series, FINRA may exempt a member or associated person from the provisions of this Rule for good cause shown.

      * * * * *

    • 12-39 FINRA Requests Comment on TRACE Dissemination Issues; Comment Period Expires: November 19, 2012

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      Trade Reporting and Compliance Engine (TRACE)

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Fixed Income
      Legal
      Trading
      Key Topics

      Dissemination Caps
      Rule 144A Transactions
      TRACE Dissemination
      TRACE-Eligible Security
      Referenced Rules & Notices

      FINRA Rule 6710
      FINRA Rule 6750
      Securities Act Section 3
      Securities Act Section 5
      Securities Act Rule 144A

      Executive Summary

      FINRA requests comment on two issues relating to the dissemination of information on TRACE-eligible securities transactions. First, FINRA seeks input on whether it should maintain or modify current TRACE dissemination caps, under which the actual size (volume) of a transaction over a certain par value is not displayed in disseminated real-time TRACE transaction data. Second, FINRA requests comment on whether transactions in TRACE-eligible securities effected pursuant to Securities Act Rule 144A1 (Rule 144A transactions) should be disseminated, and if so, the scope and manner of such dissemination.

      Questions regarding this Notice should be directed to:

      •    Elliot R. Levine, Associate Vice President and Counsel, Transparency Services, at (202) 728-8405; or
      •    Sharon Zackula, Associate Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-8985.

      [On September 24, 2012 the comment period was extended from October 10, 2012 to November 9, 2012.]

      Update on November 1, 2012: Due to the disruption of normal business operations relating to Hurricane Sandy, FINRA is extending the deadline to provide comment from November 9, 2012, to November 19, 2012

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by October 10, 2012.

      Member firms and other interested parties can submit their comments using the following methods:

      •  Emailing comments to pubcom@finra.org; or
      •  Mailing comments in hard copy to:

      Marcia E. Asquith
      Office of the Corporate Secretary
      FINRA
      1735 K Street, N.W.
      Washington, D.C. 20006-1506

      To help FINRA process and review comments more efficiently, persons should only use one method to comment on the proposal.

      Important Notes: The only comments FINRA will consider are those submitted using the methods described above. All comments received in response to this Notice will be made available to the public on the FINRA website. Generally, FINRA will post comments as they are received.2

      Background & Discussion

      Dissemination Caps

      As part of the initial TRACE implementation in July 2002, FINRA established dissemination protocols that included certain caps. Disseminated TRACE transaction data includes price, time of execution, size and other information. The size disseminated is the total par value of the trade, subject to the limits of the applicable dissemination cap.

      •  For investment grade TRACE-eligible securities and agency debt securities, the current dissemination cap is $5 million, and a transaction in excess of $5 million is disseminated as "$5MM+."3
      •  For non-investment grade TRACE-eligible securities, the current dissemination cap is $1 million, and a transaction in excess of $1 million is disseminated as "$1MM+."4

      FINRA recently announced additional caps as part of the dissemination of transaction information on agency pass-through mortgage-backed securities traded to be announced (TBA transactions).5 FINRA will begin disseminating TBA transactions on November 5, 2012.

      •  For TBA transactions eligible "for good delivery," the dissemination cap is $25 million, and a transaction in excess of $25 million will be disseminated as "$25MM+."
      •  For TBA transactions "not for good delivery," the dissemination cap is $10 million, and a transaction in excess of $10 million will be disseminated as "$10MM+."6

      Discussion

      FINRA periodically evaluates current practices and seeks input on modifications that may be beneficial. FINRA seeks comment as to whether to modify, leave unchanged or eliminate the $1 million and $5 million TRACE volume dissemination caps, which have been in place since TRACE began operating on July 1, 2002. As part of a broader effort to review dissemination practices, FINRA also seeks comment on the caps for TBA transactions that become effective on November 5, 2012.

      Most firms have comprehensive policies and procedures for TRACE compliance, and regularly use TRACE data for pricing purposes, as well as for internal supervisory purposes. Providing transaction data showing the actual trade size may assist all market participants in determining the quality of their executions and member firms in complying with their best execution obligations. In addition, the dissemination of transaction data showing actual trade size may have a positive impact on the quality of pricing for valuation purposes.

      The following tables show the percentage of transactions in TRACE-eligible securities reported to TRACE—excluding asset-backed securities—by total par value and trade count, that are effected at various sizes, and the impact of the $5 million dissemination cap (for investment grade and agency debt securities) and $1 million dissemination cap (for non-investment grade securities) on the percentage of par value and trades for which actual size is above the indicated cap level and therefore not displayed in disseminated data. The tables also show the impact of dissemination caps if set at alternative levels.7

      INVESTMENT GRADE CORPORATE BONDS   NON-INVESTMENT GRADE CORPORATE BONDS   AGENCY DEBT SECURITIES
      Percentage of Par Value Traded Above Cap Level Percentage of Par Value Traded Above Cap Level Percentage of Par Value Traded Above Cap Level
      Cap Level Percentage Cap Level Percentage Cap Level Percentage
      $1 million + 83.17% $1 million + Current Level 79.49% $1 million + 94.14%
      $5 million + Current Level 48.91% $5 million + 36.39% $5 million + Current Level 77.20%
      $10 million + 30.49% $10 million + 23.03% $10 million + 66.01%
      $15 million + 22.99% $15 million + 18.39% $15 million + 60.07%
      $20 million + 17.84% $20 million + 15.22% $20 million + 54.99%
      $25 million + 14.10% $25 million + 12.89% $25 million + 47.42%
      $50 million + 7.23% $50 million + 8.06% $50 million + 31.50%
      $75 million + 5.19% $75 million + 6.59% $75 million + 26.93%
      $100 million + 3.90% $100 million + 5.49% $100 million + 20.36%
      Percentage of Trades Above Cap Level Percentage of Trades Above Cap Level Percentage of Trades Above Cap Level
      Cap Level Percentage Cap Level Percentage Cap Level Percentage
      $1 million + 8.08% $1 million + Current Level 10.85% $1 million + 23.90%
      $5 million + Current Level 1.81% $5 million + 1.43% $5 million + Current Level 8.34%
      $10 million + 0.64% $10 million + 0.46% $10 million + 4.65%
      $15 million + 0.35% $15 million + 0.26% $15 million + 3.40%
      $20 million + 0.21% $20 million + 0.16% $20 million + 2.64%
      $25 million + 0.13% $25 million + 0.11% $25 million + 1.76%
      $50 million + 0.03% $50 million + 0.03% $50 million + 0.63%
      $75 million + 0.02% $75 million + 0.02% $75 million + 0.43%
      $100 million + 0.0080% $100 million + 0.0105% $100 million + 0.23%

      The following tables show the percentage of TBA transactions reported to TRACE, by total par value and trade count, that are effected at various sizes, and the impact the $25 million dissemination cap (for TBA transactions eligible "for good delivery") and the $10 million dissemination cap (for TBA transactions "not for good delivery") (based on historical transaction data) would have had on the percentage of par value traded and trades for which the actual size would not have been displayed (if such transactions had been disseminated during that period).8 The tables also show the impact of dissemination caps if set at alternative levels.

      TBA GOOD DELIVERY TBA NOT GOOD DELIVERY
      Percentage of Par Value Traded Above Cap Level Percentage of Par Value Traded Above Cap Level
      Cap Level Percentage Cap Level Percentage
      $10 million + 92.40% $10 million + Current Level 84.53%
      $25 million + Current Level 84.17% $25 million + 54.71%
      $50 million + 74.20% $50 million + 23.52%
      $75 million + 69.37% $75 million + 15.50%
      $100 million + 57.70% $100 million + 10.11%
      $250 million + 33.82% $250 million + 2.68%
      $500 million + 17.40% $500 million + 0.00%
      Percentage of Trades Above Cap Level Percentage of Trades Above Cap Level
      Cap Level Percentage Cap Level Percentage
      $10 million + 32.79% $10 million + Current Level 41.47%
      $25 million + Current Level 20.13% $25 million + 15.98%
      $50 million + 12.45% $50 million + 3.80%
      $75 million + 10.04% $75 million + 1.80%
      $100 million + 6.19% $100 million + 0.90%
      $250 million + 1.87% $250 million + 0.12%
      $500 million + 0.51% $500 million + 0.00%

      Rule 144A Transactions

      Securities Act Rule 144A is a safe harbor exemption from the registration requirements of Securities Act Section 5 for certain offers and sales of qualifying securities by certain persons other than the issuer of the securities. The exemption applies to the re-sale of securities to qualified institutional buyers (QIBs).9 Rule 144A transactions have been subject to TRACE reporting requirements since TRACE inception. Unlike transactions in publicly traded bonds, Rule 144A transactions are not subject to dissemination because of the private nature of the transactions.10 However, this approach results in limited or no price transparency in the market in Rule144A TRACE-eligible securities. Without any disseminated data, it may be difficult for market participants to assess the quality of the executions of their orders and for firms to determine if they have complied with their best execution obligations. In addition, the lack of disseminated data in Rule 144A transactions may have an adverse impact on the accurate valuation of positions in such securities.

      FINRA seeks comment on the current approach and whether Rule 144A transactions should be subject to dissemination. FINRA notes that Rule 144A transactions account for approximately 4 percent of trades and 18 percent of par value in corporate debt securities reported to TRACE. The table below summarizes the percentage of all TRACE corporate debt trades, all TRACE non-investment grade corporate debt trades and all TRACE investment grade corporate debt trades that are Rule 144A trades.11

        July 2011 Through June 2012
      Rule 144A trades as a percentage of total TRACE corporate trades 4.37%
      Rule 144A non-investment grade trades as a percentage of all TRACE non-investment grade trades 8.09%
      Rule 144A investment grade trades as a percentage of all TRACE investment grade corporate trades 2.50%
      Rule 144A par value traded as a percentage of total TRACE corporate par value traded 17.53%
      Rule 144A non-investment grade par value traded as a percentage of all TRACE non-investment grade corporate par value traded 20.59%
      Rule 144A investment grade par value traded as a percentage of all TRACE investment grade corporate par value traded 14.89%

      If Rule 144A transactions were disseminated and dissemination caps were applied, the following tables show the percentages of Rule 144A transactions (and par value traded) that would be subject to various dissemination cap levels.

      July 2011 Through June 2012 July 2011 Through June 2012
      INVESTMENT GRADE RULE 144A NON-INVESTMENT GRADE RULE 144A
      Percentage of Par Value Traded Above Cap Level Percentage of Par Value Traded Above Cap Level
      Cap Level Percentage Cap Level Percentage
      $1 million + 94.02% $1 million + 89.41%
      $5 million + 64.30% $5 million + 44.63%
      $10 million + 47.22% $10 million + 30.57%
      $15 million + 39.48% $15 million + 25.07%
      $20 million + 33.58% $20 million + 21.20%
      $25 million + 28.40% $25 million + 18.42%
      $50 million + 18.01% $50 million + 12.22%
      $75 million + 14.70% $75 million + 9.93%
      $100 million + 12.48% $100 million + 8.01%
      Percentage of Trades Above Cap Level Percentage of Trades Above Cap Level
      Cap Level Percentage Cap Level Percentage
      $1 million + 50.68% $1 million + 51.47%
      $5 million + 13.28% $5 million + 7.35%
      $10 million + 5.52% $10 million + 2.61%
      $15 million + 3.38% $15 million + 1.51%
      $20 million + 2.23% $20 million + 0.96%
      $25 million + 1.44% $25 million + 0.66%
      $50 million + 0.42% $50 million + 0.21%
      $75 million + 0.23% $75 million + 0.12%
      $100 million + 0.15% $100 million + 0.06%

      Request for Comment

      FINRA welcomes all comments on the use of dissemination caps and the dissemination of Rule 144A transactions. FINRA also specifically requests comment on the issues identified below.

      Dissemination Caps for Investment Grade and Non-Investment Grade Debt Securities

      1. What would be the impact of raising the dissemination caps for:
      a. investment grade TRACE-eligible securities transactions to $10 million, $15 million, $20 million or higher; and
      b. non-investment grade TRACE-eligible securities transactions to $5 million, $10 million, $20 million or higher?
      2. Should FINRA set a dissemination cap applicable solely to agency debt securities in light of the larger size of many transactions in such securities?
      a. If so, should it be set at $25 million, $50 million, $100 million or higher?
      3. Should there continue to be different dissemination caps for investment grade and non-investment grade debt securities?
      4. Should the dissemination caps for investment grade and non-investment grade debt securities be eliminated entirely?
      5. Would the information available as a result of higher dissemination caps allow broker-dealers and institutional investors to better value positions?
      6. Could alternative ways of determining dissemination caps—for example, by dollar value12 of transaction rather than par value—provide meaningful trade volume exposure while still limiting the transaction sizes displayed through the caps?

      Dissemination Caps for TBA Transactions

      1. Should there be a dissemination cap for TBA transactions?
      a. If yes, are the levels appropriate or should higher or lower caps be considered?

      Rule 144A Transactions

      1. Should Rule 144A transactions-private re-sales of securities to QIBs-be subject to dissemination?
      2. If yes, should Rule 144A transactions be subject to dissemination in the same manner as other disseminated transactions in TRACE-eligible securities?
      a. If yes, should they be disseminated subject to a dissemination cap?
      b. If yes, what is the appropriate size (volume) at which to set the dissemination cap?
      c. If yes, should FINRA distinguish between investment grade and non-investment grade securities, and set a higher dissemination cap for Rule 144A transactions in investment grade securities and a lower dissemination cap for Rule 144A transactions in non-investment grade securities?
      3. Would dissemination of Rule 144A transaction information impact investment decisions and price negotiations, and, if yes, how?
      4. If information on Rule 144A TRACE-eligible securities transactions should be disseminated, should the transaction information be disseminated publicly without limitation or on a more limited basis?

      1 17 CFR 239.144A.

      2 FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Persons should submit only information that they wish to make publicly available. See Notice to Members 03-73 (November 2003) (NASD Announces Online Availability of Comments) for more information.

      3 The term investment grade is defined in FINRA Rule 6710(h). In most cases, an agency debt security that is not rated is traded and priced as an investment grade security. Thus, for purposes of TRACE, in most cases, such securities are classified as investment grade debt and subject to the $BMM+ dissemination cap. The term agency debt security is defined in FINRA Rule 6710(1).

      4 The term non-investment grade is defined in FINRA Rule 6710(i). For purposes of TRACE, most unrated corporate bonds are considered non-investment grade debt and are subject to the $1MM+ dissemination cap.

      5 The terms agency pass-through mortgage-backed security and to be announced are defined in, respectively, FINRA Rule 6710(v) and FINRA Rule 6710(u). See Securities Exchange Act Release No. 66829 (April 18, 2012), 77 FR 24748 (April 25, 2012) (SEC Approval Order Relating to Post-Trade Transparency of Agency Pass-Through Mortgage-Backed Securities Traded TBA) (TBA Dissemination Approval Order); Regulatory Notice 12-26 (May 2012) (announcing November 5, 2012, as the effective date for the dissemination of TBA transactions, dissemination caps for such TBA transactions, and related rule changes).

      6 See FINRA Rule 6710(u) (as effective on November 5, 2012) for reference to the terms "for good delivery" and "not for good delivery." See also Regulatory Notice 12-26 and TBA Dissemination Approval Order.

      7 FINRA calculated the percentages based on the 12-month period from July 1, 2011, to June 30, 2012.

      8 See supra note 5.

      9 Qualified institutional buyer is defined in Securities Act Rule 144A(a)(1). 17 CFR 239.144A(a)(1).

      10 See FINRA Rule 6750(b)(1).

      11 FINRA calculated the percentages based on the 12-month period from July 1, 2011, to June 30, 2012.

      12 For this discussion, the dollar value of the transaction means the par value multiplied by the execution price of the transaction.

    • 12-38 SEC Approves Amendments to FINRA's Short-Interest Reporting Rule; Effective Date: November 30, 2012

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      Short-Interest Reporting

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Systems
      Technology
      Trading and Market Making
      Training
      Key Topics

      Short Interest
      Short Sales
      Referenced Rules & Notices

      FINRA Rule 4560
      FINRA Rule 6420
      Regulation SHO

      Executive Summary

      The SEC approved amendments to FINRA Rule 4560 (Short-Interest Reporting).1 The amendments: (1) codify the requirement that member firms report only "gross" short interest existing in each proprietary and customer account (rather than net positions across accounts); (2) clarify that member firms' short-interest reports must reflect only those short positions that have settled or reached settlement date by the close of the FINRA-designated reporting settlement date; and (3) delete certain existing exceptions to the rule.

      The text of the rule can be found in the online FINRA Manual.

      Questions regarding this Notice should be directed to:

      •    The Legal Section, Market Regulation, at (240) 386-5126; or
      •    The Office of General Counsel at (202) 728-8071.

      Background and Discussion

      FINRA Rule 4560 requires that each member firm maintain a record of total "short" positions in all customer and proprietary firm accounts in all equity securities (other than a "restricted equity security," as defined in Rule 6420) and regularly report such information to FINRA in the manner FINRA prescribes.2

      Amended Rule 4560 codifies a previously issued interpretation that states that firms must record and report short positions existing in each individual firm or customer account on a "gross," as opposed to a "net," basis3 (including accounts of a broker-dealer): (1) that resulted from a "short sale," as that term is defined in Rule 200(a) of SEC Regulation SHO4; or (2) where the transaction(s) that caused the short position was marked "long," consistent with SEC Regulation SHO due to the firm's or the customer's net long position at the time of the transaction (e.g., aggregation units).

      Amended Rule 4560 also clarifies that firms are required to report only those short positions resulting from short sales that have settled or reached settlement date by the close of the FINRA-designated reporting settlement date. Therefore, short positions resulting from short sales that were effected but have not reached settlement date by the given designated reporting settlement date should not be included in a firm's short-interest report for that reporting cycle. Of course, short-interest positions resulting from short sales that reached the expected settlement date, but failed to settle (i.e., resulted in a fail to deliver), must be included.

      Finally, amended Rule 4560 deletes three exceptions for stabilizing activity, domestic arbitrage and international arbitrage,5 but retains the exceptions for: (1) any sale by any person, for an account in which (s)he has an interest, if the person owns the security sold and intends to deliver the security as soon as is possible without undue inconvenience or expense; and (2) any sale by an underwriter, or any member of a syndicate or group participating in the distribution of a security, in connection with an over-allotment of securities, or any lay-off sale by such a person in connection with a distribution of securities through rights or a standby underwriting commitment.

      Frequently Asked Questions

      Q1. Does Rule 4560 require that all transactions marked "short" be reported as short interest?

      A1. Rule 4560 applies only to short-interest positions resulting from: (1) a "short sale," as defined by SEC Regulation SHO Rule 200(a); or (2) a transaction that was marked "long," consistent with SEC Regulation SHO, due to the firm's or the customer's net long position at the time of the transaction.

      However, Rule 4560(c)(1) provides an exception for sales by any person, for an account in which (s)he has an interest, if the person owns the security sold and intends to deliver the security as soon as is possible without undue inconvenience or expense. Therefore, although such sales are required to be marked "short" under SEC Regulation SHO Rule 200(g), due to this exception, the positions are not reportable as short interest. For example, positions created from sales pursuant to Rule 144 that are pending the return of clean shares from the transfer agent are not reportable as short-interest even where they result from a "short sale" as defined by SEC Regulation SHO, because such sales are exempt from short-interest reporting pursuant to paragraph (c)(1).

      Q2. Are "fail-to-receive" positions reportable to FINRA as short interest?

      A2. Fails to receive do not result from a "short sale" and are not reportable to FINRA pursuant to Rule 4560.

      Q3. Is it permissible to report short-interest positions to FINRA where the clearing firm also reported on the member firm's behalf, so long as FINRA receives the information at least once?

      A3. Complete and accurate short-interest information should be reported to FINRA only once. Duplicate reporting results in inaccurate short-interest position information. A firm is responsible for determining whether its clearing firm is reporting short interest on its behalf and, if so, the firm should not submit a duplicate report.

      Q4. Does Rule 4560 apply to positions held by a member firm in a foreign-listed security?

      A4. Firms must report gross short positions existing in each individual firm or customer account in any equity security that has a U.S. symbol, irrespective of the exchange on which the "short sale" was executed or whether the position is reflected on the firm's books and records under the U.S. CUSIP, CUSIP International Numbering System (CINS) or foreign symbol. If a foreign-listed security shares an International Securities Identification Number (ISIN) with a U.S.-listed or traded security, a short position in such security should be reported to FINRA using the U.S. symbol and relevant U.S. exchange or trading center (e.g., NASDAQ or over-the-counter).

      Q5. Should firms report short interest positions placed in an error account?

      A5. Firms should report as short interest any short positions executed in or placed into an error account that resulted from a "short sale," as defined by SEC Regulation SHO Rule 200(a), or a transaction that was marked "long," consistent with SEC Regulation SHO.

      Q6. Should a firm report short positions reflected in a dividend reinvestment account that result from the simultaneous purchase of shares for, and credit to, a customer's account, where the shares are allocated to the customer's account before the purchase transaction settles?

      A6. A position that resulted from the simultaneous purchase of shares for, and credit to, a customer's account is not reportable to FINRA — even where the transaction is internally reflected as a short position and remains open until the settlement date of the purchase transaction. Such a short position is not reportable because it neither resulted from a "short sale," as defined by SEC Regulation SHO Rule 200(a), nor a transaction causing a short position that was marked "long," consistent with SEC Regulation SHO due to the firm's or the customer's net long position at the time of the transaction.

      Q7. How should a firm reflect fractional shares in its short-interest reports?

      A7. If a firm has a fractional short-interest position (e.g., 125.6 shares), it should truncate the position to reflect a whole number when reporting such positions to FINRA pursuant to FINRA Rule 4560, instead of rounding the position up or down. For example, firms should report short-interest of 125.6 shares in XYZ as 125 shares.

      Q8. Must firms report short-interest positions that result from option exercises or assignments?

      A8. Firms must include in short-interest reports any short positions that result from the exercise or assignment of an option.

      Q9. Some prime brokers automatically flip a "long sale" executed at another broker-dealer to a "short sale" (and subsequently report it as short interest) if the customer does not have shares on deposit at the prime broker. Is this permissible under Rule 4560?

      A9. Prime brokers should not automatically assume that such trades are "short sales," as defined by SEC Regulation SHO Rule 200(a), and must take steps to verify the true nature of the position before reporting it as short interest to FINRA.

      Q10. If an exchange is trading a security on a "when-issued" basis where no settlement date has been set, should a firm's short position in the security be reported to FINRA as short-interest?

      A10. Amended Rule 4560(b) provides that firms must report only those short positions resulting from a "short sale" that has settled or reached settlement date by the close of the FINRA-designated reporting settlement date. Thus, if a transaction has not settled or reached settlement date, or if no settlement date has been established for the transaction, a firm should not report such short position to FINRA as short interest.


      1. See Securities Exchange Act Release No. 66872 (April 27, 2012), 77 FR 26340 (May 3, 2012) (Order Approving File No. SR-FINRA-2012-001).

      2. Short-interest reports must be received by FINRA no later than the second business day after the FINRA-designated reporting settlement date.

      3. The requirement that short-interest reporting be limited to gross short positions was an interpretation previously issued by the inter market Surveillance Group (ISG). See inter market Surveillance Group, Consolidated Reporting of Short Interest Positions, ISG Regulatory Memorandum 95-01 (March 6, 1995), announcing, among otherthings, the adoption by the SRO's of policies and procedures that require short-interest position reporting for all securities traded in the United States and the required frequency for reporting short-interest positions to the SROs. Consistent with this longstanding requirement, FINRA and other SROs have brought enforcement actions against member firms for failing to report short positions on a gross basis. See, e.g., In re Prudential Equity Group, LLC, AWC No. CLG050038 (April 7, 2005).

      4. Rule 200 of SEC Regulation SHO provides that "short sale" means "any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller." See Rule 200(a) of SEC Regulation SHO. See 17 CFR 242.200. SEC Rule 200 further provides, among otherthings, that a person is deemed to own a security if: (a) the person or his agent has title to it; (b) the person has purchased, or has entered into an unconditional contract, binding on both parties thereto, to purchase it, but has not yet received it; (c) the person owns a security convertible into or exchangeable for it and has tendered such security for conversion or exchange; (d) the person has an option to purchase or acquire it and has exercised such option; (e) the person has rights or warrants to subscribe to it and has exercised such rights or warrants; or (f) the person holds a security futures contract to purchase it and has received notice that the position will be physically settled and is irrevocably bound to receive the underlying security. See Rule 200(b) of SEC Regulation SHO.

      5. FINRA, in cooperation with the ISG Short interest Working Group, determined that the transactions addressed in these three exceptions result in the type of short positions that would be of interest to regulators and the public, and therefore, determined that these exceptions are no longer appropriate.

    • 12-37 SEC Approves Amended Minimum Quotation Sizes for OTC Equity Securities on a Pilot Basis; Effective Date: November 5, 2012

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      OTC Equity Quotation Size

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Operations
      Systems
      Trading and Market Making
      Key Topics

      Limit Order Display
      Minimum Quotation Size
      OTC Equity Securities
      Quotations
      Referenced Rules & Notices

      FINRA Rule 6433
      FINRA Rule 6460

      Executive Summary

      The SEC approved amendments to FINRA Rule 6433 (Minimum Quotation Size Requirements for OTC Equity Securities) to simplify the existing tier structure, facilitate the display of customer limit orders pursuant to FINRA Rule 6460 (Display of Customer Limit Orders), and expand the scope of the rule to encompass quotations displayed by non-market makers. FINRA will implement the new quotation sizes as a one-year pilot beginning on November 5, 2012, and ending on October 31, 2013, unless extended or made permanent.1

      Questions regarding this Notice should be directed to Racquel Russell, Assistant General Counsel, Office of General Counsel, at (202) 728-8363.

      The implementation date has been delayed until November 12, 2012.

      Background and Discussion

      FINRA Rule 6433 provides that member firms that enter quotations in OTC equity securities into any inter-dealer quotation system that permits quotation updates on a real-time basis must enter and honor those quotations at prescribed minimum sizes. However, under the rule, the applicable minimum size depends upon the price of the bid or offer and, therefore, a different minimum quotation size can apply to each side of the market being quoted by the firm in a given security.2 The amended rule also expands the scope of the minimum quotation sizes to apply to all quotations or orders displayed in an inter-dealer quotation system, including quotations displayed by alternative trading systems and those representing customer trading interest.

      During the one-year pilot period, the minimum quotation sizes are as follows:

      Price (Bid or Offer) Minimum Quote Size (# of shares)
      $0.0001 to $0.0999 10,000
      $0.10 to $0.1999 5,000
      $0.20 to $0.5099 2,500
      $0.51 to $0.9999 1,000
      $1.00 to $174.99 100
      $175.00+ 1

      FINRA will monitor the operation of the pilot and, if FINRA concludes that there is a significant negative impact on the over-the-counter market, FINRA will consider whether it is appropriate to rescind the pilot prior to October 31, 2013. To permit FINRA and the Securities and Exchange Commission to assess the impact of the pilot, FINRA will collect data during the pilot3 and assess, among other things, concerns raised by commenters during the rule filing process, and whether the pilot has achieved its goals. If the pilot is not extended or approved as permanent by October 31, 2013, the version of this rule prior to SR-FINRA-2011-058 will be in effect.


      1. See Securities Exchange Act Release No. 67208 (June 15, 2012), 77 FR 37458 (June 21, 2012) (Order Approving Amendments to Minimum Quotation Size Requirements for OTC Equity Securities).

      2. FINRA's inter-dealer quotation system incorporates a default feature to ensure display of at least the correct minimum size applicable to quotations entered by member firms. It is the firm's responsibility to determine the minimum size requirement applicable to its quotation.

      3. FINRA will collect data for use in assessing the impact of the pilot, including data regarding limit orders and liquidity.

    • 12-36 FINRA and ISG Delay Effective Date for Enhanced Electronic Blue Sheet Submissions; Effective Dates: November 30, 2012, and May 1, 2013

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      Electronic Blue Sheet (EBS) Submissions

      Regulatory Notice
      Type of Notice

      Guidance
      Suggested Routing

      Legal
      Compliance
      Operations
      Senior Management
      Key Topics

      Blue Sheets
      Referenced Rules & Notices

      FINRA Rule 8211
      FINRA Rule 8213
      Regulatory Notice 11-56
      Notice to Members 05-58
      SEA Rule 13h-1

      Executive Summary

      FINRA and the other interested members of the Intermarket Surveillance Group (ISG interested members)1 have extended the effective dates for firms to submit new data elements for Electronic Blue Sheets (EBS) to correspond with the recent extension by the SEC of the implementation of SEC Large Trader Reporting Rule (SEA Rule 13h-1).2

      Effective November 30, 2012, and May 1, 2013, as discussed in more detail below, firms must begin submitting the additional formats of Blue Sheet data specified in Regulatory Notice 11-56 to FINRA and the other ISG interested members. This extension will allow broker-dealers additional time to develop, test and implement the enhancements.

      Attachment A to this Notice sets forth additional modifications from Regulatory Notice 11-56 regarding changes to the Blue Sheet record layout and Attachment B outlines the updated Transaction Type Identifiers.

      Questions concerning the EBS enhancements should be directed to ebsfaq@finra.org.

      The effective date for compliance with certain elements identified in this Notice has been extended to May 1, 2013. [View PDF] See Regulatory Notice 12-47.

      Updated April 30, 2013: The effective date for compliance with certain elements identified in this Notice has been extended to November 1, 2013. See Regulatory Notice 13-16. Effective Dates: November 30, 2012, May 1, 2013 and November 1, 2013.

      Discussion

      On December 13, 2011, FINRA issued Regulatory Notice 11-56 to announce enhancements to EBS to improve the regulatory agencies' ability to analyze broker-dealers' trading activities. The new requirements specified in the Notice were a combined effort of FINRA and the ISG interested members.

      FINRA and the other ISG interested members have extended the compliance dates for the Blue Sheet reporting requirements to November 30, 2012, and May 1, 2013, to allow broker-dealers additional time to develop, test and implement the enhancements.3 By November 30, 2012, broker-dealers must be in Blue Sheet reporting compliance for all seven of the required new fields described in Regulatory Notice 11-56 and reiterated below as such fields may apply to all NMS securities and for all transactions effected directly or indirectly by or through:

      •   any proprietary account of a U.S. registered broker-dealer; or
      •   any account used by a customer that trades through a "sponsored access" arrangement.

      By May 1, 2013, broker-dealers must be in Blue Sheet reporting compliance for the Order Execution Time, Entering Firm Identifier and Executing Firm Identifier fields described below in all securities (not just NMS securities) and all types of transactions effected directly or indirectly by or through all types of accounts that are Blue Sheet reportable for a traditional (or non-LTID) Blue Sheet request. Broker-dealers may submit values in these three new fields in all securities and all types of transactions for a traditional Blue Sheet request prior to May 1, 2013, and it will be accepted by FINRA and the other ISG interested members.

      As previously announced in Regulatory Notice 11-56, broker-dealers must add the following fields to the Blue Sheet record layout. However, the Employer SIC Code field has been withdrawn as a Blue Sheet requirement. In addition, the Entering Firm and Executing Firm fields have been renamed and modified to accept either a Market Participant Identifier (MPID) or a Central Registration Depository (CRD®) number. Consistent with Regulatory Notice 11-56, FINRA reminds broker-dealers that firms may voluntarily submit the Large Trader Identification Number (LTID) and Large Traded Identification Qualifier fields to FINRA or the other ISG interested members. Please see Attachment A for details.

      Order Execution Time, Record Sequence Number Five, Field Position 72 to 77
      Firms should use this record to submit the order execution time in 24-hour format and in Eastern Time formatted as HHMMSS. This information is not limited to the blue sheet transactions relating to the SEC Large Trader Reporting Rule (SEA Rule 13h-1). Please note that all firms must synchronize their time clocks to the atomic clock to maintain an accurate audit trail in connection to the reported execution time.
      Large Trader Identification Number 1, Record Sequence Number Seven, Field Position 2 to 14
      Firms should use this record to submit the Large Trader Identification Number. This information is requested under the approved SEC Large Trader Reporting Rule (SEA Rule 13h-1) requirements.
      Large Trader Identification Number 2, Record Sequence Number Seven, Field Position 15 to 27
      Firms should use this record to submit the Large Trader Identification Number. This information is requested under the approved SEC Large Trader Reporting Rule (SEA Rule 13h-1) requirements.
      Large Trader Identification Number 3, Record Sequence Number Seven, Field Position 28 to 40
      Firms should use this record to submit the Large Trader Identification Number. This information is requested under the approved SEC Large Trader Reporting Rule (SEA Rule 13h-1) requirements.
      Large Trader Identification Qualifier, Record Sequence Number Seven, Field Position 41
      Firms should use this record to submit the Large Trader Identification Qualifier. If more than three LTIDs exist for a transaction, then firms should mark the field "Y" for Yes. Otherwise it should be marked "N" for No. This information is requested under the approved SEC Large Trader Reporting Rule (SEA Rule 13h-1) requirements.
      Entering Firm Identifier, Record Sequence Number Seven, Field Positions 42 to 49
      Firms should use this record to submit the entering firm's Market Participant Identifier or Central Registration Depository number. Please note the new field positions for this data element.
      Executing Firm Identifier, Record Sequence Number Seven, Field Positions 50 to 57
      Firms should use this record to submit the executing firm's Market Participant Identifier or Central Registration Depository number. Please note the new field positions for this data element.

      The following modifications and/or corrections were also made to Attachment A of this Notice:

      •   The Employer SIC Code field has been withdrawn as a Blue Sheet requirement.
      •   The Entering Firm MPID field has been renamed as the Entering Firm Identifier field. This field has been modified to accept either the entering firm's MPID or CRD number. The field has been moved to Record Sequence Number Seven, Position 42 through 49.
      •   The Executing Firm CRD Number field has been renamed the Executing Firm Identifier field. This field has been modified to accept either the executing MPID or CRD number. The field has been moved to Record Sequence Number Seven, Position 50 through 57.
      •   For all required new fields cited in this Notice, an "R" was added to the Field Format column to indicate that validation is required for these new fields. Please refer to the prior ISG EBS Validation Requirements in Notice to Members 05-58.
      •   An "R" was also added to the Field Format column for the Derivative Symbol, Expiration Date, Call/Put Indicator, Strike Dollar and Strike Decimal fields as an indication that validation is required for these fields. Please refer to the prior ISG EBS Validation Requirements in Notice to Members 05-58.
      •   For the Requestor Code and Exchange Code fields, the value "U" was added to represent BOX Options Exchange, LLC.
      •   For the Exchange Code field, the value "L", which was inadvertently omitted from Regulatory Notice 11-56, has been reinstated to represent the London Stock Exchange.
      •   For the Requestor Code and Exchange Code fields, the names of the ISG members have been updated, if applicable.
      •   For the Large Trader Identification Number 1 through 3 and the Large Trader Identification Qualifier fields, the Justify column was modified from Right Justification of Data (RJ) to Left Justification of Data (LJ).

      The following modifications and/or corrections were made to Attachment B of this Notice (Additional modifications to Attachment B may be forthcoming in the near future.):

      •   The value "W" was added to the Options column to represent Voluntary Professional. The value should be used to indicate clients who voluntarily declare themselves a "Voluntary Professional." It is the client's responsibility to identify the trade as such. In addition, an exchange may define what it considers to be a "Voluntary Professional." For example, CBOE Rule 1.1(fff) defines "Voluntary Professional."
      •   The values "M", "N" and "Y", which represent Market-Maker, Non-Member Market-Maker/Specialist Account and Stock Specialist-Assignment, respectively, were inadvertently mis-categorized under the Equity column in Regulatory Notice 11-56 and have been correctly re-categorized under the Options column.

      Broker-dealers are reminded that failure to properly fill out the Blue Sheet fields is a violation of FINRA Rule 8211 and/or FINRA Rule 8213.

      Blue Sheet Submission Methodology

      Currently, blue sheet requests are made under specific security symbols and option symbology. As noted in Regulatory Notice 11-56 firms will be required to submit blue sheets, when requested, using three additional formats:

      1. account number and date;
      2. account number, symbol and date; or
      3. date range and executing firm.

      Compliance with this requirement is similarly extended to November 30, 2012. As outlined in Regulatory Notice 11-56, the request by account number would require firms to identify the account number of a specific account at a firm, e.g. John Doe at CC Clearing Co. The request would cover all transactions under the John Doe account number at CC Clearing Co. To reduce data submission size, a blue sheet request may also ask for a specific symbol and date in connection with the account number. Additionally, blue sheet requests may be made for a specific review period under an executing firm. This request would require a firm to identify a clearing firm client's blue sheets for a set number of days, weeks or months, e.g. Firm ABC for the month of January 2011.

      In addition, in response to a request from the SEC for large trader transition records, broker-dealers must be prepared to submit blue sheet data, when requested, by large trader status, including LTID number(s).

      Blue Sheet Testing

      Starting on November 1, 2012, FINRA will open its customer test website to allow firms to test their enhanced blue sheets data file before submitting it to production. Firms that already have entitlement to FINRA's Regulation Filing Application can proceed with testing their Blue Sheet modifications by submitting their test data to https://regfilingtest.finra.org. To access the customer test website, firms should enter the same user ID and password they use to access the production website. Firms that do not have entitlement to FINRA's Regulation Filing Application should contact (800) 321-6273.

      The Securities Industry Automation Corporation (SIAC) will also be open to receiving blue sheet test files by November 1, 2012. Firms can obtain initial testing instructions from SIAC by contacting Michal Skibicki at (212) 383-9073 or mskibicki@nyx.com.

      Frequently Asked Questions

      FINRA provides answers to frequently asked questions (FAQ) on its website. The FAQs will be updated from time to time. Please see FINRA's website for the most recent version. Questions concerning the EBS enhancements should be directed to ebsfaq@finra.org.


      1 The interested members include the following exchanges and self-regulatory organizations (SROs) as members of the ISG: BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Board Options Exchange, Inc., C2 Options Exchange, Inc., CBOE Stock Exchange, LLC, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., International Securities Exchange, LLC, The NASDAQ Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, National Stock Exchange, Inc., New York Stock Exchange, LLC, NYSE MKT, LLC, NYSE Area, Inc., and BOX Options Exchange, LLC.

      2 The Securities and Exchange Commission extended the compliance date for the broker-dealer recordkeeping, reporting and monitoring requirements of Rule 13h-l to November 30, 2012, and May 1, 2013. Please see Securities Exchange Release No. 34-66839 (April 20, 2012), 77 FR 25007 (April 26, 2012) for further details.

      3 Id.


      Attachment A

      Record Layout for Submission of Trading Information

      Field Position Field Length Field Name/Description/Remarks Field Format Justify Picture Clause Default Value
      From To
        ***This record must be the first record of the file***  
      1 3 3 FILLER A LJ X(3) HDR
      4 5 2 FILLER A LJ X(2) .S
      6 10 5 DTRK-SYSID N LJ 9(5) 12343
      11 12 2 FILLER A LJ X(2) .E
      13 14 2 FILLER N LJ 9(2) 00
      15 16 2 FILLER A LJ X(2) .C
      17 20 4 DTRK-ORIGINATOR
      Please call SIAC for assignment
      (212) 383-2210
      A LJ X(4)
      21 22 2 FILLER A LJ X(2) .S
      23 26 4 DTRK-SUB-ORIGINATOR
      Please call SIAC for assignment
      (212) 383-2210
      A LJ X(4)
      27 27 1 FILLER A LJ X(1) B
      28 33 6 DTRK-DATE
      Contains submission date.
      N LJ 9(6) MMDDYY
      34 34 1 FILLER A LJ X(1) B
      35 59 25 DTRK-DESCRIPTION
      Required to identify this file.
      A LJ X(25) FIRM TRADING INFORMATION
      60 80 21 FILLER A LJ X(21) B
      1 1 1 HEADER RECORD CODE
      Value: Low Values OR ZERO
      A X
      2 5 4 SUBMITTING BROKER NUMBER
      If NSCC member use NSCC clearing number.
      If not a NSCC member, use clearing number assigned to you by your clearing agency.
      A-R LJ X(4) B
      6 40 35 FIRM'S REQUEST NUMBER
      Tracking number used by the firm to record requests from an organization.
      A X(35) B
      41 46 6 FILE CREATION DATE
      Format is YYMMDD
      A X(6)
      47 54 8 FILE CREATION TIME
      Format is HH:MM:SS
      A X(8)
      55 55 1 REQUESTOR CODE
      Requesting Organization Identification Values:
      A X
            A = New York Stock Exchange        
            B = NYSE MKT, LLC        
            C = Chicago Stock Exchange        
            D = NASDAQ OMX        
            E = NYSE Arca        
            F = NASDAQ OMX BX, Inc.        
            G = National Stock Exchange        
            H = BATS Exchange, Inc.        
            I = International Securities Exchange        
            J = Direct Edge (EDGA Exchange and EDGX Exchange)        
            K = Chicago Board Options Exchange,C2 Options Exchange and CBSX (CBOE Stock Exchange)        
            R = FINRA        
            U = BOX Options Exchange, LLC        
            X = U.S. Securities and Exchange Commission        
            Y = BATS Y-Exchange, Inc.        
            Z = Other        
      56 70 15 REQUESTING ORGANIZATION NUMBER
      Number assigned by requesting organization
      A LJ X(15) B
      71 80 10 FILLER A X(10) B
      1 1 1 RECORD SEQUENCE NUMBER ONE
      The first record of the transaction. Value: 1
      A X
      2 5 4 SUBMITTING BROKER NUMBER
      Identical to Submitting Broker Number in Header Record
      A-R LJ X(4)
      6 9 4 OPPOSING BROKER NUMBER
      The NSCC clearing house number of the broker on the other side of the trade.
      A-R LJ X(4) B
      10 21 12 CUSIP NUMBER
      The cusip number assigned to the security.
      Left justified since the number is nine characters at present (8+ check digit) but will expand in the future.
      A LJ X(12) B
      22 29 8 TICKER SYMBOL
      The symbol assigned to this security. For options (pre-OSI), the OPRA option symbol (space), OPRA expiration month symbol and OPRA strike price symbol should be used. (Ex. Maytag May 20 call option series would be reported as MYG ED. This example uses six spaces in the field with a space between the OPRA symbol and the OPRA expiration month.)

