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  • 2013

    • 13-45 FINRA Reminds Firms of Their Responsibilities Concerning IRA Rollovers

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      Rollovers to Individual Retirement Accounts

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Senior Management
      Key Topics

      Communications with the Public
      401(k) Plans
      Individual Retirement Accounts
      Suitability
      Supervision
      Training
      Referenced Rules & Notices

      FINRA Rule 2010
      FINRA Rule 2111
      FINRA Rule 2210
      NASD Rule 3010
      NASD Rule 3012
      Regulatory Notice 13-23

      Summary

      FINRA is issuing this Notice to remind firms of their responsibilities when (1) recommending a rollover or transfer of assets in an employer-sponsored retirement plan to an Individual Retirement Account (IRA) or (2) marketing IRAs and associated services. Reviewing firm practices in this area will be an examination priority for FINRA in 2014.

      Questions concerning this Notice should be directed to:

      •   Thomas M. Selman, Executive Vice President, Regulatory Policy, at (202) 728-6977 or tom.selman@finra.org; or
      •   Angela C. Goelzer, Vice President, at (202) 728-8120 or angela.goelzer@finra.org.

      Background and Discussion

      Saving for retirement is a top financial concern for Americans and many are confused about their retirement savings options.1 Because broker-dealers often advise customers regarding retirement plans, this Notice addresses these interactions. In particular, the Notice addresses firms' recommendations to participants in employer-sponsored 401(k) retirement plans who terminate their employment and must determine how to invest their plan assets.2 FINRA reminds firms of their responsibilities when they recommend that such an investor roll over or transfer plan assets to an IRA.3

      A plan participant leaving an employer typically has four options (and may engage in a combination of these options):

      •   leave the money in his former employer's plan, if permitted;
      •   roll over the assets to his new employer's plan, if one is available and rollovers are permitted;4
      •   roll over to an IRA; or
      •   cash out the account value.5

      Each choice offers advantages and disadvantages, depending on desired investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment, and the investor's unique financial needs and retirement plans. The complexity of these choices may lead an investor to seek assistance from a financial adviser, including a broker-dealer. Investors also may be solicited by financial services firms, including broker-dealers, regarding IRAs and retirement services.6

      A broker-dealer's recommendation that an investor roll over retirement plan assets to an IRA typically involves securities recommendations subject to FINRA rules. A firm's marketing of its IRA services also is subject to FINRA rules.7 Any recommendation to sell, purchase or hold securities must be suitable for the customer and the information that investors receive must be fair, balanced and not misleading.8 This Notice provides guidance on these activities and is intended to help firms ensure that they have policies and procedures in place that are reasonably designed to achieve compliance with FINRA rules.

      1. IRAs in the U.S. Retirement Market

      IRAs account for about 28 percent of all U.S. retirement assets, which totaled $19.5 trillion at the end of 2012. Of this amount, IRA assets were $5.4 trillion, compared with $5.1 trillion in defined contribution plans and $9 trillion in other retirement plans.9 Approximately 98 percent of IRAs with $25,000 or less are brokerage accounts.10

      Rollovers from employer-sponsored retirement plans are the largest source of contributions to IRAs. A June 2013 Employee Benefits Research Institute report states that in 2011, assets rolled over into IRAs were almost 13 times the amount of direct contributions. This is not a new trend; ICI data indicates that from 1996 to 2008 more than 90 percent of funds flowing into traditional IRAs came from rollovers, primarily from plans.11 In 2013, 49 percent of the traditional IRAs held by U.S. households included rollover funds.12
      2. The IRA Rollover Decision