      Post OSI this field must contain OPTIONXX and a Record Sequence Number Six must be completed
      A-R LJ X(8) B
      30 35 6 TRADE DATE
      The date this trade executed.
      Format is YYMMDD.
      A-R X(6) B
      36 41 6 SETTLEMENT DATE
      The date this trade will settle.
      Format is YYMMDD
      A X(6) B
      42 53 12 QUANTITY
      The number of shares or quantity of bonds or option contracts.
      N-R RJ 9(12) Z
      54 67 14 NET AMOUNT
      The proceeds of sales or cost of purchases after commissions and other charges.
      N RJ S9(12) V99 Z
      68 68 1 BUY/SELL CODE
      Values: 0 = Buy, 1 = Sale, 2 = Short Sale, 3 = Buy Open, 4 = Sell Open, 5 = Sell Close, 6 = Buy Close. A = Buy Cancel, B = Sell Cancel, C = Short Sale Cancel, D = Buy Open Cancel, E = Sell Open Cancel, F = Sell Close Cancel, G = Buy Close Cancel. Values 3 to 6 and D to G are for options only
      A-R X B
      69 78 10 PRICE
      The transaction price. Format:
      $$$$ CCCCCC.
      N-R RJ 9(4)
      V(6)
      Z
      79 79 1 EXCHANGE CODE
      Exchange where trade was executed. Values:
      A-R X B
            A = New York Stock Exchange        
            B = NYSE MKT, LLC        
            C = Chicago Stock Exchange        
            D = NASDAQ OMX PHLX        
            E = NYSE Arca        
            F = NASDAQ OMX BX, Inc.        
            G = National Stock Exchange        
            H = BATS Exchange, Inc.        
            I = International Securities Exchange        
            J = C2 Options Exchange        
            K = Chicago Board Options Exchange        
            L = London Stock Exchange        
            M =Toronto Stock Exchange        
            N = Montreal Stock Exchange        
            O =TSX Venture Exchange        
            P = Direct Edge (EDGA Exchange)        
            Q=FINRA ADF        
            R = NASDAQ OMX/NASDAQ OMX Options Market        
            S = Over-the-Counter        
            T = Tokyo Stock Exchange        
            U = BOX Options Exchange, LLC        
            V = Direct Edge (EDGX Exchange)        
            W = CBSX (CBOE Stock Exchange)        
            X = NASDAQ OMX PSX        
            Y = BATS Y-Exchange, Inc.        
            Z = Other        
      80 80 1 BROKER/DEALER CODE
      Indicate if trade was done for another Broker/Dealer.
      Values: 0 = No; 1 = Yes
      A-R X B
      1 1 1 RECORD SEQUENCE NUMBER
      TWO
      Value: 2
      A X
      2 2 1 SOLICITED CODE
      Values: 0 = No; 1 = Yes
      A-R X B
      3 4 2 STATE CODE
      Standard Postal two character identification.
      A-R X(2) B
      5 14 10 ZIP CODE/COUNTRY CODE
      Zip Code — five or nine character
      (zip plus four)
      Country code — for future use.
      A-R LJ X(10) B
      15 22 8 BRANCH OFFICE/REGISTERED
      REPRESENTATIVE NUMBER
      Each treated as a four-character field.
      Both are left justified.
      A-R LJ X(8) B
      23 28 6 DATE ACCOUNT OPENED
      Format is YYMMDD
      A-R X(6) B
      29 48 20 SHORT NAME FIELD
      Contains last name followed by comma (or space) then as much of first name as will fit.
      A LJ X(20) B
      49 78 30 EMPLOYER NAME A LJ X(30) B
      79 79 1 TIN 1 INDICATOR
      Values: 1 = SS#; 2 = TIN
      A-R X B
      80 80 1 TIN 2 INDICATOR
      Values: 1 = SS#; 2 = TIN — for future use.
      A X B
      1 1 1 RECORD SEQUENCE NUMBER
      THREE
      Value: 3
      A X
      2 10 9 TIN ONE
      Taxpayer Identification Number
      Social Security or Tax ID
      Number.
      A-R LJ X(9) B
      11 19 9 TIN TWO
      Taxpayer Identification Number
      #2
      Reserved for future use.
      A LJ X(9) B
      20 20 1 NUMBER OF N&A LINES A X B
      21 50 30 NAME AND ADDRESS LINE ONE A-R LJ X(30) B
      51 80 30 NAME AND ADDRESS LINE TWO A-R LJ X(30) B
      1 1 1 RECORD SEQUENCE NUMBER FOUR A X
            Value: 4        
      2 31 30 NAME AND ADDRESS LINE THREE A-R LJ X(30) B
      32 61 30 NAME AND ADDRESS LINE FOUR A-R LJ X(30) B
      62 62 1 TRANSACTION TYPE IDENTIFIERS
      See Attachment B for current codes.
      A-R X B
      63 80 18 ACCOUNT NUMBER
      Account number
      A-R LJ X(18) B
      1 1 1 RECORD SEQUENCE NUMBER
      FIVE
      Value: 5
      A X(1)
      2 31 30 NAME AND ADDRESS LINE FIVE A-R LJ X(30) B
      32 61 30 NAME AND ADDRESS LINE SIX A-R LJ X(30) B
      62 65 4 PRIME BROKER
      Clearing number of the account's prime broker.
      A-R LJ X(4) B
      66 66 1 AVERAGE PRICE ACCOUNT
      1= recipient of average price transaction.
      2= average price account itself.
      N-R 9(1) Z
      67 71 5 DEPOSITORY INSTITUTION
      IDENTIFIER
      Identifying number assigned to the account by the depository institution.
      A-R LJ X(5) B
      72 77 6 Order Execution Time

      HHMMSS — Time format will be in Eastern Time and 24 hour format.
      N-R LJ
      78 80 3 FILLER A X B
      1 1 1 RECORD SEQUENCE NUMBER
      SIX
      Value: 6
      A  
      2 9 8 DERIVATIVE SYMBOL
      The symbol assigned to the derivative
      A-R LJ B
      10 15 6 EXPIRATION DATE
      The date the option expires.
      Format is YYMMDD
      A-R B
      16 16 1 CALL/PUT INDICATOR
      C = Call, P = Put
      A-R B
      17 24 8 STRIKE DOLLAR
      The dollar amount of the strike price
      N-R RJ Z
      25 30 6 STRIKE DECIMAL
      The decimal amount of the strike price
      N-R RJ Z
      31 80 50 FILLER A LJ B
      1 1 1 RECORD SEQUENCE NUMBER
      SEVEN
      Value: 7
      A  
      2 14 13 Large Trader Identification 1 A-R LJ Z
      15 27 13 Large Trader Identification 2 A-R LJ Z
      28 40 13 Large Trader Identification 3 A-R LJ Z
      41 41 1 Large Trader Identification Qualifier A-R LJ Z
      42 49 8 Entering Firm Identifier A-R LJ B
      50 57 8 Executing Firm Identifier A-R LJ B
      58 80 23 FILLER A LJ B
      1 1 1 TRAILER RECORD DATE
      One record per submission.
      Must be the last record on the file. Value: High Values or "9"
      A X
      2 17 16 TOTAL TRANSACTIONS
      The total number of transactions.
      This total excludes Header and Trailer Records.
      N RJ 9(16) B
      18 33 16 TOTAL RECORDS ON FILE
      The total number of 80 byte records. This total includes Header and Trailer Records, but not the Datatrak Header Record (i.e., it does not include the first record on the file).
      N RJ 9(16) Z
      34 80 47 FILLER A X(47) B

      Field Format
      A = Alphanumeric (all caps)
      N = Numeric
      P = Packed
      B = Binary
      R = Validation Required
      Default Values
      B = Blanks
      Z= Zero
      Justify
      RJ = Right Justification of Data
      LJ = Left Justification of Data

      Attachment B

      Record Layout for Submission of Trading Information

      Transaction Type Security Type
        Equity* Options
      Non-Program Trading, Agency A C
      Non-Index Arbitrage, Program Trading, Proprietary C  
      Index Arbitrage, Program Trading, Proprietary D  
      Index Arbitrage, Program Trading, Individual Investor J  
      Non-Index Arbitrage, Program Trading, Individual Investor K  
      Non-Program Trading, Proprietary P F
      Non-Program Trading, Individual Investor I  
      Non-Index Arbitrage, Program Trading, Agency Y  
      Index Arbitrage, Program Trading, Agency U  
      Index Arbitrage, Program Trading, as Agent for Other Member M  
      Non-Index Arbitrage, Program Trading, as Agent for Other Member N  
      Non-Program Trading, as Agent for Other Member W  
      Specialist S S
      Market-Maker   M
      Non-Member Market-Maker/Specialist Account   N
      Stock Specialist — Assignment   Y
      Short Exempt, Agency B  
      Customer Range Account of a Broker/Dealer   B
      Registered Trader G  
      Error Trade Q  
      Competing Market Maker Proprietary Transaction: Affiliated w/ Clearing Member O  
      Competing Market Maker: Unaffiliated Member's Competing Market Maker T  
      Competing Market Maker: Non-Member R  
      Short Exempt Transaction: Proprietary Account of Clearing Member Organization or Affiliated Member/Member Organization E  
      Short Exempt Transaction: Proprietary Account of Unaffiliated Member/Member Organization F  
      Short Exempt Transaction: Individual Customer Account H  
      Short Exempt Transaction: Competing Market Maker this is a Member/Member Organization Trading for own account L  
      Short Exempt Transaction: One Member Acting as Agent for Another Member's Competing Market Maker Account X  
      Short Exempt Transaction: Account of Non Member Competing Market Maker Z  
      Amex Option Specialist/Market Maker Trading Paired Security V  
      Registered Trader Market Maker Transaction Regardless of the Clearing Number   P
      Transactions cleared for a NASDAQ market maker that is affiliated w/ the clearing member that resulted from telephone access to the specialist. Amex Only. 3  
      Transactions cleared for a member's NASDAQ market maker that is not affiliated with the clearing member that resulted from telephone access to the specialist. Amex Only. 4  
      Transactions cleared for a non-member NASDAQ market maker that is not affiliated with the clearing member that resulted from telephone access to the specialist. Amex Only. 5  
      Voluntary Professional   W

      * Equity securities include those securities that trade like equities (e.g., ETFs and structured products).

    • 12-35 Amendments to Mediation Code to Provide the Mediation Director With Discretion to Determine Whether Parties to a FINRA Mediation May Select a Mediator Who Is Not on FINRA's Mediator Roster; Effective Date: August 6, 2012

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      Mediator Selection

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Key Topics

      Code of Mediation Procedure
      Mediation
      Mediator Selection
      Referenced Rules & Notices

      FINRA Rule 14107

      Executive Summary

      Under FINRA Rule 14107 (Mediator Selection) of the Code of Mediation Procedure (Mediation Code), parties to a mediation may select a mediator from FINRA's roster or from a source of their own choosing, including a mediator who is not on FINRA's mediator roster. In limited instances, the director of Mediation (Mediation director) may assign a mediator. The SEC approved amendments to the Mediation Code granting the Mediation director discretion to determine whether parties may select a mediator who is not on FINRA's mediator roster.1

      The amendments are effective on August 6, 2012, for all mediation cases filed on or after the effective date.

      The text of the amendments is set forth in Attachment A.

      Questions concerning this Notice should be directed to:

      •    Kenneth L. Andrichik, Senior Vice President, Chief Counsel, Director of Mediation and Strategy, Dispute Resolution, at (212) 858-3915 or ken.andrichik@finra.org; or
      •   Julie Crotty, Deputy Director of Mediation and Business Strategies, Dispute Resolution, at (212) 858-4341 or julie.crotty@finra.org.

      Background & Discussion

      The Mediation Code permits parties to a mediation to select a mediator either from a list of FINRA mediators supplied by the Mediation director, or from a list or other source of their own choosing. In limited instances, the Mediation director assigns the mediator. Although parties usually select a FINRA mediator, under the current provision, parties may select a mediator who is not on FINRA's roster.

      In 1995, when FINRA implemented its mediation program, FINRA permitted parties to select non-FINRA mediators to ensure that parties had access to a sufficient number of mediators. After more than 15 years of administering the mediation program, FINRA's mediator roster includes many seasoned securities mediators. FINRA staff carefully screens every mediator applicant, and the National Arbitration and Mediation Committee2 (through its Mediation Subcommittee) reviews and approves each application before FINRA places an applicant on the roster. FINRA staff conducts a background check of approved applicants before placing them on the mediator roster. Staff elicits evaluations of its mediators from parties and counsel and conducts periodic quality control reviews of FINRA mediators. Non-FINRA mediators are not subject to FINRA's screening process, background check or periodic evaluation. Accordingly, the selection of a non-FINRA mediator raises concerns for the forum.

      In response to these concerns, FINRA amended FINRA Rule 14107(a) to provide the Mediation director with discretion to determine whether parties to a FINRA mediation may select a mediator who is not on FINRA's mediator roster. Under the amended rule, if the parties select a non-FINRA mediator who is willing to apply to be a FINRA mediator, and the staff believes that the mediation program would benefit by adding the mediator to the roster, then the Mediation director may permit the mediator to serve on the case.3 FINRA believes that the amendments protect the quality and integrity of the process for users of its mediation forum.

      If the Mediation director rejects a non-FINRA mediator the parties selected, the parties still have options for mediation. The parties may:

      •   select a FINRA-approved mediator;
      •   select a different non-FINRA mediator subject to the same conditions as the rejected mediator; or
      •   mediate their dispute elsewhere.

      FINRA Rule 14107(c) provides that a mediator selected or assigned to mediate a matter must comply with FINRA rules relating to disclosures required of arbitrators unless, with respect to a mediator selected from a source other than a list provided by FINRA, the parties elect to waive such disclosure. FINRA amended the provision to state that it applies to a non-FINRA mediator who is approved to serve on a FINRA mediation.

      The amendments are effective for all mediation cases filed on or after August 6, 2012.


      1 See Securities Exchange Act Rel. No. 67040 (May 22, 2012), 77 FR 31677 (May 29, 2012) (File No. SR-FINRA-2012-011).

      2 The National Arbitration and Mediation Committee (NAMC) makes recommendations to FINRA staff regarding recruitment, qualification, training and evaluation of arbitrators and mediators. The NAMC also makes recommendations on rules, regulations and procedures that govern the conduct of arbitration, mediation and other dispute resolution matters before FINRA.

      The NAMC members include investor representatives, securities industry professionals and FINRA arbitrators and mediators. A majority of the NAMC members and its chair are public (non-industry) representatives. This diverse composition ensures a neutral approach in the administration of Dispute Resolution's forum, promoting fairness to all parties.

      3 FINRA mediators pay an annual $200 fee to remain active on the roster and a $150 fee per case. FINRA will require non-FINRA mediators who serve on a case to complete the application process for inclusion on the roster and to pay the applicable fees.


      ATTACHMENT A

      New language is underlined; deletions are in brackets

      14107 Mediator Selection

      (a) A mediator may be selected:
      [•]   (1) By the parties from a list supplied by the Director;
      [•]   (2) With the Director's approval upon receipt of the parties' joint request, [By the parties] from a list or other source the parties choose [of their own choosing]; or
      [•]   (3) By the Director if the parties do not select a mediator after submitting a matter to mediation.
      (b) For any mediator assigned or selected from a list provided by FINRA, the parties will be provided with information relating to the mediator's employment, education, and professional background, as well as information on the mediator's experience, training, and credentials as a mediator.
      (c) Any mediator selected or assigned to mediate a matter shall comply with the provisions of Customer Code Rule 1240[8]5 or Industry Code Rule 13408, unless, with respect to a non-FINRA mediator approved by the Director, [mediator selected from a source other than a list provided by FINRA,] the parties elect to waive such disclosure.
      (d) No mediator may serve as an arbitrator of any matter pending in FINRA arbitration in which he served as a mediator; nor may the mediator represent any party or participant to the mediation in any subsequent FINRA arbitration relating to the subject matter of the mediation.

      * * * * *

    • 12-34 FINRA Requests Comment on Proposed Regulation of Crowdfunding Activities; Comment Period Expires: August 31, 2012

      View PDF

      Jumpstart Our Business Startups Act

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topics

      Crowdfunding
      Funding Portals
      JOBS Act
      Referenced Rules & Notices

      NTM 03-73

      Executive Summary

      The Jumpstart Our Business Startups Act (JOBS Act)1—a new law aimed at increasing American job creation and economic growth—contains key provisions relating to securities offered or sold through "crowdfunding."2 Under the new law, intermediaries performing crowdfunding on behalf of issuers must register with the Securities and Exchange Commission (SEC) as a "funding portal" or broker and must register with an applicable self-regulatory organization (SRO). FINRA is soliciting public comment on the appropriate scope of FINRA rules that should apply to member firms engaging in crowdfunding activities, either as funding portals or as brokers.

      Questions regarding this Notice should be directed to:

      •   Gary L. Goldsholle, Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8104; or
      •   Adam H. Arkel, Associate General Counsel, OGC, at (202) 728-6961.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by August 31, 2012.

      Member firms and other interested parties can submit their comments using the following methods:

      •  Emailing comments to pubcom@finra.org; or
      •  Mailing comments in hard copy to:

      Marcia E. Asquith
      Office of the Corporate Secretary
      FINRA
      1735 K Street, NW
      Washington, DC 20006-1506

      To help FINRA process and review comments more efficiently, persons should use only one method to comment on the proposal.

      Important Notes: The only comments that FINRA will consider are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the FINRA website. Generally, FINRA will post comments as they are received.3

      Before becoming effective, a proposed rule change must be authorized for filing with the SEC by the FINRA Board of Governors, and then must be filed with the SEC pursuant to Section 19(b) of the Securities Exchange Act of 1934 (SEA).4

      Background & Discussion

      The crowdfunding provisions of the JOBS Act provide an exemption from registration under the Securities Act of 1933 (Securities Act) for securities offered by issuers in amounts of up to $1 million over a 12-month period provided that the amount raised from any single investor adheres to strict limits (ranging from $2,000 to $100,000) based on the investor's annual income or net worth.5 The crowdfunding exemption establishes specific eligibility and sales practice standards for issuers and intermediaries that engage in crowdfunding.6 Intermediaries that seek to engage in crowdfunding must be registered as a broker or a funding portal, a newly created entity.

      The regulatory scheme established by Congress expressly contemplates a role for an organization such as FINRA by mandating that each registered funding portal be a member of an applicable SRO.7 However, Congress limited a national securities association's examination and enforcement authority over such registered funding portals to its rules "written specifically for registered funding portals."8

      Registered Funding Portal Rules

      While the scope of any FINRA rules written specifically for registered funding portals will be influenced by, and should not be duplicative of, any crowdfunding rules adopted by the SEC, we have had conversations with SEC staff suggesting that FINRA should consider adopting its own crowdfunding rules. To assist in developing its crowdfunding rules, FINRA solicits comment on the specific rules that FINRA should adopt for registered funding portals that become FINRA members.

      In writing rules specifically for registered funding portals, FINRA would seek to ensure that the capital-raising objectives of the JOBS Act are advanced in a manner consistent with investor protection. Commenters are encouraged to identify the types of requirements that should apply to registered funding portals, taking into account the relatively limited scope of activities by a registered funding portal permitted under the JOBS Act.9 Comments are particularly requested about possible rules concerning supervision, advertising, anti-money laundering, fraud and manipulation, and just and equitable principles of trade.

      Application of FINRA Rules to Crowdfunding Activities by Broker-Dealers

      FINRA also solicits comment on the application of existing FINRA rules to crowdfunding activities of broker-dealers. Unlike the rules applicable to registered funding portals, the JOBS Act does not limit the FINRA rules applicable to registered broker-dealers engaging in crowdfunding activities. Nevertheless, FINRA invites comments from broker-dealers regarding the application of existing FINRA rules to broker-dealers' crowdfunding activities and whether such rules should be relaxed to address a broker-dealer's crowdfunding activities, taking into account, among other things, the extent to which a broker-dealer may be able to isolate its crowdfunding business, or otherwise places limitations on its activities akin to those for registered funding portals. FINRA requests information from broker-dealers that may engage in crowdfunding concerning the organizational structure through which this activity would occur within the firm (e.g., through the broker-dealer entity or a separately identified department). FINRA also requests comment on whether engaging in crowdfunding might present special conflicts or concerns for a broker-dealer, such as might arise if a registered representative were to recommend that a customer visit the firm's crowdfunding site.


      1 Pub. L. No. 112-106,126 Stat. 306 (2012).

      2 See Title III of the JOBS Act. Crowdfunding generally refers to the use of the Internet by small businesses to raise capital through limited investments from a large number of investors.

      3 FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Persons should submit only information that they wish to make publicly available. See NTM 03-73 (November 2003) (NASD Announces Online Availability of Comments) for more information.

      4 See SEA Section 19 and rules thereunder. After a proposed rule change is filed with the SEC, the proposed rule change generally is published for public comment in the Federal Register. Certain limited types of proposed rule changes, however, take effect upon filing with the SEC. See SEA Section 19(b)(3) and SEA Rule 19b-4.

      5 Specifically, an issuer relying on the crowdfunding exemption created by the JOBS Act may not raise from an investor an aggregate amount that exceeds: (i) the greater of $2,000 or 5 percent of the investor's annual income or net worth (for investors whose annual income or net worth is less than $100,000); or (ii) 10 percent of the investor's annual income or net worth, not to exceed $100,000 (for investors whose annual income or net worth is $100,000 or more). See Securities Act Section 4(6). These aggregate amounts limit an investor's total crowdfunding purchases from all issuers in a 12-month period.

      6 See generally Securities Act Section 4A and SEA Section 3(a)(80).

      7 See SEA Section 4A(a)(2). The term "self-regulatory organization" is defined under SEA Section 3(a)(26) to include a registered securities association (e.g., FINRA). SEA Section 3(h)(2) provides in part that for purposes of SEA Section 15(b)(8) the term "broker or dealer" includes a funding portal and the term "registered broker or dealer" includes a registered funding portal. SEA Section 15(b)(8) generally requires a broker or dealer to be a member of a registered securities association.

      8 See SEA Section 3(h)(2).

      9 For example, among other things, a funding portal may not: offer investment advice or recommendations; solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal; compensate employees, agents or other persons for such solicitation or sales; or hold, manage, possess or otherwise handle customer funds or securities. See SEA Section 3(a)(80).

    • 12-33 FINRA Amends Electronic Form NMA and Adopts New Electronic Form CMA Filing Requirements; Implementation Date: July 23, 2012

      View PDF

      Membership Application Changes

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Systems
      Key Topics

      Continuing Membership
      Application
      Form CMA
      Form NMA
      New Member Application
      Referenced Rules & Notices

      NASD Rule 1012
      NASD Rule 1013
      NASD Rule 1014
      NASD Rule 1017
      SEA Rule 15c3-1

      Executive Summary

      FINRA has amended Form NMA and adopted new Form CMA. Beginning July 23, 2012:

      •   all prospective applicants for FINRA membership (new member applicants or NMA applicants) pursuant to NASD Rules 1012 (General Provisions) and 1013 (New Member Application and Interview) must submit the revised Form NMA as part of their new member applications; and
      •   all prospective applicants for approval of a change in ownership, control or business operations (continuing membership applicants or CMA applicants) pursuant to NASD Rules 1012 and 1017 (Application for Approval of Change in Ownership, Control, or Business Operations) must submit the new electronic Form CMA as part of their continuing membership applications.

      FINRA filed the rule change to amend online Form NMA for immediate effectiveness on March 5, 2012, with no changes made to existing rule text.1 On May 31, 2012, the Securities and Exchange Commission approved the rule filing to amend NASD Rules 1012 and 1017 to adopt the new standardized electronic Form CMA.2

      The text of NASD Rules 1012 and 1017 as amended is set forth in Attachment A.

      Screenshots of revised Form NMA are set forth in Exhibit 3 to SR-FINRA-2012-017, and screenshots of new Form CMA are set forth in Exhibit 3 to SR-FINRA-2012-018.

      Questions concerning this Notice should be directed to Joseph Sheirer, Director and Counsel II, Membership Application Program, at (212) 858-5132.

      Questions concerning technical requirements and the Forms NMA and CMA should be directed to FINRA's Gateway Call Center at (301) 590-6500.

      The July 23, 2012, implementation date for required use of the new electronic Form CMA has been revised by SR-FINRA-2012-036 to August 27, 2012. However, firms may begin using the electronic Form CMA on July 23, 2012. The implementation date for the amended electronic Form NMA remains July 23, 2012.

      Background & Discussion

      Revised Form NMA

      Pursuant to NASD Rules 1012 and 1013, each applicant for FINRA membership must complete and electronically file the standardized online Form NMA as part of its new member application. The standardized online Form NMA was implemented in 2008 to streamline the new member application process and to assist applicants in compiling a complete application package by identifying and organizing the information and supporting documentation required by NASD Rule 1013 into eight major sections: (I) General Information; (II) Business Lines; (III) Personnel; (IV) Net Capital and Sources of Funding; (V) Contractual and Business Arrangements; (VI) Policies and Procedures; (VII) Facilities; and (VIII) Recordkeeping System.3

      FINRA has now revised Form NMA to further streamline the new member application process and to organize Form NMA according to the 12 standards for membership enumerated in NASD Rule 1014 (Department Decision).4 The revisions also group information requests on specific topics that currently are located throughout existing Form NMA, as well as reduce current duplicative information requests in Form NMA.

      New Form CMA

      NASD Rule 1017 provides that certain changes in a member firm's ownership, control or business operations require a continuing membership application.5 Currently, NASD Rule 1017 does not require a continuing membership applicant to submit a standardized form as part of its continuing membership application and provides little detail regarding an application's required contents. Instead, each applicant is responsible for determining the contents of its continuing membership application. This often results in information deficiencies, which in turn, creates unnecessary delays in efficiently processing the applications. NASD Rule 1017 also generally requires a continuing membership application to be filed in the district office in which an applicant's principal place of business is located.

      In addition, NASD Rule 1012 provides that, unless otherwise prescribed by FINRA, applicants may submit continuing membership applications via first-class mail, overnight courier or hand-delivery (or facsimile upon agreement by FINRA and the applicant). This manner of submitting a continuing membership application reduces the overall efficiency of the process and also creates unnecessary delays in properly forwarding information within FINRA, such as in conveying information to and from the centralized Membership Application Program Group formed in January 2011.

      To streamline the continuing membership application process, FINRA has amended NASD Rules 1012 and 1017(b) to require continuing membership applicants to file an application in the manner prescribed by FINRA with the Department of Member Regulation and to include the completed Form CMA as part of the contents of a continuing membership application.

      New Form CMA is structured, similarly to the revised Form NMA, according to the 12 standards for membership enumerated in NASD Rule 1014, with adjustments in the content of Form CMA based on the differing nature of the application types.6 The new form will provide continuing membership applicants with the benefits of a streamlined application process that new member applicants currently experience via the standardized online Form NMA and is intended to reduce administrative delays that exist in today's manual application processes.

      New User Friendly Features of Forms NMA and CMA

      The forms will provide new user-friendly features intended to reduce the administrative burden placed on NMA and CMA applicants.7 Specifically, those features include:

      •  pre-populating certain fields in both forms with information provided to FINRA in other submissions (e.g., Central Registration Depository (CRD®) entitlement forms and Form BD) or otherwise available to FINRA from CRD records (e.g., continuing education status), thereby minimizing the time necessary for applicants to complete the new forms;
      •  certain information fields in revised Form NMA requesting information that applicants are currently required to provide during FINRA's review of the new member application that were not included in current Form NMA but rather obtained during application review through requests from FINRA for additional information. These information fields, which FINRA added based on industry and staff feedback on existing Form NMA and the new member application process, should reduce the need for extensive follow-up during the review process which currently results in processing delays; and
      •  optional information request fields in both forms that can be used by applicants to provide additional information if and when it is applicable to an applicant's proposed business activities, structures or circumstances. The optional field approach is intended to provide flexibility for the significant level of variation seen in member firms' structures, business lines and proposed changes.

      Information Requested by Forms NMA and CMA

      Below is a synopsis of the information requests, by standard, of revised Form NMA (and the nexus to existing Form NMA information requests) and new Form CMA:

      Standard 1 (Overview of the Applicant)

      NASD Rule 1014(a)(1) requires Member Regulation to consider whether a new member or continuing membership application and all supporting documents are complete and accurate.

      Form NMA: Information fields request certain new member applicant overview information currently contained primarily in Sections I (General Information), II (Business Lines) and VII (Facilities) of existing Form NMA (e.g., formation information, identification of business activities, types of customers (and/or counterparties), owners, officers, directors and control persons, validation of clearing arrangements).
      Form CMA: Information fields request certain continuing membership applicant overview information relevant to the proposed business change, such as details of the proposed change, verification of current business activities, new business lines added, supervisors for new business lines and identification of other persons associated with the proposed business change.

      Standard 2 (Licenses and Registrations)

      NASD Rule 1014(a)(2) requires Member Regulation to consider whether an NMA or CMA applicant and its associated persons have all licenses and registrations required by state and federal authorities and self-regulatory organizations (SROs).

      Form NMA: Information fields request relevant information regarding a new member applicant's licenses and registrations (e.g., required licenses and registrations, two-principal requirement waiver, other SRO registrations) that is currently contained primarily in Sections I (General Information) and III (Personnel) of existing Form NMA, as well as incorporating additional information requests (e.g., intent to claim exemptions from registration or seek examination waivers for personnel) that are necessary for the applicant to demonstrate compliance with this standard.
      Form CMA: Information fields request relevant information regarding a continuing membership applicant's licenses and registrations, such as changes to required licenses and registrations, new or continuing registration or examination waivers, new or continuing two-principal requirement waiver, other SRO registrations and/or withdrawals from other SRO registrations and new non-registered officers, directors or control persons that are necessary, in light of the proposed business change, for a continuing membership applicant to demonstrate compliance with the standard.

      Standard 3 (Compliance with Securities Laws, Just and Equitable Principles of Trade)

      NASD Rule 1014(a)(3) requires Member Regulation to consider whether an NMA or CMA applicant and its associated persons are capable of complying with the requirements of the federal securities laws, the rules and regulations thereunder, and FINRA rules, including observing high standards of commercial honor and just and equitable principles of trade.

      Form NMA: Information fields consist of requests that are contained in Sections I (General Information) and III (Personnel) of existing Form NMA (e.g., disciplinary history) and also incorporate additional information requests (e.g., state or federal orders or decrees, statements of claims, settlement agreements) that are necessary for the new member applicant to demonstrate compliance with the standard.
      Form CMA: Information fields request relevant information (e.g., disciplinary history) and documentation (e.g., state or federal orders or decrees, statements of claims, cancelled checks for payment of arbitration awards, proofs of settlement, settlement agreements) that are necessary, in light of the proposed business change, for a continuing membership applicant to demonstrate compliance with the standard.

      Standard 4 (Contractual and Business Relationships)

      NASD Rule 1014(a)(4) requires Member Regulation to consider whether an NMA or CMA applicant has established all contractual or other arrangements and business relationships with banks, clearing corporations, service bureaus or others necessary to: (A) initiate the operations described in the applicant's business plan, considering the nature and scope of operations and the number of personnel; and (B) comply with the federal securities laws, the rules and regulations thereunder and FINRA rules.

      Form NMA: Information fields include requests for information regarding an applicant's contractual and business relationships that are contained in Sections I (General Information), IV (Net Capital and Sources of Funding) and V (Contractual and Business Arrangements) of existing Form NMA (e.g., description of contractual arrangements, expense sharing agreements, financing arrangements, fidelity bonds or fidelity bond applications, support and service agreements, auditor information).
      Form CMA: Information fields consist of requests regarding a continuing membership applicant's contractual and business relationships that would be relevant to the proposed business change (e.g., description of new or amended contractual arrangements, expense sharing agreements, financing arrangements, fidelity bonds or fidelity bond applications, support and service agreements).

      Standard 5 (Facilities)

      NASD Rule 1014(a)(5) requires Member Regulation to consider whether an NMA or CMA applicant has, or has adequate plans, to obtain facilities that are sufficient to: (A) initiate the operations described in the applicant's business plan, considering the nature and scope of operations and the number of personnel; and (B) comply with the federal securities laws, the rules and regulations thereunder and FINRA rules.

      Form NMA: Information fields consist of requests regarding an applicant's facilities that are primarily contained in Section VII (Facilities) of existing Form NMA (e.g., space sharing arrangements, leasing or sub-leasing arrangements) and also incorporate additional information requests that are necessary to determine whether the applicant complies with the standard (e.g., authorizations to sublet, deeds of ownership).
      Form CMA: Information fields request relevant information regarding a continuing membership applicant's facilities, such as material changes to facilities or locations, departmental information barriers, space sharing arrangements, lease and/or sublease agreements.

      Standard 6 (Communications and Operational Systems)

      NASD Rule 1014(a)(6) requires Member Regulation to consider whether the communications and operational systems an NMA or CMA applicant intends to employ for the purpose of conducting business with customers and other members are adequate and provide reasonably for business continuity.

      Form NMA: Information fields include requests regarding an applicant's communications and operational systems that are contained in Sections VI (Policies and Procedures) and VII (Facilities) of existing Form NMA (e.g., communications and operational systems descriptions, supervision arrangements of multiple locations, business continuity plan documents), as well as requests for additional information that are necessary for the applicant to demonstrate compliance with the standard (e.g., information relating to the use of social media sites).
      Form CMA: Information fields consist of requests regarding a continuing membership applicant's communications and operational systems, such as communications and operational systems changes, supervision arrangements of multiple locations, business continuity plan documents and information relating to the applicant's use of social media sites.

      Standard 7 (Maintaining Adequate Net Capital)

      NASD Rule 1014(a)(7) requires Member Regulation to consider whether an NMA or CMA applicant is capable of maintaining a level of net capital in excess of the minimum net capital requirements set forth in SEA Rule 15c3-1 adequate to support the applicant's intended business operations on a continuing basis.

      Form NMA: Information fields consist of requests regarding an applicant's net capital requirements that are contained primarily in Section IV (Net Capital and Sources of Funding) of existing Form NMA (e.g., information on the nature and source of capital, additional funding plans, minimum net capital requirements, future funding sources).
      Form CMA: Information fields request relevant information regarding a continuing membership applicant's net capital requirements, such as information on the nature and source of capital, additional funding plans, minimum net capital requirements and future funding sources.

      Standard 8 (Financial Controls)

      NASD Rule 1014(a)(8) requires Member Regulation to consider whether an NMA or CMA applicant has financial controls to ensure compliance with the federal securities laws, the rules and regulations thereunder and FINRA rules.

      Form NMA: Information fields include requests regarding an applicant's financial controls that are contained primarily in Sections I (General Information), III (Personnel) and VI (Policies and Procedures) of existing Form NMA (e.g., information regarding the registered financial and operations principal's (FINOP's) experience, financial controls, FINOP outside business activity notification) and also incorporate requests for additional information that are necessary for the applicant to demonstrate compliance with the standard (e.g., net capital deficiency plans).
      Form CMA: Information fields request relevant information regarding a continuing membership applicant's financial controls, such as identification of any change to the applicant's FINOP and the impact of the proposed business change on the continuing membership applicant's financial controls.

      Standard 9 (Written Procedures)

      NASD Rule 1014(a)(9) requires Member Regulation to determine whether an NMA or CMA applicant has compliance, supervisory, operational and internal control practices and standards that are consistent with practices and standards regularly employed in the investment banking or securities business, taking into account the nature and scope of the applicant's proposed business.

      Form NMA: Information fields consist of requests regarding an applicant's written procedures that are contained in Sections III (Personnel), VI (Policies and Procedures) and VIII (Recordkeeping System) of existing Form NMA (e.g., written supervisory procedures (WSPs), WSP checklist, sample reports to support supervision and financial controls, heightened supervisory procedures attestation).
      Form CMA: Information fields request relevant information regarding a continuing membership applicant's written procedures that are applicable to the proposed business change, such as the impact of proposed change on the applicant's WSPs and WSP checklist and sample reports to support supervision and financial controls.

      Standard 10 (Supervisory Structure)

      NASD Rule 1014(a)(10) requires Member Regulation to determine whether an NMA or CMA applicant has a supervisory system, including WSPs, internal operating procedures (including operational and internal controls) and compliance procedures designed to prevent and detect, to the extent practicable, violations of the federal securities laws, the rules and regulations thereunder and FINRA rules.

      Form NMA: Information fields consist of requests regarding a new member applicant's supervisory structure that are contained in Sections I (General Information) and III (Personnel) of existing Form NMA (e.g., information regarding supervisors' experience and duties, chief compliance officers' experience, non-FINOP outside business activities notifications).
      Form CMA: Information fields contain requests regarding a continuing membership applicant's supervisory structure that are applicable to the proposed business change, such as changes to supervisory or management personnel, information regarding supervisors' experience and duties, chief compliance officers' experience and non-FINOP outside business activities notifications.

      Standard 11 (Books and Records)

      NASD Rule 1014(a)(11) requires Member Regulation to determine whether an NMA or CMA applicant has a recordkeeping system that enables the applicant to comply with federal, state and SRO recordkeeping requirements and a staff that is sufficient in qualifications and number to prepare and preserve required records.

      Form NMA: Information fields consist of requests regarding an applicant's books and records that are contained primarily in Section VIII (Recordkeeping System) of existing Form NMA (e.g., recordkeeping system, sample books and records, recordkeeping service providers).
      Form CMA: Information fields consist of requests regarding a continuing membership applicant's books and records that are applicable to the proposed business change, such as the impact of the potential business change on an applicant's recordkeeping systems and recordkeeping service providers and sample books and records relating to any new business activities.

      Standard 12 (Continuing Education)

      NASD Rule 1014(a)(12) requires Member Regulation to determine whether an NMA or CMA applicant has completed a training needs assessment and has a written training plan that complies with the continuing education (CE) requirements imposed by the federal securities laws, the rules and regulations thereunder and FINRA rules.

      Form NMA: Information fields consist of requests regarding an applicant's CE obligations that are contained in Section VI (Policies and Procedures) of existing Form NMA (e.g., firm element owner identification, CE checklist, CE needs assessment) and also incorporate additional requests for information that are necessary for the applicant to demonstrate compliance with the standard (e.g., information regarding the applicant's CE deficiency mitigation plan).
      Form CMA: Information fields consist of requests regarding a continuing membership applicant's CE obligations that are applicable to the proposed business change, such as changes to the applicant's CE program and a revised CE training needs assessment and written training plan.

      1 See Securities Exchange Act Release No. 66555 (March 9, 2012), 77 FR 15445 (March 15, 2012) (SR-FINRA-2012-017) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend Online Form NMA, the Standardized Membership Application Form Applicants Must File Pursuant to NASD Rule 1013 (New Member Application and Interview)).

      2 See Securities Exchange Act Release No. 67082 (May 31, 2012), 77 FR 33539 (June 6, 2012) (SR-FINRA-2012-018) (Order Granting Approval of Proposed Rule Change as Modified by Amendment No. 1, to Amend NASD Rules 1012 (General Provisions) and 1017 (Application for Approval of Change in Ownership, Control, or Business Operations) to Adopt Form CMA).

      3 See Securities Exchange Act Release No. 53564 (March 29, 2006), 71 FR 16847 (April 4, 2006) (SR-NASD-2006-038) (Order Approving File No. SR-NASD-2006-038); Notice to Members 06-16 (April 2006) (NASD Amends Rule 1013 to Adopt a Standardized Application Form (Form NMA) to be Used by All New Member Applicants); see also Securities Exchange Act Release No. 55412 (March 7, 2007), 72 FR 11414 (March 13, 2007) (Order Approving File No. SR-NASD-2007-015); Notice to Members 07-20 (May 2007) (NASD Amends Rules 1012 and 1013 to Require Applicants for Membership to Submit Applications Using Online Form NMA); Securities Exchange Act Release No. 57480 (March 12, 2008), 73 FR 14519 (March 18, 2008) (SR-FINRA-2008-008) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 1013 (New Member Application and Interview) and the Manner in Which Membership Applicants Submit Their Applications to FINRA); Regulatory Notice 08-14 (March 2008) (FINRA Implements New Electronic Form NMA Requirement).

      4 While NASD Rule 1014 sets forth 14 standards for membership, Form NMA does not elicit specific information from applicants regarding standards 13 (FINRA does not possess information indicating that the applicant may circumvent, evade, or otherwise avoid compliance with the federal securities laws, the rules or regulations thereunder or FINRA rules) or 14 (the application is consistent with the federal securities laws, the rules and regulations thereunder and FINRA rules). See NASD Rule 1014(a)(13) and (14).

      5 Among other things, changes that require an application include a merger of a member firm with another member firm, a direct or indirect acquisition by a member firm of another member firm, a change in equity ownership or partnership capital of the member firm that results in one person or entity directly or indirectly owning or controlling 25 percent or more of the equity or partnership capital or a "material change in business operations" as defined in NASD Rule 1011(k). NASD Rule 1011(k) defines a "material change in business operations" as including, but not limited to: (1) removing or modifying a membership agreement restriction; (2) market making, underwriting, or acting as a dealer for the first time; and (3) adding business activities that require a higher minimum net capital under SEA Rule 15c3-1.

      6 Consistent with revised Form NMA, new Form CMA does not elicit specific information from applicants regarding NASD Rule 1014's standards 13 or 14. See supra note 4.

      7 FINRA worked closely with an industry task force, comprised of seven representatives from small and large firms, several of whom also are consultants, during the development of both forms. Among other things, the task force's input assisted the staff to make these user-friendly changes.


      ATTACHMENT A

      Attachment A shows the text of the proposed rule change. Proposed new language is underlined; proposed deletions are in brackets.

      *****

      1000 MEMBERSHIP, REGISTRATION AND QUALIFICATION REQUIREMENTS

      *****

      1010 Membership Proceedings

      *****

      1012. General Provisions

      (a) Filing by Applicant or Service by FINRA
      (1) An Applicant for membership shall file an application in the manner prescribed in Rule 1013.
      (2) An Applicant seeking approval of a change of ownership, control, or business operations shall file an application in the manner prescribed in Rule 1017.
      (2) through (4) renumbered as (3) through (5).
      (b) through (e) No Change.

      *****

      1017. Application for Approval of Change in Ownership, Control, or Business Operations

      (a) No Change.
      (b) Filing and Content of Application
      (1) The member shall file the application in the manner prescribed by FINRA with the Department of Member Regulation ("the Department") [at the district office in the district in which the member's principal place of business is located. If the application involves a merger between members with principal places of business in two or more districts, the application shall be filed and processed by the district office wherein the surviving firm's principal place of business will be located].
      (2) An applicant shall submit an application that includes a Form CMA including a detailed description of [The application shall describe in detail] the change in ownership, control, or business operations [and include a business plan, pro forma financials, an organizational chart, and written supervisory procedures reflecting the change].
      (A) through (C) No Change.
      (c) through (k) No Change.

      *****

    • 12-32 Changes to Advertising, Corporate Financing, New Membership and Continuing Membership Application, Central Registration Depository and Branch Office Annual Registration Fees

      Effective Dates:

      July 2, 2012: Advertising and Corporate Financing fees

      July 23, 2012: New Membership and Continuing Membership Application fees

      January 2, 2013: Central Registration Depository fees and Branch Office Annual Registration fees and related waiver process

      View PDF

      Revised Fees

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Advertising
      Compliance
      Corporate Finance
      Legal
      Operations
      Registered Representatives
      Registration
      Senior Management
      Systems
      Key Topics

      Advertising Fees
      Branch Office Annual Registration Fees
      Central Registration Depository
      Continuing Membership Application Fees
      Corporate Financing Fees
      Disclosure Filing Fees
      Fingerprint Processing Fees
      Initial/Transfer Registration Fees
      Late Disclosure Fees
      Mass Transfer Registration Fees
      New Member Application Fees
      System Processing Fees
      Referenced Rules & Notices

      FINRA Rules 2210, 2310, 5110 and 5121
      NASD Rules 1012, 1013, 1017 and 2210
      Sections 4, 6, 7 and 13 of Schedule A to the FINRA By-Laws
      Forms U4, U5 and BD
      Regulatory Notices 12-22 and 12-29

      Executive Summary

      This Notice was updated on July 5, 2012, to correct a typographical error in the table of fees for Large, Tier 2 firms applying for a Material Change in Business.

      Effective July 2, 2012, FINRA is increasing fees for (1) reviewing advertising material filed with FINRA and (2) filing offering documents pursuant to FINRA Rule 5110. Effective July 23, 2012, FINRA is increasing its new member application filing fee and imposing a new continuing membership application filing fee. Effective January 2, 2013, FINRA is changing fees relating to (1) the Central Registration Depository (CRD® or CRD system), including fees for initial/transfer registration, disclosure filing, system processing, fingerprint processing, mass transfer registration and late disclosure; and (2) branch office annual registration and related waiver process.

      The text of the rule amendments effecting these fee changes is set forth in the following Attachments:

      Attachment A—Rule amendments regarding advertising fees

      Attachment B—Rule amendments regarding corporate financing fees

      Attachment C—Rule amendments regarding fees related to CRD

      Attachment D—Rule amendments regarding membership application process and branch office registration fees

      Questions concerning this Notice should be directed to:

      •  Amy C. Sochard, Director, Advertising Regulation, at (240) 386-4508 (regarding advertising fees);
      •  Paul Mathews, Director, Corporate Financing Department, or Joani Ward, Assistant Director, Corporate Financing Department, at (240) 386-4623 (regarding corporate financing fees);
      •  Mario DiTrapani, Vice President, Registration and Disclosure, at (240) 386-4796 (regarding fees related to CRD and branch office registration);
      •  Joseph J. Sheirer, Director and Counsel, Membership Application Program, at (212) 858-5132 (regarding membership application process fees);
      •  Office of Finance—Billing Department at (240) 386-5397; or
      •  Office of General Counsel at (202) 728-8071.

      Background & Discussion

      Advertising Fees

      FINRA's Advertising Regulation Department evaluates member firms' advertisements, sales literature and other communications for compliance with applicable rules of FINRA, the SEC, the Municipal Securities Rulemaking Board and the Securities Investor Protection Corporation. Pursuant to NASD Rule 2210 and Interpretations issued thereunder, the Advertising Regulation Department helps to ensure that all FINRA member firms' communications are based on principles of fair dealing and good faith, are fair and balanced, and provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry or service.1 Among other things, FINRA rules prohibit member firm communications from including false, exaggerated, unwarranted or misleading statements or claims.

      The rule change amends Section 13 of Schedule A to the FINRA By-Laws (Schedule A) by increasing the fee that the Advertising Regulation Department charges for reviewing advertisements, sales literature and other such material, whether in printed, video or other form, filed with or submitted to FINRA (except for items that are filed or submitted in response to a written request from the Advertising Regulation Department issued pursuant to the spot check procedures set forth in FINRA rules).2 The fee for the review of printed material and video or audio media will be $125 for the first ten pages or the first ten minutes, respectively, while the surcharge for lengthier materials will remain unchanged. The fee for expedited review will be $600 per item for the first ten pages, and the fee for pages in excess of ten will be $50 per page.

      Despite rising costs to administer the filings program, this represents FINRA's first fee increase since 2005 in connection with the review of advertisements, sales literature and other such material. The volume of filings has increased substantially over that period, and FINRA has also upgraded its technology and hired additional staff to maintain the program's effectiveness and ensure reasonable turnaround times. Moreover, FINRA anticipates a continued increase in the volume of filings in future years.

      The implementation date for the revised advertising review fees is July 2, 2012.

      Corporate Financing Fees

      FINRA's Corporate Financing Department reviews the proposed underwriting terms and arrangements of proposed public offerings of securities for compliance with the requirements of FINRA Rule 5110 (Corporate Financing Rule—Underwriting Terms and Arrangements). The public offerings reviewed by the Corporate Financing Department include initial and secondary offerings of unseasoned issuers, best efforts offerings of direct participation programs (DPPs) and real estate investment trusts (REITs), but generally exclude public offerings of seasoned issuers that are not broker-dealers or their affiliates and offerings of investment grade securities.

      The Corporate Financing Department's review is complementary to the SEC's registration process, which defers to FINRA to establish reasonable levels of underwriting compensation and adequate disclosure of the underwriting terms and conflicts. Pursuant to FINRA Rule 5110, no member firm or person associated with a member firm may participate in a public offering subject to the rule, or to FINRA Rules 5121 (Public Offerings of Securities With Conflicts of Interest) and 2310 (Direct Participation Programs), unless the documents and information specified in the rule have been filed with and reviewed by the Corporate Financing Department. Typically, the book-running manager for the offering files the documents on behalf of the participating member firms. The fee charged to member firms for this review is set forth in Section 7 of Schedule A.

      In support of its reviews under FINRA Rule 5110 and other regulatory responsibilities, the rule change amends Section 7 of Schedule A to increase the rate and the fee cap for filings pursuant to FINRA Rule 5110.3 FINRA is increasing the rate of the filing fee from .01 percent to .015 percent of the proposed maximum aggregate offering price or other applicable value of the securities, and increasing the maximum fee from $75,500 to $225,500. The fee changes will apply to initial filings and to the net increase in the maximum aggregate offering price of any amendment filings.

      The filing fee rate has remained static since it was adopted in 1970, while the cap has been adjusted periodically, most recently in 2004.4 However, the nature and complexity of offerings filed with the Corporate Financing Department have changed substantially since the most recent adjustment. Many filings seek expedited review or "same day clearance" and FINRA has deployed (and continues to deploy) significant technology resources and process enhancements to accommodate those needs.5 The Corporate Financing Department also has seen growth in filings of unlisted REITs, business development companies and other DPPs, which raise complex issues.

      The implementation date for the revised Rule 5110 filing fee is July 2, 2012. Thus, the adjusted fees and fee cap will be effective for filings and amendments made on or after July 2, 2012.

      Fees Related to CRD

      FINRA is amending Sections 4 and 6 of Schedule A to implement changes to certain fees relating to the CRD system.6

      Initial/Transfer Registration Fee

      FINRA is increasing from $85 to $100 the fee for each initial or transfer Form U4 (Uniform Application for Securities Industry Registration or Transfer) filed by a member firm in the CRD system to register an individual. In those cases where a member firm is transferring the registrations of individuals in connection with the acquisition of all or part of another member firm's business, FINRA provides a discount to the fee, ranging from 10 to 50 percent, based on the number of registered personnel being transferred. FINRA is not changing the current discount schedule. This fee has been static since 1995.7 Since 1995, FINRA has regularly enhanced the CRD system by adding features and functionality (e.g., work queues, standard reports, email notifications) designed to make form filing more efficient for firms, and to otherwise help firms meet their reporting and related regulatory obligations. FINRA also has consistently made usability and navigational enhancements since deploying the Web-based CRD system in 1999. Finally, FINRA has increased the number of registration categories available to individuals, as well as the number of SROs and jurisdictions with which individuals and firms may register.

      Disclosure Filing Fees

      As part of the securities industry's licensing and registration process, individuals and member firms are required to report certain disclosure events or proceedings to the CRD system. These disclosure matters include, for example, certain criminal charges and convictions, regulatory actions, investment-related civil judgments and injunctions and financial events such as bankruptcies and unsatisfied liens. Individuals report these disclosure events or proceedings through Form U4 or Form U5 (Uniform Termination Notice for Securities Industry Registration), while member firms report disclosure matters in which they or a control affiliate have been involved via Form BD (Uniform Application for Broker-Dealer Registration).