      A recommendation to roll over plan assets to an IRA rather than keeping assets in a previous employer's plan or rolling over to a new employer's plan should reflect consideration of various factors, the importance of which will depend on an investor's individual needs and circumstances. Some of the factors include:
      •   Investment Options—An IRA often enables an investor to select from a broader range of investment options than a plan.13 The importance of this factor will depend in part on how satisfied the investor is with the options available under the plan under consideration. For example, an investor who is satisfied by the low-cost institutional funds available in some plans may not regard an IRA's broader array of investments as an important factor.
      •   Fees and Expenses—Both plans and IRAs typically involve (i) investment-related expenses and (ii) plan or account fees. Investment-related expenses may include sales loads, commissions, the expenses of any mutual funds in which assets are invested and investment advisory fees. Plan fees typically include plan administrative fees (e.g., recordkeeping, compliance, trustee fees) and fees for services such as access to a customer service representative. In some cases, employers pay for some or all of the plan's administrative expenses.14 An IRA's account fees may include, for example, administrative, account set-up and custodial fees.
      •   Services—An investor may wish to consider the different levels of service available under each option. Some plans, for example, provide access to investment advice, planning tools, telephone help lines, educational materials and workshops. Similarly, IRA providers offer different levels of service, which may include full brokerage service, investment advice, distribution planning and access to securities execution online.
      •   Penalty-Free Withdrawals—If an employee leaves her job between age 55 and 59½, she may be able to take penalty-free withdrawals from a plan. In contrast, penalty-free withdrawals generally may not be made from an IRA until age 59½. It also may be easier to borrow from a plan.
      •   Protection from Creditors and Legal Judgments—Generally speaking, plan assets have unlimited protection from creditors under federal law, while IRA assets are protected in bankruptcy proceedings only. State laws vary in the protection of IRA assets in lawsuits.
      •   Required Minimum Distributions—Once an individual reaches age 70½, the rules for both plans and IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution. If a person is still working at age 70½, however, he generally is not required to make required minimum distributions from his current employer's plan. This may be advantageous for those who plan to work into their 70s.
      •   Employer Stock—An investor who holds significantly appreciated employer stock in a plan should consider the negative tax consequences of rolling the stock to an IRA. If employer stock is transferred in-kind to an IRA, stock appreciation will be taxed as ordinary income upon distribution.15 The tax advantages of retaining employer stock in a non-qualified account should be balanced with the possibility that the investor may be excessively concentrated in employer stock. It can be risky to have too much employer stock in one's retirement account; for some investors, it may be advisable to liquidate the holdings and roll over the value to an IRA, even if it means losing long-term capital gains treatment on the stock's appreciation.
      These are examples of the factors that may be relevant when analyzing available options, and the list is not exhaustive. Other considerations also might apply to specific circumstances.
      3. Conflicts of Interest

      Firms and their registered representatives that recommend an investor roll over plan assets to an IRA may earn commissions or other fees as a result. In contrast, a recommendation that an investor leave his plan assets with his old employer or roll the assets to a plan sponsored by a new employer likely results in little or no compensation for a firm or a registered representative. This conflict is not limited to the broker-dealer distribution channel. An investment adviser who recommends an investor roll over plan assets into an IRA may earn an asset-based fee as a result, but no compensation if assets are retained in the plan. Thus, a financial adviser has an economic incentive to encourage an investor to roll plan assets into an IRA that he will represent as either a broker-dealer or an investment adviser representative.16

      Conflicts also may exist for firms and their associated persons that are responsible for educating plan participants about their choices. For example, if an associated person receives compensation for the number of IRAs that participants open at his firm, he has an incentive to encourage participants to open IRAs rather than maintain their assets in their plan.

      FINRA urges broker-dealers to review their retirement services activities to assess conflicts of interest.17 Firms must supervise these activities to reasonably ensure that conflicts of interest do not impair the judgment of a registered representative or another associated person about what is in the customer's interest and that they neither confuse investors nor interfere with important educational efforts.
      4. Suitability and Fair Dealing

      Implicit in all broker-dealer and associated person relationships with customers and others is the fundamental responsibility for fair dealing.18 Rule 2111, FINRA's suitability rule, requires that a broker-dealer and its associated persons have a reasonable basis to believe that a recommended transaction or investment strategy involving a security is suitable for the customer.19 A firm and its registered representatives, in making a recommendation, must consider the customer's investment profile, including the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the broker-dealer or registered representative in connection with the recommendation.

      A recommendation concerning the type of retirement account in which a customer should hold his retirement investments typically involves a recommended securities transaction, and thus is subject to Rule 2111. For example, a firm may recommend that an investor sell his plan assets and roll over the cash proceeds into an IRA. Recommendations to sell securities in the plan or to purchase securities for a newly-opened IRA are subject to Rule 2111.20

      If Rule 2111 is triggered, a registered representative must have a reasonable basis to believe that the recommendation is suitable for the customer, based on information about the options obtained through reasonable diligence, and taking into account factors such as tax implications, legal ramifications, and differences in services, fees and expenses between the retirement savings alternatives.21

      Retirement plan assets typically constitute long-term investments by a customer. A registered representative must consider not only the immediate consequences of the recommendation, such as the potential tax penalties of early withdrawal from an employer sponsored plan, but also the eventual treatment under the Internal Revenue Code and other long-range effects of a particular choice. The registered representative should discuss with the customer the various factors related to the decision, in a manner reasonably likely to facilitate the investor's understanding. Some firms have adopted effective procedures under which an exception report is generated if a customer adds significant assets to an IRA.