      When a disclosure filing is made for either an individual or member firm, FINRA must, among other things, confirm that the matter is properly reported; review any documentation submitted and determine whether additional documentation is required; conduct any necessary independent research; and, depending on the matter reported, analyze whether the event or proceeding subjects the individual or member firm to a statutory disqualification pursuant to Section 3(a)(39) of the Securities Exchange Act of 1934 (Securities Exchange Act or SEA).8

      FINRA is increasing from $95 to $110 the fee to process an initial or amended Form U4 or Form U5 that includes the initial reporting, amendment or certification of one or more disclosure events or proceedings. FINRA is also imposing a new fee of $110 to process a Form BD that contains a disclosure event or proceeding. Reviewing disclosure information has become more complex, in part because Forms U4 and U5 have added further disclosure questions9 and FINRA's By-Laws have been revised to expand the categories under which an individual or member firm can be subject to a statutory disqualification.10 As a result, while costs to administer the CRD program have increased, those costs have not been offset by a commensurate increase in the current disclosure filing fee, which has remained static since 1995,11 or the establishment of a fee to cover the costs associated with review of disclosure matters submitted on Form BD.

      System Processing Fee

      FINRA is increasing from $30 to $45 the annual system processing charge for each member firm's registered individuals. This fee has not been increased since January 2000.12 Since 2000, FINRA's costs to operate, develop and maintain the CRD system (e.g., investments in system infrastructure and data security) have increased.

      Fingerprint Fees

      FINRA processes fingerprints submitted by member firms on behalf of their associated persons who are required to be fingerprinted pursuant to Section 17(f)(2) of the Securities Exchange Act13 and SEA Rule 17f-2.14 Firms submit fingerprints to FINRA either electronically or via a hard copy fingerprint card. FINRA is increasing the processing fee for fingerprints submitted electronically from $13 to $15 and the fee for fingerprints submitted by a hard copy fingerprint card from $13 to $30.15

      The fingerprint processing fee has not increased since 2003.16 FINRA is adopting a two-tiered fingerprint processing fee structure in part to reflect that the costs associated with processing fingerprints submitted via a hard copy fingerprint card are much higher than those that are submitted electronically. Specifically, fingerprints submitted by a hard copy card require additional processing by FINRA, including adding a barcode, if necessary, to the card for tracking purposes; scanning the fingerprints and converting them to a digital image for submission to the FBI; and, for first-time registrants, entering the individual's personal and demographic information into the CRD system.

      FINRA is also increasing from $13 to $30 the fee for processing and posting fingerprint results and identifying information submitted by a member firm that have been processed through another SRO. This fee has been static since 2003.17 There are higher costs associated with the processing and posting of fingerprint results and identifying information from other SROs. In this regard, upon receipt of the fingerprint results and identifying information, FINRA images and stores the documents received, verifies and matches the fingerprint processing results to an existing record in the CRD system, if available, and manually posts the results to the CRD system.

      Mass Transfer Registration Fees

      FINRA's Mass Transfer Program allows for the bulk transfer of registration and fingerprint information within the CRD system when a member firm is involved in a business combination such as a merger, consolidation or reorganization with another member firm. A member firm that FINRA determines to be a successor organization to a predecessor member firm is not required to pay the fees for the re-registration of branch offices and personnel of the predecessor as part of the mass transfer. A non-successor member firm, however, is required to pay these re-registration fees.

      FINRA is eliminating the exception to the payment of re-registration fees for successor member firms involved in a mass transfer. FINRA notes that a mass transfer, which is an optional service that FINRA makes available to member firms that engage in a business combination, involves significant work on FINRA's part, including reviewing transaction details; entering the mass transfer into the CRD system; addressing questions from firm personnel or, in certain circumstances, providing them with training; and post-mass transfer troubleshooting. The elimination of the exception will result in all member firms that participate in FINRA's Mass Transfer Program being assessed fees for the re-registration of branch offices and personnel of the predecessor member firm.

      Late Disclosure Fee

      FINRA charges a fee for each day that a new disclosure event or a change in the status of a previously reported disclosure event is not timely filed on an initial or amended Form U5 or an amended Form U4. This fee is assessed starting on the day following the last date on which the event or change in status was required to be reported. FINRA is increasing the late disclosure fee from $10 per day to $100 for the first day that an applicable disclosure event is not timely filed and $25 for each subsequent day, up to a maximum of 60 days. The maximum amount of the late disclosure fee will increase from $300 to $1,575. The current late disclosure filing fee has been in effect and remained static since 2004.18 Notwithstanding this fact, some firms and individuals still fail to timely report initial or updated disclosure events. While FINRA continues to address the issue of late disclosure filings through other avenues, including disciplinary actions, FINRA believes that it is appropriate to increase the late disclosure filing fee in part to help ensure that disclosure events are reported and updated in a timely manner.

      The implementation date for the fees relating to the CRD system is January 2, 2013. Thus, the initial/transfer registration fee, disclosure filing, fingerprint and late disclosure fees will become effective for filings or fingerprints submitted on or after January 2, 2013; the changes to the mass transfer registration fees will become effective for mass transfers executed on or after January 2, 2013; and the system processing fee will become effective for the 2013 renewal program.19

      Membership Application Process and Branch Office Registration Fees

      As discussed in further detail below, FINRA is amending Section 4 of Schedule A to (1) increase the branch office annual registration fee; (2) increase the new member application fee; and (3) assess a new fee for continuing membership applications. In connection with these amendments, FINRA is making corresponding amendments to NASD Rules 1012 (General Provisions), 1013 (New Member Application and Interview) and 1017 (Application for Approval of Change in Ownership, Control, or Business Operations) regarding the revised new member application fee and new continuing membership application fee, as well as increasing from $350 to $500 the processing fee for new member applications that are deemed not to be substantially complete and imposing a $500 processing fee for continuing membership applications that are deemed not to be substantially complete.20

      Branch Office Fees

      Despite rising costs to administer the branch office registration and examination program, FINRA has not adjusted the $75 branch office annual registration fee in Section 4(a) of Schedule A since 1994.21 In support of its branch office registration and examination program and other regulatory responsibilities, FINRA has revised the branch office annual registration fee structure to implement a tiered regressive rate structure that assesses a per branch office annual registration fee ranging from $75 to $175 depending on the number of branch offices of the firm.22

      FINRA will continue to waive, for one branch office per member firm per year, payment of the annual registration fee (and the $20 annual branch office system processing fee), but increase the amount of the waiver from $75 to $175. Also, the amendments to Section 4(a) of Schedule A codify FINRA's current practice of waiving payment of the $75 initial registration fee (and $20 branch office system processing fee) for the first branch office registered by a member firm.

      The implementation date for the branch office registration fee changes is January 2, 2013.23

      New Member Application Fee

      Notwithstanding the increase in complexity of new member applications and the related resource demands, FINRA has not changed the new member application fee required by Section 4(e) of Schedule A since 1994.24 To more closely reflect the resource demands associated with processing and reviewing new member applications, FINRA has revised the new member application fee structure to implement a fee structure that assesses fees ranging from $7,500 to $55,000 depending on the size of the new member applicant, as outlined in the table below.

      Number of Registered Persons Associated with Applicant Small Medium Large
      Tier 1 1–10 151–300 501–1,000
      Tier 2 11–100 301–500 1,001–5,000
      Tier 3 101–150 N/A >5,000

      Application Fee per Tier Small Medium Large
      Tier 1 $7,500 $25,000 $35,000
      Tier 2 $12,500 $30,000 $45,000
      Tier 3 $20,000 N/A $55,000

      The revised fee structure also assesses an additional $5,000 surcharge for a new member firm applicant that intends to engage in any clearing and carrying activities.

      Additionally, FINRA has made conforming changes to NASD Rules 1012 and 1013 regarding the revised new member application fee, as well as increasing from $350 to $500 the processing fee for new member applications that are deemed not to be substantially complete.

      The implementation date for the revised new member application fee and conforming amendments to NASD Rules 1012 and 1013 is July 23, 2012.

      Continuing Membership Application Fee

      NASD Rule 1017 provides parameters for certain changes in a member firm's ownership, control, or business operations that would require a continuing membership application. Among other things, those changes include a merger of a member firm with another member firm, a direct or indirect acquisition by a member firm of another member firm, a change in equity ownership or partnership capital of a member firm that results in one person or entity directly or indirectly owning or controlling 25 percent or more of the equity or partnership capital, or a material change in business operations as defined in NASD Rule 1011(k) (Material Change in Business Operations).25

      The membership program incurs substantial costs in reviewing continuing membership application materials and assessing whether the application meets the required standards. As a result, FINRA has amended Schedule A to require that an applicant submitting a continuing membership application pay an application fee based on the number of registered persons associated with the applicant and the type of change in ownership, control or business operations being contemplated. Since the effort required to review a continuing membership application generally depends on the facts and circumstances, with more complex changes and larger applicants requiring additional resources, FINRA believes that the new fee structure, as outlined in the table below, will be an effective means of assessing related fees.

      Number of Registered Persons Associated with Applicant Small Medium Large
      Tier 1 1–10 151–300 501–1,000
      Tier 2 11–100 301–500 1,001–5,000
      Tier 3 101–150 N/A >5,000

      Application Fee per Tier and Application Type Small Medium Large
      Merger
      Tier 1
      $7,500 $25,000 $50,000
      Tier 2 $12,500 $30,000 $75,000
      Tier 3 $20,000 N/A $100,000
      Material Change
      Tier 1
      $5,000 $20,000 $35,000
      Tier 2 $10,000 $25,000 $50,000
      Tier 3 $15,000 N/A $75,000
      Ownership Change $5,000 $10,000 $15,000
      Transfer of Assets $5,000 $10,000 $15,000
      Acquisition $5,000 $10,000 $15,000

      For instance, the fee structure will assess a member firm with only one to ten registered persons a fee ranging between $5,000 and $7,500, depending on the type of continuing membership application, whereas a member firm with 301 to 500 registered persons will be assessed a fee ranging between $10,000 and $30,000 depending on the type of continuing membership application. Further, if an applicant's request for approval of a change in ownership, control or business operations involves more than one type of change requiring a continuing membership application, the fee owed will be the highest of the applicable fees charged for those types of changes.

      In addition, FINRA has made conforming changes to NASD Rules 1012 and 1017 regarding the new continuing membership application fee, as well as imposing a new $500 processing fee for continuing membership applications that are deemed not to be substantially complete.

      The implementation date for the new continuing membership application fee and conforming amendments to NASD Rules 1012 and 1017 is July 23, 2012.


      1 The SEC recently approved new consolidated FINRA communications with the public rules, including new FINRA Rule 2210, which maintains these principles. The new rules will become effective on Februarys 2013. See Regulatory Notice 12-29 (June 2012).

      2 See Securities Exchange Act Release No. 67239 (June 22, 2012), 77 FR 38692 (June 28, 2012) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2012-028).

      3 See Securities Exchange Act Release No. 67241 (June 22, 2012), 77 FR 38698 (June 28, 2012) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2012-029).

      4 See Securities Exchange Act Release No. 50984 (January 6, 2005), 70 FR 2440 (January 13, 2005) (Notice of Filing and Immediate Effectiveness of File No. SR-NASD-2004-177) (setting the maximum fee at $75,500). The fees for automatically effective Form S-3 or F-3 offerings were added in 2007 without adjusting the existing rates. See Securities Exchange Act Release No. 55360 (February 27, 2007), 72 FR 9813 (March 5, 2007) (Notice of Filing and Immediate Effectiveness of File No. SR-NASD-2007-006).

      5 See, e.g., Regulatory Notice 12-22 (April 2012).

      6 See Securities Exchange Act Release No. 67247 (June 22, 2012), 77 FR 38866 (June 29, 2012) (Notice of Filing and Immediate Effectiveness of SR-FINRA-2012-030). The CRD system is the central licensing and registration system for the U.S. securities industry. The CRD system enables individuals and firms seeking registration with multiple states and self-regulatory organizations (SROs) to do so by submitting a single form, fingerprint card and a combined payment of fees to FINRA. Through the CRD system, FINRA maintains the qualification, employment and disciplinary histories of registered associated persons of broker-dealers. Certain information reported to the CRD system is displayed in BrokerCheck®, an electronic system that provides the public with information on the professional background, business practices and conduct of FINRA member firms and their associated persons. Investors use BrokerCheck to help make informed choices about the individuals and firms with which they currently conduct or are considering conducting business.

      7 See Securities Exchange Act Release No. 36025 (July 26,1995), 60 FR 39200 (August 1, 1995) (Notice of Filing and Immediate Effectiveness of File No. SR-NASD-95-32).

      8 15 U.S.C. 78c(a)(39).

      9 See Securities Exchange Act Release No. 59916 (May 13, 2009), 74 FR 23750 (May 20, 2009) (Order Approving File No. SR-FINRA-2009-008).

      10 See Securities Exchange Act Release No. 56145 (July 26, 2007), File No. 72 FR 42169 (August 1, 2007) (Order Approving File No. SR-NASD-2007-023).

      11 See supra note 7.

      12 See Securities Exchange Act Release No. 41937 (September 28, 1999), 64 FR 53762 (October 4,1999) (Notice of Filing and Immediate Effectiveness of File No. SR-NASD-99-43).

      13 15 U.S.C. 78q(f)(2).

      14 17 CFR 240.17f-2.

      15 This fee is in addition to a fee that FINRA collects on behalf of the Federal Bureau of Investigation (FBI), consistent with FBI guidelines. The current FBI fee is $14.50. See Revised User Fee Schedule, 76 FR 78950 (December 20, 2011).

      16 See Securities Exchange Act Release No. 48379 (August 20, 2003), 68 FR 51622 (August 27, 2003) (Notice of Filing and Immediate Effectiveness of File No. SR-NASD-2003-109).

      17 Id.

      18 See Securities Exchange Act Release No. 49224 (February 11, 2004), 69 FR 7833 (February 19, 2004) (Notice of Filing and Immediate Effectiveness of File No. SR-NASD-2003-192).

      19 FINRA will begin invoicing for the 2013 system processing fees in November 2012.

      20 See Securities Exchange Act Release No. 67240 (June 22, 2012), 77 FR 38694 (June 28, 2012) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2012-031).

      21 See Securities Exchange Act Release No. 35074 (December 9,1994), 59 FR 64827 (December 15,1994) (Notice of Filing and Immediate Effectiveness of File No. SR-NASD-94-58) (increasing the branch office registration and annual fees from $50 to $75 to reflect increased costs for registration and regulatory oversight of branch offices). In 2006, Schedule A, Section 4(a) was amended to establish an annual branch office system processing fee to reflect the costs of developing and implementing the Form BR, as well as costs associated with the ongoing branch office system maintenance and enhancements. See Securities Exchange Act Release No. 53955 (June 7, 2006), 71 FR 34658 (June 15, 2006) (Notice of Filing and Immediate Effectiveness of File No. SR-NASD-2006-065).

      22 Specifically, the amended annual registration fee requirement in Section 4(a) of Schedule A provides that each member shall be assessed an annual registration fee of: (1) $175, for the first 250 branch offices registered by the member; (2) $150, for branch offices 251 to 500 registered by the member; (3) $125, for branch offices 501 to 1,000 registered by the member; (4) $100, for branch offices 1,001 to 2,000 registered by the member; and (5) $75, for every branch office greater than 2,000 registered by the member. Section 4(a) retains the $20 annual branch office system processing fee per registered branch. Consistent with current practice, FINRA will assess each member firm's annual registration fee based on the firm's total number of branch offices registered at the end of each calendar year.

      23 FINRA will begin invoicing for these fees in November 2012.

      24 See Securities Exchange Act Release No. 33533 (January 27,1994), 59 FR 5218 (February 3,1994) (Notice of Filing and Immediate Effectiveness of File No. SR-NASD-94-05).

      25 NASD Rule 1011(k) defines a "material change in business operations" as including, but not limited to: (1) removing or modifying a membership agreement restriction; (2) market making, underwriting, or acting as a dealer for the first time; and (3) adding business activities that require a higher minimum net capital under SEA Rule 15c3-l.


      Attachment A

      Below is the text of the rule amendments regarding advertising fees pursuant to filing SR-FINRA-2012-028. New language is underlined; deletions are in brackets.

      *****

      SCHEDULE A TO THE BY-LAWS OF THE CORPORATION

      *****

      Section 13 — Review Charge for Advertisement, Sales Literature, and Other Such Material Filed or Submitted

      There shall be a review charge for each and every item of advertisement, sales literature, and other such material, whether in printed, video or other form, filed with or submitted to FINRA, except for items that are filed or submitted in response to a written request from FINRA's Advertising Regulation Department ("the Department") issued pursuant to the spot check procedures set forth in FINRA['s R]rules as follows: (1) for printed material reviewed, $125[00].00, plus $10.00 for each page reviewed in excess of 10 pages; and (2) for video or audio media, $125[00].00, plus $10.00 per minute for each minute of tape reviewed in excess of 10 minutes.

      Where a member requests expedited review of material submitted to the [Advertising Regulation] Department there shall be a review charge of $[5]600.00 per item plus $50.00[25] for each page reviewed in excess of 10 pages. Expedited review shall be completed within three business days, not including the date the item is received by the [Advertising Regulation] Department, unless a shorter or longer period is agreed to by the [Advertising Regulation] Department. The [Advertising Regulation] Department may, in its sole discretion, refuse requests for expedited review.

      *****


      Attachment B

      Below is the text of the rule amendments regarding corporate financing fees pursuant to filing SR-FINRA-2012-029. New language is underlined; deletions are in brackets.

      *****

      SCHEDULE A TO THE BY-LAWS OF THE CORPORATION

      *****

      Section 7 — Fees for Filing Documents Pursuant to the Corporate Financing Rule

      (a) There shall be a fee imposed for the filing of initial documents relating to any offering filed with FINRA pursuant to the Corporate Financing Rule equal to: (1) $500 plus .015%[.01%] of the proposed maximum aggregate offering price or other applicable value of all securities registered on an SEC registration statement or included on any other type of offering document (where not filed with the SEC), but shall not exceed $225,500[$75,500]; or (2) $225,500[$75,500] for an offering of securities on an automatically effective Form S-3 or F-3 registration statement filed with the SEC and offered pursuant to Securities Act[EC] Rule 415 by a Well-Known Seasoned Issuer as defined in Securities Act[EC] Rule 405. The amount of the filing fee may be rounded to the nearest dollar.
      (b) There shall be an additional fee imposed for the filing of any amendment or other change to the documents initially filed with FINRA pursuant to the Corporate Financing Rule equal to .015%[.01%] of the net increase in the maximum aggregate offering price or other applicable value of all securities registered on an SEC registration statement, or any related Securities Act Rule 462(b) registration statement, or reflected on any Securities Act Rule 430A prospectus, or included on any other type of offering document. However, the aggregate of all filing fees paid in connection with an SEC registration statement or other type of offering document shall not exceed $225,500[$75,500].

      *****


      Attachment C

      Below is the text of the rule amendments regarding fees related to the Central Registration Depository pursuant to filing SR-FINRA-2012-030. New language is underlined; deletions are in brackets.

      *****

      SCHEDULE A TO THE BY-LAWS OF THE CORPORATION

      *****

      Section 4 — Fees

      (a) No Change.
      (b) FINRA shall assess each member a fee of:
      (1) [$85.00] $100.00 for each initial Form U[-]4 filed by the member with FINRA for the registration of a representative or principal, except that the following discounts shall apply to the filing of Forms U[-]4 to transfer the registration of representatives or principals in connection with acquisition of all or a part of a member's business by another member:

      Number of Registered Personnel Transferred Discount
      1,000–1,999 10%
      2,000–2,999 20%
      3,000–3,999 30%
      4,000–4,999 40%
      5,000 and over 50%
      (2) $40.00 for each initial Form U[-]5 filed by the member with FINRA for the termination of a registered representative or registered principal, plus a late filing fee of $80.00 if the member fails to file the initial Form U[-]5 within 30 days after the date of termination;
      (3) [$95.00] $110.00 for the additional processing of each initial or amended Form U[-]4, [or] Form U[-]5 or Form BD that includes the initial reporting, amendment, or certification of one or more disclosure events or proceedings;
      (4) [$13.00] $15.00 for processing and posting to the CRD system each set of fingerprints submitted electronically by the member to FINRA, plus any other charge that may be imposed by the United States Department of Justice for processing each set of fingerprints;
      (5) $30.00 for processing and posting to the CRD system each set of fingerprint cards submitted in non-electronic format by the member to FINRA, plus any other charge that may be imposed by the United States Department of Justice for processing each set of fingerprints;
      ([5]6) [$13.00] $30.00 for processing and posting to the CRD system each set of fingerprint results and identifying information that have been processed through another self-regulatory organization and submitted by a member to FINRA;
      ([6]7) [$30.00] $45.00 annually for each of the member's registered representatives and principals for system processing; and
      ([7]8) No Change.
      (c) through (g) No Change.
      (h) FINRA shall assess each member a fee of $100.00 on the first day and [$10] $25.00 for each subsequent [per] day, up to a maximum of [$300] $1,575, [for each day] that a new disclosure event or a change in the status of a previously reported disclosure event is not timely filed as required by FINRA on an initial Form U5, an amendment to a Form U5, or an amendment to a Form U4, with such fee to be assessed starting on the day following the last date on which the event was required to be reported.

      * * * * *

      Section 6 — Assessments and Fees for New Members, Resigning Members and Successor Organizations

      (a) No Change.
      (b) A member that is a successor organization to a previous member or members shall assume the unpaid balance of the assessments of its predecessor or predecessors and its next assessment shall be determined, if applicable, upon the assessment data of its predecessors. Such successor member shall not be required to re-register branch offices and personnel of predecessor members, but shall be required to [or] pay registration fees therefor. Whether a member is the successor organization to a previous member or members shall be determined by FINRA upon a consideration of the terms and conditions of the particular merger, consolidation, reorganization, or succession. A member that has simply acquired the personnel and offices of another member under circumstances that do not constitute the member a successor organization shall not be required to assume the unpaid assessments of the other member. Such non-successor member shall be required to re-register the branch offices and personnel acquired from the other member and pay applicable registration fees.

      * * * * *


      Attachment D

      Below is the text of the rule amendments regarding membership application process and branch office registration fees pursuant to filing SR-FINRA-2012-031. New language is underlined; deletions are in brackets.

      * * * * *

      SCHEDULE A TO THE BY-LAWS OF THE CORPORATION

      * * * * *

      Section 4 — Fees

      (a)
      (1) Each member shall be assessed a registration fee of $75.00 and a branch office system processing fee of $20.00 upon the registration of each branch office, as defined in the By-Laws.
      (2) FINRA shall waive, for the first branch office registered by a member, payment of the $75.00 registration fee and the $20.00 branch office system processing fee (where such fees have been assessed pursuant to paragraph (a)(1)).
      (3) Each member also shall be assessed:
      [(1)]
      (A) an annual registration fee of:
      (i) $175, for each of the first 250 branch offices registered by the member;
      (ii) $150, for each of branch offices 251 to 500 registered by the member;
      (iii) $125, for each of branch offices 501 to 1,000 registered by the member;
      (iv) $100, for each of branch offices 1,001 to 2,000 registered by the member;
      (v) $75, for every branch office greater than 2,000 registered by the member;
      and
      [in an amount equal to the lesser of (i) $75.00 per registered branch, or (ii) the product of $75.00 and the number of registered representatives and registered principals associated with the member at the end of FINRA's fiscal year; and (2)]
      (B) an annual branch office system processing fee of $20.00 per registered branch.
      (4) [As of July 3, 2006,] FINRA shall waive, for one branch office per member per year, payment of the $175[$75.00] annual registration fee (where such fee has been assessed pursuant to paragraph (a)(3)(A)(i)[(a)(1)(i))] and the $20.00 annual branch office system processing fee assessed pursuant to paragraph (a)[(2)](3)(B).
      (b) through (d) No Change.
      (e)
      (1) In addition to any dues or fees otherwise payable, each applicant for membership shall be assessed an application fee, [as follows] based on the number of registered persons proposed to be associated with the applicant at the time the application is filed, as outlined in the tables below:

      Number of Registered Persons Associated with Applicant Small Medium Large
      Tier 1 1–10 151–300 501–1,000
      Tier 2 11–100 301–500 1,001–5,000
      Tier 3 101–150 N/A >5,000

      Application Fee per Tier Small Medium Large
      Tier 1 $7,500 $25,000 $35,000
      Tier 2 $12,500 $30,000 $45,000
      Tier 3 $20,000 N/A $55,000
      (2) Each applicant for membership also shall be assessed an additional $5,000 if the applicant will be engaging in any clearing and carrying activity.
      [(1) $5,000, if the type of business in which the applicant proposes to engage will require it to calculate its net capital pursuant to section (a)(1), (a)(7), (a)(8) or (f) (1) of SEC Rule 15c3-1, or pursuant to sections 402.1(e) or 402.2(b) of the Treasury Regulations ("Treasury Regulations") promulgated under Section 15C of the Act;]
      [(2) $3,000, if the type of business in which the applicant proposes to engage will require it to calculate its net capital pursuant to section (a)(2) of SEC Rule 15c3-1, or pursuant to section 402.2(c) of the Treasury Regulations; and]
      [(3) for all other applicants, $3,000.]
      (f) through (h) No Change.
      (i)
      (1) In addition to any dues or fees otherwise payable, each applicant submitting an application for approval of a change in ownership, control, or business operations shall be assessed an application fee, based on the number of registered persons associated with the applicant (including registered persons proposed to be associated with the applicant upon approval of the application) at the time the application is filed and the type of change in ownership, control, or business operations, as outlined in the tables below:

      Number of Registered Persons Associated with Applicant Small Medium Large
      Tier 1 1–10 151–300 501–1,000
      Tier 2 11–100 301–500 1,001–5,000
      Tier 3 101–150 N/A >5,000

      Application Fee per Tier and Application Type Small Medium Large
      Merger Tier 1 $7,500 $25,000 $50,000
      Tier 2 $12,500 $30,000 $75,000
      Tier 3 $20,000 N/A $100,000
      Material Change Tier 1 $5,000 $20,000 $35,000
      Tier 2 $10,000 $25,000 $35,000
      Tier 3 $15,000 N/A $75,000
      Ownership Change $5,000 $10,000 $15,000
      Transfer of Assets $5,000 $10,000 $15,000
      Acquisition $5,000 $10,000 $15,000
      (2) If an applicant's application for approval of a change in ownership, control, or business operations involves more than one type of application identified in the "application fee per tier and application type" table in paragraph (i)(1) of this section, the application fee shall be the highest amount of the applicable fees (e.g., the application fee for an applicant associated with 1-10 registered persons filing an application involving a merger and material change would be $7,500).

      * * * * *

      1000. MEMBERSHIP, REGISTRATION AND QUALIFICATION REQUIREMENTS

      * * * * *

      1010. Membership Proceedings

      * * * * *

      1012. General Provisions

      (a) Filing by Applicant or Service by FINRA
      (1) An Applicant for membership shall file an application in the manner prescribed in Rule 1013, including the timely submission of an application fee pursuant to Schedule A to the FINRA By-Laws.
      (2) An Applicant seeking approval of a change of ownership, control, or business operations shall file an application in the manner prescribed in Rule 1017, including the timely submission of an application fee pursuant to Schedule A to the FINRA By-Laws.
      (3) through (5) No Change.
      (b) Lapse of Application
      (1) No Change.
      (2) If an Applicant wishes to continue to seek membership or approval of a change in ownership, control, or business operations, then the Applicant shall be required to submit a new application in the manner prescribed in [and fee under] Rule 1013 or 1017, respectively, including the timely submission of an application fee pursuant to Schedule A to the FINRA By-Laws. FINRA shall not refund any fee for a lapsed application.
      (c) through (e) No Change.

      1013. New Member Application and Interview

      (a) Filing of Application
      (1) How to File

      An Applicant for FINRA membership shall file its application in the manner prescribed by FINRA with the Department of Member Regulation ("the Department"). An Applicant shall submit an application that includes:
      (A) through (D) No Change;
      [(E) payment of the appropriate fee;]
      (F) through (S) renumbered as (E) through (R).
      (2) No Change.
      (3) Rejection of Application That Is Not Substantially Complete

      If the Department determines within 30 days after the filing of an application that the application is not substantially complete, the Department may reject the application and deem it not to have been filed. In such case, within the 30 day period, the Department shall serve a written notice on the Applicant of the Department's determination and the reasons therefor. FINRA shall refund the application fee, less $500[350], which shall be retained by FINRA as a processing fee. If the Applicant determines to continue to seek membership, the Applicant shall submit a new application [and fee] under this Rule and fee pursuant to Schedule A to the FINRA By-Laws.
      (4) No Change.
      (b) No Change.

      * * * * *

      1017. Application for Approval of Change in Ownership, Control, or Business Operations

      (a) through (c) No Change.
      (d) Rejection Of Application That Is Not Substantially Complete

      If the Department determines within 30 days after the filing of an application that the application is not substantially complete, the Department shall reject the application and deem it not to have been filed. In such case, within the 30 day period, the Department shall serve a written notice on the Applicant of the Department's determination and the reasons therefor. FINRA shall refund the application fee, less $500, which shall be retained by FINRA as a processing fee. If the Applicant determines to continue to apply for approval of a change in ownership, control, or business operations, the Applicant shall submit a new application under this Rule and fee pursuant to Schedule A to the FINRA By-Laws.
      (e) through (j) No Change.
      (k) Lapse or Denial of Application for Approval of Change in Ownership

      If an application for approval of a change in ownership lapses, or is denied and all appeals are exhausted or waived, the member shall, no more than 60 days after the lapse or exhaustion or waiver of appeal:
      (1) submit a new application under this Rule and fee pursuant to Schedule A to the FINRA By-Laws;
      (2) through (3) No Change.
      For the protection of investors, the Department may shorten the 60-day period. For good cause shown by the member, the Department may lengthen the 60-day period. The Department shall serve written notice on the Applicant of any change in the 60-day period and the reasons therefor. During the 60-day or other imposed period, the Department may continue to place interim restrictions on the member for the protection of investors.

      * * * * *

    • 12-31 SEC Approves Increase in the TAF Rate for Sales of Covered Equity Securities; Effective Date: July 1, 2012

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      Trading Activity Fee (TAF)

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Finance
      Internal Audit
      Legal
      Operations
      Senior Management
      Systems
      Trading
      Key Topics

      Trading Activity Fee
      Referenced Rules & Notices

      FINRA By-Laws, Schedule A, 1(a)
      Regulatory Notice 10-56
      Regulatory Notice 12-06

      Executive Summary

      Effective July 1, 2012, the Trading Activity Fee (TAF) rate for sales of covered equity securities will increase from $0.000095 per share for each sale of a covered equity security to $0.000119 per share, with a corresponding increase to the per-transaction cap for covered equity securities from $4.75 to $5.95.1 The new rate applies to any sale of a covered equity security subject to the TAF occurring on or after July 1, 2012.

      The text of the new rule is available in the online FINRA Manual.

      Questions concerning this Notice should be directed to:

      •    FINRA Finance at (240) 386-5397; or
      •    The Office of General Counsel at (202) 728-8071.

      Background & Discussion

      FINRA's primary member regulatory pricing structure consists of the Personnel Assessment, the Gross Income Assessment and the TAF. Revenue from these fees is used to fund FINRA's regulatory activities, including examinations; financial monitoring; and FINRA's policymaking, rulemaking and enforcement activities.2

      As noted in Section 1 of Schedule A to FINRA's By-Laws, FINRA shall periodically review revenue from these fees in conjunction with the costs to FINRA of regulating its members to determine the applicable rate of the fees.3 Beginning with trades occurring on or after March 1, 2012, the TAF rate for covered equity securities was increased to $0.000095 per share for each sale of a covered equity security, with a maximum charge of $4.75 per trade.4 Given the trend for lower volume levels, however, FINRA's TAF projections for the year continue to indicate a shortfall, notwithstanding the rate change put into place effective March 1, 2012.

      In light of the decreased volume of trading in the equity markets, and in order to stabilize revenue flows necessary to support FINRA's regulatory mission, the SEC recently approved an increase to the TAF rate for covered equity securities. Effective July 1, 2012, the TAF rate for sales of covered equity securities will increase from $0.000095 per share to $0.000119 per share, with a corresponding increase to the per-transaction cap for covered equity securities from $4.75 to $5.95. The new rate will apply to any sale of a covered equity security subject to the TAF occurring on or after July 1, 2012. The TAF Self-Reporting Form, available on FINRA's website5, will reflect this new rate beginning with TAF Self-Reporting Forms due on August 14, 2012,6 which reflect trades subject to the TAF occurring in July 2012.7


      1. See Securities Exchange Act Release No. 67242 (June 22, 2012) (File No. SR-FINRA-2012-023).

      2. See FINRA By-Laws, Schedule A, § 1(a).

      3. Id.

      4. See Regulatory Notice 12-06 (January 2012).

      5. FINRA maintains a TAF page on its website that provides firms with additional guidance on the TAF, including Frequently Asked Questions (FAQ), as well as applicable forms. See Regulatory Notice 10-56 (October 2010).

      6. The TAF is self-reported by firms on a monthly basis. See TAF FAQ 100.5. TAF Self-Reporting Forms should be submitted to FINRA by the tenth business day following the end of the month. See TAF FAQ 100.7.

      7. The TAF is calculated based on trade date, not settlement date. See TAF FAQ 100.8.

    • 12-30 SEC Approves Amendments to Arbitration Codes to Raise the Limit for Simplified Arbitration from $25,000 to $50,000; Effective Date: July 23, 2012

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      Simplified Arbitration

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Key Topics

      Arbitration
      Code of Arbitration Procedure
      Simplified Arbitration
      Referenced Rules & Notices

      FINRA Rule 12401
      FINRA Rule 12800
      FINRA Rule 13401
      FINRA Rule 13800

      Executive Summary

      FINRA Rules 12800 and 13800 (Simplified Arbitration) of the Customer and Industry Codes of Arbitration Procedure (Codes) provide streamlined arbitration procedures for claimants seeking damages of $25,000 or less. The SEC approved amendments to the Codes to raise the dollar limit for simplified arbitration from $25,000 to $50,000.1

      The amendments are effective on July 23, 2012, for all cases filed on or after the effective date.

      The text of the amendments is set forth in Attachment A.

      Questions concerning this Notice should be directed to:

      •    Richard W. Berry, Senior Vice President and Director of Case Administration and Regional Office Services, Dispute Resolution, at (212) 858-4307 or richard.berry@finra.org; or
      •   Margo A. Hassan, Assistant Chief Counsel, Dispute Resolution, at (212) 858-4481 or margo.hassan@finra.org.

      Background & Discussion

      Currently, FINRA offers streamlined arbitration procedures for claimants seeking damages of $25,000 or less. Under Rules 12800 and 13800 (simplified arbitration rules), unless a party requests a hearing, a single arbitrator resolves the dispute and issues an award based on the written submissions of the parties. In a customer case, only the customer has the option to request a hearing (an industry party may not request a hearing). In an industry case, only the claimant (whether a firm or an individual) has the option to request a hearing (other parties may not request a hearing). FINRA also streamlines discovery for cases administered under these rules.

      The SEC approved amendments to the Codes to raise the limit for claims eligible under the simplified arbitration rules from $25,000 to $50,000. However, if any pleading (such as a counterclaim) increases the amount in dispute to more than $50,000, FINRA would no longer administer the claim under the simplified arbitration rules. FINRA also made conforming amendments to Rules 12401 and 13401 (Number of Arbitrators) to reflect that FINRA will administer claims up to $50,000 under the simplified arbitration rules.

      The higher limit under the simplified arbitration rules benefits forum users in a number of ways. First, parties benefit from reduced forum fees because they can avoid hearing session fees and hearing process fees. Second, parties save the time and expense of preparing for, scheduling and traveling to a hearing when an arbitrator decides a case on the pleadings. Third, customers who are unable to retain an attorney, or are uncomfortable appearing at a hearing without representation, now have the option of having their claims decided on their written submissions. Fourth, FINRA can expedite administration of cases under the simplified arbitration rules because the arbitrator and the parties do not need to schedule a hearing.

      The amendments are effective for all cases filed on or after July 23, 2012.


      1. See Securities Exchange Act Rel. No. 66913 (May 3, 2012), 77 Federal Register 27262 (May 9, 2012) (File No. SR-FINRA-2012-012).


      ATTACHMENT A

      New language is underlined; deletions are in brackets

      * * * * *

      Customer Code

      12401. Number of Arbitrators

      (a) Claims of [$25,000] $50,000 or Less

      If the amount of a claim is [$25,000] $50,000 or less, exclusive of interest and expenses, the panel will consist of one arbitrator and the claim is subject to the simplified arbitration procedures under Rule 12800.
      (b) Claims of More Than [$25,000] $50,000 Up To $100,000

      If the amount of a claim is more than [$25,000] $50,000 but not more than $100,000, exclusive of interest and expenses, the panel will consist of one arbitrator unless the parties agree in writing to three arbitrators.
      (c) No change.

      * * * * *

      12800. Simplified Arbitration

      a) Applicability of Rule

      This rule applies to arbitrations involving [$25,000] $50,000 or less, exclusive of interest and expenses. Except as otherwise provided in this rule, all provisions of the Code apply to such arbitrations.
      (b)–(d) No change.
      (e) Increases in Amount in Dispute

      If any pleading increases the amount in dispute to more than [$25,000] $50,000, the arbitration will no longer be administered under this rule, and the regular provisions of the Code will apply. If an arbitrator has been appointed, that arbitrator will remain on the panel. If a three-arbitrator panel is required or requested under Rule 12401, the remaining arbitrators will be appointed by the Director in accordance with Rule 12403(c) or Rule 12403(d). If no arbitrator has been appointed, the entire panel will be appointed in accordance with the Neutral List Selection System.
      (f) No change.

      * * * * *

      Industry Code

      13401. Number of Arbitrators

      (a) Claims of [$25,000] $50,000 or Less

      If the amount of a claim is [$25,000] $50,000 or less, exclusive of interest and expenses, the panel will consist of one arbitrator and the claim is subject to the simplified arbitration procedures under Rule 13800.
      (b) Claims of More Than [$25,000] $50,000 Up To $100,000

      If the amount of a claim is more than [$25,000] $50,000 but not more than $100,000, exclusive of interest and expenses, the panel will consist of one arbitrator unless the parties agree in writing to three arbitrators.
      (c) No change.

      * * * * *

      13800. Simplified Arbitration

      a) Applicability of Rule

      This rule applies to arbitrations involving [$25,000] $50,000 or less, exclusive of interest and expenses. Except as otherwise provided in this rule, all provisions of the Code apply to such arbitrations.
      (b)–(d) No change.
      (e) Increases in Amount in Dispute

      If any pleading increases the amount in dispute to more than [$25,000] $50,000, the arbitration will no longer be administered under this rule, and the regular provisions of the Code will apply. If an arbitrator has been appointed, that arbitrator will remain on the panel. If a three-arbitrator panel is required or requested under Rule 13401, the remaining arbitrators will be appointed by the Director in accordance with Rule 13406(b). If no arbitrator has been appointed, the entire panel will be appointed in accordance with the Neutral List Selection System.
      (f) No change.

      * * * * *

    • 12-29 SEC Approves New Rules Governing Communications With the Public; Effective Date: February 4, 2013

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      Communications With the Public

      Regulatory Notice
      Notice Type

      Consolidated Rulebook
      New Rules
      Suggested Routing

      Advertising
      Compliance
      Investment Companies
      Legal
      Registered Representatives
      Research
      Senior Management
      Key Topics

      Advertising
      Communications With the Public
      Correspondence
      Institutional Communications
      Retail Communications
      Referenced Rules & Notices

      FINRA Rule 2200 Series
      FINRA Rule 4511
      FINRA Rule 9600 Series
      Incorporated NYSE Rules 344 and 472
      Investment Advisers Act Rule 206(4)-1
      Investment Company Act Rule 24b-3
      Investment Company Act Section 24(b)
      NASD IM-2210-1 through IM-2210-8
      NASD Rules 1022, 2210, 2211, 2711, 3010
      Regulatory Notices 08-64, 09-10, 09-70, 10-06 and 10-52
      SEA Rule 17a-4
      Securities Act Rules 134, 433 and 482

      Executive Summary

      The SEC approved FINRA's proposed rule change to adopt NASD Rules 2210 and 2211 and NASD Interpretive Materials and 2210-3 through 2210-8 as FINRA Rules 2210 and 2212 through 2216 (collectively, the Communications Rules), and to delete certain provisions of Incorporated NYSE Rule 472 and certain Supplementary Material and Rule Interpretations related to NYSE Rule 472.1 The Communications Rules become effective on February 4, 2013.

      The text of the Communications Rules can be found at www.finra.org/ notices/12-29.

      Questions concerning this Notice should be directed to:

      •   Thomas A. Pappas, Vice President & Director, Advertising Regulation, at (240) 386-4553; or
      •   Joseph P. Savage, Vice President & Counsel, Investment Companies Regulation, at (240) 386-4534.

      Background & Discussion

      Current Rules Governing Communications With the Public

      NASD Rules 2210 and 2211, and the Interpretive Materials that follow 2210, generally govern all FINRA member firms' communications with the public. Incorporated NYSE Rule 472 governs communications with the public of firms that also are members of the New York Stock Exchange.

      NASD Rule 2210 divides communications into six separate categories, as follows:

      •  Advertisement generally includes written (including electronic) retail communications that do not have a limited audience, such as newspaper, magazine, television and radio advertisements, billboards and websites.
      •  Sales literature generally includes written (including electronic) retail communications that have a more targeted audience, such as brochures, performance reports, telemarketing scripts, seminar scripts and form letters.
      •  Correspondence includes written letters, electronic mail, instant messages and market letters sent to (i) one or more existing retail customers; and (ii) fewer than 25 prospective retail customers within a 30 calendar-day period.
      •  Institutional sales material includes communications that are distributed or made available only to institutional investors. NASD Rule 2211 defines the term "institutional investor" generally to include registered investment companies, insurance companies, banks, registered broker-dealers, registered investment advisers, certain retirement plans, governmental entities, and individual investors and other entities with at least $50 million in assets.
      •  Independently prepared reprint includes reprints of articles from independent publications, as well as reports published by independent research firms.
      •  Public appearance includes unscripted participation in live events, such as interviews, seminars and call-in television and radio shows.

      These definitions are important because certain of the principal pre-use approval, filing and content standards may apply differently to each category. For example, members generally must have a principal approve all advertisements, sales literature and independently prepared reprints prior to use. This pre-use approval requirement does not apply to: (1) institutional sales material; (2) public appearances; or (3) correspondence, unless it is sent to 25 or more existing retail customers within a 30 calendar-day period and includes an investment recommendation or promotes a product or service of the firm. While such communications do not require principal pre-use approval, firms still must establish and maintain policies and procedures to supervise them for compliance with applicable standards.

      Firms must file with the FINRA Advertising Regulation Department for review certain advertisements and sales literature. For example, advertisements and sales literature concerning mutual funds, variable insurance products and public direct participation programs, and advertisements concerning government securities, must be filed within 10 business days of first use, but firms are not required to file independently prepared reprints, correspondence or institutional sales material. The filing requirements also differ based on the firm using the material. A firm that has not previously filed advertisements with FINRA must file its initial advertisement with FINRA at least 10 business days prior to use and must continue to file its advertisements at least 10 business days prior to use for a one-year period.

      Incorporated NYSE Rule 472 requires an "allied member, supervisory analyst or qualified person" to approve prior to use each advertisement, sales literature or other similar type of communication.2 The Incorporated NYSE Rule 472 definitions of "advertisement" and "sales literature" are similar to those used in NASD Rule 2210.

      The communications rules include both general and specific content standards. Certain general standards apply to all communications, such as requirements that communications be fair and balanced, and provide a sound basis for evaluating the facts in regard to any particular security, industry or service, and prohibitions on omitting material facts whose absence would make the communication misleading. More particular content standards apply to specific issues or securities.

      Reorganization of Rules

      New FINRA Rule 2210 encompasses, subject to certain changes, the provisions of current NASD Rules 2210 and 2211, NASD Interpretive Materials 2210-1 and 2210-4, and the provisions of Incorporated NYSE Rule 472 that do not pertain to research analysts and research reports. Each of the other Interpretive Materials that follow NASD Rule 2210, except IM-2210-2 (Communications with the Public About Variable Life Insurance and Variable Annuities), have been assigned separate FINRA rule numbers and adopt the same communication categories used in FINRA Rule 2210.3

      Communication Categories

      The rule change reduces the number of current communication categories from six to three, as follows:

      •  Institutional communication includes written (including electronic) communications that are distributed or made available only to institutional investors, but does not include a firm's internal communications. "Institutional investor" generally has the same definition as under NASD Rule 2211(a)(3).4
      •  Retail communication includes any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. "Retail investor" includes any person other than an institutional investor, regardless of whether the person has an account with the firm.
      •  Correspondence includes any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period.

      Communications that currently qualify as advertisements and sales literature generally fall under the definition of "retail communication." In addition, to the extent that a firm distributes or makes available a communication that currently qualifies as an independently prepared reprint to more than 25 retail investors within a 30 calendar-day period, the communication also falls under the definition of "retail communication."

      Correspondence

      As discussed above, the definition of "correspondence" has changed in several key respects. Currently, NASD Rule 2211(a)(1) defines "correspondence" as "any written or electronic mail message and any market letter distributed by a member to: (A) one or more of its existing retail customers; and (B) fewer than 25 prospective retail customers within any 30 calendar day period."

      As revised, FINRA Rule 2210(a)(2) defines "correspondence" as "any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period." Thus, the current distinction between existing retail customers and prospective retail customers is eliminated. Instead, if a firm distributes or makes available a written communication to 25 or fewer retail investors within a 30 calendar-day period, the communication is considered correspondence. If a firm distributes or makes available a written (including electronic) communication to more than 25 retail investors (even if they are existing retail customers) within a 30 calendar-day period, it is considered a retail communication.

      In addition, the current definition of correspondence only covers written letters, electronic mail messages and market letters. Under FINRA Rule 2210, it covers any type of written communication. Thus, for example, a seminar handout provided to 25 or fewer retail investors within a 30 calendar-day period would be considered correspondence under the new definition.

      Lastly, the new definition of correspondence no longer specifically refers to market letters, which are defined under NASD Rule 2211 as "any written communication excepted from the definition of 'research report' pursuant to [NASD] Rule 2711(a)(9)(A)."5 Under FINRA Rule 2210, if a firm distributes a written communication that falls within the definition of "market letter" to more than 25 retail investors within a 30-calendar day period, the market letter will be considered a retail communication rather than correspondence.

      Nevertheless, a firm still may supervise retail communications that fall within the current definition of "market letter" in the same manner as correspondence under the new rules, unless the communication makes any financial or investment recommendation. In this regard, FINRA Rule 2210(b)(1)(D)(i) excepts from the principal pre-use approval requirements retail communications that are excepted from the definition of "research report" pursuant to NASD Rule 2711(a)(9)(A) and that do not make a financial or investment recommendation. Under this exception, a firm must supervise and review such retail communications in the same manner as it supervises and reviews correspondence.

      Institutional Communications

      NASD Rule 2211(a)(3) defines "institutional sales material" as "any communication that is distributed or made available only to institutional investors." Under FINRA Rule 2210(a)(3), communications that currently qualify as "institutional sales material" generally fall within the definition of "institutional communication"—written (including electronic) communications that are distributed or made available only to institutional investors. However, FINRA is excluding from the definition of "institutional communication" a firm's internal communications. In the past, FINRA has applied FINRA's rules governing communications with the public to a firm's internal communications.6

      While FINRA Rule 2210 will not apply to a firm's internal communications once it becomes effective, firms still must supervise these communications, including a firm's internal communications that train or educate registered representatives. Under NASD Rule 3010, firms must establish, maintain and enforce written procedures to supervise the types of business in which they engage and to supervise associated persons' activities that are reasonably designed to achieve compliance with applicable securities laws and regulations and with applicable FINRA rules, including the suitability rule and just and equitable principles of trade.7 In this regard, a firm's supervisory policies and procedures concerning internal training and education materials must be reasonably designed to ensure that such materials are fair, balanced and accurate. Firms must determine the extent to which the review of internal communications is necessary in accordance with the supervision of their business8 and maintain records of all internal communications relating to their business as a broker-dealer.9

      Firms should note, however, that sales scripts intended for use with retail customers are considered retail communications rather than internal communications. The current definition of "sales literature" in NASD Rule 2210 specifically includes telemarketing scripts, and under FINRA Rule 2210, the term "retail communication" includes telemarketing and other sales scripts used with more than 25 retail investors within a 30 calendar-day period.

      "Reason to Believe" Standard

      The definition of "institutional investor" under both NASD Rule 2211(a)(3) and FINRA Rule 2210(a)(4) specifies that "[n]o member may treat a communication as having been distributed to an institutional investor if the member has reason to believe that the communication or any excerpt thereof will be forwarded or made available to any retail investor."10 Although this standard also applies to the current definition of "institutional investor," some commenters on proposed FINRA Rule 2210 expressed concern that the standard creates uncertainty for firms distributing institutional communications, particularly mutual fund underwriters.

      The "reason to believe" standard does not impose an affirmative obligation on firms to inquire whether an institutional communication will be forwarded to retail investors every time such a communication is distributed. The "reason to believe" standard also does not make a fund underwriter responsible for supervising the associated persons of recipient broker-dealers (unless the person is also associated with the underwriter).

      Rather, firms should have policies and procedures in place reasonably designed to prevent institutional communications from being forwarded to retail investors, and make appropriate efforts to implement such policies and procedures. Such procedures may include the use of legends warning the recipient of an institutional communication that it is for institutional investor use only.

      However, to the extent that a firm becomes aware that a recipient institutional investor is forwarding or making available institutional communications to retail investors, the firm must treat future communications to such institutional investors as retail communications until it reasonably concludes that the improper practice has ceased. Similarly, if red flags indicate to a fund underwriter that a recipient broker-dealer has used or intends to use an institutional communication provided by the underwriter with retail investors, the underwriter must follow up those red flags and, if it determines that this is the case, treat institutional communications distributed to that recipient broker-dealer as retail communications (or cease distribution) until the underwriter reasonably concludes that the broker-dealer has adopted appropriate measures to prevent redistribution.

      Approval, Review and Recordkeeping Requirements

      Principal Pre-Use Approval Requirements for Retail Communications

      Currently NASD Rule 2210(b)(1)(A) requires a registered principal of a firm to approve each advertisement, item of sales literature and independently prepared reprint before the earlier of its use or filing with FINRA. FINRA Rule 2210(b)(1)(A) requires an appropriately qualified registered principal of the firm to approve each retail communication before the earlier of its use or filing with FINRA. The principal registration required to approve particular communications depends upon the permissible activities for each principal registration category. The rule change eliminates Incorporated NYSE Rule 472(a)(1), which requires an "allied member, supervisory analyst, or qualified person" to approve in advance each advertisement, sales literature or other similar type of communication by an NYSE member firm.11

      NASD Rule 2210(b)(1)(B) permits a Series 16 supervisory analyst approved pursuant to Incorporated NYSE Rule 344 to approve research reports on debt and equity securities. FINRA Rule 2210(b)(1)(B) expands the authority of supervisory analysts to approve certain other types of research-related retail communications. In addition to approving research reports on debt and equity securities, a Series 16 supervisory analyst may approve retail communications as described in NASD Rule 2711(a)(9) (list of research-related communications that do not fall within the definition of "research report" under NASD Rule 2711), and other research that does not fall within NASD Rule 2711's definition of "research report," provided that the supervisory analyst has technical expertise in the particular product area. A supervisory analyst may not approve a retail communication that requires a separate registration (such as retail communications concerning options, security futures or municipal securities) unless the supervisory analyst also holds the other registrations.

      NASD Rule 2210(b)(1)(C) currently requires a registered principal qualified to supervise securities futures activities to approve each advertisement or item of sales literature concerning securities futures. This requirement remains in place with respect to retail communications concerning security futures. Nevertheless, this provision is being eliminated as redundant given the requirement under FINRA Rule 2210(b)(1)(A) that an appropriately qualified principal approve each retail communication.12

      Exceptions From Principal Pre-Use Approval Requirements for Retail Communications

      NASD Rule 2210(b)(1)(D) provides an exception from the principal pre-use approval requirements of NASD Rule 2210(b)(1)(A) for an advertisement, item of sales literature or independently prepared reprint, if, at the time that a firm intends to publish or distribute it: (i) another firm has filed it with FINRA and has received a letter from FINRA stating that it appears to be consistent with applicable standards; and (ii) the firm using the communication in reliance on this exception has not materially altered it and will not use it in a manner that is inconsistent with the conditions of the Advertising Regulation Department's letter. FINRA Rule 2210(b)(1)(C) preserves this exception for retail communications.

      FINRA Rule 2210(b)(1)(D) excepts from the principal pre-use approval requirements of Rule 2210(b)(1)(A) three additional categories of retail communications, provided that the firm supervises and reviews the communications in the same manner as required for supervising and reviewing correspondence pursuant to NASD Rule 3010(d). These communications include: (i) any retail communication that is excepted from the definition of "research report" pursuant to NASD Rule 2711(a)(9)(A), unless the communication makes any financial or investment recommendation; (ii) any retail communication that is posted on an online interactive electronic forum; and (iii) any retail communication that does not make any financial or investment recommendation or otherwise promote a product or service of the firm.

      As discussed above, the first category generally carries forward a current exception from the principal pre-use approval requirements for market letters.13 The second category codifies a current interpretation of the rules governing communications with the public that allows firms to supervise communications posted on interactive electronic forums in the same manner as is required for supervising correspondence.14

      Currently firms are not required to have a principal approve prior to use correspondence that is sent to 25 or more existing retail customers within any 30 calendar-day period and that does not make any financial or investment recommendation or otherwise promote a product or service of the firm.15 The third category applies this same standard to all retail communications, rather than just correspondence sent to existing retail customers. Accordingly, a firm will not be required to approve prior to use any retail communication that does not make any financial or investment recommendation or otherwise promote a product or service of the firm. Firms will still be required to supervise such retail communications in the same manner as correspondence.

      FINRA expects firms to apply the same analysis used today to analyze correspondence regarding principal pre-use approval to all retail communications. For example, this exception would cover communications that are administrative or informational in nature, such as communications that inform investors that their account statement is available online or the date on which a security in an investor's portfolio is expected to pay a dividend.

      FINRA Rule 2210(b)(1)(E) allows FINRA, pursuant to the FINRA Rule 9600 Series, to grant an exemption from the principal pre-use approval requirements of paragraph (b)(1)(A) for good cause shown after taking into consideration all relevant factors, provided that the exemption is consistent with the purposes of FINRA Rule 2210, the protection of investors and the public interest. NASD Rule 2210 contains no similar authority. However, as a general matter, FINRA intends to employ this exemptive authority only in unique circumstances and on a case-by-case basis. Any exemptive relief that is granted under this provision will apply only to the firms that have applied for such relief. If FINRA determines that similar relief is appropriate for all firms, it will file a proposed rule change with the SEC to accomplish this result.16

      FINRA Rule 2210(b)(1)(F) provides that, notwithstanding any other provision of FINRA Rule 2210, a registered principal must approve a communication prior to the firm filing it with the Advertising Regulation Department. FINRA Rule 2210(b)(1)(A) requires a principal to approve each retail communication before the earlier of its use or filing with FINRA, subject to certain exceptions. FINRA Rule 2210(b)(1)(F) is intended to clarify that an appropriately qualified principal must approve any communication that is filed with the Advertising Regulation Department, even if a communication otherwise would come under an exception to the principal pre-use approval requirements of FINRA Rule 2210(b)(1)(A).

      Correspondence and Institutional Communications

      NASD Rules 2211(b)(1) and 3010(d) impose certain supervisory and review requirements with regard to a firm's correspondence and institutional sales material.17 FINRA Rules 2210(b)(2) and (3) generally maintain the supervision and review standards for correspondence and institutional communications that are currently found in NASD Rules 2211 and 3010(d).

      Recordkeeping Requirements

      NASD Rule 2210(b)(2) requires firms to maintain all advertisements, sales literature and independently prepared reprints in a separate file for a period beginning on the date of first use and ending three years from the date of last use. The file must include:

      (i) a copy of the communication and the dates of first and last use;
      (ii) the name of the registered principal who approved the communication and the date approval was given, unless approval was not required pursuant to NASD Rule 2210(b)(1)(D); and
      (iii) for any communication for which principal pre-use approval was not required pursuant to NASD Rule 2210(b)(1)(D), the name of the other firm that filed the communication with FINRA and a copy of the corresponding Advertising Regulation Department review letter.

      NASD Rule 2211(b)(2) requires firms to maintain records of institutional sales material for a period of three years from the date of last use, including the name of the person who prepared each of the communications.

      FINRA Rule 2210(b)(4)(A) sets forth the recordkeeping requirements for retail and institutional communications; generally, these requirements mirror current recordkeeping requirements. This provision incorporates by reference the recordkeeping format, medium and retention period requirements of SEA Rule 17a-4.18

      FINRA Rule 2210(b)(4)(A) specifies that such records must include:

      •  a copy of the communication and the dates of first and (if applicable) last use;
      •  the name of any registered principal who approved the communication and the date that approval was given;
      •  in the case of a retail communication or institutional communication that is not approved prior to first use by a registered principal, the name of the person who prepared or distributed the communication;19
      •  information concerning the source of any statistical table, chart, graph or other illustration used in the communication; and
      •  for retail communications that rely on the exception under paragraph (b)(1)(C), the name of the firm that filed the retail communication with FINRA and a copy of the Advertising Regulation Department's review letter.

      FINRA Rule 2210(b)(4)(B) cross-references NASD Rule 3010(d)(3) and FINRA Rule 4511 with respect to correspondence recordkeeping requirements.

      Filing Requirements and Review Procedures

      FINRA Rule 2210(c) generally incorporates the filing requirements in NASD Rule 2210(c), subject to certain changes.

      New Member Firm Filing Requirements

      NASD Rule 2210(c)(5)(A) currently requires a firm that previously has not filed advertisements with FINRA or another self-regulatory organization to file its initial advertisement with the Advertising Regulation Department at least 10 business days prior to use. This filing requirement continues for a year after the initial filing. Under FINRA Rule 2210(c)(1)(A) a new firm's one-year filing requirement begins on the date reflected in the Central Registration Depository (CRD®) system that the firm's FINRA membership becomes effective, rather than on the date a firm first files an advertisement with FINRA.

      This new member firm filing requirement only applies to certain broadly disseminated retail communications, such as generally accessible websites, print media communications, and television and radio commercials. In addition, to the extent any retail communication that is subject to this filing requirement is a free writing prospectus that has been filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii), the firm may file the retail communication within 10 business days of first use rather than 10 business days prior to first use.

      Advertising Regulation Department Authority to Require Firms to File Communications Prior to Use

      NASD Rule 2210(c)(5)(B) currently authorizes the Advertising Regulation Department to require a firm to file all of its advertisements and/or sales literature, or the portion of the firm's material that is related to any specific types or classes of securities or services, with FINRA at least 10 business days prior to use, if the Advertising Regulation Department determines that the firm has departed from NASD Rule 2210's standards. FINRA Rule 2210(c)(1)(B) authorizes the Advertising Regulation Department to require the firm to file prior to use all of the firm's communications (rather than just advertisements or sales literature) or a specified subset of the firm's communications.

      Pre-Use Filing Requirements

      NASD Rule 2210(c)(4) currently requires firms to file certain communications at least 10 business days prior to first use and to withhold them from use until any changes specified by the Advertising Regulation Department have been made. These communications include advertisements and sales literature for certain registered investment companies that include self-created rankings, advertisements concerning collateralized mortgage obligations (CMOs) and advertisements concerning security futures.

      FINRA Rule 2210(c)(2) revises the categories of communications that fall within this pre-use filing requirement. These include retail communications concerning any registered investment company that include self-created rankings, retail communications concerning security futures and retail communications that include bond mutual fund volatility ratings. The requirement to file retail communications concerning security futures prior to first use would not apply to (i) retail communications that are submitted to another self-regulatory organization having comparable standards pertaining to such communications, and (ii) retail communications in which the only reference to security futures is contained in a listing of the services of a firm.

      Concurrent With Use Filing Requirements

      NASD Rule 2210(c)(2) requires a firm to file within 10 business days of first use or publication:

      •  advertisements and sales literature concerning registered investment companies (including mutual funds, variable contracts, continuously offered closed-end funds and unit investment trusts) that do not include bond fund volatility ratings;
      •  advertisements and sales literature concerning public direct participation programs, as defined in NASD Rule 2810 (now FINRA Rule 2310);
      •  advertisements concerning government securities; and
      •  any template for written reports produced by, or advertisements and sales literature concerning, an investment analysis tool, as such term is defined in IM-2210-6.

      FINRA Rule 2210(c)(3) revises the categories of communications that must be filed within 10 business days of first use or publication. Similar to NASD Rule 2210(c)(2), FINRA Rule 2210(c)(3) requires retail communications concerning registered investment companies and public direct participation programs to be filed within 10 business days of first use. However, FINRA Rule 2210(c)(3) requires that all retail communications concerning closed-end registered investment companies be filed with FINRA. Currently NASD Rule 2210 requires firms to file within 10 business days of first use advertisements and sales literature concerning closed-end funds that are distributed during the fund's initial public offering (IPO) period, as well as all advertisements and sales literature concerning continuously offered (interval) closed-end funds.20 The new filing requirement also applies to retail communications that are distributed after a closed-end fund's IPO period.

      NASD Rule 2210(c)(2)(C) requires firms to file within 10 business days of first use all advertisements concerning government securities. This filing requirement has been eliminated.

      Consistent with current requirements, FINRA Rule 2210(c)(3)(C) requires firms to file within 10 business days of first use templates for written reports produced by, or retail communications concerning, an investment analysis tool, as it is defined in FINRA Rule 2214.21

      FINRA Rule 2210(c)(3)(D) requires firms to file within 10 business days of first use retail communications concerning CMOs that are registered under the Securities Act of 1933. Currently firms are required only to file advertisements concerning CMOs, but must file them at least 10 business days prior to first use.22

      FINRA Rule 2210(c)(3)(E) requires firms to file within 10 business days of first use all retail communications concerning any security that is registered under the Securities Act of 1933 and that is derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance or a foreign currency, not included within the requirements of paragraphs (c)(1), (c)(2) or sub-paragraphs (A) through (D) of paragraph (c)(3). No similar filing requirement exists under current rules. The purpose of this provision is to require the filing of retail communications concerning publicly offered structured or derivative products, such as exchange-traded notes or registered grantor trusts, that currently are not required to be filed. This provision excludes retail communications that are already subject to a separate filing requirement found elsewhere in paragraph (c), such as retail communications concerning registered investment companies or public direct participation programs.23

      Other Filing Requirements

      NASD Rule 2210(c)(6) provides that, if a firm has filed a draft version or "story board" of a television or video advertisement pursuant to a filing requirement, then the firm also must file the final filmed version within 10 business days of first use or broadcast. FINRA Rule 2210(c)(4) maintains this standard.

      NASD Rule 2210(c)(1) specifies that a firm must provide with each filing the actual or anticipated date of first use, the name and title of the registered principal who approved the advertisement or sales literature and the date that the approval was given. FINRA Rule 2210(c)(5) carries forward these requirements, while also requiring each filing to include the registered principal's CRD number. The requirement to include a principal's CRD number is consistent with current FINRA policy.

      NASD Rule 2210(c)(7) provides that each firm's written and electronic communications may be subject to a spot-check procedure, and that firms must submit requested material within the time frame specified by the Advertising Regulation Department. FINRA Rule 2210(c)(6) carries forward these requirements.

      Exclusions From Filing Requirements

      FINRA Rule 2210(c)(7) generally duplicates the current exclusions from the filing requirements under NASD Rule 2210(c)(8), with certain modifications.

      NASD Rule 2210(c)(8)(A) excludes from filing advertisements and sales literature that previously have been filed with FINRA and that are to be used without material change. FINRA Rule 2210(c)(7)(A) continues this exclusion for retail communications that meet these standards.

      FINRA Rule 2210(c)(7)(B) adds an exclusion for retail communications that are based on templates that were previously filed with FINRA if the changes are limited to updates of more statistical or other non-narrative information. Although there is no similar express filing exclusion in NASD Rule 2210, this exclusion is based in part on an earlier staff interpretation concerning how NASD Rule 2210's approval, recordkeeping and filing requirements apply to statistical updates contained in pre-existing templates.24

      NASD Rule 2210(c)(8)(B) excludes from filing advertisements and sales literature solely related to recruitment or changes in a firm's name, personnel, electronic or postal address, ownership, offices, business structure, officers or partners, telephone or teletype numbers, or concerning a merger with or acquisition by, another member firm. This exclusion has been replaced by FINRA Rule 2210(c)(7)(C), which excludes retail communications that do not make any financial or investment recommendation or otherwise promote a product or service of the firm.25

      NASD Rules 2210(c)(8)(C), (D), (F) and (G) exclude from filing advertisements and sales literature that do no more than identify a national securities exchange symbol of the firm or identify a security for which the firm is a registered market maker; advertisements and sales literature that do no more than identify the firm or offer a specific security at a stated price; certain "tombstone" advertisements governed by Securities Act Rule 134; and press releases that are made available only to members of the media. FINRA Rules 2210(c)(7)(D), (E), (G) and (H) carry forward these filing exclusions for retail communications that meet the same standards.

      NASD Rule 2210(c)(8)(E) excludes from filing prospectuses and other documents that have been filed with the SEC or any state. The current filing exclusion does not cover investment company omitting prospectuses published pursuant to Securities Act Rule 482.

      FINRA Rule 2210(c)(7)(F) modifies this filing exclusion by also not covering free writing prospectuses that are filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii).27 As discussed in Regulatory Notice 10-52, FINRA is concerned that broadly disseminated free writing prospectuses present the same investor protection concerns as communications regulated by NASD Rules 2210 and 2211. Accordingly, FINRA interprets Rules 2210 and 2211 to apply to broker-prepared, widely disseminated free writing prospectuses.28 Firms should note that FINRA requires firms to file the Management's Discussion of Fund Performance (MDFP) and any non-required sales material that are contained in a mutual fund annual or semi-annual report if a firm intends to use the report to market the fund to prospective investors.

      NASD Rule 2210(c)(8)(H) excludes from filing reprints of independently prepared articles or reports. FINRA Rule 2210(c)(7)(I) maintains the filing exclusion for retail communications that meet the same standards.29

      NASD Rule 2210(c)(8)(I) and (J) exclude from filing correspondence and institutional sales material. FINRA Rules 2210(c)(7)(J) and (K) maintain these filing exclusions for correspondence and institutional communications.

      NASD Rule 2210(c)(9) excludes from filing material that refers to investment company securities, direct participation programs or exempted securities solely as part of a listing of products or services offered by the member firm. This provision has been replaced by FINRA Rule 2210(c)(7)(L), which excludes from filing communications that refer to types of investments solely as part of a listing of products or services offered by the firm.

      FINRA Rule 2210(c)(7)(M) excludes from filing retail communications that are posted on online interactive electronic forums, such as an electronic bulletin board or an interactive forum that is contained on a social media website. Under NASD Rule 2210, posts on interactive electronic forums are considered public appearances.30 Under FINRA Rule 2210, such posts will be considered retail communications, assuming the forum is available to retail investors. Nevertheless, FINRA is excluding these posts from Rule 2210's filing requirements.

      FINRA Rule 2210(c)(7)(N) creates a new filing exception for press releases issued by closed-end investment companies listed on the NYSE that are subject to the "immediate release policy" under section 202.06 of the NYSE Listed Company Manual (or any successor provision).31 Information required to be published under the immediate release policy may include, among other things, dividend announcements, which closed-end funds typically announce via press release. Such press releases are not subject to filing.

      FINRA Rule 2210(c)(8) provides that communications excluded from the filing requirements pursuant to paragraphs (c)(7)(H) through (K) are deemed filed with FINRA for purposes of Section 24(b) of the Investment Company Act and Rule 24b3 thereunder. This provision is consistent with NASD Rule 2210(c)(8).

      Exemptive Authority

      NASD Rule 2210(c)(10) allows FINRA to exempt, pursuant to the FINRA Rule 9600 Series, a firm from the pre-use filing requirements of NASD Rule 2210(c) (i.e., requirement for certain firms to file retail communications prior to first use) for good cause shown.32 FINRA Rule 2210(c)(9)(A) carries forward this exemptive authority with respect to the pre-use filing requirement for new member firms under Rule 2210(c)(1)(A).

      FINRA Rule 2210(c)(9)(B) allows FINRA to grant an exemption from the concurrent-with-use filing requirements of paragraph (c)(3) (i.e., requirement to file certain retail communications) for good cause shown after taking into consideration all relevant factors, provided that the exemption is consistent with the purposes of Rule 2210, the protection of investors and the public interest. Generally this relief is limited to the same extent as in FINRA Rule 2210(b)(1)(E), which authorizes FINRA to grant exemptive relief from the principal pre-use approval requirements in FINRA Rule 2210(b)(1)(A) for retail communications, subject to the same standards.

      Content Standards

      FINRA Rule 2210(d) reorganizes but largely incorporates the current content standards applicable to communications with the public that are found in NASD Rule 2210(d), NASD IM-2210-1, NASD IM-2210-4 and Incorporated NYSE Rules 472(i) and (j), subject to certain changes. Content standards that currently apply to advertisements and sales literature generally apply to retail communications.

      General Content Standards

      NASD Rule 2210(d)(1)(A) requires all firm communications to be based on principles of fair dealing and good faith, to be fair and balanced, and to provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry or service. It also prohibits a firm from omitting any material fact or qualification if the omissions, in light of the context of the material presented, would cause the communication to be misleading. FINRA Rule 2210(d)(1)(A) incorporates the same standards without change.

      NASD Rule 2210(d)(1)(B) prohibits a firm from making any false, exaggerated, unwarranted or misleading statement or claim in any communication, and prohibits the publication, circulation or distribution of any communication that the firm knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading. FINRA Rule 2210(d)(1)(B) incorporates the same standards as NASD Rule 2210(d)(1)(B) without change, other than expressly prohibiting promissory statements or claims. FINRA staff already interprets NASD Rule 2210(d)(1)(B) to prohibit promissory language in member communications, and Incorporated NYSE Rule 472(i) specifically prohibits promissory statements.

      NASD Rule 2210(d)(1)(C) permits information to be placed in a legend or footnote only in the event that the placement would not inhibit an investor's understanding of the communication. FINRA Rule 2210(d)(1)(C) incorporates the standards of NASD Rule 2210(d)(1)(C) without change.

      NASD IM-2210-1(1) requires firms to ensure that statements are not misleading within the context in which they are made, and that they provide balanced treatment of risks and potential benefits. It also requires communications to be consistent with the risks of fluctuating prices and the uncertainty of dividends, rates of return and yield inherent in investments. NASD IM-2210-1(3) requires firm communications to be clear. FINRA Rule 2210(d)(1)(D) generally incorporates these standards with only minor, non-substantive changes.

      NASD IM-2210-1(2) generally requires firms to consider the nature of the audience to which a communication will be directed and to provide details and explanations appropriate to the audience. FINRA Rule 2210(d)(1)(E) incorporates these standards, although in a more abbreviated fashion.

      Predictions and Projections of Performance

      NASD Rule 2210(d)(1)(D) currently prohibits communications from predicting or projecting performance, implying that past performance will recur or making any exaggerated or unwarranted claim, opinion or forecast. This provision permits, however, a hypothetical illustration of mathematical principles, provided that it does not predict or project the performance of an investment or investment strategy.

      FINRA Rule 2210(d)(1)(F) carries forward the current prohibition of performance predictions and projections, as well as the allowance for hypothetical illustrations of mathematical principles. The rule also clarifies that FINRA allows two additional types of projections of performance in communications with the public that are not reflected in the text of NASD Rule 2210(d)(1)(D). First, FINRA allows projections of performance in reports produced by investment analyst tools that meet the requirements of NASD IM-2210-6.33 Second, FINRA has permitted research reports on debt or equity securities to include price targets under certain circumstances.34

      Accordingly, FINRA Rule 2210(d)(1)(F) clarifies that it does not prohibit an investment analysis tool, or a written report produced by such a tool, that meets the requirements of FINRA Rule 2214. FINRA Rule 2210(d)(1)(F) also clarifies that it does not prohibit a price target contained in a research report on debt or equity securities, provided that the price target has a reasonable basis, the report discloses the valuation methods used to determine the price target, and the price target is accompanied by disclosure concerning the risks that may impede achievement of the price target.35

      Comparisons and Disclosure of a Firm's Name

      NASD Rule 2210(d)(2)(B) requires any comparison in advertisements and sales literature between investments or services to disclose all material differences between them, including (as applicable) investment objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return and tax features. FINRA Rule 2210(d)(2) incorporates these standards for retail communications without substantive change.

      NASD Rule 2210(d)(2)(C) requires all advertisements and sales literature to (i) prominently disclose the name of the firm; (ii) reflect any relationship between the firm and any non-member or individual who is also named in the communication; and (iii) if the communication includes other names, reflect which products and services are offered by the firm. FINRA Rule 2210(d)(3) applies these standards to correspondence as well as to retail communications. Firms are permitted to use the name under which it conducts its broker-dealer business as disclosed on the firm's Form BD, as well as a name by which a firm is commonly recognized or which is required by any state or jurisdiction.

      Tax Considerations

      NASD IM-2210-1(5) specifies that in advertisements and sales literature, references to tax-free or tax-exempt income must indicate which income taxes apply, or which do not, unless income is free from all applicable taxes, and provides an example of income from an investment company investing in municipal bonds that is free from federal income tax but subject to state or local income taxes. FINRA Rule 2210(d)(4)(A) carries forward this rule for all retail communications and correspondence.

      NASD IM-2210-1(4) prohibits communications with the public from characterizing income or investment returns as tax-free or exempt from income tax when tax liability is merely postponed or deferred, such as when taxes are payable upon redemption. FINRA Rule 2210(d)(4)(B) carries forward this prohibition for all communications.

      FINRA Rule 2210(d)(4)(C) adds new language concerning comparative illustrations of the mathematical principles of tax-deferred versus taxable compounding. The illustration:

      •  must depict both the taxable investment and the tax-deferred investment using identical investment amounts and identical assumed gross investment rates of return, which may not exceed 10 percent per annum;
      •  must use and identify actual federal income tax rates;
      •  is permitted (but not required) to reflect an actual state income tax rate, provided that the communication prominently discloses that the illustration is applicable only to investors that reside in the identified state;
      •  if it is intended for a target audience, must reasonably reflect its tax bracket or brackets as well as the tax character of capital gains and ordinary income;
      •  must reflect the impact of taxes during any specific investment payout period identified in the illustration;
      •  may not assume an unreasonable period of tax deferral; and
      •  must include the following disclosures, as applicable:
      •  the degree of risk in the investment's assumed rate of return, including a statement that the assumed rate of return is not guaranteed;
      •  the possible effects of investment losses on the relative advantage of the taxable versus tax-deferred investments;
      •  the extent to which tax rates on capital gains and dividends would affect the taxable investment's return;
      •  the fact that ordinary income tax rates will apply to withdrawals from a tax-deferred investment;
      •  its underlying assumptions;36
      •  the potential impact resulting from federal or state tax penalties (e.g., for early withdrawals or use on non-qualified expenses); and
      •  that an investor should consider his or her current and anticipated investment horizon and income tax bracket when making an investment decision, as the illustration may not reflect these factors.

      Much of this language reflects previous guidance that FINRA has provided regarding tax-deferral illustrations.37 By placing this rule language in FINRA Rule 2210, FINRA is clarifying that these standards apply to any illustration of tax-deferred versus taxable compounding, regardless of whether it appears in a communication promoting variable insurance products or some other communication, such as one discussing the benefits of investing through a 401(k) retirement plan or individual retirement account. Of course, any communication concerning variable insurance products also must comply with standards specifically applicable to such communications.38

      Disclosure of Fees, Expenses and Standardized Performance

      NASD Rule 2210(d)(3) currently requires communications with the public, other than institutional sales material and public appearances, that present the performance of a non-money market mutual fund, to disclose the fund's maximum sales charge and operating expense ratio as set forth in the fund's current prospectus fee table. FINRA Rule 2210(d)(5) maintains this standard for retail communications and correspondence.

      Testimonials

      NASD Rule 2210(d)(1)(E) currently provides that, if any testimonial in a communication with the public concerns a technical aspect of investing, the person making the testimonial must have the knowledge and experience to form a valid opinion. FINRA Rule 2210(d)(6)(A) carries forward this standard for communications.

      NASD Rule 2210(d)(2)(A) requires any advertisement or sales literature that includes a testimonial concerning the investment advice or investment performance of a firm or its products to prominently disclose the fact that: (i) the testimonial may not be representative of the experience of other customers; (ii) the testimonial is no guarantee of future performance or success; and (iii) if more than a nominal sum is paid, it is a paid testimonial. FINRA Rule 2210(d)(6)(B) carries forward these disclosure requirements for retail communications and correspondence, and requires disclosure regarding payment if more than $100 in value (rather than a "nominal sum") is paid for the testimonial.

      Recommendations

      FINRA Rule 2210(d)(7) revises in several ways the standards currently found in NASD IM-2210-1(6) applicable to communications that contain a recommendation.

      NASD IM-2210-1(6)(A) requires disclosure of certain specified conflicts of interest to the extent applicable. These disclosures include if the firm:

      (i) was making a market in the recommended securities, or the underlying security if the recommended security is an option or security future, or that the member or associated person will sell to or buy from customers on a principal basis;
      (ii) and/or its officers or partners have a financial interest in the securities of the recommended issuer and the nature of the financial interest, unless the extent of the financial interest is nominal; and
      (iii) was manager or co-manager of a public offering of any securities of the issuer whose securities are recommended in the past 12 months.

      FINRA Rule 2210(d)(7)(A) retains the first and third disclosure requirements, but modifies the second disclosure requirement. As revised, a retail communication that includes a recommendation of securities must disclose, if applicable, that the firm or any associated person directly and materially involved in the preparation of the content has a financial interest in any of the securities of the issuer whose securities are recommended, and the nature of the financial interest, unless the extent of the financial interest is nominal. This change would substantially narrow the number of parties whose financial interests have to be disclosed, particularly for large firms with numerous officers and partners.39 Rule 2210(d)(7)(A) also carries forward the current requirement of NASD IM-2210-1(6)(A) to have a reasonable basis for the recommendation.

      NASD IM-2210-1(6)(B) requires a firm to provide, or offer to furnish upon request, available investment information supporting the recommendation, and if the recommendation is for an equity security, to provide the price at the time the recommendation is made. FINRA Rule 2210(d)(7)(B) carries forward these requirements without change.

      FINRA Rule 2210(d)(7)(C) amends the provisions governing communications that include past recommendations, which are currently found in NASD IM-2210-1(6)(C) and (D) and Incorporated NYSE Rule 472(j)(2). The new standards mirror those found in Rule 206(4)-1(a)(2) under the Investment Advisers Act of 1940, which apply to investment adviser advertisements that contain past recommendations. FINRA Rule 2210(d)(7)(C), like Rule 206(4)-1(a)(2), generally prohibits retail communications from referring to past specific recommendations of the firm that were or would have been profitable to any person. The rule allows, however, a retail communication or correspondence to set out or offer to furnish a list of all recommendations as to the same type, kind, grade or classification of securities made by the firm within the immediately preceding period of not less than one year. The list must provide certain information regarding each recommended security and include a prescribed cautionary legend warning investors not to assume that future recommendations will be profitable.

      FINRA Rule 2210(d)(7)(D) expressly excludes from the requirements of paragraph (d)(7) communications that meet the definition of "research report" for purposes of NASD Rule 2711 and that include all of the applicable disclosures required by that rule. FINRA Rule 2210(d)(7)(D) also excludes any communication that recommends only registered investment companies or variable insurance products, provided that such communications must have a reasonable basis for the recommendation.

      Prospectuses Filed With the SEC

      FINRA Rule 2210(d)(8) provides that prospectuses, preliminary prospectuses, fund profiles and similar documents that have been filed with the SEC are not subject to the content standards of FINRA Rule 2210(d); provided that its standards shall apply to investment company "omitting prospectuses" published pursuant to Securities Act Rule 482 and free writing prospectuses that have been filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii).40 Firms should note, as discussed above, that FINRA applies its content standards to the MDFP and any non-required sales material that are contained in a mutual fund annual or semi-annual report if a firm intends to use the report to market the fund to prospective investors.

      Public Appearances

      Currently, a "public appearance" is defined as "participation in a seminar, forum (including an interactive electronic forum), radio or television interview, or other public appearance or public speaking activity."41 Public appearances are a separate category of communications within the broader term "communications with the public." As such, public appearances must meet the same standards that apply to all communications with the public, such as the requirements that they be fair and balanced and not include false or misleading statements. However, public appearances are not subject the principal pre-use approval requirements of NASD Rule 2210(b)(1)(A), nor must a firm file a public appearance with FINRA.

      In the interest of simplification, the term "public appearance" is no longer a separate communication category. Nevertheless, FINRA Rule 2210(f) sets forth many of the same general standards that currently apply to public appearances. Public appearances must meet the general "fair and balanced" standards of paragraph (d)(1).

      If an associated person recommends a security in a public appearance, the associated person must have a reasonable basis for the recommendation. The associated person also must disclose, as applicable:

      •  that the associated person has a financial interest in any of the securities of the issuer whose securities are recommended, and the nature of the financial interest, unless the extent of the financial interest is nominal; and
      •  any other actual, material conflict of interest of the associated person or firm of which the associated person knows or has reason to know at the time of the public appearance.42

      Rule 2210(f) also requires firms to establish appropriate written policies and procedures to supervise public appearances, and makes clear that scripts, slides, handouts or other written (including electronic) materials used in connection with public appearances are considered communications for purposes of FINRA Rule 2210.43

      The disclosure requirements regarding securities recommendations in paragraph (f)(2) do not apply to a public appearance by a research analyst for purposes of NASD Rule 2711 that includes all of the applicable disclosures required by that rule. Paragraph (f)(2) also does not apply to a recommendation of investment company securities or variable insurance products, provided that the associated person must have a reasonable basis for the recommendation.44

      Use of Investment Company Rankings in Retail Communications

      FINRA Rule 2212 replaces NASD IM-2210-3 with regard to standards applicable to the use of investment company rankings in communications. The standards generally remain the same. FINRA has revised the standards applicable to investment company rankings for more than one class of an investment company with the same portfolio. Such rankings also must be accompanied by prominent disclosure of the fact that the investment companies or classes have different expense structures. FINRA Rule 2212 adds a new paragraph (h) that excludes from the rule's coverage reprints or excerpts of articles or reports that are excluded from filing requirements pursuant to FINRA Rule 2210(c)(7)(I).

      Requirements for the Use of Bond Mutual Fund Volatility Ratings

      FINRA Rule 2213 replaces NASD IM-2210-5 with regard to standards applicable to the use of bond mutual fund volatility ratings in communications. The standards remain the same as in NASD IM-2210-5.

      Requirements for the Use of Investment Analysis Tools

      FINRA Rule 2214 replaces NASD IM-2210-6 with regard to standards applicable to the use of investment analysis tools. The standards generally remain the same with some minor changes. Currently NASD IM-2210-6 requires a firm that offers or intends to offer an investment analysis tool, within 10 days of first use, to provide the Advertising Regulation Department access to the tool and file with the department any template for written reports produced by, or advertisements and sales literature concerning, the tool. FINRA Rule 2214(a) requires firms to provide the department with access to the tool and to file any template for written reports produced by, or any retail communication concerning, the tool within 10 business days of first use. This revision makes the access and filing requirement time frame consistent with other filing requirements under FINRA Rule 2210(c).

      FINRA Rule 2214 also relocates certain language that is currently contained either in NASD IM-2210-6's text or in footnotes to the rule. Supplementary Material 06 to FINRA Rule 2214 provides that a retail communication that contains only an incidental reference to an investment analysis tool does not have to include the disclosures otherwise required for retail communications that advertise an investment analysis tool, and does not have to be filed with FINRA unless otherwise required by FINRA Rule 2210.45

      In addition, the Supplementary Material provides that, if a retail communication refers to an investment analysis tool in more detail but does not provide access to the tool or the results generated by the tool, the communication must include only the disclosures required by paragraphs (c)(2) and (c)(4) of Rule 2214. Supplementary Material 07 to FINRA Rule 2214 provides additional detail regarding disclosure required by paragraph (c)(3) of FINRA Rule 2214. This language is currently found in footnote 4 to NASD IM-2210-6. However, FINRA has added a specific requirement to disclose whether the investment analysis tool is limited to searching, analyzing or in any way favoring securities in which the member serves as underwriter.

      Guidelines for Communications With the Public Regarding Security Futures

      FINRA Rule 2215 replaces NASD IM-2210-7 with regard to standards applicable to communications concerning security futures. FINRA Rule 2215 would revise the current standards in several respects.

      Portions of NASD IM-2210-7 apply only to advertisements. FINRA Rule 2215 applies these provisions to all retail communications.

      NASD IM-2210-7(a)(1) requires firms to submit all advertisements concerning security futures to FINRA at least 10 days prior to use. FINRA Rule 2215(a)(1) requires firms to submit all retail communications concerning security futures to FINRA at least 10 business days prior to first use. Both the current and the new filing provisions require a firm to withhold the communication from publication or circulation until any changes specified by the Advertising Regulation Department have been made.

      FINRA Rule 2215 amends the provisions that require communications concerning security futures to be accompanied or preceded by the security futures risk disclosure document under certain circumstances.46 As revised, a communication concerning security futures must be accompanied or preceded by the risk disclosure document if it contains the names of specific securities.

      FINRA Rule 2215(b)(4)(D) clarifies that communications that contain the historical performance of security futures must disclose all relevant costs, which must be reflected in the performance.

      Communications With the Public About Collateralized Mortgage Obligations

      FINRA Rule 2216 replaces NASD IM-2210-8 with regard to standards applicable to retail communications concerning collateralized mortgage obligations. The standards remain the same as in NASD IM-2210-8.


      1 See Securities Exchange Act Release No. 66681 (March 29, 2012), 77 FR 20452 (April 4, 2012) (Notice of Filing of Amendment No. 3 and Order Granting Accelerated Approval of a Proposed Rule Change; File No. SR-FINRA-2011-035). The current FINRA rulebook consists of: (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules). While the NASD Rules generally apply to all FINRA members, the incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE. The FINRA Rules apply to all FINRA members, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process, see Information Notice 03/12/03 (Rulebook Consolidation Process).

      2 Incorporated NYSE Rule 472(a)(1).

      3 Proposed FINRA Rule 2211 (Communications with the Public About Variable Insurance Products), which would replace NASD interpretive Material 2210-2, will be the subject of a separate proposal.

      4 FINRA has modified the definition of "institutional investor" in FINRA Rule 2210 to clarify that the term includes multiple employee benefit plans and multiple qualified plans offered to employees of the same employer, provided that the plans in the aggregate have at least 100 participants.

      5 NASD Rule 2211(a)(5). NASD Rule 2711(a)(9) (A) excludes from the definition of "research report" certain enumerated written research-related communications, such as discussions of broad-based indices, commentaries on economic, political or market conditions, and technical analyses concerning the demand and supply for a sector, index or industry based on trading volume and price. FINRA revised the definition of "correspondence" to include market letters in February 2009 to allow firms to send market letters to traders and other investors who base their decisions on timely market analysis without having to have a principal approve them in advance. Previously, members were required to approve market letters prior to use. See Regulatory Notice 09-10 (SEC Approves Rule Relating to Supervision of Market Letters) (February 2009).

      6 See, e.g., NASD Regulatory & Compliance Alert, "Ask the Analyst" (September 1998), (content standards of rules governing communications with the public apply to a member's internal communications); see also letter from Barbara Z. Sweeney, NASD to Katherine A. England, Assistant Director, SEC (November 4, 2002) (letter responding to comments on prior proposed change to rules governing communications with the public making clear rules apply to internal communications), and Securities Exchange Act Release No. 47820 (May 9, 2003), 68 FR 27116 (May 19, 2003) (File No. SR-NASD-00-12) (noting these comments and the NASD's response in SEC order approving the proposed rule change). FINRA also has settled a number of enforcement actions against members involving misleading internal educational and training materials that alleged violations of NASD Rules 2210 and 2211. See, e.g., NASD Letter of Acceptance, Waiver and Consent No. EAF0401000001 (MML Distributors, LLC) (Oct. 2005); NASD Letter of Acceptance, Waiver and Consent No. EAF0401240001 (AFSG Securities Corp.) (Oct. 2005); FINRA Letter of Acceptance, Waiver and Consent No. 20080130571 (US Bancorp Investments, Inc.) (Feb. 12, 2010); and FINRA Letter of Acceptance, Waiver and Consent No. 2008015443301 (UBS Financial Services, Inc.) (April 8, 2011).

      7 See NASD Rule 3010(b)(1).

      8 See Regulatory Notice 07-59 (FINRA Provides Guidance Regarding the Review and Supervision of Electronic Communications) (December 2007). Regulatory Notice 07-59 makes clear that a firm must have reasonably designed procedures for the supervisory review of those internal communications that are of a subject matter that require review under FINRA rules and the federal securities laws.

      9 See SEA Rule 17a-4(a)(4); FINRA Rule 4511(a).

      10 FINRA Rule 2210(a)(4).

      11 The term "allied member" was largely deleted from the Incorporated NYSE Rules in 2008, and thus is not being carried over as part of FINRA Rule 2210(b)(1)(A). See Regulatory Notice 08-64 (Oct. 2008) (Amendments to Incorporated NYSE Rules to Reduce Regulatory Duplication).

      12 NASD Rule 1022(f)(1) requires every person engaged in the supervision of options and security futures sales practices to be registered as a Registered Options and Security Futures Principal. Approval of retail communications concerning security futures falls within this requirement.

      13 See NASD Rules 2211(a)(1), (a)(5) and (b)(1)(A); see also Regulatory Notice 09-10 (SEC Approves Rule Relating to Supervision of Market Letters) (February 2009).

      14 See Regulatory Notice 10-06 (Guidance on Blogs and Social Networking Web Sites) (January 2010).

      15 See NASD Rule 2211(b)(1)(A).

      16 See letter from Annette L Nazareth, Director, Division of Market Regulation, SEC, to T. Grant Callery, Executive Vice President & Genera Counsel, National Association of Securities Dealers, re: SRO Exemption Authority (March 27, 2003).

      17 These rules require each firm to establish written procedures that are appropriate to its business, size, structure and customers for the review by a registered principal of correspondence and institutional sales material. The procedures must be in writing and be designed to reasonably supervise each registered representative. Where such procedures do not require review of all such communications prior to use or distribution, they must include provision for the education and training of associated persons as to the member's procedures, documentation of such education and training, and surveillance and follow-up to ensure that such procedures are implemented and adhered to. Evidence of such implementation must be maintained and made available to FINRA upon request.

      18 SEA Rule 17a-4(b) requires broker-dealers to preserve certain records for a period of not less than three years, the first two in an easily accessible place. Among these records, pursuant to SEA Rule 17a-4(b)(4), are "[o]riginals of all communications received and copies of all communications sent (and any approvals thereof) by the member, broker or dealer (including inter-office memoranda and communications) relating to its business as such, including all communications which are subject to rules of a self-regulatory organization of which the member, broker or dealer is a member regarding communications with the public. As used in this paragraph, the term communications includes sales scripts." SEA Rule 17a-4(f) permits broker-dealers to maintain and preserve these records on "micrographic media" or by means of "electronic storage media," as defined in the rule and subject to a number of conditions.

      19 To the extent clerical staff is employed in the preparation or distribution of the communication, the records should include the name of the person on whose behalf the communication was prepared or distributed.

      20 See NASD Regulatory & Compliance Alert, "Ask the Analyst" (Winter 1999) p. 13.

      21 See NASD Rule 2210(c)(2)(D).

      22 See NASD Rule 2210(c)(4)(B).

      23 This filing requirement also does not apply to options communications, which are governed by FINRA Rule 2220. FINRA Rule 2220 employs the same communications categories as NASD Rules 2210 and 2211. FINRA intends to amend Rule 2220 at a later date to conform its communications categories to those used in FINRA Rule 2210.

      24 See Letter from Thomas M. Selman, NASD, to Forrest R. Foss, T. Rowe Price Associates, Inc. (January 28, 2002). If a member changed the template's presentation in any material respect, however, this exclusion would not apply.

      25 This filing exception has the same scope as the exception from the principal pre-use approval requirements for retail communications that do not make any financial or investment recommendation or otherwise promote a product or service of the member. See FINRA Rule 2210(b)(l)(D)(iii).

      26 See NASD Rule 2210(c)(8)(E).

      27 Securities Act Rule 433(d)(l)(ii) requires any offering participant, other than the issuer, to file with the SEC a free writing prospectus that is used or referred to by such offering participant and distributed by or on behalf of such person in a manner reasonably designed to lead to its broad unrestricted dissemination.

      28 See Regulatory Notice 10-52 (Application of Rules on Communications with the Public and institutional Sales Material and Correspondence to Certain Free Writing Prospectuses) (October 2010). This filing requirement does not apply to a free writing prospectus prepared by or on behalf of the issuer of securities. See 17 C.F.R. §§ 230.433(d)(l)(i) and 230.433(h)(1).

      29 The filing exclusion for reprints of independently prepared articles or reports incorporates the conditions currently included in the definition of "independently prepared reprint." See NASD Rule 2210(a)(6)(A). This filing exclusion also covers independently prepared investment company reports described in NASD Rule 2210(a)(6)(B).

      30 See NASD Rule 2210(a)(5).

      31 The NYSE Listed Company Manual requires listed companies to "release quickly to the public any news or information which might reasonably be expected to materially affect the market for its securities." NYSE Listed Company Manual section 202.05. Section 202.06 of the Manual (the "immediate release policy") requires this information to be disclosed by means of any Regulation FD compliant method, such as a press release.

      32 This provision is consistent with NASD Rule 2210(c)(10).

      33 See NASD IM-2210-6 (Requirements for the Use of Investment Analysis Tools). NASD IM-2210-6 will be codified as FINRA Rule 2214.

      34 See NASD Rule 2711(h)(7).

      35 These standards mirror those required for price targets contained in research reports on equity securities under NASD Rule 2711(h)(7).