      Some firms and their associated persons provide educational information to plan participants concerning their retirement choices. Firms that permit educational information only should adopt measures reasonably designed to ensure that the firm and its associated persons do not make recommendations for purposes of Rule 2111 to plan participants. These measures should include training concerning what statements may trigger application of Rule 2111, and consideration of the compensation arrangements that could cause an associated person to make a recommendation. To the extent that a firm prohibits recommendations to plan participants, supervisory personnel of the firm should reasonably monitor the communications to ensure that the prohibition is not compromised.
      5. Supervision and Supervisory Control System

      Under NASD Rule 3010, broker-dealers must establish written supervisory procedures that are reasonably designed to ensure that their recommendations and marketing of IRA accounts and related services comply with applicable securities laws and FINRA rules. Written supervisory procedures should be reasonably designed to ensure that (i) registered representatives perform appropriate customer-specific suitability analyses and (ii) marketing materials are fair and balanced. Firms also are reminded that NASD Rule 3012 requires firms to test and verify that their written supervisory procedures are reasonably designed to ensure compliance with the federal securities laws and FINRA rules.22
      6. Training of Registered Representatives

      Firms must ensure that a registered representative who recommends a rollover to an IRA has been properly trained concerning retirement savings options and the tax, investment and other implications of the decision. Firms should update their training as needed if regulatory changes occur that are relevant to the decision whether to roll over plan assets. Firms should emphasize that performance of the suitability responsibilities of a broker-dealer or registered representative should never be compromised by their financial interest in recommending an IRA rollover or another action.
      7. Communications With the Public

      Under FINRA Rule 2210, firms must ensure that their communications with the public are based on principles of fair dealing and good faith, are fair and balanced, and provide a sound basis to evaluate the facts about any particular security or type of security, industry or service. No broker-dealer may omit any material fact or qualification if the omission, in light of the context of the material presented, would cause the communications to be misleading. No broker-dealer may make any false, exaggerated, unwarranted or misleading statement or claim in any communication with the public, or publish, circulate or distribute any public communication that the broker-dealer knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading.

      Rule 2210 applies to a broker-dealer's marketing of IRAs and related services. Whether in written sales material or an oral marketing campaign, it would be false and misleading to imply that a retiree's only choice, or only sound choice, is to roll over her plan assets to an IRA sponsored by the broker-dealer. The marketing of the IRA rollover services offered by the broker-dealer must be balanced by a discussion of other available options and how they compare to the IRA offered, particularly with regard to fees. As stated in Regulatory Notice 13-23, any discussion of IRA fees must be fair and balanced. The broker-dealer may not claim that its IRAs are "free" or carry "no fee" when the investor will incur costs related to the account, account investments or both. If in marketing IRA rollovers a broker-dealer describes the various benefits of an IRA, the communication may be deemed misleading if it omits information needed to cause the description to be fair and balanced in terms of its comparison to other options.
      8. FINRA Examinations of Firms

      A determination to roll over plan assets to an IRA rather than keeping them in a previous employer's plan or rolling over to a new employer's plan should reflect consideration of various factors, the importance of which will depend on the customer's individual needs, circumstances and options. The recommendation and marketing of IRA rollovers will be an examination priority for FINRA in 2014.

      1 See, e.g., Gallup video on retirement planning and the Employee Benefit Research Institute's 2013 Retirement Confidence Survey. According to the Gallup poll, 61 percent of Americans are very or moderately worried about not having enough money for retirement. See also Department of Labor, "Taking the Mystery Out of Retirement Planning." ("The whole retirement scene has changed and many American workers find it a mystery.")

      2 For ease of reference, this Notice addresses rollovers from 401(k) plans to IRAs. Similar considerations may arise in rollover decisions involving other types of employer-sponsored plans, such as 403(b) plans.

      3 In a transfer, an investor does not take physical custody of plan assets; the assets move directly from the 401(k) plan to the IRA. In a rollover, an investor receives a check from the 401(k) plan after requesting liquidation and deposits the check into a rollover IRA within a certain period of time. For ease of reference, this Notice generally uses "rollover" to refer to both situations.

      4 Not all employer plans accept rollovers. See Government Accountability Office 13-30, "Labor and IRS Could Improve the Rollover Process for Participants" at 8 (March 2013) ("GAO Report").

      5 This option—taking a lump sum distribution that is not rolled over into another plan or an IRA—may be costly for many younger individuals. In general, tax penalties will apply if the employee is below age 59½ and the distribution will be taxed as ordinary income.

      6 GAO stated that many experts indicate "[much] of the information and assistance participants receive is through the marketing efforts of service providers touting the benefits of IRA rollovers and is not always objective." See GAO Report at 22.

      7 These rules include FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade), 2210 (Communications with the Public) and 2111(Suitability), and NASD Rules 3010 (Supervision) and 3012 (Supervisory Control Systems).