      36 These assumptions may include, for example, the age at which an investor may begin withdrawing funds from a tax-deferred account, the actual federal tax rates applied in the hypothetical taxable illustration, any state income tax rate applied in the illustration, and the charges associated with the hypothetical investment.

      37 See "NASD Reminds Members of Their Responsibilities Regarding Hypothetical Tax-Deferral Illustrations in Variable Annuity illustrations," NASD Member Alert (May 10, 2004).

      38 See NASD IM-2210-2.

      39 FINRA has found that the current rules governing disclosures of financial interests in connection with recommendations contained in advertisements and sales literature, which apply to financial interests of all officers and partners, do not lead to useful disclosure when a firm has a large number of officers or partners. See NASD IM-2210-1(6)(A)(ii).

      40 The content standards do not apply to a free writing prospectus prepared by or on behalf of the issuer of securities. See 17 C.F.R. §§ 230.433(d)(l)(i) and 230.433(h)(1).

      41 NASD Rule 2210(a)(5).

      42 FINRA Rule 2210(f)(2).

      43 The requirement to establish supervisory policies and procedures for public appearances is consistent with NASD Rule 3010(b) and Incorporated NYSE Rule 472(1).

      44 FINRA Rule 2210(f)(5).

      45 This provision is consistent with footnote 3 to NASD IM-2210-6.

      46 See NASD IM-2210-7(b).

    • 12-28 SEC Approves Amendments to Rule 13204 of the Industry Code to Preclude Collective Action Claims from Being Arbitrated Under the Code; Effective Date: July 9, 2012

      View PDF

      Collective Action Claims

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Key Topics

      Arbitration
      Code of Arbitration Procedure
      Collective Action
      Industry Code
      Referenced Rules & Notices

      Rule 13204

      Executive Summary

      The SEC approved amendments to FINRA Rule 13204 of the Code of Arbitration Procedure for Industry Disputes (Industry Code) to preclude collective action claims by employees of FINRA member firms under the Fair Labor Standards Act (FLSA),1 the Age Discrimination in Employment Act (ADEA)2 or the Equal Pay Act of 1963 (EPA)3 from being arbitrated under the Industry Code.4

      The amendments are effective on July 9, 2012, for any claims that are part of a certified or putative collective action under the FLSA, ADEA or EPA. The text of the amendments is set forth in Attachment A.

      Questions regarding this Notice may be directed to:

      •   Kenneth L. Andrichik, Senior Vice President, Chief Counsel and Director of Mediation and Strategy, Dispute Resolution, at (212) 858-3915 or ken.andrichik@finra.org; or
      •   Mignon McLemore, Assistant Chief Counsel, Dispute Resolution, at (202) 728-8151 or mignon.mclemore@finra.org.

      Background and Discussion

      The Code of Arbitration Procedure for Customer Disputes (Customer Code) and the Industry Code (together, Codes) prohibit a claim that is part of a class action from being arbitrated in FINRA's Dispute Resolution forum.5 Specifically, the class action rules provide that any claim that is based upon the same facts and law, and involves the same defendants as in a court-certified class action or a putative class action, shall not be arbitrated, unless the party bringing the claim files with FINRA one of the following:

      •   a copy of a notice filed with the court in which the class action is pending that the party will not participate in the class action or in any recovery that may result from the class action, or has withdrawn from the class according to any conditions set by the court; or
      •   a notice that the party will not participate in the class action or in any recovery that may result from the class action.6

      FINRA issued an interpretive letter (FINRA letter) in 1999 that stated that its class action rules should include collective action claims brought under the FLSA and, thus, considered these claims ineligible for arbitration in its forum.7 Despite that interpretation, a district court decision found that an FLSA collective action is not a class action for purposes of Rule 13204 of the Industry Code and compelled arbitration of the claim in FINRA's dispute resolution forum.8 FINRA is, therefore, amending Rule 13204 of the Industry Code to preclude expressly collective actions from being arbitrated in its dispute resolution forum.9

      Under the amendments, Rule 13204(b)(1) provides that collective action claims under the FLSA, the ADEA or the EPA may not be arbitrated under the Code.

      Second, Rule 13204(b)(2) states that any claim that involves similarly-situated10 plaintiffs against the same defendants, such as a court-certified collective action or a putative collective action,11 or that is ordered by a court for collective action at a forum not sponsored by a self-regulatory organization, shall not be arbitrated under the Code, if the party bringing the claim has opted-in to the collective action. Thus, under the rule, if an associated person opts in to a collective action, that person would be precluded from arbitrating the same claims in FINRA's arbitration forum.

      Third, Rule 13204(b)(3) provides that the director will refer to a panel any dispute as to whether a claim is part of a collective action, unless a party asks the court or other forum hearing the collective action to resolve the dispute within 10 days of receiving notice that the director has decided to refer the dispute to a panel. The rule gives arbitrators the authority to decide disputes about whether a claim is part of a collective action, unless a court or other forum resolves the dispute.

      Finally, Rule 13204(b)(4) prohibits a member firm or associated person from enforcing an agreement to arbitrate in this forum against a member of a certified or putative collective action with respect to any claim that is the subject of the certified or putative collective action until either the collective certification is denied or the group is decertified. This rule clarifies that the existence of a certified or putative collective action nullifies any pre-dispute arbitration agreements with respect to claims involving that collective action. If, however, a court denies a plaintiff's request to certify a collective action or the court decertifies the collective action, the pre-dispute arbitration agreement would be enforceable.

      Effective Date Provisions

      The amendments are effective on July 9, 2012, for any claims that are part of a certified or putative collective action under the FLSA, ADEA or EPA.


      1 See 29 U.S.C. § 201 et seq.

      2 See 29 U.S.C. §§ 621 et seq. The relief provisions of the ADEA incorporate Section 16 of the FLSA, which outlines the penalties for violations of the statute, and state that the ADEA shall be enforced by the "powers, remedies and procedures" of the FLSA. See 29 U.S.C. § 626(b).

      3 See 29 U.S.C. § 206(d). The EPA, which is part of FLSA as amended, is administered and enforced by the United States Equal Employment Opportunity Commission. The relief provisions of the EPA also incorporate Section 16 of the FLSA.

      4 See Securities Exchange Act Rel. No. 66774 (April 9, 2012), 77 FR 22374 (April 13, 2012) (Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change as Modified by Amendment No. 1, Amending Rule 13024 of the Code of Arbitration Procedure for Industry Disputes To Preclude Collective Action Claims From Being Arbitrated) (File No. SR-FINRA-2011-075).

      5 See Rule 12204 of the Customer Code and Rule 13204 of the Industry Code (class action rules).

      6 In its April 2012 Approval Order, the SEC states that "Rule 13204 of the Industry Code generally provides that any claim that is based upon the same facts and law, and involves the same defendants as in a court-certified class action or a putative class action, shall not be arbitrated." See supra note 4 at p. 22374. FINRA notes that, under its class action rules, claims based on the same facts and law and involving the same defendants may be arbitrated in FINRA's forum provided that the party bringing the claims meets certain criteria. See supra note 5.

      7 See, e.g., FINRA Interpretive Letter to Cliff Palefsky, Esq., dated Sept. 21,1999.

      8 Hugo Gomez et al. v. Brill Securities, Inc. et al, No. 10 Civ. 3503, 2010 U.S. Dist. LEXIS 118162 (S.D.N.Y. Nov. 2, 2010); see also Velez v. Perrin Holden & Davenport Capital Corp., Nelson Braff, Jody Eisenman and Perter Hoffman, No. 10 Civ. 3735, 2011 U.S. Dist. LEXIS 16678 (S.D.N.Y. Feb. 3, 2011).

      9 The Customer Code would not be amended because, for the FLSA, ADEA or EPA to apply, there must be an employment relationship between an employer and employee. See U.S. Department of Labor, " What does the Fair Labor Standards Act require?", elaws—Fair Labor Standards Act Advisor.

      10 The FLSA statute uses the term "similarly-situated" to describe the type of plaintiffs who file a collective action claim. See 29 U.S.C. § 216(b).

      11 Before a collective action is certified, courts often refer to the case as a putative collective action.


      ATTACHMENT A

      New language is underlined; deleted language is in brackets.

      Code of Arbitration Procedure for Industry Disputes

      Industry Code

      13204. Class Action & Collective Action Claims

      (a) Class Actions
      (1) Class action claims may not be arbitrated under the Code.
      (2) Any claim that is based upon the same facts and law, and involves the same defendants as in a court-certified class action or a putative class action, or that is ordered by a court for class-wide arbitration at a forum not sponsored by a self-regulatory organization, shall not be arbitrated under the Code, unless the party bringing the claim files with FINRA one of the following:
      (i) a copy of a notice filed with the court in which the class action is pending that the party will not participate in the class action or in any recovery that may result from the class action, or has withdrawn from the class according to any conditions set by the court; or
      (ii) a notice that the party will not participate in the class action or in any recovery that may result from the class action.
      (3) The Director will refer to a panel any dispute as to whether a claim is part of a class action, unless a party asks the court hearing the class action to resolve the dispute within 10 days of receiving notice that the Director has decided to refer the dispute to a panel.
      (4) A member or associated person may not enforce any arbitration agreement against a member of a certified or putative class action with respect to any claim that is the subject of the certified or putative class action until:
      •   The class certification is denied;
      •   The class is decertified;
      •   The member of the certified or putative class is excluded from the class by the court; or
      •   The member of the certified or putative class elects not to participate in the class or withdraws from the class according to conditions set by the court, if any.
      (b) Collective Actions
      (1) Collective action claims under the Fair Labor Standards Act, the Age Discrimination in Employment Act, or the Equal Pay Act of 1963 may not be arbitrated under the Code.
      (2) Any claim that involves plaintiffs who are similarly-situated against the same defendants as in a court-certified collective action or a putative collective action, or that is ordered by a court for collective action at a forum not sponsored by a self-regulatory organization, shall not be arbitrated under the Code, if the party bringing the claim has opted-in to the collective action.
      (3) The Director will refer to a panel any dispute as to whether a claim is part of a collective action, unless a party asks the court or other forum hearing the collective action to resolve the dispute within 10 days of receiving notice that the Director has decided to refer the dispute to a panel.
      (4) A member or associated person may not enforce an agreement to arbitrate in this forum against a member of a certified or putative collective action with respect to any claim that is the subject of the certified or putative collective action until the collective action certification is denied or the collective action is decertified.
      [This] These subparagraphs do[es] not otherwise affect the enforceability of any rights under the Code or any other agreement.

    • 12-27 FINRA Requests Comment on Proposed Amendments to FINRA Rule 5110 Regarding Deferred Compensation Arrangements in Public Offerings; Comment Period Expires: July 23, 2012

      View PDF

      Corporate Financing Rule

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Corporate Finance
      Legal
      Senior Management
      Key Topics

      Deferred Compensation Arrangements in Public Offerings
      Exemption for Exchange-Traded Fund Offerings
      Referenced Rules & Notices

      FINRA Rule 5110
      NASD Rule 2830
      NTM 97-82

      Executive Summary

      FINRA is requesting comments on proposed amendments to FINRA Rule 5110 (Corporate Financing Rule) that address current deferred compensation arrangements for financial advisory services in connection with public offerings, eliminate an anomalous filing requirement for exchange traded funds structured as statutory or grantor trusts, and make certain ministerial amendments to, among other things, reflect electronic filing requirements.

      The text of the proposed rule change is set forth in Attachment A.

      Questions regarding this Notice may be directed to:

      •   Joseph E. Price, Senior Vice President, Corporate Financing/Advertising Regulation, at (240) 386-4623;
      •   Paul Mathews, Director, Corporate Financing Department, at (240) 386-4639; or
      •   Lisa Jones Toms, Associate Director and Senior Counsel, Corporate Financing Department, at (240) 386-4661.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by July 23, 2012.

      Member firms and other interested parties can submit their comments using the following methods:

      •  Emailing comments to pubcom@finra.org; or
      •  Mailing comments in hard copy to:

      Marcia E. Asquith
      Office of the Corporate Secretary
      FINRA
      1735 K Street, NW
      Washington, DC 20006-1506

      To help FINRA process and review comments more efficiently, persons should use only one method to comment on the proposal.

      Important Notes: The only comments that FINRA will consider are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the FINRA website. Generally, FINRA will post comments as they are received.1

      Before becoming effective, a proposed rule change must be authorized for filing with the Securities and Exchange Commission (SEC) by the FINRA Board of Governors, and then must be filed with the SEC pursuant to Section 19(b) of the Securities Exchange Act of 1934 (SEA).2

      Background and Discussion

      A. Deferred Compensation Arrangements

      The Corporate Financing Rule requires member firms to file with FINRA's Corporate Financing Department documents and information about the underwriting terms and arrangements in public offerings in which they will participate. Before a public offering is filed, investment banks may enter into engagement letters with issuers for underwriting and financial advisory services, and these engagement letters often have provisions that allow issuers to defer payment until after the completion of a capital-raising transaction (deferred compensation arrangement). A deferred compensation arrangement responds to issuer concerns that up-front payment for financial advisory services could adversely affect the issuer's business. To address the risks that an issuer having received financial advisory services might unreasonably cancel an engagement to avoid the deferred compensation payment, engagement letters often provide for termination fees (sometimes called tail fees) or rights of first refusal. A termination fee permits an underwriter to receive fees if its services are terminated and the issuer consummates a similar transaction with another underwriter in lieu of the transaction subject to the engagement letter. A right of first refusal (ROFR) grants an underwriter the right to act in an agreed upon capacity in a subsequent financing transaction. Both arrangements provide issuers and underwriters with greater flexibility to negotiate deferred compensation arrangements.

      The Corporate Financing Rule only permits termination fees in exchange offers or similar transactions in which substantial structuring and advisory services beyond traditional underwriting and distribution services have been provided.3 The rule permits ROFRs, but the staff has interpreted the rule to prohibit ROFRs when a member's participation in the original transaction is terminated.4 The restrictions on the establishment of termination fees and ROFRs in the Corporate Financing Rule may unnecessarily interfere with the ability of issuers and underwriters to negotiate deferred or other appropriate compensation arrangements that may be better suited to the issuer's business interests. For this reason, FINRA proposes to amend the Corporate Financing Rule to permit termination fees and ROFRs in a wider set of circumstances.5

      FINRA proposes to amend Rule 5110(f)(2)(D) to allow termination fees and ROFRs when the written agreement between the issuer and underwriter specifies that:
      •   the amount of the termination fee must be reasonable in relation to the services contemplated in the agreement and fees arising from services provided under an ROFR must be customary for those type of services;
      •   the issuer has a right of "termination for cause," which includes the member's material failure to provide the services contemplated in the agreement; and
      •   an issuer's termination for cause eliminates any obligations with respect to any termination fee or ROFR.
      The proposed amendments would retain the requirements in the existing rule that termination fees can only be paid and ROFRs can be executed within certain time periods. The proposed amendments thus would require that an offering or other transaction described in the agreement must be consummated within two years of the date the engagement is terminated, and would continue to prohibit any ROFR with a duration of more than three years from the date of effectiveness or commencement of sales of a public offering.6 These time limitations will help ensure that the issuer is not subject to a termination fee or ROFR even after its business and operations may have significantly changed.
      B. Filing Requirements for Certain Exchange-Traded Funds

      Most exchange-traded funds (ETFs) are structured as open-end investment companies or unit investment trusts (UITs) that offer redeemable securities. Investment companies and UITs are exempt from regulation under the Corporate Financing Rule and are not required to be filed with FINRA's Corporate Financing Department. However, some ETFs are structured as Delaware statutory trusts or grantor trusts. The portfolio assets in these trusts typically are commodities, currencies or other assets that are not securities. Currently, there is no exemption for public offerings of ETFs structured in this manner and therefore these offerings are required to be filed under the rule.

      The provisions in the Corporate Financing Rule regarding underwriting terms and arrangements are not designed for the ETF distribution methodology by which a "basket" of the underlying assets is deposited into the ETF's portfolio and "creation units" of shares are provided to the broker-dealer in return. ETFs should be treated consistently, without regard to the chosen legal structure, which is dictated primarily by the nature of the assets in the portfolios rather than differences in distribution methods or underwriting terms and arrangements. Accordingly, the proposed amendments would exempt from the rule's filing requirement offerings of securities issued by ETFs formed as grantor or statutory trusts in which the portfolio assets include commodities, currencies or other assets that are not securities.
      C. Administrative Changes

      FINRA proposes to make certain ministerial amendments to certain provisions in the Corporate Financing Rule to, among other things, reflect the acceptance of electronic filings.

      1 FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Persons should submit only information that they wish to make publicly available. See NTM 03-73 (November 2003) (NASD Announces Online Availability of Comments) for more information.

      2 See SEA Section 19 and rules thereunder. After a proposed rule change is filed with the SEC, the proposed rule change generally is published for public comment in the Federal Register. Certain limited types of proposed rule changes, however, take effect upon filing with the SEC. See SEA Section 19(b)(3) and SEA Rule 19b-4.

      3 See Rule 5110(f)(2)(E).

      4 See Rule 5110(f)(2), (F) & (G).

      5 If an underwriter does not meet the requirements of proposed Rule 5110(f)(2)(D) (ii), then it would continue to be prohibited from receiving compensation for underwriting services in a terminated offering except for reimbursement of out-of-pocket accountable expenses.

      6 Currently, Rule 5110(f)(2)(E) requires that the issuer consummate a transaction similar to the transaction contemplated in the agreement between the issuer and the underwriter within two years of termination of the agreement.


      Attachment A

      * * * * *

      5110. Corporate Financing Rule — Underwriting Terms and Arrangements

      (a) No Change.
      (b) Filing Requirements
      (1) through (4) No Change.
      (5) Documents to be Filed
      (A) The following documents relating to all proposed public offerings of securities that are required to be filed under paragraph (b)(4) above shall be filed [with] through FINRA's electronic filing system for review:
      (i) [Three copies of t]The registration statement, offering circular, offering memorandum, notification of filing, notice of intention, application for conversion and/or any other document used to offer securities to the public;
      (ii) [Three copies of a]Any proposed underwriting agreement, agreement among underwriters, selected dealers agreement, agency agreement, purchase agreement, letter of intent, consulting agreement, partnership agreement, underwriter's warrant agreement, escrow agreement, and any other document that describes the underwriting or other arrangements in connection with or related to the distribution, and the terms and conditions relating thereto; and any other information or documents that may be material to or part of the said arrangements, terms and conditions and that may have a bearing on FINRA's review;
      (iii) [Three copies of e]Each pre- and post-effective amendment to the registration statement or other offering document, [one] with a copy marked to show changes; and [three (3) copies of] any other amended document previously filed pursuant to subparagraphs (i) and (ii) above, [one] with a copy marked to show changes; and
      (iv) [Three copies of t]The final registration statement declared effective by the SEC or equivalent final offering document and a list of the members of the underwriting syndicate, if not indicated therein, and one copy of the executed form of the final underwriting documents and any other document submitted to FINRA for review.
      (B) [All d]Documents that are filed with the SEC through the SEC's Electronic Data Gathering, Analysis, and Retrieval ("EDGAR") System that are referenced in FINRA's electronic filing system shall be treated as filed with FINRA.
      (6) No Change.
      (7) Offerings Exempt from Filing

      Notwithstanding the provisions of subparagraph (1) above, documents and information related to the following public offerings need not be filed with FINRA for review, unless subject to the provisions of Rule 5121(a)(2). However, it shall be deemed a violation of this Rule or Rule 2310, for a member to participate in any way in such public offerings if the underwriting or other arrangements in connection with the offering are not in compliance with this Rule or Rule 2310, as applicable:
      (A) through (E) No Change.
      (F) exchange offers of securities where:
      (i) the securities to be issued or the securities of the company being acquired are listed on The Nasdaq Global Market, the New York Stock Exchange, or the American Stock Exchange; or
      (ii) the company issuing securities qualifies to register securities with the SEC on registration statement Forms S-3, F-3, or F-10, pursuant to the standards for those Forms as set forth in subparagraphs (C)(i) and (ii) of this paragraph; [and]
      (G) offerings of securities by a church or other charitable institution that is exempt from SEC registration pursuant to Section 3(a)(4) of the Securities Act[.]; and
      (H) offerings of securities issued by an exchange-traded fund formed as a grantor trust or statutory trust in which the portfolio assets include commodities, currencies or other assets that are not securities.
      (8) through (9) No Change.
      (c) Underwriting Compensation and Arrangements
      (1) No Change.
      (2) Amount of Underwriting Compensation
      (A) No Change.
      (B) For purposes of determining the amount of underwriting compensation, all items of value received or to be received from any source by the underwriter and related persons which are deemed to be in connection with or related to the distribution of the public offering as determined pursuant to subparagraph[s] (3) [and (4)] below shall be included.
      (C) through (D) No Change.
      (3) No Change.
      (d) through (e) No Change.
      (f) Unreasonable Terms and Arrangements
      (1) No Change.
      (2) Prohibited Arrangements

      Without limiting the foregoing, the following terms and arrangements, when proposed in connection with a public offering of securities, shall be unfair and unreasonable.
      (A) Any accountable expense allowance granted by an issuer to the underwriter and related persons that includes payment for general overhead, salaries, supplies, or similar expenses of the underwriter incur[ ]red in the normal conduct of business.
      (B) through (C) No Change.
      (D) [The payment of a] Any compensation by an issuer to a member or person associated with a member in connection with an offering of securities that is not completed according to the terms of agreement between the issuer and underwriter, except: [those negotiated and paid in connection with a transaction that occurs in lieu of the proposed offering as a result of the efforts of the underwriter and related persons and provided, however, that]
      (i) the reimbursement of out-of-pocket accountable expenses actually incurred by the member or person associated with a member[ shall not be presumed to be unfair or unreasonable under normal circumstances.];
      (ii) a termination fee or a right of first refusal, as set forth in a written agreement between the issuer and the member, provided that the agreement specifies:
      a. the amount of any termination fee must be reasonable in relation to the services contemplated in the agreement and any fees arising from services provided under a right of first refusal must be customary for those type of services;
      b. the issuer has a right of "termination for cause," which shall include the member's material failure to provide the services contemplated in the agreement;
      c. an issuer's "termination for cause" eliminates any obligations with respect to any termination fee or right of first refusal; and
      d. the termination fee requires that in order for the issuer to be responsible for paying the fee, an offering or other transaction (as set forth in the agreement) must be consummated within two years of the date the engagement is terminated by the issuer.
      [(E) Any "tail fee" arrangement granted to the underwriter and related persons that has a duration of more than two years from the date the member's services are terminated, in the event that the offering is not completed in accordance with the agreement between the issuer and the underwriter and the issuer subsequently consummates a similar transaction, except that a member may demonstrate on the basis of information satisfactory to FINRA that an arrangement of more than two years is not unfair or unreasonable under the circumstances.]
      ([F]E) Any right of first refusal provided to the underwriter or related persons to underwrite or participate in future public offerings, private placements or other financings that:
      (i) has a duration of more than three years from the [date of effectiveness or] commencement of sales of the public offering or the termination date of the engagement between the issuer and underwriter; or
      (ii) has more than one opportunity to waive or terminate the right of first refusal in consideration of any payment or fee;
      ([G]F) Any payment or fee to waive or terminate a right of first refusal regarding future public offerings, private placements or other financings provided to the underwriter and related persons that:
      (i) has a value in excess of the greater of 1% of the offering proceeds in the public offering where the right of first refusal was granted (or an amount in excess of 1% if additional compensation is available under the compensation guideline of the original offering) or 5% of the underwriting discount or commission paid in connection with the future financing (including any overallotment option that may be exercised), regardless of whether the payment or fee is negotiated at the time of or subsequent to the original public offering; or
      (ii) is not paid in cash.
      (H) through (I) redesignated as (G) through (H).
      ([J]I) When proposed in connection with the distribution of a public offering of securities on a "firm commitment" basis, any over[ ]allotment option providing for the over[ ]allotment of more than 15% of the amount of securities being offered, computed excluding any securities offered pursuant to the over[ ]allotment option.
      (K) through (L) redesignated as (J) through (K).
      [(M) For a member or person associated with a member to participate in a public offering of real estate investment trust securities, as defined in NASD Rule 2340(c)(4), unless the trustee will disclose in each annual report distributed to investors pursuant to Section 13(a) of the Exchange Act a per share estimated value of the trust securities, the method by which it was developed, and the date of the data used to develop the estimated value.]
      (g) Lock-Up Restriction on Securities
      (1) No change.
      (2) Exceptions to Lock-Up Restriction
      (A)(i) through (ii) No Change.
      (iii) if the aggregate amount of securities of the issuer held by the underwriter [or] and related persons do not exceed 1% of the securities being offered;
      (iv) through (viii) No Change.
      (B) No Change.
      (h) Non-Cash Compensation
      (1) No Change.
      (2) Restrictions on Non-Cash Compensation
      (A) through (B) No Change.
      (C) Payment or reimbursement by offerors in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member, provided that:
      (i) associated persons obtain the member's prior approval to attend the meeting and attendance by a member's associated persons is not conditioned by the member on the achievement of a sales target or any other incentives pursuant to a non-cash compensation arrangement permitted by paragraph ([d]h)(2)(D);
      (ii) through (iii) No Change.
      (iv) the payment or reimbursement by the issuer or affiliate of the issuer is not conditioned by the issuer or an affiliate of the issuer on the achievement of a sales target or any other non-cash compensation arrangement permitted by paragraph ([d]h)(2)(D).
      (D) No Change.
      (E) Contributions by a non-member company or other member to a non-cash compensation arrangement between a member and its associated persons, provided that the arrangement meets the criteria in paragraph ([d]h)(2)(D).

      A member shall maintain records of all non-cash compensation received by the member or its associated persons in arrangements permitted by paragraphs ([d]h)(2)(C) through (E). The records shall include: the names of the offerors, non-members or other members making the non-cash compensation contributions; the names of the associated persons participating in the arrangements; the nature and value of non-cash compensation received; the location of training and education meetings; and any other information that proves compliance by the member and its associated persons with paragraphs ([d]h)(2)(C) through (E).
      (i) No Change.

      * * * * *

    • 12-26 SEC Approves Amendments to TRACE Reporting Requirements and Dissemination of Agency Pass-Through Mortgage-Backed Securities Traded To Be Announced and Related Fees; Effective Date: November 5, 2012

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      Trace Reporting and Compliance Engine (TRACE)

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Fixed Income
      Legal
      Operations
      Systems
      Trading
      Training
      Key Topics

      Agency Pass-Through Mortgage-Backed Securities Traded To Be Announced (TBA)
      Asset-Backed Securities
      Dissemination
      TRACE Fees
      Transaction Reporting
      Referenced Rules & Notices

      FINRA Rule 6710
      FINRA Rule 6730
      FINRA Rule 6750
      FINRA Rule 7730

      Executive Summary

      The SEC approved amendments to FINRA Rule 6700 Series and TRACE dissemination protocols regarding the reporting and dissemination of transactions in TRACE-eligible securities that are agency pass-through mortgage-backed securities that are traded to be announced (TBA transactions).1 In addition, the SEC approved amendments to FINRA Rule 7730 regarding TRACE fees to provide for data fees for TBA transaction data. The amendments also include the deletion of the reference to an expired pilot program and minor technical changes. The effective date is November 5, 2012.

      The amended rule text is available at www.finra.org/notices/12-26.

      Questions regarding this Notice may be directed to:

      •    Patrick Geraghty, Director, Market Regulation, at (240) 386-4973;
      •    Elliot Levine, Associate Vice President and Counsel, Transparency Services, at (202) 728-8405; or
      •    Sharon Zackula, Associate Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-8985.

      Background and Discussion

      FINRA amended the TRACE rules and dissemination protocols to provide for the dissemination of agency pass-through mortgage-backed securities traded in TBA transactions, which will significantly increase transparency in the TBA market. FINRA also reduced the reporting periods for TBA transactions to improve the timeliness and value of the transaction information to be disseminated, and incorporated certain other amendments. The substantive amendments to the FINRA rules are as follows:

      •    Dissemination. FINRA amended Rule 6750(b)(4) to provide for the dissemination of TBA transactions immediately upon receipt of a transaction report. Under TRACE dissemination protocols, TBA transactions for which good delivery may be made (TBA transactions GD) will be disseminated subject to a $25 million dissemination cap and TBA transactions in products that are not traded for good delivery (TBA transactions NGD) will be disseminated subject to a $10 million dissemination cap.
      •    Reporting Time Periods. FINRA amended Rule 6730 to establish requirements for reporting TBA transactions GD and TBA transactions NGD.
      •    TBA Transactions GD. FINRA Rule 6730(a)(3)(D)(i) provides that for a pilot program that will expire on May 10, 2013, TBA transactions GD must be reported no later than 45 minutes from the time of execution, subject to minor exceptions for TBA transactions GD executed shortly before the TRACE system closes and when the TRACE system is closed.2 After May 10, 2013, FINRA Rule 6730(a)(3)(D)(ii) provides that TBA transactions GD must be reported no later than 15 minutes from the time of execution, subject again to exceptions to the reporting time frames for transactions executed shortly before the TRACE system closes and when the TRACE system is closed.3
      •    TBA Transactions NGD. FINRA Rule 6730(a)(3)(E)(i) provides that for a pilot program that will expire on May 10, 2013, TBA transactions NGD must be reported no later than 120 minutes from the time of execution, subject to minor exceptions for TBA transactions NGD executed shortly before the TRACE system closes or when the TRACE system is closed.4 After May 10, 2013, FINRA Rule 6730(a)(3)(E)(ii) provides that TBA transactions NGD must be reported no later than 60 minutes from the time of execution, subject again to exceptions to the reporting time frames for transactions executed shortly before the TRACE system closes and when the TRACE system is closed.5
      •    Definitions. FINRA amended Rule 6710(u), the definition of "TBA," to incorporate the concepts "for good delivery" and "not for good delivery."
      •    Fees. FINRA amended Rule 7730 to establish fees for current market data for TBA transactions and aged TBA transaction data (historic TRACE data). The fees are set at the same rate currently in effect for other current TRACE market data and historic TRACE data.6

      1. See Securities Exchange Act Release No. 66829 (April 18, 2012), 77 FR 24748 (April 25, 2012) (SEC Approval Order of File No. SR-FINRA-2012-020).

      2. See FINRA Rule 6730(a)(3)(D)(i)a., c. and d.

      3. See Rule 6730(a)(3)(D)(ii), which incorporates by reference Rule 6730(a)(1)(A) through (D).

      4. See FINRA Rule 6730(a)(3)(E)(i)a., c. and d.

      5. See FINRA Rule 6730(a)(3)(E)(ii)a., c. and d.

      6. FINRA also deleted references to a pilot program that expired in Rule 6730 and incorporated minor administrative, technical or clarifying changes to Rule 6730 and Rule 7730.

    • 12-25 Additional Guidance on FINRA's New Suitability Rule; Implementation Date: July 9, 2012

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      Suitability

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topics

      Acting in Customers' Best Interests
      Complex Securities
      Customer
      Information Gathering
      Institutional-Customer Exemption
      Investment Strategies
      Reasonable Diligence
      Recommendation
      Risk-Based Compliance
      Suitability
      Referenced Rules & Notices

      Bank Secrecy Act
      FINRA Rules 0160, 1250, 2010, 2020, 2090, 2111, 2210, 2214, 2330, 2360, 2370, 3270, 4512 and 5310
      JOBS Act
      NASD Rules 1014, 1021, 1031, 2210, 2310 and 3010
      NTMs 05-59, 05-50, 05-26, 05-18, 04-89, 04-30, 03-71, 03-07, 01-23, 99-45, 96-32 and 93-73
      Regulatory Notices 12-03, 11-25, 11-15, 11-02, 10-51, 10-22, 10-09, 10-06, 09-73, 09-31 and 08-81
      Rule 506 of Regulation D
      SEA Rules 17a-3 and 17a-4

      Executive Summary

      In November 2010, the Securities and Exchange Commission (SEC) approved FINRA's new suitability rule, FINRA Rule 2111.1 FINRA then issued Regulatory Notice 11-02, which announced the SEC's approval of the new rule and discussed its requirements. FINRA also issued Regulatory Notice 11-25, which offered further guidance on the rule and announced a new implementation date of July 9, 2012. This Notice provides additional guidance on the rule in response to recent industry questions.

      Questions regarding this Notice should be directed to James S. Wrona, Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-8270.

      Discussion

      New FINRA Rule 2111 requires, in part, that a broker-dealer or associated person "have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer's investment profile."2 In general, FINRA's new suitability rule retains the core features of the previous NASD suitability rule, NASD Rule 2310. In addition, Rule 2111 codifies several important interpretations of the predecessor rule and imposes a few new or modified obligations.

      The new rule, for instance, codifies and clarifies the three main suitability obligations that previously had been discussed largely in case law:

      •    reasonable-basis suitability (a broker must perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards, and determine whether the recommendation is suitable for at least some investors based on that understanding);
      •    customer-specific suitability (a broker must have a reasonable basis to believe that a recommendation of a security or investment strategy involving a security or securities is suitable for the particular customer based on the customer's investment profile); and
      •    quantitative suitability (a broker who has control over a customer account must have a reasonable basis to believe that a series of recommended securities transactions are not excessive).

      The new rule also broadens the explicit list of customer-specific factors that firms and associated persons generally must attempt to obtain and analyze when making recommendations to customers.3 The new rule adds a customer's age, investment experience,4 time horizon,5 liquidity needs6 and risk tolerance7 to the explicit list of customer-specific factors from the predecessor rule (i.e., other investments,8 financial situation and needs,9 tax status,10 and investment objectives11). These factors generally make up a customer's investment profile.

      The new rule, moreover, imposes broader obligations on firms and associated persons regarding recommendations of investment strategies involving a security or securities. Not only does the new rule now explicitly cover recommended investment strategies involving a security or securities, but it also states that the term "investment strategy" is to be interpreted "broadly" and includes recommendations to "hold" a security or securities. In addition, the new rule modifies the institutional-customer exemption by changing the definition of institutional customer and requiring an affirmative indication from the institutional customer of its intention to independently analyze the broker-dealer's recommendations. Finally, FINRA stated that firms generally may use a risk-based approach to documenting compliance with the rule.12

      Soon after the SEC approved Rule 2111, broker-dealers began assessing the extent to which they needed to prepare new or update current procedures, modify automated systems and educate their associated persons regarding compliance with the new rule. In the Regulatory Notices referenced above, FINRA addressed numerous issues that firms initially raised. Firms, however, have asked FINRA for additional guidance regarding issues they subsequently identified while developing their approaches to complying with the new rule. This Notice provides answers to those questions.

      FINRA reiterates, however, that many of the obligations under the new rule are the same as those under the predecessor rule and related case law. Existing guidance and interpretations regarding suitability obligations continue to apply to the extent that they are not inconsistent with the new rule. Furthermore, FINRA appreciates that no two firms are exactly alike. Firms have different business models; offer divergent services, products and investment strategies; and employ distinct approaches to complying with applicable regulatory requirements. FINRA's guidance is not intended to influence any firm's choice of a particular business model or reasonable approach to ensuring compliance with suitability or other regulatory requirements.

      Suitability Questions and Answers

      Firms' recent questions regarding Rule 2111 have focused on the following topics: the obligation to act in a customer's best interests; the scope of the terms "recommendation," "customer" and "investment strategy"; the use of a risk-based approach to documenting suitability; information-gathering requirements; reasonable-basis and quantitative suitability; and the institutional-customer exemption. The questions addressed below are representative of the issues firms are attempting to resolve as they finalize their compliance strategies. FINRA emphasizes, however, that it previously addressed numerous issues during the rulemaking process and immediately after the SEC approved the rule. FINRA encourages firms to review its responses to comments13 and Regulatory Notices 11-02 and 11-25, which provide additional information regarding the rule's requirements.

      Acting in a Customer's Best Interests

      Q1 Regulatory Notice 11-02 and a recent SEC staff study on investment adviser and broker-dealer sales-practice obligations cite cases holding that brokers' recommendations must be consistent with their customers' "best interests."14 What does it mean to act in a customer's best interests?

      A1. In interpreting FINRA's suitability rule, numerous cases explicitly state that "a broker's recommendations must be consistent with his customers' best interests."15 The suitability requirement that a broker make only those recommendations that are consistent with the customer's best interests prohibits a broker from placing his or her interests ahead of the customer's interests.16 Examples of instances where FINRA and the SEC have found brokers in violation of the suitability rule by placing their interests ahead of customers' interests include the following:

      •   A broker whose motivation for recommending one product over another was to receive larger commissions.17
      •   A broker whose mutual fund recommendations were "designed 'to maximize his commissions rather than to establish an appropriate portfolio' for his customers."18
      •   A broker who recommended "that his customers purchase promissory notes to give him money to use in his business."19
      •   A broker who sought to increase his commissions by recommending that customers use margin so that they could purchase larger numbers of securities.20
      •   A broker who recommended new issues being pushed by his firm so that he could keep his job.21
      •   A broker who recommended speculative securities that paid high commissions because he felt pressured by his firm to sell the securities.22

      The requirement that a broker's recommendation must be consistent with the customer's best interests does not obligate a broker to recommend the "least expensive" security or investment strategy (however "least expensive" may be quantified), as long as the recommendation is suitable and the broker is not placing his or her interests ahead of the customer's interests. Some of the cases in which FINRA and the SEC have found that brokers placed their interests ahead of their customers' interests involved cost-related issues. The cost associated with a recommendation, however, ordinarily is only one of many important factors to consider when determining whether the subject security or investment strategy involving a security or securities is suitable.

      The customer's investment profile, for example, is critical to the assessment, as are a host of product- or strategy-related factors in addition to cost, such as the product's or strategy's investment objectives, characteristics (including any special or unusual features), liquidity, risks and potential benefits, volatility and likely performance in a variety of market and economic conditions. These are all important considerations in analyzing the suitability of a particular recommendation, which is why the suitability rule and the concept that a broker's recommendation must be consistent with the customer's best interests are inextricably intertwined.23

      Recommendation

      Q2. The suitability rule applies only to recommended securities and investment strategies involving securities, but FINRA does not define the term "recommendation" other than to say that it is a facts and circumstances inquiry. What factors determine whether a recommendation has been made for purposes of the suitability rule?

      A2. Although FINRA does not define the term "recommendation," it has offered several guiding principles that firms and brokers should consider when determining whether particular communications could be viewed as recommendations. FINRA has extensively addressed those guiding principles in past Regulatory Notices, and cases have applied them to specific facts.24 Some SEC releases and FINRA cases and interpretive letters also have explained that a broker-dealer's use or distribution of marketing or offering materials ordinarily would not, by itself, constitute a "recommendation" for purposes of the suitability rule.25 The prior guidance and interpretations generally remain applicable,26 and firms and brokers should review those existing resources for assistance in understanding the breadth of the term "recommendation."

      Q3. FINRA has stated that the new suitability rule does not broaden the scope of implicit recommendations applicable to the predecessor rule. What are the conditions under which an implicit recommendation can trigger the suitability rule?

      A3. FINRA and the SEC have recognized that certain actions constitute implicit recommendations that can trigger suitability obligations. FINRA and the SEC have held, for example, that brokers who effect transactions on a customer's behalf without informing the customer have implicitly recommended those transactions, thereby triggering application of the suitability rule.27 Although such holdings continue to act as precedent regarding those issues, the new rule does not broaden the scope of implicit recommendations. The new rule, for example, does not apply to implicit recommendations to hold a security or securities. Thus, the new rule's "hold" language would not apply when a broker remains silent regarding security positions in an account. The hold recommendation must be explicit.28

      Q4. Customers sometimes ask broker-dealer call centers whether they may continue to maintain their investments at the firm if, for instance, they want to move from an employer-sponsored retirement account held at the firm to an individual retirement account held at the firm. If a firm's call center informs customers that they are permitted to continue to maintain their investments at the firm under such circumstances, would FINRA consider those communications to be "hold" recommendations triggering application of the new suitability rule?

      A4. In general, FINRA would not view those communications as "hold" recommendations for purposes of the rule because the firm's call center is not responding to the question of whether the customer should hold the securities, but rather whether the customer can continue to maintain them at the firm.

      Q5. Section 201(a) of the Jumpstart Our Business Startups Act (JOBS Act)29 directs the SEC to amend Rule 506 of Regulation D under the Securities Act of 1933 to eliminate the prohibition on general solicitations to the extent that all purchasers are accredited investors. Does the elimination of the general solicitation prohibition mean that broker-dealers no longer have suitability obligations regarding private placements?

      A5. No. The JOBS Act removes certain marketing impediments but not a broker-dealer's suitability obligations. In that regard, and as explained above in the answer to question 2, a broker-dealer's general solicitation of a private placement through the use or distribution of marketing or offering materials ordinarily would not, by itself, constitute a recommendation triggering application of the suitability rule.30 When a broker-dealer "recommends" a private placement, however, the suitability rule applies.31

      Customer

      Q6. What constitutes a "customer" for purposes of the suitability rule?

      A6. The suitability rule only applies to a broker's recommendation to a "customer." FINRA defines "customer" broadly as including anyone who is not a "broker or dealer."32 Although in certain circumstances the term may include some additional parameters, a "customer" clearly would include an individual or entity with whom a broker-dealer has even an informal business relationship related to brokerage services, as long as that individual or entity is not a broker or dealer. A broker-customer relationship would arise and the suitability rule would apply, for example, when a broker recommends a security to a potential investor, even if that potential investor does not have an account at the firm.

      Investment Strategy

      Q7. The new suitability rule requires that a recommended investment strategy involving a security or securities must be suitable. What is an "investment strategy" under the rule?

      A7. Rule 2111 states that the term "investment strategy" is to be interpreted "broadly."33 The new rule would cover a recommended investment strategy involving a security or securities regardless of whether the recommendation results in a securities transaction or even mentions a specific security or securities.34 FINRA would not consider a broker's recommendation that a customer generally invest in equities or fixed-income securities to be an investment strategy covered by the rule, unless such a recommendation was part of an asset allocation plan not eligible for the safe-harbor provision in Rule 2111.03 (discussed below in the answer to question 8). The rule would, however, apply to recommendations to invest in more specific types of securities, such as high dividend companies or the "Dogs of the Dow,"35 or in a particular market sector. It also would apply to recommendations generally to use a bond ladder, day trading, "liquefied home equity,"36 or margin strategy involving securities, irrespective of whether the recommendations mention particular securities.

      Additionally, the term would capture an explicit recommendation to hold a security or securities or to continue to use an investment strategy involving a security or securities.37 The rule would apply, for example, when an associated person meets with a customer during a quarterly or annual investment review and explicitly advises the customer not to sell any securities in or make any changes to the account or portfolio or to continue to use an investment strategy. However, as explained above in the answer to question 3, the rule would not cover an implicit recommendation to hold.

      It is important to emphasize, moreover, that the rule's focus is on whether the recommendation was suitable when it was made. A recommendation to hold securities, maintain an investment strategy involving securities, or use another investment strategy involving securities—as with a recommendation to purchase, sell or exchange securities—normally would not create an ongoing duty to monitor and make subsequent recommendations.

      Q8. What is the scope of the safe-harbor provision in Rule 2111.03 regarding a firm's use of an asset allocation model?

      A8. Rule 2111.03 excludes from the suitability rule's coverage various types of communications that are educational in nature even though they could be considered investment strategies involving securities. The rule states that certain communications "are excluded from the coverage of Rule 2111 as long as they do not include (standing alone or in combination with other communications) a recommendation of a particular security or securities[.]"38 Specifically, the rule provides a safe harbor for firms' use of "[a]sset allocation models that are (i) based on generally accepted investment theory, (ii) accompanied by disclosures of all material facts and assumptions that may affect a reasonable investor's assessment of the asset allocation model or any report generated by such model, and (iii) in compliance with NASD IM-2210-6 (Requirements for the Use of Investment Analysis Tools) (soon to be renumbered as FINRA Rule 2214), if the asset allocation model is an 'investment analysis tool' covered by [the interpretative material]."39

      Under this provision, the suitability rule would not apply, for example, to a general recommendation that a customer's portfolio have certain percentages of investments in equity securities, fixed-income securities and cash equivalents, if the recommendation is based on an asset allocation model that meets the above criteria and the firm does not recommend a particular security or securities in connection with the allocation. The suitability rule also would not apply to a firm's allocation recommendation regarding broad-based market sectors (e.g., agriculture, construction, finance, manufacturing, mining, retail, services, transportation and public utilities, and wholesale trade).40 Again, however, the recommendation must be based on an asset allocation model that meets the above criteria and cannot include recommendations of particular securities.

      In this regard, firms should note that, as an allocation recommendation becomes narrower or more specific, the recommendation gets closer to becoming a recommendation of particular securities and, thus, subject to the suitability rule, depending on a variety of factors (including the number of issuers that fall within the broker-dealer's allocation recommendation).41 Accordingly, broker-dealers should assess whether allocation recommendations involving certain types of sub-categories of broader market sectors or even more limited groupings are so specific or narrow that they constitute recommendations of particular securities.42

      Q9. Would a recommendation to maintain an asset mix that was based on an asset allocation model that meets the criteria described in the rule fall within the safe-harbor provision in Rule 2111.03?

      A9. Yes. The safe-harbor provision in Rule 2111.03 would apply to a recommendation to maintain a generic asset mix based on an asset allocation model that meets the criteria described in the rule if the firm does not explicitly recommend that the customer "hold" the specific securities that make up the allocation.

      Q10. Does the new rule's "investment strategy" language cover a broker's recommendation involving both a security and a non-security investment?

      A10. Yes. Just as Regulatory Notices and disciplinary actions make clear under the predecessor rule, the new suitability rule would continue to cover a broker's recommendation of an "investment strategy" involving both a security and a non-security.43 Suitability obligations apply, for example, to a broker's recommendation of an investment strategy to use home equity to purchase securities44 or to liquidate securities to purchase an investment-related product that is not a security.45

      Some firms have raised questions regarding their supervisory responsibilities for such recommendations. A firm's supervisory system must be reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules.46 Although the reasonableness of a supervisory system will depend on the facts and circumstances, a firm may use a risk-based approach to supervising its brokers' recommendations of investment strategies with both a security and non-security component. For instance, as long as the supervisory system is reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules, a firm could focus on the detection, investigation and follow-up of "red flags" indicating that a broker may have recommended an unsuitable investment strategy with both a security and non-security component.47 A broker's recommendation that a customer with limited means purchase a large position in a security might raise a "red flag" regarding the source of funds for such a purchase. Similarly, a broker's recommendation that a "buy and hold" customer with an investment objective of income liquidate large positions in blue chip stocks paying regular dividends might raise a "red flag" regarding whether that recommendation is part of a broader investment strategy.

      Q11. Does the new rule cover a "hold" recommendation regarding securities that the broker did not originally recommend? Would a broker, for example, be responsible for a hold recommendation involving blue chip stocks that a customer transferred into an account at the broker-dealer?

      A11. Where a broker did not recommend the original purchase of a security but explicitly recommends that the customer subsequently hold that security, the new suitability rule would apply. However, as stated above and discussed in greater detail below, a firm may take a risk-based approach to evidencing compliance with the rule. A hold recommendation involving shares of a blue chip stock ordinarily would not present the type of risk, absent unusual facts, that would require a detailed analysis or documentation. Where the hold recommendation involves an overly concentrated position in a security, however, documentation usually would be necessary, even if the broker did not originally recommend the purchase of the security.

      Risk-Based Approach to Documenting Compliance With Suitability Obligations

      Q12. For purposes of using a risk-based approach to documenting compliance with suitability obligations, what types of recommendations does FINRA generally consider complex or potentially risky?

      A12. As with many obligations under various rules, a firm will need to make some judgment calls on the types of recommendations that it should document under FINRA's suitability rule. FINRA previously stated that, although a firm has a general obligation to evidence compliance with applicable FINRA rules, the suitability rule does not include explicit documentation requirements, except in a situation where a firm determines not to seek certain customer information in the first place.48 The suitability rule applies to all recommendations of a security or securities or investment strategies involving a security or securities, but the extent to which a firm needs to document its suitability analysis depends on an assessment of the customer's investment profile and the complexity of the recommended security or investment strategy involving a security or securities (in terms of both its structure and potential performance) and/or the risks involved.49

      The recommendation of a large-cap, value-oriented equity security usually would not require documentation. Conversely, the recommendation of a complex and/or potentially risky security or investment strategy involving a security or securities usually would require documentation. Numerous Regulatory Notices and cases discuss various types of complex and/or potentially risky securities and investment strategies involving a security or securities. Firms and brokers may want to consult those Regulatory Notices50 and cases51 when considering the types of recommended securities and investment strategies involving securities that they should document.

      Q13. What types of "hold" recommendations should firms consider documenting?

      A13. For "hold" recommendations, FINRA has stated that a firm may want to focus on securities that by their nature or due to particular circumstances could be viewed as having a shorter-term investment component; that have a periodic reset or similar mechanism that could alter a product's character over time; that are particularly susceptible to changes in market conditions; or that are otherwise potentially risky or problematic to hold at the time the recommendations are made.52

      Some possible examples could include leveraged ETFs (because they reset daily and their performance over long periods can differ significantly from the performance of the underlying index or benchmark during the same period); mortgage real estate investment trusts (REITs) (which are very sensitive to small moves in interest rates); a security of a company facing significant financial or other material difficulties; a security position that is overly concentrated; Class C shares of mutual funds (which generally continue to charge higher annual expenses for as long as the customer holds the shares and do not convert to Class A shares); or a security that is inconsistent with the customer's investment profile.

      Q14. How should a firm document "hold" recommendations?

      A14. The suitability rule does not prescribe the manner in which a firm must document "hold" recommendations when documentation may be necessary. Some firms may create "hold" tickets and some may add "hold" sections to existing order tickets. Other firms may require emails or memoranda to supervisors or emails or letters to customers copying supervisors. Still other firms may create data fields for entering such information into automated supervisory systems.

      These are only examples of how some firms may document "hold" recommendations if necessary. Firms do not have to document or individually approve every "hold" recommendation.53 As with recommendations of other types of investment strategies or of purchases, sales or exchanges of securities, firms may use a risk-based approach to documenting and supervising "hold" recommendations. FINRA emphasizes, moreover, that firms may use methods that are not highlighted in this Notice to document and supervise "hold" recommendations as long as those methods are reasonable.

      Information-Gathering Requirements

      Q15. Does a broker-dealer have to seek to obtain all of the customer-specific factors listed in the new rule by the rule's implementation date?

      A15. No. The rule generally requires a broker-dealer to seek to obtain and analyze the customer-specific factors listed in the rule when making a recommendation to a customer. Accordingly, a broker-dealer could choose to seek to obtain and analyze the customer-specific factors listed in Rule 2111 when it makes new recommendations to customers (regardless of whether they are new or existing customers).54

      Q16. What constitutes "reasonable diligence" in attempting to obtain the customer-specific information?

      A16. Although the reasonableness of the effort will depend on the facts and circumstances, asking a customer for the information ordinarily will suffice. Moreover, absent "red flags" indicating that such information is inaccurate or that the customer is unclear about the information, a broker generally may rely on the customer's responses. A broker may not be able to rely exclusively on a customer's responses in situations such as the following:

      •   the broker poses questions that are confusing or misleading to a degree that the information-gathering process is tainted,
      •   the customer exhibits clear signs of diminished capacity, or
      •   other "red flags" exist indicating that the customer information may be inaccurate.

      Q17. What if a customer refuses to provide certain customer-specific information?

      A17. Some customers may be reluctant to provide certain types of information to their broker-dealers. A customer, for example, may not want to divulge information about "other investments" held away from the broker-dealer in question. The suitability rule generally requires broker-dealers to use reasonable diligence to seek to obtain and analyze the customer-specific factors listed in the rule. A broker-dealer cannot make assumptions about customer-specific factors for which the customer declines to provide information.55 Furthermore, when customer information is unavailable despite a broker-dealer's reasonable diligence, the firm must carefully consider whether it has a sufficient understanding of the customer to properly evaluate the suitability of a recommendation.56 As with the predecessor rule, however, the new rule would not prohibit a broker-dealer from making a recommendation in the absence of certain customer-specific factors as long as the firm has enough information about the customer to have a reasonable basis to believe the recommendation is suitable. The significance of specific types of customer information will depend on the facts and circumstances of the particular case.57

      Q18. In addition to using reasonable diligence to obtain and analyze certain specific factors about the customer, the new suitability rule requires a broker to consider "any other information the customer may disclose" in connection with the recommendation. How much of a duty does a firm have to pursue "any other information the customer may disclose" to see if it has suitability implications? Does the firm have a duty, for example, to ask its customers if there is anything else it should know about them when collecting information for suitability purposes?

      A18. Where a customer discloses information to a broker in connection with the recommendation, the broker must consider that information as part of the suitability analysis. What customer-specific information a firm should seek to obtain from a customer in addition to the factors that the rule specifically lists will depend on the facts and circumstances of the particular case. Although a firm is not required to affirmatively ask customers if there is anything else it should know about them, the better practice is to attempt to gain as much relevant information as possible before making recommendations.

      Q19. What is a firm's responsibility when customers indicate that they have multiple investment objectives that appear inconsistent?

      A19. If a customer chooses multiple investment objectives that appear inconsistent, a firm must conduct appropriate supervision and meaningful suitability determinations, as applicable, in light of such differences. For example, a firm should, among other things, clarify the customer's intent and, if necessary, reconcile and/or determine how it will handle the customer's differing investment objectives.

      Q20. Should the investment experience of a guardian, custodian, trustee or similarly situated third party managing an account be taken into consideration when making account recommendations?

      A20. In many circumstances, the answer is yes. In the case of a trust held in a brokerage account, for instance, the firm should consider the trustee's investment experience with, and knowledge of, various investments and investment strategies. The firm, however, also must consider factors such as the trust's investment objectives, time horizon and risk tolerance to complete the suitability analysis.

      It also is important to note that, where an institutional customer has delegated decisionmaking authority to an agent, such as an investment adviser or a bank trust department, Rule 2111 (b) makes clear that the factors relevant to determining whether the customer meets the criteria for the institutional-customer exemption will be applied to the agent.

      Q21. Can a broker make recommendations based on a customer's overall portfolio, including investments held at other financial institutions? For instance, does each individual recommendation have to be consistent with the customer's investment profile or can the suitability of a broker's recommendation be judged in light of its consistency with the customer's overall portfolio?

      A21. The answer depends on the facts and circumstances of the particular case. The suitability rule applies on a recommendation-by-recommendation basis. A suitability analysis of a particular recommendation and consideration of a customer's overall investment portfolio, however, are not mutually exclusive concepts. The new suitability rule (as with the predecessor rule) requires a broker to seek to obtain and analyze a customer's other investments. The rule thus explicitly permits a suitability analysis to be performed within the context of a customer's other investments. Some customers, moreover, desire portfolios made up of securities with different levels of liquidity, risk and time horizons. When a broker is aware of a customer's overall portfolio (including investments held at other financial institutions), the broker is permitted to make recommendations based on the customer's overall portfolio as long as the customer is in agreement with such an approach. Under these circumstances, the suitability of a broker's recommendation may be analyzed on the basis of whether the customer's overall portfolio, considering any changes to the portfolio that flow from the broker's recommendation, aligns with the customer's investment profile.58

      As noted above in the answer to question 17, however, a broker cannot make assumptions about a customer's other holdings.59 The firm should evidence a customer's approval of a broker's use of a portfolio-based analysis regarding the suitability of the broker's recommendations.60 Some customers, for instance, may desire all recommendations to be consistent with their stated risk tolerance, investment time horizon or liquidity needs. Accordingly, a broker may not use a portfolio approach to analyzing the suitability of specific recommendations when:

      •   the customer wants each individual recommendation to be consistent with his or her investment profile or particular factors within that profile;
      •   the broker is unaware of the customer's overall portfolio; or
      •   "red flags" exist indicating that a broker's information about the customer's other holdings may be inaccurate.

      Nothing in this guidance, moreover, relieves a firm from having to ensure that a customer's investment profile or factors within that profile accurately reflect the customer's decisions.

      Reasonable-Basis Suitability

      Q22. Can a broker who does not understand the risks associated with a recommendation violate the reasonable-basis obligation even if the recommendation is suitable for some investors?

      A22. Yes. The reasonable-basis obligation has two components: a broker must (1) perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards, and (2) determine whether the recommendation is suitable for at least some investors based on that understanding.61 A broker must adhere to both components of reasonable-basis suitability. A broker could violate the obligation if he or she did not understand the recommended security or investment strategy, even if the security or investment strategy is suitable for at least some investors. A broker must understand the securities and investment strategies involving a security or securities that he or she recommends to customers.62

      The reasonable-basis obligation is critically important because, in recent years, securities and investment strategies that brokers recommend to customers, including retail investors, have become increasingly complex and, in some cases, risky. Brokers cannot fulfill their suitability responsibilities to customers (including both their reasonable-basis and customer-specific obligations) when they fail to understand the securities and investment strategies they recommend. Firms' supervisory policies and procedures must be reasonably designed to ensure that their brokers comply with this important requirement.63

      Quantitative Suitability

      Q23. Is the quantitative suitability obligation under the new rule any different from the excessive trading line of cases under the predecessor rule?

      A23. No. The quantitative suitability obligation under the new rule simply codifies excessive trading cases. Quantitative suitability requires a broker who has actual or de facto control64 over a customer account to have a reasonable basis for believing that, in light of the customer's investment profile, a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer.65 Factors such as turnover rate,66 cost-to-equity ratio,67 and use of in-and-out trading68 in a customer's account may provide a basis for finding that the activity at issue was excessive.

      Institutional-Customer Exemption

      Q24. Some third-party vendors have created "Institutional Suitability Certificates" to facilitate firms' compliance with the new institutional-customer exemption in Rule 2111(b). Has FINRA endorsed or approved any of these certificates?

      A24. No. By way of background, the new suitability rule modifies the institutional-customer exemption that existed under the predecessor rule (NASD IM-2310-3). Rule 2111 (b) replaces the previous rule's definition of "institutional customer" with the more common definition of "institutional account" in FINRA's "books and records" rule, Rule 4512(c).69 "Institutional account" means the account of a bank, savings and loan association, insurance company, registered investment company, registered investment adviser or any other person (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50 million.70 In regard to the "other person" category, the monetary threshold generally changed from at least $10 million invested in securities and/or under management used in the predecessor rule to at least $50 million in assets in the new rule.71 Moreover, the definition now includes natural persons who meet such criteria.

      In addition to the definitional change, the new institutional-customer exemption focuses on two factors: (1) whether a broker "has a reasonable basis to believe the institutional customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies involving a security or securities" (a factor used in the predecessor rule), and (2) whether "the institutional customer affirmatively indicates that it is exercising independent judgment" (a new requirement).72 A broker-dealer fulfills its customer-specific suitability obligation if all of these conditions are satisfied.73

      Some third-party vendors have created and aggressively marketed proprietary "Institutional Suitability Certificates" to facilitate compliance with the new institutional-customer exemption. FINRA has not approved or endorsed any third-party Institutional Suitability Certificates and has not contracted with any third-party vendor to create such certificates on FINRA's behalf. FINRA also emphasizes that broker-dealers are not required to use such certificates to comply with the new institutional-customer exemption. As discussed below in the answer to question 26, firms can use any number of approaches to complying with the new exemption requirements.

      Q25. Some of the "Institutional Suitability Certificates" that are being marketed do not identify an institutional customer's experience with particular asset classes or types of securities or investment strategies involving a security or securities. Does FINRA expect broker-dealers or institutional customers to provide more specificity?

      A25. Firms should understand that the use of any such Institutional Suitability Certificate in no way constitutes a safe harbor from the rule. As noted above in the answer to question 24, FINRA has not endorsed or promoted any certificate. What further action a broker-dealer will need to take will depend on the facts and circumstances of the particular case. In general, however, when there is an indication that the institutional customer is not capable of analyzing, or does not intend to exercise independent judgment regarding, all of a broker-dealer's recommendations, the broker-dealer necessarily will have to be more specific in its approach to ensuring that it complies with the exemption. A broker-dealer need not automatically use a detailed approach when no such indication exists, although providing at least some level of specificity (even if not required) may help eliminate misunderstandings.

      FINRA previously issued written guidance on a customer's capability of analyzing risks (a factor used in both the predecessor and new suitability rules).74 FINRA stated that a broker-dealer may conclude in some cases that a customer is not capable of making independent investment decisions in general. In other cases, the institutional customer may have general capability, but may not be able to understand a particular type of instrument or its risk. If a customer is either generally not capable of evaluating investment risk or lacks sufficient capability to evaluate the particular product or investment strategy that is the subject of a recommendation, the scope of a broker's customer-specific obligations under the suitability rule would not be diminished by the fact that the broker was dealing with an institutional customer. However, the fact that a customer initially needed help understanding a potential investment or investment strategy need not necessarily imply that the customer did not ultimately develop an understanding.

      As to an institutional customer's affirmative indication that it intends to exercise independent judgment (a new requirement), Rule 2111.07 states that "an institutional customer may indicate that it is exercising independent judgment on a trade-by-trade basis, on an asset-class-by-asset-class basis, or in terms of all potential transactions for its account." In its response to comments during the rulemaking process, however, FINRA noted that a broker-dealer "is free to decide as a business matter to service only those institutional investors that are willing to make the affirmative indication in terms of all potential transactions for its account."75

      Q26. Does the suitability rule require a broker-dealer to have a hard copy agreement on file reflecting an institutional customer's affirmative indication that it intends to exercise independent judgment?

      A26. As discussed earlier in the answer to question 12, the suitability rule applies to all recommendations of a security or securities or investment strategies involving a security or securities, but the rule generally allows a firm to take a risk-based approach to documenting suitability. In relation to a customer affirmatively indicating the intention to exercise independent judgment, negative consent will not suffice, but the affirmative indication does not necessarily have to be in writing. A firm may use a risk-based approach to documenting compliance with this provision.

      A firm could comply with this requirement, for example, by having an institutional customer indicate in a signed customer agreement or other document that the institutional customer will be exercising independent judgment in evaluating recommendations or a firm could call its institutional customer, have that discussion, and (if it chooses or circumstances require) document the conversation to evidence the institutional customer's affirmative indication.


      1. See 75 Fed. Reg. 71479 (Nov. 23, 2010) (Order Approving Proposed Rule Change; File No. SR-FINRA-2010-039). In addition, the SEC's order approved FINRA Rule 2090 (Know Your Customer), which also is effective on July 9, 2012. See id.; Regulatory Notice 11-25,at 1.

      2. FINRA Rule 2111 (a).

      3. This aspect of the new rule largely codifies case aw indicating that brokers generally should consider various customer-specific factors that NASD Rule 2310 did not explicitly reference. FINRA Rule 2111.04 provides, however, that a broker-dealer need not seek to obtain and analyze all of the factors if it "has a reasonable basis to believe, documented with specificity, that one or more of the factors are not relevant components of a customer's investment profile in light of the facts and circumstances of the particular case." If a broker-dealer reasonably determines that certain factors do not require analysis with respect to a category of customers or accounts, then it could document the rationale for this decision in its procedures or elsewhere. See Regulatory Notice 11-25, at 4.

      4. FINRA created a model New Account Application Template. The template indicates that "investment experience" could include the types of investment products that the customer previously has owned (e.g., mutual funds, exchange-traded funds (ETFs), individual stocks, bonds, options, securities futures, annuities), the number of transactions per year for each category, and the number of years of experience with each category. See id. at 5.

      It is important to note that the New Account Application Template is a voluntary mode brokerage account form that is provided as a resource to firms when they design or update their new account forms. Firms are under no regulatory obligation to use the template, in whole or in part. FINRA recognizes that firms may continue to use their proprietary application forms, methods and processes, as long as they meet all applicable regulatory requirements. In addition, use of the voluntary template in whole or in part does not guarantee compliance with or create any safe harbor with respect to FINRA rules, the federal securities laws or state laws. Firms are responsible for ensuring that they comply with all regulatory requirements (including, but not limited to, applicable information-gathering and disclosure obligations).

      5. "Time horizon" represents the "expected number of months, years, or decades [a customer plans to invest] to achieve a particular financial goal." Regulatory Notice 11-25, at 4.

      6. "Liquidity needs" represent the "extent to which a customer desires the ability or has financial obligations that dictate the need to quickly and easily convert to cash all or a portion of an investment or investments without experiencing significant loss in value from, for example, the lack of a ready market, or incurring significant costs or penalties." Regulatory Notice 11-25, at 4. FINRA stated that "examples of possible liquid investments include money market funds, Treasury bills and many blue-chip stocks, ETFs and mutual funds." Id. at 9 n.11. FINRA emphasized, however, "that a high level of liquidity does not, in and of itself, mean that the recommended product is suitable for a I customers. For instance, some relatively liquid products can be complex and/or risky and therefore unsuitable for some customers." Id.

      7. "Risk tolerance" is a customer's "ability and willingness to lose some or all of [the] original investment in exchange for greater potential returns." Regulatory Notice 11-25, at 4. For a discussion of the relationship between time horizon, liquidity needs and risk tolerance, see Regulatory Notice 11-25, at 5.

      8. In many circumstances, a broker should have actual knowledge of investments held at the firm where the broker is registered and should use reasonable diligence to ascertain investments held at other financial institutions. A broker generally may satisfy the obligation to seek information about investments held at other financial institutions by asking the customer for such information.

      9. "Financial situation and needs" might include, among other things, a customer's annual income, net worth, liquid net worth, annual (recurring) expenses, and special (non-recurring) expenses. See New Account Application Template, supra note 4, at 4.

      10. "Tax status" could include a customer's highest marginal tax rate. See New Account Application Template, supra note 4, at 4.

      11. "Investment objectives" might include one or more of the following: generate income; fund retirement; steadily accumulate wealth over the long-term; preserve wealth and pass it on to heirs; pay for education; pay for a house; and/or market speculation. See New Account Application Template, supra note 4, at 7.

      12. Nothing in this guidance, including the discussions relating to a risk-based approach to documenting compliance with Rule 2111, shall be construed as altering in any manner a broker-dealer's obligations under applicable federal securities laws, regulations and rules, including Securities Exchange Act (SEA) Rules 17a-3 and 17a-4 and the Bank Secrecy Act, 31 U.S.C. §§ 5311, et seq.

      13. See FINRA Response to Comments, Oct. 21, 2010; 75 Fed. Reg. 51310, at 51313–51321 (Aug. 19, 2010) (Notice of Filing of Proposed Rule Change to Adopt FINRA Rules 2090 (Know Your Customer) and 2111 (Suitability) in the Consolidated FINRA Rulebook; File No. SR-FINRA-2010-039) (Notice of Proposed Rule Change).

      14. See Regulatory Notice 11-02, at 7 n.11; SEC Staff Study on Investment Advisers and Broker-Dealers as Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, at 59 (Jan. 2011) (IA/BD Study). See also Notice of Proposed Rule Change, supra note 13, at 51314–51315.

      15. Raghavan Sathianathan, Exchange Act Rel. No. 54722, 2006 SEC LEXIS 2572, at *21 (Nov. 8, 2006); see also Scott Epstein, Exchange Act Rel. No. 59328, 2009 SEC LEXIS 217, at *40 n.24 (Jan. 30, 2009) ("In interpreting the suitability rule, we have stated that a [broker's] 'recommendations must be consistent with his customer's best interests.'"); Dane S. Faber, 57 S.E.C. 297, 310, 2004 SEC LEXIS 277, at *23–24 (2004) (stating that a "broker's recommendations must be consistent with his customer's best interests" and are "not suitable merely because the customer acquiesces in [them]"); Wendell D. Belden, 56 S.E.C. 496, 503, 2003 SEC LEXIS 1154, at *11 (2003) ("As we have frequently pointed out, a broker's recommendations must be consistent with his customer's best interests."); Daniel R. Howard, 55 S.E.C. 1096, 1100, 2002 SEC LEXIS 1909, at *5–6 (2002) (same), affd, 11 F. App'x 2 (1st Cir. 2003); Powell & McGowan, Inc., 41 S.E.C. 933, 935, 1964 SEC LEXIS 497, at *3–4(1964) (same); Dep't of Enforcement v. Evans, No. 20006005977901, 2011 FINRA Discip. LEXIS 36, at *22 (NAC Oct. 3, 2011) (same); Dep't of Enforcement v. Cody, No. 2005003188901, 2010 FINRA Discip. LEXIS 8, at *19 (NAC May 10, 2010) (same), aff'd, Exchange Act Rel. No. 64565, 2011 SEC LEXIS 1862 (May 27, 2011); Dep't of Enforcement v. Bendetsen, No. C01020025, 2004 NASD Discip. LEXIS 13, at *12 (NAC Aug. 9, 2004) ("[A] broker's recommendations must serve his client's best interests, and the test for whether a broker's recommendations are suitable is not whether the client acquiesced in them, but whether the broker's recommendations were consistent with the client's financial situation and needs."); IA/BD Study, supra note 14, at 59 ("[A] central aspect of a broker-dealer's duty of fair dealing is the suitability obligation, which generally requires a broker-dealer to make recommendations that are consistent with the best interests of his customer.").

      16. See Epstein, 2009 SEC LEXIS 217, at *42 (stating that the broker's "mutual fund switch recommendations served his own interest by generating substantial production credits, but did not serve the interests of his customers" and emphasizing that the broker violated the suitability rule "when he put his own self-interest ahead of the interests of his customers").

      17. See Belden, 56 S.E.C. at 504–05, 2003 SEC LEXIS 1154, at *14.

      18. Epstein, 2009 SEC LEXIS 217, at *72; see also Sathianathan, 2006 SEC LEXIS 2572, at *23.

      19. Robin B. McNabb, 54 S.E.C. 917, 928, 2000 SEC LEXIS 2120, at *24 (2000), affd, 298 F.3d 1126 (9th Cir. 1990).

      20. See Stephen T. Rangen, 52 S.E.C. 1304, 1311, 1997 SEC LEXIS 762, at *19 (1997).

      21. See Curtis I. Wilson, 49 S.E.C. 1020, 1022, 1989 SEC LEXIS 25, at *6–7 (1989), affd, 902 F.2d 1580 (9th Cir. 1990).

      22. Howard, 55 S.E.C. at 1100, 2002 SEC LEXIS 1909, at *6–7.

      23. It is important to keep in mind that, in addition to the suitability rule, FINRA has numerous other investor-protection rules. See, e.g., FINRA Rule 2010 (requiring that a broker-dealer, "in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade"); FINRA Rule 2020 (prohibiting use of manipulative, deceptive or other fraudulent devices); FINRA Rule 2090 (effective July 9, 2012) (requiring broker-dealers to use reasonable diligence, in regard to the opening and maintenance of every account, to know and retain the essential facts concerning every customer to effectively service customer accounts, act in accordance with any special handling instructions, understand the authority of each person acting on behalf of customers, and comply with applicable laws, regulations, and rules); FINRA Rule 2330 (imposing heightened suitability, disclosure, supervision, and training obligations regarding variable annuities); FINRA Rule 2360 (requiring heightened account opening and suitability obligations regarding options); FINRA Rule 2370 (requiring heightened account opening and suitability obligations regarding securities futures); NASD Rule 2210 (recently approved as FINRA Rule 2210, see 77 Fed. Reg. 20452 (Apr. 4, 2012)) (requiring broker-dealers' communications with the public to, among other things, be fair and balanced, include material information, be free from exaggerated, false or misleading statements or claims, and, as to certain communications, be approved prior to use by a principal and/or filed with FINRA); NASD Rule 3010 (imposing supervisory obligations); FINRA Rule 5310 (requiring broker-dealers to provide best execution). Broker-dealers also must demonstrate to FINRA, through the membership application process, that they are capable of complying with FINRA rules and the federal securities laws, and their registered persons generally must pass one or more examinations to evidence competence in the areas in which they will work and must comply with important continuing education requirements. See, e.g., NASD Rules 1014, 1021 and 1031, and FINRA Rule 1250. These (and many other) FINRA rules provide broad and significant protections to investors. FINRA BrokerCheck®, moreover, allows investors to review the professional and disciplinary backgrounds of firms and brokers online.

      24. See, e.g., Regulatory Notice 11-02, at 2–3 (discussing FINRA's guiding principles that firms and brokers should consider when determining whether a particular communication could be considered a "recommendation" for purposes of the suitability rule); Regulatory Notice 10-06, at 3–4 (Jan. 2010) (providing guidance on recommendations made on blogs and social networking websites); Notice to Members 01-23 (Apr. 2001) (announcing the guiding principles and providing examples of communications that likely do and do not constitute recommendations); Michael F. Siegel, Exchange Act Rel. No. 58737, 2008 SEC LEXIS 2459, at *21–27 (Oct. 6, 2008) (applying the guiding principles to the facts of the case to find a recommendation), affd in relevant part, 592 F.3d 147 (D.C. Cir.), cert. denied, 130 S.Ct. 333 (2010).

      25. See, e.g., SEC Adoption of Rules Under Section 15(b)(10) of the Exchange Act, 32 Fed. Reg. 11637, 11638 (Aug. 11, 1967) (noting that the SEC's now-rescinded suitability rule would not apply to "general distribution of a market letter, research report or other similar material"); Suitability Requirements for Transactions in Certain Securities, 54 Fed. Reg. 6693, 6696 (Feb. 14, 1989) (stating that proposed SEA Rule 15c2-6, which would have required documented suitability determinations for speculative securities, "would not apply to general advertisements not involving a direct recommendation to the individual"); DBCC v. Kunz, No. C3A960029, 1999 NASD Discip. LEXIS 20, at *63 (NAC July 7, 1999) (stating that, under the facts of the case, the mere distribution of offering material, without more, did not constitute a recommendation triggering application of the suitability rule), affd, 55 S.E.C. 551, 2002 SEC LEXIS 104 (2002); FINRA Interpretive Letter, Mar. 4, 1997 ("[T]he staff agrees that a reference to an investment company or an offer of investment company shares in an advertisement or piece of sales literature would not by itself constitute a 'recommendation' for purposes of [the suitability rule].").

      26. The discussions (and examples provided) in previous Regulatory Notices, cases, interpretive letters, and SEC releases remain applicable to the extent that they are not inconsistent with Rule 2111.

      27. See, e.g., Rafael Pinchas, 54 S.E.C. 331, 341 n.22, 1999 SEC LEXIS 1754, at *20 n.22 (1999) ("Transactions that were not specifically authorized by a client but were executed on the client's behalf are considered to have been implicitly recommended within the meaning of [FINRA's suitability rule]."); Paul C. Kettler, 51 S.E.C. 30, 32 n.11, 1992 SEC LEXIS 2750, at *5 n.11 (1992) (stating that transactions a broker effects for a discretionary account are implicitly recommended).

      28. FINRA previously responded to questions regarding whether the absence of a sell order in a discretionary account amounts to an implicit hold recommendation covered by the rule. FINRA stated that, "[t]o the extent that a customer account at a broker-dealer can be discretionary under applicable federal securities laws, the suitability rule generally would not apply where a firm refrains from selling a security." Regulatory Notice 11-25, at 10 n.21 (emphasis in original).

      29. Pub. L. No. 112-106, 126 Stat. 306 (2012).

      30. See supra note 25.

      31. When analyzing whether a particular communication could be viewed as a recommendation triggering application of the suitability rule, firms should consult the prior guidance cited supra at notes 24 and 25.

      32. See FINRA Rule 0160(b)(4) (Definition of Customer).

      33. See FINRA Rule 2111.03.

      34. See Regulatory Notice 11-25, at 6; Regulatory Notice 11-02, at 3. However, as described in greater detail infra in the answer to question 8, there is a safe-harbor provision for certain types of educational information that otherwise could be considered investment strategies captured by the new rule's broad language. See FINRA Rule 2111.03.

      35. The "Dogs of the Dow" strategy is premised on investing "equal dollar amounts in the ten constituents of the Dow Jones industrial average with the highest dividend yields, hold[ing] them for twelve months and then switching] to a new group of dogs." Vincent Apicella, Forbes.com (May 29, 2001).

      36. See Notice to Members 04-89 (Dec. 2004) (discussing liquefied home equity).

      37. See FINRA Rule 2111.03.

      38. Nonetheless, FINRA has stated that the safe-harbor provision would be strictly construed. See Regulatory Notice 11-25, at 7.

      39. FINRA Rule 2111.03. NASD IM-2210-6 (Requirements for the Use of Investment Analysis Tools) will soon be renumbered pursuant to the SEC's recent approval of FINRA Rule 2214. See 77 Fed. Reg. 20452 (Apr. 4, 2012). As discussed above in the answer to question 8, Rule 2111.03 provides a safe harbor for firms' use of asset allocation models that are, among other things, based on "generally accepted investment theory." These models often take into account the historic returns of different asset classes over defined periods of time. FINRA expects a firm to be capable of explaining how an asset allocation model that it uses is consistent with generally accepted investment theory.

      40. The examples of market sectors discussed in this Notice are from the Standard Industrial Classification Code. See SEC Division of Corporation Finance: Standard Industrial Classification.

      41. When a broker-dealer recommends an allocation strategy that includes an allocation in fixed-income securities, FINRA recognizes that a number of additional factors would be relevant in determining if the broker-dealer has "recommended" particular debt securities. A firm's analysis of whether the identification of a more limited universe of fixed-income securities constitutes a recommendation of particular securities may, depending on the facts and circumstances, differ from its assessment regarding equity securities. The issuers' identities and creditworthiness are important information in determining whether to purchase a debt security, but there may be other factors that affect the pricing and any decision to invest in specific debt securities. Moreover, the relative importance of the issuers to other factors in making fixed-income investment decisions varies depending on the total mix of the relevant facts and circumstances. Thus, identifying a more limited universe of debt issuers may not constitute a recommendation if such issuers have many debt securities outstanding, of many maturities, and having distinct structures or features.

      42. In Notice to Members 01-23 (Apr. 2001), FINRA explained "that a portfolio analysis tool that merely generates a suggested mix of genera classes of financial assets" would not, by itself, trigger a suitability obligation under NASD Rule 2310; however, the more a general class is narrowed (e.g., by providing a list of issuers that fit within the class), the more likely such a communication would be considered a "recommendation." Id. at 6 n.15. Firms should use a similar approach to analyzing whether particular recommendations are eligible for the Rule 2111.03 safe-harbor provision.

      43. If the recommended investment strategy does not have a security component, the suitability rule would not apply. The suitability rule applies only when the recommended investment strategy involves a security or securities (although, as discussed above in the answer to question 7, a broker's recommendation of a strategy need not mention a particular security or result in a transaction for the rule to apply). While the suitability rule applies only to recommendations involving a security or securities, other FINRA rules potentially apply, depending on the facts of the particular case, to broker-dealers' and associated persons' conduct that does not involve securities. See, e.g., FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade); 2210 (see supra note 23) (Communications with the Public); 3270 (Outside Business Activities of Registered Persons); see also laleggio v. SEC, No. 98-70854, 1999 U.S. App. LEXIS 10362, *4–5 (9th Cir. May 20, 1999) (holding that FINRA's requirement that brokers act in a manner consistent with just and equitable principles of trade applies to all unethical business conduct, regardless of whether the conduct involves securities); Vail v. SEC, 101 F.3d 37, 39 (5th Cir. 1996) (same); Robert L Wallace, 53 S.E.C. 989, 995, 1998 SEC LEXIS 2437, at *13 (1998) (emphasizing, in an action involving viatical settlements, that Rule 2210 is "not limited to advertisements for securities, but provide[s] standards applicable to all [broker-dealer] communications with the public").

      44. FINRA made similar points regarding recommended investment strategies on several occasions under the predecessor suitability rule. FINRA explained in one instance under the predecessor rule that "recommending liquefying home equity to purchase securities may not be suitable for all investors. [Broker-dealers] should consider not only whether the recommended investments are suitable, but also whether the strategy of investing liquefied home equity in securities is suitable." Notice to Members 04-89, at 3 (Dec. 2004). See also Donna M. Vogt, AWC No. EAF0400730002 (Feb. 21, 2007) (barring broker for, among other things, recommending to ten customers, many of whom were nearing retirement, that they obtain home equity loans and use the proceeds to purchase securities, without considering whether such recommendations were suitable for such customers in light of their financial situation and needs) James A. Kenas, AWC No. C3B040001 (Jan. 23, 2004) (suspending broker for six months for violating the suitability rule by recommending that his customers use liquefied home equity to purchase mutual fund shares); Steve C. Morgan, AWC No. C3A040016 (Mar. 9, 2004) (suspending broker for six months and ordering him to pay restitution of more than $15,000 for recommending that a retired couple use liquefied home equity to purchase a variable annuity).

      45. In 2008, FINRA barred a broker, in part, for recommending that some of his customers sell securities to purchase equity indexed annuities (EIAs) that were unsuitable for them. The settlement in William R. Barto, Settlement No. 20060043524 (Oct. 27, 2008), states that "Barto recommended to four [of his firm's] customers (two married couples) that they sell or exchange various securities and invest the proceeds in [certain] EIAs, life insurance products sold by Barto as part of an outside business activity approved by [his firm]." Id. at 5. The settlement further notes that, "[a]t the time Barto made these recommendations, his customers were at or near retirement and needed immediate access to a large percentage of their funds. The EIAs [at issue], however, [were] long-term, illiquid investments with high surrender penalties that did not match the customers' investment objectives. Based on the financial situations and needs of his customers, Barto did not have reasonable grounds to believe that his recommendations to sell or exchange securities to purchase [the] EIAs were suitable." Id. See also Notice to Members 05-50, at 5 (Aug. 2005) ("[Recommendations to liquidate or surrender a registered security such as a mutual fund, variable annuity, or variable life contract must be suitable, including where such liquidations or surrenders] are for the purpose of funding the purchase of an unregistered EIA.").

      46. See NASD Rule 3010 (Supervision).

      47. In Notice to Members 99-45 (June 1999), FINRA explained that the supervision rule "requires that a [firm's] supervisory system be reasonably designed to achieve compliance with applicable laws and regulations. This standard recognizes that a supervisory system cannot guarantee firm-wide compliance with all laws and regulations. However, this standard does require that the system be a product of sound thinking and within the bounds of common sense, taking into consideration the factors that are unique to a member's business." Id. at 295. An associated person, of course, is responsible for having a reasonable basis for believing that each recommendation he or she makes of a security or securities or investment strategy involving a security or securities is suitable.

      48. See supra note 3.

      49. Firms should keep in mind, however, that SEA Rule 17a-3 requires that, for each account with a natural person as a customer or owner, a broker-dealer must create a record that includes, among other things, the customer's or owner's name, date of birth, employment status, annual income, and net worth, as well as the account's investment objectives. See SEA Rule 17a-3(a)(17) (i)(A). SEA Rule 17a-3 also states that the broker-dealer must furnish such customer or owner a copy of the required account record information or alternative document with all information required by SEA Rule 17a-3(a)(17)(i)(A), including an explanation of any terms regarding investment objectives, for verification within 30 days of account opening and at least once every 36 months thereafter. See SEA Rule 17a-3(a)(17) (0(B)(1). "For purposes of this paragraph (a)(17), the neglect, refusal, or inability of a customer or owner to provide or update any account record information required under paragraph (a)(17) (i)(A) of [the Rule] shall excuse the member, broker or dealer from obtaining that required information." SEA Rule 17a-3(a)(17)(i)(C). The account record requirements in paragraph (a)(17) (i)(A) of the Rule apply only to accounts for which the broker or dealer is, or within the past 36 months has been, required to make a suitability determination. See SEA Rule 17a-3(a)(17)(i)(D).

      50. See, e.g., Regulatory Notice 12-03 (Jan. 2012) (providing guidance to broker-dealers on supervision and suitability obligations for various complex products); Regulatory Notice 11-15 (Apr. 2011) (providing guidance on low-priced equity securities in customer margin and firm proprietary accounts); Regulatory Notice 10-51 (Oct. 2010) (reminding broker-dealers of their sales practice obligations for commodity futures-linked securities); Regulatory Notice 10-22 (Apr. 2010) (discussing broker-dealer obligations when participating in private offerings);Regulatory Notice 10-09 (Feb. 2010) (reminding broker-dealers of sales practice obligations with reverse exchangeable securities or reverse convertibles);Regulatory Notice 09-73 (Dec. 2009) (reminding broker-dealers of their sales practice obligations relating to principal-protected notes);Regulatory Notice 09-31 (June 2009) (reminding broker-dealers of sales practice obligations relating to leveraged and inverse exchange-traded funds); Regulatory Notice 08-81 (Dec. 2008) (reminding broker-dealers of their obligations regarding the sale of securities in a high yield environment); Notice to Members 05-59 (Sept. 200B) (providing guidance to broker-dealers on the sale of structured products); Notice to Members 05-18 (Mar. 2005) (issuing guidance on section 1031 tax-deferred exchanges of real property for certain tenants-in-common interests in real property offerings); Notice to Members 03-71 (Nov. 2003) (reminding broker-dealers of obligations when selling non-conventional investments); Notice to Members 03-07 (Feb. 2003) (reminding broker-dealers of their obligations when selling hedge funds); Notice to Members 96-32 (May 1996) (providing best practices when dealing in speculative securities); Notice to Members 93-73 (Oct. 1993) (reminding members of their obligations when selling collateralized mortgage obligations).

      51. See, e.g., Cody, 2011 SEC LEXIS 1862, at *36–40 (discussing non-investment grade securities); Wells Fargo Invs., LLC, AWC No. 2008015651901 (Dec. 15, 2011) (stating that "[r]everse convertibles are complex structured products that combine a debt instrument and put option into one product," the repayment of principal is linked to the performance of an underlying asset, such as a stock, a basket of stocks or an index, which is generally unrelated to the issuer of the note, and at maturity, if the value of the underlying asset has fallen below a certain level, the investor may receive less than a full return of principal); Chase Invs. Servs. Corp., AWC No. 2008015078603 (Nov. 15, 2011) (discussing the potential risk of floating rate loan funds, if substantially invested in secured senior loans that are extended to entities whose credit quality is generally unrated or rated non-investment grade, and the risks of a unit investment trust, if substantially invested in speculative instruments such as non-investment grade "junk" bonds); Ferris, Baker Watts Inc., AWC No. 20070091803 (Oct. 20, 2010) (discussing reverse convertibles exposing investors to risks in addition to those risks associated with investment in bonds and bond funds, and having complex pay-out structures involving multiple variables); Jeffrey C Young, Exchange Act Rel. No. 61247, 2009 SEC LEXIS 4332, at *3–6 (Dec. 29, 2009) (discussing the risks of recommendations to certain municipalities to engage in a trading strategy involving buying and selling the same long-term, zero-coupon United States Treasury Bonds (also known as Separate Trading of Registered Interest and Principal of Securities or "STRIPS") within the same day or days using repurchase agreements (repos) to finance such purchases, which "significantly increased the risks...as repos effectively allowed the accounts to borrow large amounts of money in order to hold larger positions of STRIPS"); Siegel, 2008 SEC LEXIS 2459, at *30–32 (holding that recommendations of a private placement were unsuitable where the offering documents contained "conflicting [and] confusing information" and there "was no other information on which a prospective investor could rely to make an investment decision"); Ronald Pellegrino, Exchange Act Rel. No. 59125, 2008 SEC LEXIS 2843, at *7–10 (Dec. 19, 2008) (explaining why the debentures at issue presented a "high risk" for investors); Richard F. Kresge, Exchange Act Rel. No. 55988, 2007 SEC LEXIS 1407, at *21–23 (June 29, 2007) (describing the speculative nature of three low-priced securities at issue); Faber, 2004 SEC LEXIS 277, at *25 (discussing speculative nature of the security of a company that "had no revenues and had never showed any profits"); Jack H. Stein, 56 S.E.C. 108, 117, 2003 SEC LEXIS 338, at *15 (2003) (focusing, in part, on risks of using margin); James B. Chase, 56 S.E.C. 149, 153 & 156–157, 2003 SEC LEXIS 566, at *7–8 & *13 (2003) (discussing speculative nature of the security of "a start-up company whose business consisted of manufacturing and selling a single product" that was "new and had no established or tested market" and emphasizing the risks associated with overly concentrated securities positions); Larry I. Klein, 52 S.E.C. 1030, 1032–1034, 1996 SEC LEXIS 2922, at *5–10 (1996) (explaining risks associated with certain foreign currency debt securities); Clinton H. Holland, Jr., 52 S.E.C. 562, 565, 1995 LEXIS 3452, at *9 (1995) (remarking that securities of companies "with a limited history of operations and no profitability" are speculative); David J. Dambro, 51 S.E.C. 513, 515, 1993 SEC LEXIS 1521, at *5 (1993) (discussing risky nature of investing in a company that had a history of operating losses and concentrated its assets in illiquid holdings in other unproven start-up companies in the same industry); Gordon S. Venters, 51 S.E.C. 292, 293–94, 1993 SEC LEXIS 3645, at *3–5 (1993) (discussing risky nature of investing in a company when that company "was losing money, had never paid a dividend, and its prospects were totally speculative"); Patrick G. Keel, 51 S.E.C. 282, 284, 1993 SEC LEXIS 41, at *5 (1993) ("[O]ptions transactions involve a high degree of financial risk. Only investors who understand those risks, and who are able to sustain the costs and financial losses that may be associated with options trading should participate in the listed options markets."); F.J. Kaufman and Co., 50 S.E.C. 164, 165 n.1, 1989 SEC LEXIS 2376, at *2 n.l (1989) ("The effect of trading on margin is to leverage any position so that the systematic and unsystematic risks are both greater per dollar of investment.").

      52. Regulatory Notice 11-25, at 7.

      53. Firms are reminded, however, that copies of all communications relating to their business as such and memoranda of brokerage orders are required to be preserved for three years. See SEA Rules 17a-3(a)(6) and 17a-4(b)(l) and (b)(4).

      54. For an expanded discussion of this issue, see Regulatory Notice 11-25, at 3–4. See also supra note 3.

      55. See DBCC v. Hurni, No. C07960035, 1997 NASD Discip. LEXIS 15, at *9 (NBCC Mar. 7, 1997) ("A broker has a duty to make recommendations based upon the information he has about his customer, rather than based on speculation."); see also Stein, 56 S.E.C. at 114, 2003 SEC LEXIS 338, at *11 (explaining that, when a customer refuses to supply information, a broker must "make recommendations only on the basis of the concrete information that the customer did supply and not on the basis of guesswork"); Dambro, 51 S.E.C. at 516–17, 1993 SEC LEXIS 1521, at *9–10 (same).

      56. See Regulatory Notice 11-25, at 3–4.

      57. See Regulatory Notice 11-25, at 4.

      58. FINRA also previously stated that a customer with multiple accounts at a single firm could have different investment profiles or investment-profile factors (e.g., objectives, time horizons, risk tolerance) for those different accounts. FINRA cautioned, however, that a firm should evidence a customer's intent to use different investment profiles or factors for the different accounts. In addition, FINRA explained that, where a firm allows a customer to use different investment profiles or factors for different accounts rather than using a single customer profile for all of the customer's accounts, a firm could not borrow profile factors from the different accounts to justify a recommendation that would not be appropriate for the account for which the recommendation was made. See Regulatory Notice 11-25, at 5.

      59. See supra note 55 and cases cited therein.

      60. Firms should note, however, that SEA Rule 17a-3 requires that, for each account with a natural person as a customer or owner, a broker-dealer generally must create a record that includes, among other things, the account's investment objectives. See SEA Rules 17a-3(a)(17)(i). See also supra notes 12 and 49.

      61. FINRA Rule 2111.05(a). The new rule explains that, "[i]n general, what constitutes reasonable diligence will vary depending on, among other things, the complexity of and risks associated with the security or investment strategy and the [broker-dealer's] familiarity with the security or investment strategy. A [broker-dealer's] reasonable diligence must provide [it] with an understanding of the potential risks and rewards associated with the recommended security or strategy." Id.

      62. That is true under case law addressing the predecessor suitability rule as well. See Cody, 2011 SEC LEXIS 1862, at *30–32 (stating that a broker can violate reasonable-basis suitability by failing to perform a reasonable investigation of the recommended product and to understand its risks even though the recommendation is otherwise suitable); Siegel, 2008 SEC LEXIS 2459, at *28–30 (finding violation for failing to perform reasonable diligence to understand the security). See also Notice to Members 04-30, at 341 (Apr. 2004) (discussing broker-dealers' reasonable-basis obligations regarding bonds and bond funds); Notice to Members 03-71, at 767 (Nov. 11, 2003) ("[T]he reasonable-basis suitability analysis can only be undertaken when a [broker-dealer] understands the investment products it sells. Accordingly, a [firm] must perform appropriate due diligence to ensure that it understands the nature of the product, as well as the potential risks and rewards associated with the product.").

      63. FINRA previously responded to a question asking whether, for purposes of compliance with the reasonable-basis obligation, it is sufficient that a firm's "product committee," which conducts due diligence on products, has approved a product for sale. FINRA explained that, although due diligence reviews by such committees can be extremely beneficial (see, e.g., Notice to Members 05-26 (Apr. 2005)), a firm's approval of a product for sale does not necessarily mean that an associated person has complied with the reasonable-basis obligation. "That is, even if a firm's product committee has approved a product for sale, an individual broker's lack of understanding of a recommended product or strategy could violate the obligation, notwithstanding that the recommendation is suitable for some investors." Regulatory Notice 11-25, at 8.

      FINRA stated that "[a] firm should educate its associated persons on the potential risks and rewards of the products that the firm permits them to recommend. In general, an associated person may rely on a firm's fair and balanced explanation of the potential risks and rewards of a product." Id. FINRA cautioned, however, that, "if the associated person remains uncertain about the potential risks and rewards of a product, or has reason to believe that the firm failed to address a particular issue or has done so in an incomplete or inaccurate manner, then the associated person would need to engage in further inquiry before recommending the product." Id.

      64. A broker-dealer would have actual control, for instance, if it has discretionary authority over the account. See Peter C. Bucchieri, 52 S.E.C. 800, 805 n.11, 1996 SEC LEXIS 1331, at *12 n.11 (1996). A broker-dealer would have de facto control over an account if the customer routinely follows the broker-dealer's advice "because the customer is unable to evaluate the broker's recommendations and [to] exercise independent judgment." Harry Cliksman, 54 S.E.C. 471, 475, 1999 SEC LEXIS 2685, at *7 (1999).

      65. FINRA Rule 2111.05(c).

      66. Turnover rate is calculated by "dividing the aggregate amount of purchases in an account by the average monthly investment. The average monthly investment is the cumulative total of the net investment in the account at the end of each month, exclusive of loans, divided by the number of months under consideration." Pinchas, 54 S.E.C. at 339–40 n.14, 1999 SEC LEXIS 1754, at *17 n.14. Turnover rates between three and six may trigger liability for excessive trading. See Cody, 2011 SEC LEXIS 1862, at *48 (finding turnover rate of three provided support for excessive trading); Dep't of Enforcement v. Stein, No. C07000003, 2001 NASD Discip. LEXIS 38, at *17 (NAC Dec. 3, 2001) ("Turnover rates between three and five have triggered liability for excessive trading"). A turnover rate greater than six creates a presumption that the trading was excessive. See Craighead v. E.F. Hutton & Co., 899 F.2d 485, 490 (6th Cir. 1990); Arceneaux v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 767 F.2d 1498, 1502 (11th Cir. 1985).

      67. The cost-to-equity ratio represents "the percentage of return on the customer's average net equity needed to pay broker-dealer commissions and other expenses." Pinchas, 54 S.E.C. at 340, 1999 SEC LEXIS 1754, at *18. Cost-to-equity ratios as low as 8.7 have been considered indicative of excessive trading, and ratios above 12 generally are viewed as very strong evidence of excessive trading. See Cody, 2011 SEC LEXIS 1862, at *49 &*55 (finding cost-to-equity ratio of 8.7 percent excessive); Thomas F. Bandyk, Exchange Act Rel. No. 35415, 1995 SEC LEXIS 481, at *2–3 (Feb. 24, 1995) ("His excessive trading yielded an annualized commission to equity ratio ranging between 12.1% and 18.0%.").

      68. In-and-out trading refers to the "sale of all or part of a customer's portfolio, with the money reinvested in other securities, followed by the sale of the newly acquired securities." Costello v. Oppenheimer & Co., 711 F.2d 1361, 1369 n.9 (7th Cir. 1983). A broker's use of in-and-out trading ordinarily is a strong indicator of excessive trading. Id.

      69. See FINRA Rule 2111 (b).

      70. See FINRA Rule 4512(c).

      71. Compare FINRA Rules 2111(b) and 4512(c) with NASD IM-2310-3.

      72. FINRA Rule 2111 (b).

      73. FINRA Rule 2111 (b). The institutional-customer exemption does not apply to reasonable-basis and quantitative suitability. See id.; Regulatory Notice 11-02, at 4–5. Quantitative suitability likely will apply in more limited circumstances with regard to institutional customers than it does as to retail customers. The factors that must exist for an institutional customer to qualify for the exemption may, depending on the facts, negate some of the elements relevant to a showing of a broker's "control" over the account. That will not always be the case, however. See Pryor, McClendon, Counts & Co., Exchange Act Rel. No. 45402, 2002 SEC LEXIS 284, at *20–21 & n.10 (Feb. 6, 2002) (holding that the defendant broker "controlled" the account because he essentially was a co-conspirator with the institutional customer's investment officer, who was authorized to place orders fort he institutional customer's account).

      74. See Regulatory Notice 11-02, at 8 n.24.

      75. FINRA Response to Comments, Oct. 21, 2010, at 10.

    • 12-24 FINRA Reminds Firms of Rule 5131(d)(4)'s Prohibition on Accepting Market Orders for the Purchase of New Issues Prior to the Commencement of Trading on the Secondary Market

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      New Issue Allocations and Distributions

      Regulatory Notice
      Type of Notice

      Guidance
      Suggested Routing

      Compliance
      Legal
      Systems
      Trading and Market Making
      Training
      Key Topics

      Allocations
      Initial Public Offerings
      Investment Banking
      Market Orders
      New Issues
      NMS Stocks
      OTC Equity Securities
      Spinning
      Referenced Rules & Notices

      FINRA Rule 5130
      FINRA Rule 5131
      Regulatory Notice 10-60
      Regulatory Notice 11-29

      Executive Summary

      This Notice reminds firms that FINRA Rule 5131(d)(4) prohibits firms from accepting a market order for the purchase of shares in a new issue in the secondary market prior to the commencement of trading of such shares in the secondary market.

      The text of the rule can be found in the online FINRA Manual.

      Questions regarding this Notice may be directed to Racquel Russell, Assistant General Counsel, Office of General Counsel, at (202) 728-8363.

      Background and Discussion

      New issues are inherently more volatile than securities with an established public trading history. Given the absence of an established trading market, the potential exists for a wide variance between the public offering price of a new issue and the price at which trading on the secondary market commences. As a result, investors who place market orders for an IPO may find their orders filled at prices beyond their reasonable expectations, and such transactions may further contribute to the unconstrained increase in the price of a new issue in the secondary market.

      To protect against this occurrence, paragraph (d)(4) of Rule 5131 prohibits members from accepting a market order for the purchase of shares of a new issue in the secondary market prior to the commencement of trading of such shares in the secondary market. FINRA believes that requiring investors to place limit orders prior to the commencement of trading serves the dual purposes of protecting investors and facilitating price discovery. This rule, which was announced in FINRA Regulatory Notices 10-60 and 11-29, became effective on September 26, 2011.

      For more information on Rule 5131, see rule filing SR-NASD-2003-140.

    • 12-23 FINRA Requests Comment on Proposed Supplementary Schedule for Derivatives and Other Off-Balance Sheet Items; Comment Period Expires: June 4, 2012

      View PDF

      Supplemental FOCUS Information

      Regulatory Notice
      Type of Notice

      Request for Comment
      Suggested Routing

      Compliance
      Finance
      Legal
      Operations
      Regulatory Reporting
      Senior Management
      Key Topics

      FOCUS Reporting
      Referenced Rules & Notices

      FINRA Rule 4524

      Executive Summary

      On February 9, 2012, the SEC approved FINRA Rule 4524 (Supplemental FOCUS Information), which requires each firm, as FINRA shall designate, to file such additional financial or operational schedules or reports as FINRA may deem necessary or appropriate for the protection of investors or in the public interest as a supplement to the FOCUS Report.1 FINRA requests comment on one such proposed schedule, a supplementary schedule for derivatives and other off-balance sheet items.

      The proposed supplementary schedule for derivatives and other off-balance sheet items (including instructions to the form) is set forth in Attachment A.

      Questions concerning this Notice should be directed to:

      •    Kris Dailey, Vice President, Risk Oversight & Operational Regulation (ROOR), at (646) 315-8434;
      •    Marshall Levinson, Vice President, ROOR, at (646) 315-8453; or
      •    Matthew E. Vitek, Assistant General Counsel, Office of General Counsel, at (202) 728-8156.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by June 4, 2012.

      Member firms and other interested parties can submit their comments using the following methods:

      •   Emailing comments to pubcom@finra.org; or
      •   Mailing comments in hard copy to:

      Marcia E. Asquith
      Office of the Corporate Secretary
      FINRA
      1735 K Street, NW
      Washington, DC 20006-1506

      To help FINRA process and review comments more efficiently, persons should use only one method to comment on the proposal.

      Important Notes: The only comments that FINRA will consider are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the FINRA website. Generally, FINRA will post comments as they are received.2

      Before becoming effective, a proposed rule change must be authorized for filing with the Securities and Exchange Commission (SEC) by the FINRA Board of Governors, and then must be filed with the SEC pursuant to Section 19(b) of the Securities Exchange Act of 1934 (SEA).3

      Background & Discussion

      FINRA Rule 4524 (Supplemental FOCUS Information) requires each firm, as FINRA shall designate, to file such additional financial or operational schedules or reports as FINRA may deem necessary or appropriate for the protection of investors or in the public interest as a supplement to the FOCUS Report. Pursuant to this rule, FINRA is proposing to adopt a supplemental schedule to capture important information that is not otherwise reported on certain firms' balance sheets. To that end, the proposal requires all carrying and clearing firms to file with FINRA a proposed Derivatives and Other Off-Balance Sheet Items Schedule (OBS) within 22 business days of the end of each calendar quarter.

      In the aftermath of the financial crisis, FINRA began to closely monitor firms' levels of leverage and available liquidity to meet their funding needs and began to collect certain additional information from certain carrying and clearing firms with regard to their proprietary positions, financing transactions and certain off-balance sheet transactions. In proposing the OBS, FINRA's aim is to obtain more comprehensive and consistent information regarding carrying and clearing firms' off-balance sheet assets, liabilities and other commitments. This information will permit FINRA to assess more effectively on an ongoing basis the potential impact off-balance sheet activities may have on carrying and clearing firms' net capital, leverage and liquidity, and ability to fulfill their customer protection obligations.

      The proposed OBS would require firms to report their gross exposures in financing transactions (e.g., reverse repos, repos and other transactions that are otherwise netted under generally accepted accounting principles, reverse repos and repos to maturity and collateral swap transactions), interests in and exposure to Variable Interest Entities, non-regular way settling transactions (including to be announced or TBA securities and delayed settlement/delivery transactions), underwriting and other financing commitments, and gross notional amounts in centrally cleared and non-centrally cleared derivative contracts involving equities, commodities, interest rates, foreign exchange derivatives and credit default swaps.

      Request for Comment

      While FINRA is interested in receiving comments on all aspects of the proposed OBS, FINRA seeks specific comment on whether there is a category of carrying or clearing firms that should not be required to file the proposed OBS based upon de minimis off-balance sheet activity. The comment period expires on June 4, 2012.

      Following FINRA's receipt of comments on the proposed OBS in response to this Notice, in accordance with the requirements of FINRA Rule 4524, FINRA will file the proposed OBS with the SEC pursuant to Exchange Act Section 19(b).


      1 See Securities Exchange Act Release No. 66364 (February 9, 2012), 77 FR 8938 (February 15, 2012) (Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 2; File No. SR-FINRA-2011-064).

      2 FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Persons should submit only information that they wish to make publicly available. See NTM 03-73 (November 2003) (NASD Announces Online Availability of Comments) for more information.

      3 See SEA Section 19 and rules thereunder. After a proposed rule change is filed with the SEC, the proposed rule change generally is published for public comment in the Federal Register. Certain limited types of proposed rule changes, however, take effect upon filing with the SEC. See SEA Section 19(b)(3) and SEA Rule 19b-4.


      Attachment A

      Supplemental Quarterly Schedule To Focus Report

      Derivatives And Other Off-Balance Sheet Items

      General Instructions

      1. Commitments
      A. Securities Underwriting

      Report the market value of open contractual commitments at month-end, including both registered and non-registered issuances.

      Note: Exclude U.S. Treasuries and direct obligations of U.S. Federal Agencies.
      B. Financing commitments not included on lines 3F or 3G

      Report the dollar amount of any other commitments to lend funds that haven't been identified in lines 3F or 3G including margin or other undrawn loan commitments.
      2. Variable Interest Entities (VIEs)
      A. Unconsolidated VIEs

      Report the gross amounts of assets and liabilities of unconsolidated VIEs.
      B. Maximum exposure to loss relating to unconsolidated VIEs

      The maximum exposure to loss assumes all assets in the unconsolidated VIEs are worthless and includes potential losses associated with off-balance sheet commitments such as unfunded liquidity commitments and other contractual arrangements.

      Memo item: Investment in unconsolidated VIEs

      Report any investment(s) that have been included on the balance sheet for any entity(ies) whose assets and liabilities are included in line 2A above.
      C. Maximum exposure to loss relating to consolidated VIEs

      Report the maximum exposure to loss in consolidated VIEs including retained interests and other exposures (e.g., derivatives and liquidity commitments).
      3. Off-Balance Sheet Financing Transactions
      A. Reverse Repos and Repos offset pursuant to ASC 210-20-45-11

      Report the gross contract value that was netted pursuant to ASC 210-20-45-11.

      Note: Include the gross contract value of Buy/Sell-backs and Sell/Buy-backs that were netted pursuant to ASC 210-20-45-11.
      B. Transactions offset pursuant to ASC 210-20-45-1

      Report the gross contract value of transactions that have been netted pursuant to ASC 210-20-45-1.
      C. Reverse Repos/Repos to maturity pursuant to ASC 860-10-40-5

      Report the gross contract value of Reverse Repo or Bonds Borrowed contracts (as a debit) and the gross contract value of Repos or Bonds Loaned contracts (as a credit) that were de-recognized from the balance sheet pursuant to ASC 860-10-40-5.
      D. Securities Borrowed vs. Pledge agreements

      Report the gross collateral market value of Non-Cash Securities Borrows and Non-Cash Securities Loans agreements not included on the balance sheet pursuant to ASC 860.
      E. Reverse Repo vs. Pledge agreements

      Report the gross collateral market value of Non-Cash Reverse Repo and Repurchase agreements not included on the balance sheet pursuant to ASC 860.
      F. Forward starting Reverse Repurchase and Securities Borrowing agreements

      Report the gross contract value of the on-side leg of forward starting Reverse Repo and Securities Borrow transactions.
      G. Forward starting Repurchase and Securities Lending agreements

      Report the gross contract value of the on-side leg of forward starting Repurchase and Securities Lending transactions.
      H. Other

      Report any other off-balance sheet financing agreements not otherwise included above.
      4. Non-Regular Way Settling Trades
      A. When Issued Securities

      Report the gross long and short market values of securities positions purchased and sold on a "When Issued" basis and not otherwise included on the balance sheet.
      B. Delayed Delivery/Delayed Settlement

      Report the gross long and short market values of all unsettled trades transacted on a Delayed Delivery/Delayed Settlement basis, not otherwise included on the balance sheet.
      C. To Be Announced (TBA) transactions

      Report the gross long and short market values of all unsettled TBA transactions in securities issued by Freddie Mac (FHLMC), Fannie Mae (FNMA) and Ginnie Mae (GNMA).
      D. TBA related fails not included on balance sheet

      Report the gross long and short market value of TBA transactions that have passed their contracted settlement date and are not otherwise included on the balance sheet.
      E. Other

      Report the gross long and short market value of any other Non-Regular Way settling transactions not otherwise included on the balance sheet or in 4A through D above.
      5. Forwards
      A. Foreign Exchange

      Report the gross amount stated in $USD, of all foreign exchange forwards committing the firm to purchase or sell foreign (non-$USD) currencies for a $USD exchange, where the predominant risk is foreign exchange risk.

      The term "foreign exchange forward" means a transaction that solely involves the exchange of two different currencies on a specific future date at a fixed rate agreed upon on the inception of the contract covering the exchange.

      Note: For purposes of the OBS, a foreign exchange forward is a contract with a settlement date greater than two business days following the trade date. (i.e., > T+2).
      B. Other

      Report the gross purchase and sale of other forward settling transactions, not otherwise included in the balance sheet.
      FINRA FORM OBS SUPPLEMENTAL QUARTERLY SCHEDULE TO FOCUS REPORT
      DERIVATIVES AND OTHER OFF-BALANCE SHEET ITEMS
      (Please read instructions before completing Form)
      NAME OF BROKER-DEALER
      _____________________________13
      SEC FILE NO.
      _____________________________14
      ADDRESS OF PRINCIPAL PLACE OF BUSINESS

      _____________________________20
      (No. and Street)
      FIRM ID NO.
      __________________________15
      ______________________21 ______________________22______________________23
      (City) (State) (Zip Code)
      FOR PERIOD ENDING (MM/DD/YY)
      ________________________________24
      NAME OF PERSON COMPLETING THIS REPORT____________________________10001
      TELEPHONE NO. OF PERSON COMPLETING THIS REPORT_______________________________________10002
      All reporting is in millions Gross Amounts Debit or Long Market Value Gross Amounts
      Credit or Short
      Market Value
      1 Commitments    
      A. Securities Underwriting
      $________________ 10100 $______________ 10101
      B. Financing commitments not included on lines 3F or 3G
      $________________ 10102 $______________ 10103
      2 Variable Interest Entities (VIEs)    
      A. Unconsolidated VIEs
      $________________ 10104 $______________ 10105
      B. Maximum exposure to loss relating to unconsolidated VIEs
      Memo item: Investment in unconsolidated VIEs...$ ______10108
      $________________ 10106 $______________ 10107
      C. Maximum exposure to loss relating to consolidated VIEs
      $________________ 10110 $______________ 10111
      3 Off-Balance Sheet Financing Transactions    
      A. Reverse Repos and Repos offset pursuant to ASC 210-20-45-11
      $________________ 10112 $______________ 10113
      B. Transactions offset pursuant to ASC 210-20-45-1
      $________________ 10114 $______________ 10115
      C. Reverse Repos/Repos to maturity pursuant to ASC 860-10-40-5
      $________________ 10116 $______________ 10117
      D. Securities Borrowed vs. Pledge agreements
      $________________ 10118 $_____________ 10119
      E. Reverse Repo vs. Pledge agreements.
      $________________ 10120 $______________ 10121
      F. Forward starting Reverse Repurchase and Securities Borrowing agreements
      $______________ 10122 $______________ 10123
      G. Forward starting Repurchase and Securities Lending agreements
      $________________ 10124 $________________ 10125
      H. Other
      $________________ 10126 $________________ 10127
      4 Non-Regular Way Settling Trades    
      A. When Issued Securities
      $________________ 10128 $________________ 10129
      B. Delayed Delivery/Delayed Settlement
      $______________ 10130 $______________ 10131
      C. To Be Announced (TBA) transactions
      $______________ 10132 $______________ 10133
      D. TBA related fails not included on balance sheet
      $________________ 10134 $________________ 10135
      E. Other
      $________________ 10136 $________________ 10137
      5 Forwards    
      A. Foreign Exchange
      $________________ 10138 $________________ 10139
      B. Other
      $________________ 10140 $________________ 10141



      SUPPLEMENTAL QUARTERLY SCHEDULE TO FOCUS REPORT
      DERIVATIVES AND OTHER OFF-BALANCE SHEET ITEMS
      For the period (MMDDYY) ending ________________ 3932

      Derivatives
        Interest
      Rate
      Contracts
      Foreign
      Exchange
      Contracts
      Equity
      Derivative
      Contracts
      Commodity and other Contracts
      6. Total gross notional amount $_________ 10142 $_________ 10143 $_________ 10144 $_________ 10145
      7. Dollar amount in 6 that is centrally cleared $_________ 10146 $_________ 10147 $_________ 10148 $_________ 10149
      8. Gross Mark-to-Market receivable $_________ 10150 $_________ 10151 $_________ 10152 $_________ 10153
      9. Gross Mark-to-Market payable $_________ 10154 $_________ 10155 $_________ 10156 $_________ 10157
      Credit Derivatives
        Sold Protection Purchased Protection
      10. Total gross notional amount $_________ 10158 $_________ 10159
      11. Dollar amount in 10 that is centrally cleared $_________ 10160 $_________ 10161
      12. Gross Mark-to-Market receivable $__________ 10162 $__________ 10163
      13. Gross Mark-to-Market payable $__________ 10164 $__________ 10165

    • 12-22 New Electronic Filing System for Public Offering Filings

      View PDF

      Corporate Financing Filings

      Regulatory Notice
      Type of Notice

      Regulatory Notice
      Suggested Routing

      Compliance
      Corporate Finance
      Legal
      Senior Management
      Key Topics

      COBRADesk
      Corporate Financing
      Exemption from Timely Filing Requirements
      Public Offering Filings
      Public Offering Underwriting Terms
      Referenced Rules & Notices

      FINRA Rule 2310
      FINRA Rule 5110
      FINRA Rule 5121
      Notice to Members 02-26

      Executive Summary

      On June 4, 2012, FINRA will introduce a new public offering filing system for public offerings that are required to be filed under FINRA Rules 5110, 5121 and 2310 (Corporate Financing Rules). The new Public Offering System will provide operational efficiencies and useful enhancements for filers. The new system will replace COBRADesk, which has been operational since 1999 and will be retired on June 20, 2012.1 This Notice provides information on the transition period to the new system and describes certain process enhancements for filing shelf offerings.

      To avoid any potential inaccuracies in the translation of filings submitted through the COBRADesk application, FINRA will not migrate data from COBRADesk to the new system. COBRADesk and the data therein will no longer be available to firms after June 20, 2012. In addition, offerings that were filed in COBRADesk and that are under review as of this date must be refiled in the new system.

      Firms may address inquiries about refiling to the staff member in the Corporate Financing Department who is reviewing the offering. No additional fees will apply to any offering that is refiled in the Public Offering System if the fees were previously paid when the offering was filed in COBRADesk.2

      Questions regarding this Notice may be directed to:

      •    Joseph E. Price, Senior Vice President, Corporate Financing/Advertising Regulation, at (240) 386-4642;
      •    Paul M. Mathews, Director, Corporate Financing, at (240) 386-4639; Eugene Buchanan, Associate Director, Corporate Financing, at (240) 386-4626; or
      •    Joani Ward, Assistant Director, Corporate Financing, at (240) 386-4623.

      Background

      FINRA's Corporate Financing Rules require member firms to file information about public offerings of securities in which they participate, subject to certain filing exemptions including exemptions for offerings of "seasoned issuers," investment grade securities and registered investment companies. Currently, firms file their offerings through FINRA's COBRADesk system.3 FINRA reviews the filings and issues a "no objections" opinion if the terms and arrangements governing member firms' participation and disclosure regarding those terms and arrangements appear to comply with the rules' requirements. A member firm must receive a "no objections" opinion before it may participate in a distribution of securities to investors.

      FINRA's review provides firms with regulatory guidance as to what constitutes fair and reasonable underwriting arrangements and complements the SEC's registration process for issuers. The SEC defers to FINRA to establish reasonable levels of underwriting compensation and adequate disclosure of the underwriting terms and conflicts. The SEC staff generally will not declare an issuer's registration statement to be effective unless the underwriters have obtained a "no objections" opinion from FINRA.

      In June 2012, FINRA will replace COBRADesk with the new system.

      Public Offering System Implementation and Transition Timeline

      The new Public Offering System will be available for all types of filings on June 4, 2012.

      Dates Action Required/Suggested
      Through June 20, 2012 Transfer and archive data from filings submitted in COBRADesk
      May 15 through June 1 Firms may request an exemption from the timely filing requirements until the new system is available on June 4
      May 31 Last day to file a new public offering in COBRADesk
      June 1 New public offering filings will no longer be accepted in COBRADesk

      Please contact Corporate Financing to make arrangements regarding any expedited offering that must be filed on June 1 (e.g., overnight "bought deals", SDCs,WKSIs) at corpfin@finra.org.
      June 4 New Public Offering System available for all types of filings
      June 11 End of the exemption period from the timely filing requirements
      June 20 Last day to retrieve data from COBRADesk

      New Features

      The new Public Offering System includes features that are designed to improve the overall filing experience. Among the new features is the Deal Filing Cabinet, a dashboard-like display that lists all of a firm's filings with key information about the deal, the status of the review and the assigned FINRA staff. In addition, firms can search all their filings using a keyword search function, filter and sort results based on specific criteria, review all correspondence related to a specific filing and quickly identify outstanding regulatory issues the firm must address.

      The new system makes the filing process more intuitive and user friendly by displaying new questions based on answers provided. Users can also print a list of "errors" that must be addressed before submitting the filing and can also view FINRA's Corporate Financing Rules.

      The system also will improve the filing process for offerings registered with the SEC pursuant to Rule 415 under the Securities Act of 1933 (shelf offerings) and shelf takedown offerings (takedowns). The filing process for shelf offering filings in the system will expand the current "same day clearance" (SDC) process in COBRADesk to all shelf offerings except those for which a firm voluntarily elects to have the takedown filing reviewed by Corporate Financing.

      COBRADesk Retirement

      To facilitate an orderly transition to the new system, FINRA will not accept new filings in COBRADesk after May 31, 2012. After June 20, 2012, COBRADesk will no longer be available in any capacity. Firms therefore will no longer have access to any information that was filed through this system. As noted above, firms should retrieve any data that they may need access to in the future from COBRADesk no later than June 20, 2012.

      Corporate Financing intends to work diligently to help firms avoid refiling in the new system offerings that had already been filed in COBRADesk. To ensure that refiling will not be required, a firm must file its offering in COBRADesk before May 31, 2012, and must have received clearance by Corporate Financing by June 20, 2012. FINRA will continue to review filings that were made on COBRADesk through June 20, 2012, when COBRADesk will be retired. While Corporate Financing will review filings as expeditiously as possible, firms that are considering whether to file in COBRADesk close to the May 31 deadline should consider the possibility that the offering will not be cleared by Corporate Financing by June 20, in which case refiling in the new system will be necessary.

      Amendments and Updates

      FINRA currently receives various types of updates to filings, including responses to comments issued by FINRA staff, amendments to underwriting documents, final prospectuses and post-effective amendments to registration statements. These updates are typically filed to comply with the applicable requirements of the Corporate Financing Rule.

      If an offering is filed in COBRADesk before May 31, 2012, and a subsequent update would not change the underwriting terms and arrangements or the information provided to FINRA as part of its review of those arrangements, and would not change the size of the offering, then filing the update in the new system will not be necessary. Instead, firms may send the update by email to CFupdates@finra.org. FINRA will provide instructions for emailing these updates to filings submitted through COBRADesk on its website along with a user guide for the Public Offering System.

      However, if a subsequent update would change the underwriting terms and arrangements, the information provided to FINRA as part of its review of those arrangements, or the offering size, unless Corporate Financing has cleared the offering with the update before June 20, the offering will have to be refiled with the update in the new system.

      Shelf Offerings

      On May 31, FINRA will transfer the file IDs of all base shelf prospectuses that have been cleared by that date to the new system. This will enable subsequent shelf takedowns to be filed in the new system without requiring firms to refile the base prospectuses. As most base shelf offerings receive same day clearance, Corporate Financing expects that virtually all of the base prospectuses filed by that date will be in the new system and available for takedowns once the new system is available on June 4. However if a base shelf prospectus was filed but not cleared by May 31, it must be refiled in the new system and be cleared before a takedown can be filed. All shelf takedowns must be filed in the Public Offering System after May 31.

      Assistance to Firms

      FINRA has provided instructions for printing filings submitted through COBRADesk and saving and exporting files in the log-in page for COBRADesk. This information will also be provided by email upon request to corpfin@finra.org.

      FINRA is providing online training before the new system is implemented and will post additional information on its website. Firms may address additional inquiries about refiling to the Corporate Financing staff reviewing the offering. No additional fees will apply to any offering that is refiled in the new system if all necessary fees were paid when the offering was filed in COBRADesk.

      Exemption Available From Timely Filing Requirement

      The Corporate Financing Rule requires that an offering and any updates be filed with Corporate Financing within one business day of the filing with the SEC or other regulatory authority. To accommodate firms that wish to delay their filing with FINRA until the new system is available, FINRA will grant an exemption from this timely filing requirement to any member firm that elects to wait and file in the Public Offering System once it becomes available on June 4, 2012. The exemptive period begins on May 15, 2012, and filers receiving an exemption have until June 11, 2012, to enter filings in the new system.

      Firms are reminded that the exemption is to assist with the transition to the new system, and will not shorten the regulatory review process.

      Firms that wish to obtain an exemption should email FINRA at CFexemption@finra.org, notifying the staff and providing basic information identifying the member firm and the offering.4

      The recently enacted JOBS Act permits emerging growth companies to file their initial public offerings confidentially with the SEC.5 The timely filing requirements in the Corporate Financing Rule apply to confidential filings as well as public offerings filed with the SEC through EDGAR. All filings with FINRA pursuant to the Corporate Financing Rules are nonpublic. COBRADesk has a modified filing process for offerings that have been filed confidentially with the SEC and are not yet available in EDGAR. That process will continue to be available in the Public Offering System.

      Responsibility for Filing

      The majority of COBRADesk filings are currently made by outside counsel on behalf of member firms. While a member firm may authorize another party to file with FINRA on its behalf, the member firm is required to ensure the accuracy and completeness of all information filed with FINRA in accordance with the rule. Member firms are reminded to review the content of all filings for which they are responsible and to ensure they have procedures in place to complete this review before submission to FINRA even if the filing is made by a third party.

      Member firms will access the new system through FINRA's Firm Gateway®. Non-member filers (e.g., outside counsel) must receive entitlement in order to access the new system. The entitlement process may take 48 hours from the time of the request, so filers should ensure they have access to the system before attempting to file. Entitlement information and forms are available on FINRA's website.


      1 COBRADesk was announced in Notice to Members 99-41. Rules 5110, 5121 and 2310 are interrelated and share definitions, filing provisions and other requirements.

      2 Firms will be prompted for the COBRADesk file ID of the previous filing when they create the filing in the Public Offering System. While there will be no new fees associated with refiling an offering in the new system, if an update increases the size of an offering, an additional filing fee may be due pursuant to the current fee structure in Section 7 of Schedule A to the FINRA By-Laws.

      3 In 2002, the SEC approved amendments to the rules to require that members file proposed public offerings using FINRA's electronic filing system. See Notice to Members 02-26. The amendments also provided that documents filed with the SEC through its Electronic Data Gathering and Retrieval (EDGAR) system are treated as filed with FINRA. As a practical matter, such documents must be linked through entry of the company's accession number in COBRADesk. The requirement to link to SEC filed documents will continue in the new FINRA filing system.

      4 Emailed requests for the exemption should include: (i) name of the issuer, (ii) name of the lead managing underwriter or FINRA member firm responsible for submitting the filing, (iii) SEC registration number where applicable, (iv) identity and contact information of the person requesting the exemption and their relationship to the FINRA member and (v) the anticipated effective or pricing date.

      5 On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act) which provides that "emerging growth companies" (generally issuers with less than $1 billion in annual revenues) prior to their initial public offering may confidentially submit to the SEC a draft registration statement for nonpublic review by the SEC staff, not later than 21 days before the date the issuer conducts a road show, as that term is defined in section 230.433(h)(4) of title 17 of the Code of Federal Regulations.

    • 12-21 SEC Approves Amendments to Align FINRA Rules With Statutes That Invalidate Predispute Arbitration Agreements for Whistleblower Disputes; Effective Date: May 21, 2012

      View PDF

      Arbitration of Whistleblower Disputes

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Key Topics

      Arbitration
      Code of Arbitration Procedure
      Form U4
      Predispute Arbitration Agreement
      Whistleblower Dispute
      Referenced Rules & Notices

      FINRA Rule 1010
      FINRA Rule 2263
      FINRA Rule 13201

      Executive Summary

      The SEC approved amendments to FINRA Rule 13201 of the Code of Arbitration Procedure for Industry Disputes (Industry Code) to provide that a dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated under the Industry Code.1 Parties may arbitrate such a dispute only if they have agreed to arbitrate it after the dispute arose. The rule change aligns the Industry Code with statutes that invalidate predispute arbitration agreements for whistleblower disputes. The rule change also makes a conforming change to FINRA Rule 2263 (Arbitration Disclosure to Associated Persons Signing or Acknowledging Form U4).

      The amendments to Rule 13201 are effective on May 21, 2012, for all whistleblower disputes arising under a statute that prohibits the use of predispute arbitration agreements, regardless of when the predispute arbitration agreement was executed. The amendments do not apply to any pending matters at FINRA. The conforming change to FINRA Rule 2263 also is effective on May 21, 2012.

      The text of the amendments is set forth in Attachment A.

      Questions concerning this Notice should be directed to:

      •    Richard W. Berry, Senior Vice President and Director of Case Administration and Regional Office Services, Dispute Resolution, at (212) 858-4307 or richard.berry@finra.org; or
      •    Margo A. Hassan, Assistant Chief Counsel, Dispute Resolution, at (212) 858-4481 or margo.hassan@finra.org.

      Background & Discussion

      The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)2 amended the Sarbanes-Oxley Act of 2002 (SOX) by adding a new paragraph (e) to 18 U.S.C. § 1514A3 to provide that:

      1. Waiver of Rights and Remedies—The rights and remedies provided for in this section may not be waived by any agreement, policy form, or condition of employment, including by a predispute arbitration agreement.
      2. Predispute Arbitration Agreements—No predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.

      Prior to the Dodd-Frank Act, FINRA required parties to arbitrate SOX whistleblower claims under the Industry Code. In light of the changes set forth in the Dodd-Frank Act that invalidate predispute arbitration agreements in the case of SOX whistleblower claims, FINRA is amending FINRA Rule 13201 of the Industry Code to make clear that parties are not required to arbitrate SOX whistleblower claims. While the main impetus for the rule change is the need to update FINRA staff's stated position on SOX whistleblower claims, FINRA made the rule text broad enough to cover any statutes that prohibit predispute arbitration agreements for whistleblower claims.4

      Rule 13201 of the Industry Code currently provides that a claim alleging employment discrimination, including sexual harassment, in violation of a statute, is not required to be arbitrated under the Industry Code. Such a claim may be arbitrated only if the parties have agreed to arbitrate it, either before or after the dispute arose. FINRA is amending Rule 13201 to add a new provision to provide that a dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated under the Industry Code. The revised rule states that such a dispute may be arbitrated only if the parties have agreed to arbitrate it after the dispute arose.

      FINRA is making a conforming amendment to FINRA Rule 2263, which requires firms to provide each associated person with certain written disclosures regarding the nature and process of arbitration proceedings whenever the firm asks an associated person, pursuant to FINRA Rule 1010 (Electronic Filing Requirements for Uniform Forms), to manually sign a new or amended Form U4, or to otherwise provide written acknowledgment of an amendment to the form. FINRA is amending Rule 2263 to add a disclosure provision stating that a dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated under FINRA rules, and that such a dispute may be arbitrated only if the parties have agreed to arbitrate it after the dispute arose.

      Effective Date

      The amendments to Rule 13201 are effective on May 21, 2012, for all whistleblower disputes arising under a statute that prohibits the use of predispute arbitration agreements, regardless of when the predispute arbitration agreement was executed. The amendments do not apply to any pending matters at FINRA. The conforming change to FINRA Rule 2263 also is effective on May 21, 2012.


      1. See Securities Exchange Act Rel. No. 66575 (March 12, 2012), 77 Federal Register 15824 (March 16, 2012) (File No. SR-FINRA-2011-067).

      2. See Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203 (2010).

      3. See Dodd-Frank Section 922(c)(2), adding 18 U.S.C. § 1514A(e) (Nonenforceability of Certain Provisions Waiving Rights and Remedies or Requiring Arbitration of Disputes).

      4. The Dodd-Frank Act also invalidated predispute arbitration agreements in other whistleblower statutes, including, for example, 7 USCA § 26(n) relating to Commodity Exchange Whistleblower Incentives and Protections.


      Attachment A

      New language is underlined; deletions are in brackets

      Code of Arbitration Procedure for Industry Disputes

      * * * * *

      13201. Statutory Employment Discrimination Claims and Disputes Arising Under a Whistleblower Statute that Prohibits the Use of Predispute Arbitration Agreements
      (a) Statutory Employment Discrimination Claims

      A claim alleging employment discrimination, including sexual harassment, in violation of a statute, is not required to be arbitrated under the Code. Such a claim may be arbitrated only if the parties have agreed to arbitrate it, either before or after the dispute arose. If the parties agree to arbitrate such a claim, the claim will be administered under Rule 13802.
      (b) Disputes Arising Under a Whistleblower Statute that Prohibits the Use of Predispute Arbitration Agreements

      A dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated under the Code. Such a dispute may be arbitrated only if the parties have agreed to arbitrate it after the dispute arose.

      * * * * *

      2263. Arbitration Disclosure to Associated Persons Signing or Acknowledging Form U4

      A member shall provide an associated person with the following written statement whenever the associated person is asked, pursuant to FINRA Rule 1010, to manually sign an initial or amended Form U4, or otherwise provide written (which may be electronic) acknowledgment of an amendment to the Form U4

      The Form U4 contains a predispute arbitration clause. It is in item 5 of Section 15A of the Form U4. You should read that clause now. Before signing the Form U4, you should understand the following:
      (1) You are agreeing to arbitrate any dispute, claim or controversy that may arise between you and your firm, or a customer, or any other person that is required to be arbitrated under the rules of the self-regulatory organizations with which you are registering. This means you are giving up the right to sue a member, customer, or another associated person in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed.
      (2) A claim alleging employment discrimination, including a sexual harassment claim, in violation of a statute is not required to be arbitrated under FINRA rules. Such a claim may be arbitrated at FINRA only if the parties have agreed to arbitrate it, either before or after the dispute arose. The rules of other arbitration forums may be different.
      (3) A dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated under FINRA rules. Such a dispute may be arbitrated only if the parties have agreed to arbitrate it after the dispute arose.
      ([3]4) Arbitration awards are generally final and binding; a party's ability to have a court reverse or modify an arbitration award is very limited.
      ([4]5) The ability of the parties to obtain documents, witness statements and other discovery is generally more limited in arbitration than in court proceedings.
      ([5]6) The arbitrators do not have to explain the reason(s) for their award unless, in an eligible case, a joint request for an explained decision has been submitted by all parties to the panel at least 20 days prior to the first scheduled hearing date.
      ([6]7) The panel of arbitrators may include arbitrators who were or are affiliated with the securities industry or public arbitrators, as provided by the rules of the arbitration forum in which a claim is filed.
      ([7]8) The rules of some arbitration forums may impose time limits for bringing a claim in arbitration. In some cases, a claim that is ineligible for arbitration may be brought in court.

      * * * * *

    • 12-20 Securities Industry/Regulatory Council on Continuing Education Issues Firm Element Advisory Update

      View PDF

      Continuing Education

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Continuing Education
      Legal
      Registration
      Senior Management
      Key Topics

      Continuing Education
      Firm Element
       

      The Securities Industry/Regulatory Council on Continuing Education (Council) has released its Spring 2012 Firm Element Advisory (FEA). The Council produces the FEA to identify regulatory and sales practice topics that firms should consider in their Firm Element training plans. Topics updated or added since the prior FEA are indicated in the document as such.

      The updated FEA is available at: http://www.cecouncil.com/Documents/FEA_Semi_Annual_Update.pdf.

      The FEA topics are not exhaustive and are intended as a guide to firms when they determine what to include in their training plans. Firms should consider the specific nature of their business, clients, products and services when creating their training plans.

      Previous editions of the FEA, as well as a matrix indicating the topics covered in those editions, are available at the Council's website at www.cecouncil.com.

      Questions concerning this Notice should be directed to:

      •    Roni Meikle, Director, Continuing Education, FINRA, at (212) 858-4084.

    • 12-19 FINRA Announces New Electronic Process for Submission of Notice and Information Relating to Distributions Subject to SEC Regulation M; Effective Date: June 4, 2012

      View PDF

      Regulation M

      Regulatory Notice
      Type of Notice

      Guidance
      Suggested Routing

      Compliance
      Corporate Financing
      Executive Representatives
      Legal
      Senior Management
      Trading
      Training
      Key Topics

      Alternative Display Facility
      Distributions
      NMS Stocks
      OTC Equity Securities
      SEC Regulation M
      Securities Offerings
      Trade Reporting
      Unregistered Secondary Distributions
      Referenced Rules & Notices

      FINRA Rule 5190
      FINRA Rule 6275
      FINRA Rule 6282
      FINRA Rule 6380A
      FINRA Rule 6380B
      FINRA Rule 6622
      Regulatory Notice 08-74
      Regulatory Notice 11-40
      SEC Regulation M

      Executive Summary

      FINRA is reminding firms of their notification obligations under FINRA Rules 5190 and 6275(f), and FINRA trade reporting rules relating to distributions that are subject to SEC Regulation M. In addition, FINRA is announcing a new process for the electronic submission of the notice and information required under the rules.

      Effective June 4, 2012, firms are required to make submissions under Rule 5190, Rule 6275(f) and applicable trade reporting rules in accordance with the new electronic submission process. Prior to the effective date, FINRA will provide access to the system for testing purposes.

      Questions regarding this Notice may be directed to:

      •    Scott Trilling, Deputy Director, Market Regulation Department, at (240) 386-5113;
      •    Melissa Springer, Team Leader, Market Regulation Department, at (240) 386-5088;
      •    John Scrofani, Director, NY Equities Section of the Market Regulation Department, at (917) 281-3117;
      •   FINRA's Regulation M Filings General Inquiry Line, at (240) 386-5560; or
      •   Office of General Counsel at (202) 728-8071.

      Background and Discussion

      Under FINRA Rules 5190 and 6275(f), firms must provide FINRA notice and information relating to activities in connection with a distribution subject to SEC Regulation M. For example, under Rule 5190(c), a firm that is participating in a distribution subject to a restricted period under Rule 101 of Regulation M must provide notice to FINRA no later than the business day prior to the first complete trading session of the applicable restricted period, unless later notification is necessary under specific circumstances. Under Rule 6275(f), an ADF Market Maker is required to request excused withdrawal status (and rescission of such status) to comply with an applicable restricted period under Regulation M. Currently, firms submit notice and information to FINRA on the Regulation M Restricted Period Notification Form, Regulation M Trading Notification Form or Regulation M Notice of Intent to Impose a Penalty Bid and/or Effect a Syndicate Covering Transaction Form, as applicable, via email, facsimile or a third-party vendor.1

      In addition, under FINRA trade reporting rules applicable to OTC equity transactions,2 firms are required to provide notice and information to FINRA when they rely on the exception from the trade reporting requirements for transactions that are part of an "unregistered secondary distribution."3 Currently, firms provide such notice and information to FINRA on the Regulation M Trading Notification Form.4

      FINRA is establishing a new process for the electronic submission to FINRA of the notice and information relating to distributions subject to Regulation M required under Rule 5190, Rule 6275(f) and the trade reporting rules. As of June 4, 2012, firms are required to make all such submissions electronically through the FINRA Firm Gateway. After that date, firms can no longer use the forms and processes mentioned above. Through the website, in addition to submitting the required notice and information electronically, firms will be able to view, edit and delete their submissions, as well as view their prior submissions.5

      Access to the new electronic process will require a FINRA user ID and password administered under the FINRA Entitlement Program. Users should contact their firm's Super Account Administrator (SAA) to assist with establishing a new FINRA user ID and password, or they can use an existing user ID and password to access the system. SAAs may contact the FINRA Help Desk at (800) 321-6273 with questions.

      FINRA notes that firms' notification obligations under Rule 5190, Rule 6275(f) and the applicable trade reporting rules have not changed. FINRA is merely establishing a new and enhanced process for submitting notice and information under the rules.

      FINRA further notes that some firms also may have obligations under the Regulation M-related notification rules of a national securities exchange. With respect to NYSE Rule 5190, NYSE Amex Equities Rule 5190, and NYSE Arca Equities Rule 5190, NYSE and NYSE Amex will publish an Information Memo and NYSE Arca will publish a Regulatory Bulletin relating to the use of FINRA's new electronic process for purposes of complying with those rules. With respect to NASDAQ Exchange rules that expressly require notice to be provided to both FINRA and NASDAQ,6 firms must use the new electronic process to make the submission to FINRA. Firms should consult NASDAQ regarding the appropriate forms and processes for submission to NASDAQ under NASDAQ rules.

      As noted above, the effective date for the new electronic submission process is Monday, June 4, 2012. Prior to that date, FINRA will provide access to the system for testing purposes and will make a subsequent announcement to notify firms when the system is available.


      1. Firms should consult Regulatory Notice 08-74 (December 2008) for a more detailed discussion of the notice and information requirements under Rule 5190, as well as the timing of such notice, the parties that must provide such notice, and the forms and submission processes that currently are in use.

      2. OTC equity transactions are transactions effected otherwise than on an exchange in: (1) NMS stocks, which are reported through the Alternative Display Facility (ADF) or a Trade Reporting Facility; and (2) OTC equity securities (i.e., non-NMS stocks), which are reported through the OTC Reporting Facility.

      3. See Rules 6282.01, 6380A.01, 6380B.01 and 6622.02.

      4. Firms should consult Regulatory Notice 11-40 (August 2011) for a more detailed discussion of the notice and information requirements under Rules 6282.01, 6380A.01, 6380B.01 and 6622.02, as well as the timing of such notice, the parties that must provide such notice, and the forms and submission processes that currently are in use.

      5. FINRA notes that while not required under FINRA rules, firms also may submit a request for an Underwriting Activity Report electronically through this system.

      6. See, e.g., NASDAQ Rule 4619(e).

    • 12-18 FINRA Requests Comment on Proposed New In re Expungement Procedures for Persons Not Named in a Customer-Initiated Arbitration; Comment Period Expires: May 21, 2012

      View PDF

      Expungement Procedures

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Senior Management
      Key Topics

      Arbitration
      Central Registration Depository
      Code of Arbitration Procedure
      Dispute Resolution
      Expungement
      Form U4
      Form U5
      Referenced Rules & Notices

      FINRA Rule 2080
      Code of Arbitration Procedure for Customer Disputes, Rule 12000 Series
      Code of Arbitration Procedure for Industry Disputes, Rule 13000 Series
      FINRA Rule 12805
      FINRA 13805
      Regulatory Notice 09-23

      Executive Summary

      FINRA is requesting comment on proposed 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 (unnamed persons), to seek expungement relief by initiating In re1 expungement proceedings at the conclusion of the underlying customer-initiated arbitration case. These allegations must be reported in the same way that customer complaints are reported—to the Central Registration Depository (CRD®) system on Forms U4 or U5. Currently, the Code of Arbitration Procedure for Customer Disputes (Customer Code) and the Code of Arbitration Procedure for Industry Disputes (Industry Code) (together, Codes) do not provide unnamed persons with express procedures to seek expungement of these types of allegations.

      FINRA believes the proposed In re expungement rules and accompanying forms provide unnamed persons with a remedy to seek redress concerning allegations that could impact their livelihoods, yet maintain the protections of FINRA's expungement rules to ensure the integrity of the CRD records, on which the investing public relies.

      The text of the following proposed rules can be found at www.finra.org/ notices/12-18:

      •    Rule 12100(z) (Unnamed Person);
      •    Rule 12806 (Expungement of Customer Dispute Information by Persons Named as Parties);
      •    Rule 13100(cc) (Unnamed Person);
      •    Rule 13806 (Expungement of Customer Dispute Information by Persons Named as Parties); and
      •    Rule 13807 (Expungement of Customer Dispute Information by an Unnamed Person).

      The proposed Notice of Intent to File an In re Expungement Claim (Notice of Intent to File) and Submission Agreement for In re Expungement Claims (In re Submission Agreement) forms are set forth as Attachments A and B, respectively.

      Questions concerning this Notice should be directed to:

      •   Kenneth L. Andrichik, Senior Vice President, Chief Counsel and Director of Mediation and Strategy, Dispute Resolution, at (212) 858-3915 or ken.andrichik@finra.org; or
      •   Mignon McLemore, Assistant Chief Counsel, Dispute Resolution, at (202) 728-8151 or mignon.mclemore@finra.org.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by May 21, 2012.

      Member firms and other interested parties can submit their comments using the following methods:

      •   Emailing comments to pubcom@finra.org; or
      •   Mailing comments in hard copy to:

      Marcia E. Asquith
      Office of the Corporate Secretary
      FINRA
      1735 K Street, NW
      Washington, DC 20006-1506

      To help FINRA process and review comments more efficiently, persons should use only one method to comment on the proposal.

      Important Notes: The only comments that FINRA will consider are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the FINRA website. Generally, FINRA will post comments as they are received.2

      Before becoming effective, a proposed rule change must be authorized for filing with the Securities and Exchange Commission (SEC) by the FINRA Board of Governors, and then must be filed with the SEC pursuant to Section 19(b) of the Securities Exchange Act of 1934 (SEA).3

      Background and Discussion

      In 2009, the SEC approved amendments to Forms U44 and U55 to, among other things, require the reporting of allegations of sales practice violations made against unnamed persons. Specifically, Forms U4 and U5 were amended to add questions to elicit whether the applicant or registered person, though not named as a respondent or defendant in a customer-initiated arbitration, was either mentioned in or could be reasonably identified from the body of the arbitration claim as a registered person who was involved in one or more of the alleged sales practice violations.6

      FINRA has received numerous inquiries from unnamed persons who want these disclosures expunged from their CRD records7 because they believe that the allegations against them in the arbitration claims are unfounded or that they have been incorrectly identified as the person involved in the alleged sales practice violation. Currently, the Customer Code8 and Industry Code9 do not provide unnamed persons with express procedures to seek expungement of these types of allegations.

      Under the Codes, an unnamed person may seek to expunge these "subject of" allegations by:

      •   asking their current or former firm that is a party to the arbitration to request expungement on their behalf;
      •   seeking to intervene in the arbitration filed by the customer; or
      •   initiating a new arbitration case in which the unnamed person requests expungement relief and names the customer or firm as the respondent.

      FINRA believes that the current options do not always adequately address a number of issues that can arise in connection with expungement requests. First, FINRA does not believe it is fair to the unnamed person to rely on the person's current or former firm to request expungement relief on the person's behalf, especially in an adversarial proceeding in which the interests of the unnamed person and firm may not be aligned. Second, FINRA believes that a customer's arbitration case should not be disrupted or delayed to address an issue that may have no bearing on the outcome of the customer's relief requests. Moreover, it may be impractical for the unnamed person to become a party in the customer's arbitration case, as it could expose the person to liability. Finally, if the unnamed person files a new arbitration case to expunge these allegations, FINRA believes that neither the firm nor customer should be required to incur the additional expense of participating as a respondent in a new case.

      For these reasons, FINRA is proposing new (or revised) FINRA Rules 12100(z), 12806, 13100(cc), 13806 and 13807, and new Notice of Intent to File and In re Submission Agreement forms to address expungement requests.

      Under the proposed rules, FINRA would notify an unnamed person in writing when a firm reports to the CRD system that an unnamed person was the subject of an investment-related customer-initiated arbitration proceeding alleging sales practice violations. An unnamed person would file a Notice of Intent to File to alert FINRA that the person is considering filing a claim for expungement relief. At the conclusion of the underlying customer-initiated arbitration case, FINRA would notify the unnamed person who filed the Notice of Intent to File that it has closed the underlying case. If an unnamed person determines to seek expungement relief, the person would then file a statement of claim and an In re Submission Agreement, which would allow FINRA to arbitrate these types of cases.

      I. Proposed Rules 12100(z) and 13100(cc) — Definition of Unnamed Person

      FINRA is proposing to define a person who is not named in an arbitration, but is the "subject of" allegations of sales practice violations, as an "unnamed person."

      Proposed FINRA Rules 12100(z) and 13100(cc) would define an unnamed person as an associated person who is identified in a Form U4 or Form U5 as having been the subject of an investment-related customer-initiated arbitration proceeding that alleged that the associated person was involved in one or more sales practice violations, but who was not named as a respondent in the proceeding.
      II. Proposed Rule 13807 — Expungement of Customer Dispute Information by an Unnamed Person

      Under proposed FINRA Rule 13807, unnamed persons who are the "subject of" allegations of sales practice violations made in arbitration claims may seek expungement of these allegations from their CRD records by initiating In re expungement proceedings.
      A. Applicability and Limitations of the Proposed In re Expungement Rule

      Under proposed Rule 13807(a), the unnamed person would be the sole party in the case, and thus may not name the customer, firm or any other party as respondents.

      The unnamed person may request expungement relief only. The arbitrator would not have the authority to award monetary damages or other relief in an In re proceeding. Also, the In re proceedings would commence only after the underlying customer arbitration has concluded.

      Further, under proposed Rule 13807, an unnamed person would be expressly precluded from seeking expungement relief by attempting to intervene in the arbitration filed by the customer. However, a party to the underlying arbitration may still request expungement relief on behalf of an unnamed person. In addition, the proposal would preclude an unnamed person from filing a claim to request expungement relief that names either the customer or member firm as the respondent.

      Proposed Rule 13807 would not apply if the unnamed person decides to pursue other claims in addition to a claim to expunge a "subject of" allegation. For example, if the unnamed person has a defamation claim against a firm and a claim to expunge a "subject of" allegation, the unnamed person may file both claims in one arbitration proceeding against the firm under current Code rules. As this dispute would involve adverse parties, proposed Rule 13807 would not apply.
      B. Notice to the Unnamed Person

      FINRA would notify an unnamed person in writing when a member firm reports to the CRD system, through a Form U4 or Form U5, that the person was the subject of a customer arbitration claim alleging sales practice violations. In addition to this notification, FINRA would provide a copy of the statement of claim in the underlying customer arbitration case. Further, under proposed Rule 13807, FINRA would send the written notice and statement of claim using overnight mail or express courier service to the unnamed person's residential address, as reflected in the CRD system,10 to ensure timely delivery and proof of delivery.
      C. Unnamed Person's Notice of Intent to File

      Proposed Rule 13807(c) would require that an unnamed person notify FINRA of the intent to file for relief by submitting a signed Notice of Intent to File within 180 days from the date FINRA sends written notice. (See discussion about the proposed Notice of Intent to File in Section III below.)

      An unnamed person who does not timely notify FINRA of the intent to file would not be permitted to seek relief through an In re expungement proceeding, unless the Director extends or modifies the time period for good cause. By giving notice of intent, an unnamed person would not be required to file an In re proceeding at the conclusion of the underlying case. The unnamed person could determine whether to go forward when the underlying case closes, whether by award, settlement or withdrawal.

      The Notice of Intent to File would alert FINRA staff and the arbitrators on the underlying customer arbitration case to prepare for a possible In re claim. The 180-day timeframe would assist the forum in processing these claims efficiently by ensuring that the relevant parties receive notice in a timely manner, and that arbitrators consider the evidence and other information presented during the underlying customer arbitration for possible relevance to the In re claim.
      D. Conclusion of the Underlying Customer Arbitration Case

      At the conclusion of the underlying customer arbitration case, FINRA would inform the unnamed person who provided notice of intent to file that the case had concluded. The unnamed person would then have 60 days from the date of the notification letter that the case had concluded to file an In re claim with FINRA. An unnamed person who does not timely file within the 60-day period would not be permitted to file such a claim, unless the Director extends or modifies the time period for good cause.

      In addition to the notice, FINRA would provide a copy of the pleadings (including any exhibits) submitted in the underlying proceeding as well as a copy of the award, if any. If the parties settled the underlying customer arbitration case, the FINRA-registered party in that arbitration would be required to provide a copy of any settlement agreements to the unnamed person within 10 days from the date that the unnamed party requests such documents. These documents would be subject to the confidentiality agreement contained in the Notice of Intent to File. (See discussion about the proposed Notice of Intent to File in Section III below.)

      FINRA recognizes that the proposed process for unnamed persons to receive expungement relief is long, because the unnamed person must wait until the underlying customer arbitration is concluded to pursue relief. However, it is unlikely that the arbitration panel could determine that expungement is appropriate without reaching a conclusion in the underlying case. Further, if the arbitrators attempted to make an interim ruling regarding expungement during the pending customer claim, it could result in delays and increased costs for the customer—a result that FINRA does not endorse. Therefore, FINRA believes that the proposed In re procedures allow for the efficient resolution of a customer's case while establishing a process for an unnamed person to seek expungement relief.
      E. Filing a Claim

      To file an In re expungement claim under proposed Rule 13807(f), an unnamed person would be required to file a statement of claim and an In re Submission Agreement.

      The In re Submission Agreement would require the associated person to, among other things, agree to arbitrate the request for expungement relief in accordance with FINRA's rules, and to agree to be bound by FINRA's procedures and rules. (See discussion about the proposed In re Submission Agreement in Section III.)

      FINRA would provide a copy of the pleadings (including any exhibits) submitted in the underlying customer arbitration proceeding within 10 days from the date the unnamed person files an expungement claim, if the unnamed party did not receive a copy of them.
      F. Filing Fees

      In addition to the statement of claim and In re Submission Agreement, the unnamed person would be required to pay a nonrefundable fee of $750. The $750 filing fee would include one hearing session with the arbitrator.11 Unnamed persons would be responsible for the costs of any additional hearing sessions, which would be calculated at a rate of $450 per session.

      Proposed Rule 13807(g) would also allow the Director to defer or waive payment of all or part of the filing or hearing session fees upon a showing of financial hardship. Additionally, FINRA would not assess member surcharge fees in these cases.12
      G. Arbitrator Appointment

      Under proposed Rule 13807(h), FINRA would appoint a single public arbitrator to hear In re expungement proceedings. Once appointed, the arbitrator would be required to follow the requirements enumerated in Rule 13805.13

      In cases in which FINRA appointed a panel in the underlying customer arbitration case, the In re proceeding would be handled by the public chairperson of that arbitration panel. In a majority public panel arbitration, if the public chairperson is unable or unwilling to serve, FINRA would appoint the public arbitrator from the panel to hear the In re expungement proceeding. If the public arbitrator is unable or unwilling to serve, FINRA would appoint randomly a new public chair-qualified arbitrator to hear the In re proceeding.

      In an optional all public panel arbitration, in which there are three public arbitrators, if the public chairperson is unable or unwilling to serve, FINRA would appoint one of the two remaining public arbitrators from the panel in the underlying customer arbitration case to hear the In re expungement proceeding. FINRA will use the parties' rankings in the underlying case to determine which of the two arbitrators to appoint. FINRA would first attempt to appoint the person who was the highest ranked public arbitrator from the parties' combined ranked list of public arbitrators. If that public arbitrator is unable or unwilling to serve, FINRA would appoint the remaining public arbitrator from that panel. If neither of the public arbitrators is able or willing to serve, FINRA would appoint randomly a new public chair-qualified arbitrator to handle the expungement request.

      If no arbitrators were appointed in the customer case, FINRA would appoint randomly, using the Neutral List Selection System (NLSS),14 a single chair-qualified public arbitrator to handle the In re proceeding.
      H. Arbitrator Challenges

      Proposed Rule 13807(i) would permit an unnamed person to consider an arbitrator's disclosures and raise a challenge for cause based on the disclosure information, as any party has the right to do in other arbitration proceedings.15 However, under this proposed rule, the unnamed person could not challenge arbitrators based on their rulings and decisions in the underlying customer arbitration case.
      I. Hearing Location

      Under proposed Rule 13807(j), the hearing location of the In re expungement proceeding would be determined by the availability of the public arbitrators from the underlying customer arbitration proceeding.

      If a public arbitrator from the underlying customer arbitration case is available to serve, then the hearing location would be in the same location as the underlying customer arbitration case. However, if none of the public arbitrators from the underlying customer arbitration case is available to serve, the hearing location for the In re proceeding would be the hearing location closest to where the unnamed person was employed at the time of the dispute.16 In this case, the arbitrator would be selected randomly from this location.
      J. Appearance

      Proposed Rule 13807(k) provides that all parties to the underlying customer arbitration proceeding would be permitted to attend the In re expungement proceeding.17 Parties to the underlying customer arbitration proceeding could elect to appear and testify either in-person or by telephone. This proposed rule provides that the absence of a party at the In re expungement proceeding would not create a presumption that the absent party either consents to or opposes the expungement request. Further, all parties from the underlying customer arbitration case would have the right to representation at the In re expungement proceeding.18
      K. Discovery

      Proposed Rule 13807(l) addresses discovery issues concerning In re expungement proceedings.

      Documents

      Proposed Rule 13807(l) requires arbitrators to determine on a case-by-case basis whether an unnamed person may receive documents. This proposed rule limits document requests by unnamed persons to only those documents needed to establish the grounds for expungement under FINRA Rule 2080.19 An unnamed person would be required to demonstrate that the requested documents have a substantial and direct relationship to the request for expungement. Further, a party from the underlying customer arbitration case would be allowed to object to producing such documents within 10 days of the unnamed person's request. If a party objects to the additional document request, the objection must be in writing and served on the unnamed person and arbitrator at the same time and in the same manner. The arbitrator would rule on objections to additional document requests. The unnamed person requesting the production of documents would pay the costs of production.

      Subpoenas or Orders for Witnesses to Appear

      Proposed Rule 13807(l) limits subpoena requests by an unnamed person to witnesses needed to establish the grounds for expungement under Rule 2080. The proposed rule also requires that an unnamed person demonstrate that the requested witnesses have a substantial and direct relationship to the request for expungement. The proposal further limits the scope of the subpoena request to prohibit an unnamed person from seeking to subpoena a customer in the underlying customer arbitration case, unless the unnamed person demonstrates that the customer's testimony is not available from tape, digital or other recording or transcript, and that no other approach or method exists to introduce the relevant documents or information.

      If a party to an underlying customer arbitration case objects to the scope or propriety of a subpoena, that party must file a written objection with the Director, with an additional copy for the arbitrator, and serve a copy on the unnamed person at the same time and in the same manner as on the Director. The unnamed person may respond to the objection. After considering the objections and responses, the arbitrator would rule on the issuance and scope of the subpoena. The unnamed person requesting the appearance of witnesses would pay the costs of the appearance.

      Confidentiality

      Proposed Rule 13807(l) also makes clear that unnamed persons would be subject to any confidentiality agreements or orders associated with the documents or testimony produced in the underlying customer arbitration case.
      L. Consequences of Motions to Vacate an Award in the Underlying Customer Arbitration Case

      A motion to vacate is a challenge to the validity of the award. Courts decide these motions and can either vacate, confirm or modify the award. A confirmed award stands as issued by the arbitrators. An award vacated by the courts is voided.
      i. Motions to Vacate Pending

      Under proposed Rule 13807(a), an In re proceeding starts only after the conclusion of the underlying customer arbitration case. If a party to the underlying customer arbitration case files a motion to vacate and it is pending in court, FINRA would not consider the underlying customer arbitration case to be concluded. Therefore, under proposed Rule 13807(e), if there is a pending motion to vacate and an unnamed person files an In re expungement claim, FINRA would accept the In re filing, but declare it as "inactive" until the conclusion of the court action concerning the motion to vacate.
      ii. Motions to Vacate Denied

      If a court denies a party's motion to vacate an award in the underlying customer arbitration case, the award would stand as issued by the arbitrators. FINRA would consider the underlying customer arbitration case to be concluded, which would permit the In re proceeding to commence.

      Under proposed Rule 13807(e), FINRA would appoint the public chairperson of the customer arbitration panel to the In re expungement proceeding. If the public chair-qualified arbitrator is unable or unwilling to serve, FINRA would appoint a replacement arbitrator pursuant to the procedures described in proposed Rule 13807(h).
      iii. Motions to Vacate Granted

      When a court grants a motion to vacate, the court may vacate the award, in whole or in part, may send the matter back to the arbitration panel (remanding the case), or may order the case to be reheard by a new panel.

      If a court vacates an award, whether in whole or in part, in the underlying customer arbitration case without remand, the issues vacated would be heard anew in FINRA's forum. FINRA would appoint new arbitrators to decide the outstanding issues in the underlying customer arbitration case. The In re expungement proceeding would commence at the conclusion of this customer arbitration case. Further, under proposed Rule 13807(e), FINRA would appoint the public chairperson of the new customer arbitration panel to the In re expungement proceeding.

      If a court vacates an award, whether in whole or in part, and remands the matter to the same arbitrators, FINRA would appoint the chair-qualified public arbitrator from the underlying customer arbitration case to the In re proceeding at the conclusion of the underlying customer arbitration case. If the public chair-qualified arbitrator is unable or unwilling to serve, FINRA would appoint the next available public arbitrator pursuant to proposed Rule 13807(h).
      iv. Effect of Appeals

      A losing party may appeal a court's decision concerning a motion to vacate. This means that the losing party could request that a higher court review the lower court's decision.

      FINRA does not consider the underlying customer arbitration to be concluded until the higher court decides the appeal. For example, if a court denies a respondent's motion to vacate, the respondent may appeal the decision. If the respondent appeals, the underlying customer arbitration case would not be concluded until a higher court renders a decision on the appeal. Similarly, if a court grants a respondent's motion to vacate, the customer may appeal, thereby delaying the conclusion of the underlying customer arbitration case. Thus, the In re proceeding would not commence until the higher court decides the appeal.
      M. Petitioning a Court Concerning Expungement Relief

      Under FINRA Rule 2080,20 registered persons must obtain a court order directing expungement or confirming an arbitration award containing an expungement directive. In addition, Rule 2080 requires that FINRA be named as a party to the court proceedings and be served with all appropriate documents, unless FINRA waives that requirement.

      Proposed Rule 13807(m) incorporates this requirement of Rule 2080 by mandating that an unnamed person name FINRA as a party to any court proceedings in which the unnamed person seeks to vacate an In re award. A request to vacate an In re award is likely only when the arbitrator denies the expungement request. Since there would be no other party to object to the motion to vacate, proposed Rule 13807(m) requires the unnamed person to name FINRA as a party to any court proceedings, to allow FINRA to oppose the motion if appropriate under Rule 2080.
      III. Proposed Notice of Intent to File and In re Submission Agreement

      As mentioned above, FINRA is proposing to create two new documents to facilitate the In re expungement process: a Notice of Intent to File and an In re Submission Agreement. The unnamed person would file the Notice of Intent to File before the conclusion of the underlying customer arbitration case to declare an intent to seek expungement relief under proposed Rule 13807. The In re Submission Agreement, however, would be filed, along with the Statement of Claim, after the conclusion of the underlying customer arbitration and would alert FINRA that the unnamed person has initiated expungement proceedings.

      The Notice of Intent to File would serve as a mechanism for the unnamed person to preserve the right to file an In re expungement claim in the future, and alerts FINRA and the arbitrators in the underlying customer case to that possibility. Further, it would contain confidentiality provisions that require the unnamed person to maintain confidentiality of any documents from the underlying customer arbitration to which the person is given access before the person files an In re expungement claim.21 It also would require the unnamed person to abide by any confidentiality agreements or orders associated with documents or testimony produced from the underlying customer arbitration case.

      The In re Submission Agreement would require the associated person to agree to arbitrate the request for expungement relief in accordance with FINRA's rules, and to agree to be bound by FINRA's procedures and rules. The In re Submission Agreement contains a provision that requires the unnamed person to maintain the confidentiality of any settlement agreement, tape, digital or other recording, or transcript from the underlying customer arbitration case to which the party is given access. In addition, the In re Submission Agreement requires the unnamed person to agree to abide by any confidentiality agreements or orders associated with documents produced from the underlying arbitration case. By filing this document, the unnamed person would initiate expungement proceedings and allow FINRA to arbitrate the claim.
      IV. Proposed Rules 12806 and 13806 — Expungement of Customer Dispute Information by Persons Named as Parties

      Under the proposed In re expungement rule (as discussed in Section II above), unnamed persons may seek expungement relief of "subject of" allegations from their CRD records. If, however, the associated person is named in an investment-related customer-initiated arbitration proceeding, the proposed In re expungement rule would not apply.

      Proposed Rules 12806 and 1380622 would state that an associated person named as a respondent in an investment-related customer-initiated arbitration proceeding may seek expungement of the associated customer dispute information from the CRD system only during that customer arbitration. The proposed rules state further that an associated person named as a respondent in an investment-related customer-initiated arbitration proceeding may not seek expungement of the customer dispute information under Rule 13807 or during any subsequent proceeding under the Code. Thus, if an associated person, named as a respondent in a customer-initiated arbitration, does not seek expungement during that customer case, the associated person could not later seek expungement under the proposed In re expungement rule or in a separate arbitration proceeding.

      The proposed rules reflect the current procedures that associated persons may use to expunge customer disclosures when they are named in an arbitration. First, a named party may request expungement as a relief request when the party files either a statement of claim or answer. The arbitrators would consider and rule on this request as they do on other parties' requests for relief. Second, if the parties to an arbitration settle their claims, the named party may request a "stipulated award," in which all parties to the arbitration agree to grant expungement. Finally, in those arbitrations in which FINRA closes the case23 and the customer does not oppose the named party's expungement request, the arbitrators from the customer arbitration would hold a separate hearing to decide the named party's request, which operates similarly to the proposed In re proceeding described above. Thus, named parties in an arbitration have several options to expunge customer disclosures, which would continue notwithstanding the express limitations in proposed Rules 12806 and 13806.
      V. Applicable Rules of the Industry Code

      FINRA notes that other rules of the Industry Code would apply to the In re expungement proceedings, and, is therefore, proposing to list them as Supplementary Material.

      However, since In re expungement proceedings would not involve adverse parties, FINRA proposes to exclude from the list those rules that presume the existence of adverse parties.

      Request for Comment

      While FINRA is interested in receiving comments on all aspects of proposed FINRA Rules 12100(z), 12806, 13100(cc), 13806 and 13807 and the proposed forms, FINRA seeks specific comment on:

      •   whether the 180-day notice requirement in proposed Rule 13807(c) for the unnamed person to notify FINRA of the intent to file for expungement relief after FINRA sends its notice of an alleged sales practice violation would provide an unnamed person with sufficient time to determine whether to pursue an In re expungement claim; and
      •   whether FINRA should either automatically provide documents, defined as tapes, digital or other recordings or transcripts in proposed Rule 13807(l)(1)(A)(i), to an unnamed person or alternatively require the unnamed person to subpoena FINRA for these documents, rather than permit the unnamed person to request documents as provided in proposed Rule 13807(l)(1)(A)(i).

      The comment period expires May 21, 2012.


      1 The term "in re" is a method of entitling a judicial proceeding in which there are no adverse parties. The term is also sometimes used to designate a proceeding where one party makes an application on his or her own behalf. Black's Free Online Law Dictionary (2d ed. 2012), (last visited February 22, 2012).

      2 FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Persons should submit only information that they wish to make publicly available. See Notice to Members 03-73 (NASD Announces Online Availability of Comments) (November 2003) for more information.

      3 See Section 19 and rules thereunder. After a proposed rule change is filed with the SEC, the proposed rule change generally is published for public comment in the Federal Register. Certain limited types of proposed rule changes, however, take effect upon filing with the SEC. See SEA Section 19(b)(3) and SEA Rule 19b-4.

      4 The Uniform Application for Securities Industry Registration or Transfer, referred to as Form U4 , is used by broker-dealers to register or transfer the registrations of, associated persons with self-regulatory organizations (SROs), and with states, commonwealths and territories.

      5 The Uniform Termination Notice for Securities Industry Registration, referred to as Form UB, is used by broker-dealers to terminate the registrations of associated persons with SROs, and with states, commonwealths and territories.

      6 See Regulatory Notice 09-23 (Revised Forms U4 and UB) (May 2009).

      7 In order for an arbitrator to grant expungement of customer dispute information under Rule 1380B,the arbitrator must: (1) hold a recorded hearing regarding the appropriateness of expungement; (2) in cases involving settlements, review settlement documents and consider the amount of payments made to any party and any other terms and conditions of a settlement; and (3) indicate in the award which of the Rule 2080 grounds for expungement serves as the basis for the expungement order and provide a brief written explanation of the reasons for the finding that one or more Rule 2080 grounds for expungement applies to the facts of the case.

      8 See Code of Arbitration Procedure for Customer Disputes, Rule 12000 Series.

      9 See Code of Arbitration Procedure for Industry Disputes, Rule 13000 Series.

      10 If FINRA has actual knowledge that the residential address as reflected in the CRD is incorrect, FINRA will use the correct address.

      11 A hearing session is defined in the Codes as any meeting between the parties and arbitrator(s) of four hours or less, including a hearing or a prehearing conference. See Rules 12100(n) and 13100(n).

      12 See Rules 12901 and 13901 (Member Surcharge).

      13 See supra note 7.

      14 See Rules 12400(a) and 13400(a) (Neutral List Selection System).

      15 See Rules 12407 and 13410 (Removal of Arbitrator by Director).

      16 Hearing locations are selected in this manner currently under the Industry Code. See Rule 13213.

      17 Parties to an arbitration may include investors, members and associated persons who were parties in the underlying case, as well as their respective counsel (as long as counsel still represents the client).

      18 See Rules 12208 and 13208 (Representation of Parties).

      19 Rule 2080 requires that FINRA members or registered persons name FINRA as an additional party in any court proceeding in which they request confirmation of an award containing an order of expungement. Upon request, however, FINRA may waive the requirement to name FINRA as a party in these proceedings—provided the arbitration award directing expungement contains, at least, one of the following arbitral findings: (1) the claim, allegation, or information is factually impossible or clearly erroneous; (2) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (3) the claim, allegation or information is false.

      20 Id.

      21 It is possible that the unnamed person may also need to review the settlement agreement to determine whether to pursue an expungement claim.

      22 Identical rule language would be added to the Customer Code and Industry Code. The text of current Rule 13806 (Promissory Notes) would be renumbered as Rule 13808, but would otherwise remain unchanged.

      23 FINRA considers a case to be concluded when the staff closes the case, whether the claim is withdrawn, settled or closed by award.


      ATTACHMENT A

      FINRA ARBITRATION — Notice of Intent to File an In re Expungement Claim

      In the Matter of the Arbitration involving the Expungement Request of

      Name of Associated Person

      ____________________________________________________________________________________________________________________

      ____________________________________________________________________________________________________________________

      ____________________________________________________________________________________________________________________

      1. The undersigned party (party) hereby notifies FINRA of the party's intent to file an In re expungement claim. This notice does not bind the party to file such a claim.
      2. By filing this notice, the party agrees to maintain confidentiality of any settlement agreement, tape, digital or other recording, or transcript from the underlying customer arbitration case to which the party is given access.
      3. The party agrees to abide by any confidentiality agreements or orders associated with documents produced from the underlying customer arbitration case.
      4. The party or the person's representative hereto has signed and agrees to be bound by the provisions of this Notice.

      ____________________________________________________________________________________________________________________
      Name of Associated Person (please print)

      ____________________________________________________________________________________________________________________
      Associated Person (signature) Date

      ____________________________________________________________________________________________________________________
      Name of Representative of Associated Person (please print)

      ____________________________________________________________________________________________________________________
      Representative of Associated Person (signature) Date

      Submission Instructions: The associated person must file this Notice with FINRA, using the instructions provided in FINRA's letter notifying the associated person that the associated person was the subject of a customer arbitration claim alleging sales practice violations.

      If needed, copy this page.


      ATTACHMENT B

      FINRA ARBITRATION — Submission Agreement for In re Expungement Claims

      In the Matter of the Arbitration involving the Expungement Request of

      Name of Associated Person

      ____________________________________________________________________________________________________________________

      ____________________________________________________________________________________________________________________

      ____________________________________________________________________________________________________________________

      1. The undersigned party (party) hereby submits the request for expungement relief, as set forth in the attached statement of claim, to arbitration in accordance with the FINRA By-Laws, Rules and the FINRA Code of Arbitration Procedure for Industry Disputes.
      2. The party hereby states that the person or the person's representative has read the procedures and rules of FINRA relating to arbitration, and the party agrees to be bound by these procedures and rules.
      3. The party agrees to maintain confidentiality of any settlement agreement, tape, digital or other recording, or transcript from the underlying customer arbitration case to which the party is given access.
      4. The party agrees to abide by any confidentiality agreements or orders associated with documents produced from the underlying customer arbitration case.
      5. The party agrees that the hearing shall be held at a time and place as may be designated by the Director of Arbitration. The party further agrees and understands that the arbitration will be conducted in accordance with the FINRA Code of Arbitration Procedure for Industry Disputes.
      6. The party or the person's representative hereto has signed and acknowledged the foregoing Submission Agreement.

      ____________________________________________________________________________________________________________________
      Name of Associated Person (please print)

      ____________________________________________________________________________________________________________________
      Associated Person (signature) Date

      ____________________________________________________________________________________________________________________
      Name of Representative of Associated Person (please print)

      ____________________________________________________________________________________________________________________
      Representative of Associated Person (signature) Date

      If needed, copy this page.

    • 12-17 SEC Approves Consolidated Telemarketing Rule; Effective Date: June 29, 2012

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      Telemarketing

      Regulatory Notice
      Notice Type

      Consolidated Rulebook
      New Rule
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topics

      Cold Call
      Do-Not-Call Lists
      Established Business Relationship
      Telemarketing
      Referenced Rules & Notices

      FINRA Rule 3230
      NASD Rule 2212
      NYSE Rule 440A and its Interpretation

      Executive Summary

      The SEC approved FINRA's proposed rule change to adopt NASD Rule 2212 (Telemarketing) as FINRA Rule 3230 (Telemarketing) in the consolidated rulebook (Consolidated FINRA Rulebook), taking into account certain requirements under NYSE Rule 440A (Telephone Solicitation) and its Interpretation.1 Further, the new rule adopts provisions that are substantially similar to Federal Trade Commission (FTC) rules that prohibit deceptive and other abusive telemarketing acts or practices. FINRA Rule 3230 becomes effective on June 29, 2012.

      The text of FINRA Rule 3230 can be found at www.finra.org/notices/12-17. Questions concerning this Notice should be directed to:

      •   Gary L. Goldsholle, Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8104; or
      •   Matthew E. Vitek, Assistant General Counsel, OGC, at (202) 728-8156.

      Background & Discussion

      NASD Rule 2212 and Rule 440A are similar rules that require member firms to maintain and consult do-not-call lists, limit the hours of telephone solicitations and prohibit members from using deceptive and abusive acts and practices in connection with telemarketing. The SEC directed FINRA and NYSE to adopt these telemarketing rules in accordance with the Telemarketing Consumer Fraud and Abuse Prevention Act of 1994 (Prevention Act).2 The Prevention Act requires the SEC to promulgate, or direct any national securities exchange or registered securities association to promulgate, rules substantially similar to the FTC rules to prohibit deceptive and other abusive telemarketing acts or practices.3 In 2011, SEC staff directed FINRA to conduct a review of its telemarketing rule and propose rule amendments that provide protections that are, in the SEC's view, at least as strong as those provided by the FTC's telemarketing rules.4

      FINRA Rule 3230

      The SEC approved FINRA's proposed rule change to adopt NASD Rule 2212 as FINRA Rule 3230 in the Consolidated FINRA Rulebook, subject to certain amendments.5 The approved rule change deletes NYSE Rule 440A and NYSE Rule Interpretation 440A/01. However, the new rule incorporates certain provisions of NYSE Rule 440A and its Interpretation, and contains additional provisions that are substantially similar to FTC rules that prohibit deceptive and other abusive telemarketing acts or practices as described below.

      Caller Identification Information

      FINRA Rule 3230 includes caller identification information provisions similar to those contained in NYSE Rule 440A(h). These provisions provide that firms engaging in telemarketing must transmit caller identification information and are explicitly prohibited from blocking caller identification information. The telephone number provided must permit any person to make a do-not-call request during normal business hours. Inclusion of these caller identification information provisions in the new rule does not create any new obligations on broker-dealers as they are already subject to identical provisions under FCC regulations.6

      Maintenance of Do-Not-Call Lists

      FINRA Rule 3230(d)(6) maintains the requirement in NASD Rule 2212(d)(6) that a firm making an outbound telephone call must maintain a record of a caller's request not to receive further calls. However, the new rule eliminates the five-year window under which a firm must honor a firm-specific do-not-call request. SEC staff directed FINRA to delete this provision because the firm specific opt out period is indefinite under the FTC's Telemarketing Sales Rule,7 rather than five years as provided in NASD Rule 2212.8

      Wireless Communications

      NASD Rule 2212(e) states that the provisions set forth in the rule are applicable to firms' telemarketing calls to wireless telephone numbers. FINRA Rule 3230(e) clarifies that the application of the rule also applies to persons associated with a firm making outbound telephone calls to wireless telephone numbers.

      Outsourcing Telemarketing

      NASD Rule 2212(f) states that if a firm uses another entity to perform telemarketing services on its behalf, the firm remains responsible for ensuring compliance with all provisions contained in the rule. FINRA Rule 3230(f) clarifies that firms must consider whether the entity or person that performs telemarketing services on its behalf must be appropriately registered or licensed, where required.

      Unencrypted Consumer Account Numbers

      FINRA Rule 3230(h) prohibits a firm or its associated person from disclosing or receiving, for consideration, unencrypted consumer account numbers for use in telemarketing. The provision is substantially similar to the FTC's provision regarding unencrypted consumer account numbers.9 Additionally, the provision defines "unencrypted" as not only complete, visible account numbers, whether provided in lists or singly, but also encrypted information with a key to its decryption. The definition is substantially similar to the view taken by the FTC.10

      Submission of Billing Information

      FINRA Rule 3230(i) requires, for any telemarketing transaction, a firm or its associated person to obtain the express informed consent of the person to be charged and to be charged using the identified account. If the telemarketing transaction involves pre-acquired account information and a free-to-pay conversion feature, the firm or its associated person must: (1) obtain from the customer, at a minimum, the last four digits of the account number to be charged; (2) obtain from the customer an express agreement to be charged and to be charged using the identified account number; and (3) make and maintain an audio recording of the entire telemarketing transaction. For any other telemarketing transaction involving pre-acquired account information, the firm or its associated person must: (1) identify the account to be charged with sufficient specificity for the customer to understand what account will be charged; and (2) obtain from the customer an express agreement to be charged and to be charged using the identified account number. The rule is substantially similar to the FTC's provision regarding the submission of billing information.11

      Abandoned Calls

      FINRA Rule 3230(j)(1) prohibits a firm or its associated person from abandoning any outbound telemarketing call. The abandoned calls prohibition is subject to a "safe harbor" under paragraph (j)(2), which provides that a firm or its associated person will not be liable for violating FINRA Rule 3230(j)(1) if: (1) the firm or its associated person employs technology that ensures abandonment of no more than three percent of all calls answered by a person, measured over the duration of a single calling campaign, if less than 30 days, or separately over each successive 30-day period or portion thereof that the campaign continues; (2) the firm or its associated person, for each telemarketing call placed, allows the telephone to ring for at least 15 seconds or four rings before disconnecting an unanswered call; (3) whenever an associated person is not available to speak with the person answering the telemarketing call within two seconds after the person's completed greeting, the firm or its associated person promptly plays a recorded message stating the name and telephone number of the firm or associated person on whose behalf the call was placed; and (4) the firm retains records establishing compliance with the "safe harbor." The rule is substantially similar to the FTC's provisions regarding abandoned calls.12

      Prerecorded Messages

      FINRA Rule 3230(k) prohibits a firm or its associated person from initiating any outbound telemarketing call that delivers a prerecorded message without a person's express written agreement to receive such calls. The rule also requires that all prerecorded telemarketing calls provide specified opt-out mechanisms so that a person can opt out of future calls. The prohibition does not apply to a prerecorded message permitted for compliance with the "safe harbor" for abandoned calls under paragraph (j)(2). The rule is substantially similar to the FTC's provisions regarding prerecorded messages.13

      Credit Card Laundering

      FINRA Rule 3230(l) prohibits credit card laundering, the practice of depositing into the credit card system a sales draft that is not the result of a credit card transaction between the cardholder and the firm. Except as expressly permitted by the applicable credit card system, the rule prohibits a firm or its associated person from: (1) presenting to or depositing into, the credit card system for payment, a credit card sales draft generated by a telemarketing transaction that is not the result of a telemarketing credit card transaction between the cardholder and the firm; (2) employing, soliciting, or otherwise causing a merchant, or an employee, representative or agent of the merchant, to present to or to deposit into the credit card system for payment, a credit card sales draft generated by a telemarketing transaction that is not the result of a telemarketing credit card transaction between the cardholder and the merchant; or (3) obtaining access to the credit card system through the use of a business relationship or an affiliation with a merchant, when the access is not authorized by the merchant agreement or the applicable credit card system. The rule is substantially similar to the FTC's provisions regarding credit card laundering.14

      Definitions

      FINRA Rule 3230(m) adopts definitions that are substantially similar to the FTC's definitions.15 The rule adopts substantially similar definitions of "acquirer," "billing information," "caller identification service," "cardholder," "charitable contribution," "credit," "credit card," "credit card sales draft," "credit card system," "customer," "donor," "free-topay conversion," "merchant," "merchant agreement," "outbound telephone call," "person" and "pre-acquired account information." Additionally, the rule amends the definition of "telemarketing" to track the FTC definition and deletes the reference to "telephone solicitation."

      Supplementary Material

      FINRA Rule 3230 includes as Supplementary Material a provision that is similar to NYSE Rule Interpretation 440A/01. The provision reminds firms that the rule does not affect the obligation of any firm or its associated person that engages in telemarketing to comply with relevant state and federal laws and rules, including the rules of the FCC relating to telemarketing practices and the rights of telephone consumers.


      1 See Securities Exchange Act Release No. 66279 (January 30, 2012), 77 FR 5611 (February 3, 2012) (Order Approving Proposed Rule Change; File No. SR-FINRA-2011-059). The current FINRA rulebook consists of: (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules). While the NASD Rules generally apply to all FINRA members, the Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (Dual Members). The FINRA Rules apply to all FINRA members, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process, see Information Notice 03/12/08 (Rulebook Consolidation Process). For convenience, the Incorporated NYSE Rules are referred to as the NYSE Rules.

      2 15 U.S.C. 6101-6108.

      3 15 U.S.C. 6102.

      4 See Letter from Robert W. Cook, Director, Division of Trading and Markets, SEC, to Richard G. Ketchum, Chairman and Chief Executive Officer, FINRA, dated May 10, 2011.

      5 See Securities Exchange Act Release No. 66279 (January 30, 2012), 77 FR 5611 (February 3, 2012) (Order Approving Proposed Rule Change; File No. SR-FINRA-2011-059).

      6 See 47 CFR 64.1601.

      7 See 16 CFR 310.

      8 See Letter from Robert W. Cook, Director, Division of Trading and Markets, SEC, to Richard G. Ketchum, Chairman and Chief Executive Officer, FINRA, dated May 10, 2011.

      9 See 16 CFR 310.4(a)(6); see also Federal Trade Commission, Telemarketing Sales Rule, 68 FR 4580 (January 29, 2003) at 4615.

      10 See Federal Trade Commission, Telemarketing Sales Rule, 68 FR 4580 (January 29, 2003) at 4616.

      11 See 16 CFR 310.4(a)(7); see also Federal Trade Commission, Telemarketing Sales Rule, 68 FR 4580 (January 29, 2003) at 4616.

      12 See 16 CFR 310.4(b)(1)(iv); see also 16 CFR 310.4(b)(4); see also Federal Trade Commission, Telemarketing Sales Rule, 68 FR 4580 (January 29, 2003) at 4641.

      13 See 16 CFR 310.4(b)(1)(v); see also Federal Trade Commission, Telemarketing Sales Rule, 73 FR 51164 (August 29, 2008).

      14 See 16 CFR 310.3(c); see also Federal Trade Commission, Telemarketing Sales Rule, 60 FR 43842 (August 23, 1995) at 43852.

      15 See 16 CFR 310.2; see also Federal Trade Commission, Telemarketing Sales Rule, 60 FR 43842 (August 23, 1995) at 43843; see also Federal Trade Commission, Telemarketing Sales Rule, 68 FR 4580 (January 29, 2003) at 4587.

    • 12-16 Changes to Qualification Examination Fees and New Service Charge for Regulatory Element Continuing Education Sessions Taken Outside the United States; Effective Date: April 2, 2012

      View PDF

      Qualification Examination and Continuing Education Fees

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Continuing Education
      Legal
      Registered Representatives
      Registration
      Senior Management
      Key Topics

      Qualification Examination Fees
      Regulatory Element Fees
      Referenced Rules & Notices

      FINRA Rule 1230
      NASD Rule 1021
      NASD Rule 1022
      NASD Rule 1031
      NASD Rule 1032
      NASD Rule 1041
      NASD Rule 1050
      Section 4 of Schedule A to the FINRA By-Laws

      Executive Summary

      Effective April 2, 2012, FINRA is increasing qualification examination fees, and assessing a service charge for any Regulatory Element Continuing Education (Regulatory Element) session taken in a test center located outside the territorial limits of the United States.

      The text of the amendments to Section 4(c) of Schedule A to the FINRA By-Laws is set forth in Attachment A.

      Questions concerning this Notice should be directed to Joe McDonald, Senior Director, Testing and Continuing Education Department, at (240) 386-5065.

      Background & Discussion

      As described in further detail below, FINRA has filed for immediate effectiveness amendments to Section 4(c) of Schedule A to the FINRA By-Laws to (1) increase qualification examination fees, and (2) assess a service charge for any Regulatory Element session taken in a test center located outside the territorial limits of the United States.

      Qualification Examination Fees

      Under NASD Rules 1021(a) and 1031(a), persons engaged, or to be engaged, in the investment banking or securities business of a FINRA member firm and who are to function as principals or representatives are required to register with FINRA in each category of registration appropriate to their functions as specified in NASD Rules 1022 and 1032.2 The individuals must pass an appropriate qualification examination before their registration can become effective. These mandatory qualification examinations cover a broad range of subjects regarding financial markets and products, individual responsibilities, securities industry rules and regulatory structure. FINRA develops, maintains and delivers all qualification examinations for individuals who are registered or seeking registration with FINRA. FINRA also administers and delivers examinations sponsored (i.e., developed) by the Municipal Securities Rulemaking Board (MSRB), the North American Securities Administrators Association, the National Futures Association, the Federal Deposit Insurance Corporation and other self-regulatory organizations.

      FINRA currently administers examinations via computer through the PROCTOR® system3 at testing centers operated by vendors under contract with FINRA. FINRA charges an examination fee to candidates for FINRA-sponsored and co-sponsored examinations to cover the development, maintenance and delivery of these examinations. For qualification examinations sponsored by a FINRA client and administered by FINRA, FINRA charges a delivery fee that represents either a portion of or the entire examination fee for the examination.4

      FINRA regularly conducts a comprehensive review of the examination fee structure, including an analysis of the costs associated with developing, administering and delivering examinations. The most recent review revealed that certain operational costs have increased and, based on current information, will continue to increase over the next few years. In particular, these costs consist of (1) fees that vendors charge FINRA for delivering qualification examinations, and (2) PROCTOR maintenance and enhancement expenses. Therefore, FINRA is increasing certain qualification examination fees as follows:5

      Series Examination Title Current Fee New Fee
      Series 4 Registered Options Principal $90 $100
      Series 6 Investment Company Products/Variable Contracts Representative $85 $95
      Series 7 General Securities Representative $265 $290
      Series 9 General Securities Sales Supervisor — Options Module $70 $75
      Series 10 General Securities Sales Supervisor — General Module $110 $120
      Series 11 Assistant Representative — Order Processing $70 $75
      Series 14 Compliance Official $320 $335
      Series 16 Supervisory Analyst $210 $230
      Series 17 Limited Registered Representative $70 $75
      Series 22 Direct Participation Programs Representative $85 $95
      Series 23 General Securities Principal Sales Supervisor Module $85 $95
      Series 24 General Securities Principal $105 $115
      Series 26 Investment Company Products/Variable Contracts Principal $85 $95
      Series 27 Financial and Operations Principal $105 $115
      Series 28 Introducing Broker-Dealer Financial and Operations Principal $85 $95
      Series 37 Canada Module of S7 (Options Required) $160 $175
      Series 38 Canada Module of S7 (No Options Required) $160 $175
      Series 39 Direct Participation Programs Principal $80 $90
      Series 42 Registered Options Representative $65 $70
      Series 51 Municipal Fund Securities Limited Principal $85 $95
      Series 52 Municipal Securities Representative $95 $120
      Series 53 Municipal Securities Principal $95 $105
      Series 55 Limited Representative — Equity Trader $95 $105
      Series 62 Corporate Securities Limited Representative $80 $90
      Series 72 Government Securities Representative $95 $105
      Series 79 Investment Banking Qualification Examination $265 $290
      Series 82 Limited Representative — Private Securities Offering $80 $90
      Series 86 Research Analyst — Analysis $160 $175
      Series 87 Research Analyst — Regulatory $115 $125

      The new qualification examination fees will apply for examination requests made in the CRD system on or after April 2, 2012.

      Foreign Test Center Regulatory Element Session Service Charge

      FINRA assesses a service charge of $15 for any qualification examination that is taken in a foreign test center (i.e., a test center located outside of the territorial limits of the United States) to help offset the higher fees that vendors charge FINRA for delivering qualification examinations in those locations. Vendors also charge FINRA higher fees for the delivery of Regulatory Element sessions in foreign test centers; however, all individuals are currently assessed the same amount for a Regulatory Element session regardless of where they take the session. Therefore, FINRA is assessing a $15 service charge for any Regulatory Element session taken in a foreign test center to more closely align the fee with the cost of the sessions.

      The foreign test center Regulatory Element session service charge will become effective for Regulatory Element sessions taken on or after April 2, 2012.


      1 See Securities Exchange Act Release No. 66465 (February 24, 2012), 77 FR 12635 (March 1, 2012) (Notice of Filing and Immediate Effectiveness of SR-FINRA-2012-009).

      2 See also NASD Rules 1041 and 1050 and FINRA Rule 1230(b)(6) regarding the qualification and registration requirements for Order Processing Assistant Representatives, Research Analysts and Operations Professionals, respectively.

      3 PROCTOR is a computer system that is specifically designed for the administration and delivery of computer-based testing and training.

      4 The delivery fee represents a portion of the entire examination fee when a FINRA client has established an additional fee for an examination that it sponsors. For example, the fee to take the Municipal Fund Securities Limited Principal qualification examination (Series 51) is currently $145. Of this amount, $85 is the FINRA administration and delivery fee, and $60 is the development fee determined by the FINRA client, the MSRB. See MSRB Rule A-16.

      5 FINRA is not increasing the fee for the Operations Professional qualification examination (Series 99) since it was implemented in late 2011. See Securities Exchange Act Release No. 64687 (June 16, 2011), 76 FR 36586 (June 22, 2011) (Order Approving Proposed Rule Change; File No. SR-FINRA-2011-013); Securities Exchange Act Release No. 65221 (August 30, 2011), 76 FR 55441 (September 7, 2011) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change; File No. SR-FINRA-2011-042).


      Attachment A

      Below is the text of the amendments. New language is underlined; deletions are in brackets.

      * * * * *

      Schedule A to the By-Laws of the Corporation

      * * * * *

      Section 4 — Fees

      (a) and (b) No Change.
      (c) The following fees shall be assessed to each individual who registers to take an examination as described below. These fees are in addition to the registration fee described in paragraph (b) and any other fees that the owner of an examination that FINRA administers may assess.

      Series 4 Registered Options Principal [$90] $100
      Series 6 Investment Company Products/ Variable Contracts Representative [$85] $95
      Series 7 </