      See also Regulatory Notice 13-23 (July 2013) (guidance concerning the marketing of "no-fee" IRAs.)

      8 Rule 2111 applies only to explicit hold recommendations, and does not apply when a broker-dealer is silent regarding security positions in an account. See Frequently Asked Questions FINRA Rule 2111 (Suitability).

      9 See Investment Company Institute (ICI) Frequently Asked Questions About Individual Retirement Accounts and 2013 Investment Company Fact Book at 114. In calculating defined contribution plan assets, the ICI included 401(k) plans, 403(b) plans, 457 plans, Keoghs and other defined contribution plans "without 401(k) features." In calculating IRA assets, the ICI included traditional IRAs, Roth IRAs and employer-sponsored IRAs (SEP IRAs, SAR-SEP RAs and SIMPLE IRAs). The $9 trillion in other retirement plans includes, among others, private-sector defined benefit plans, federal, state and local pension plans and all fixed and variable annuity reserves at life insurance companies less annuities held by IRAs, 403(b) plans, 457 plans and private pension funds.

      10 See letter to Employee Benefits Security Administration from Davis & Harman, April 12, 2011 (transmitting study prepared by Oliver Wyman Inc.).

      11 See ICI, The U.S. Retirement Market, Second Quarter 2012 (September 2012).

      12 See ICI Research Perspective, "The Role of IRAs in U.S. Households' Saving for Retirement, 2013."

      13 Not all IRAs permit a broad range of investments. For example, an IRA held with a mutual fund complex may limit investment to the complex's funds.

      14 See U.S. Department of Labor publication A Look At 401(k) Plan Fees. See also Society for Human Resource Management article citing the 12th edition of the 401k Averages Book. The average total plan cost for a small retirement plan (no more than 100 participants) for all expenses bundled together, including investment fees deducted from participants' assets and administrative, recordkeeping and trustee fees, paid by the plan sponsor or passed along to participants, was 1.3 percent of assets under management in 2011. The average total plan cost for a large plan (at least 1,000 participants) was slightly lower, at 1.08 percent.

      Individual service fees are charged separately to the accounts of participants who choose to take advantage of a particular plan feature, such as taking a loan from the plan. Other services may include, for example, provision of a toll-free telephone number for help and assistance. U.S. Department of Labor publication A Look At 401(k) Plan Fees.

      15 Generally, to obtain favorable tax treatment, an investor must (i) take a lump-sum distribution of all of his assets in the plan; (ii) request an in-kind distribution of the employer stock; and (iii) place the employer stock into a non-retirement account. Upon doing so, the investor will pay ordinary income tax on his cost basis (and a 10 percent penalty if under age 59½ when he sells the stock, however, he will pay long-term capital tax, not ordinary income tax, on the stock's appreciation.

      16 Similar conflicts may be presented for banks and other financial services firms that hold IRAs.

      17 Firms should consider FINRA's October 14, 2013, Report on Conflicts of Interests, which highlights effective conflicts management practices that may go beyond current regulatory requirements.

      18 See Rule 2111, Supplementary Material .01.

      19 In addition to a customer-specific suitability determination, Rule 2111 requires reasonable-basis suitability (a determination that the recommendation is suitable for at least some investors) and quantitative suitability.

      20 Many plans allow for in-kind distributions, which permits securities held in the plan by a participant to be transferred to a new qualified account. Certain holdings, however, such as institutional mutual funds that are available only to plan participants, may not be transferable; such assets must be sold if an investor seeks to roll over to an IRA.

      21 The rule generally does not apply to a communication that only describes a plan. See Rule 2111, Supplementary Material .03(b).

      22 On December 23, 2013, the SEC issued an order approving FINRA's proposed rule change to adopt rules regarding supervision in the consolidated FINRA rulebook. See Securities Exchange Act Release No. 71179 (December 23, 2013) (Order Approving File No. SR-FINRA-2013-025). FINRA will issue a Regulatory Notice announcing the effective date of the consolidated supervision rules.

    • 13-44 FINRA Announces Updates of the Interpretations of Financial and Operational Rules

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      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Finance
      Legal
      Operations
      Regulatory Reporting
      Senior Management
      Key Topics

      Books and Records
      Customer Protection
      Financial Reporting
      Net Capital
      Referenced Rules & Notices

      Regulatory Notice 08-46
      Regulatory Notice 08-56
      SEA Rule 15c3-1
      SEA Rule 15c3-1b
      SEA Rule 15c3-1d
      SEA Rule 15c3-3
      SEA Rule 17a-5

      Executive Summary

      FINRA is making available updates to the Interpretations of Financial and Operational Rules that the staff of the SEC's Division of Trading and Markets (SEC staff) have communicated to FINRA. The updated interpretations—consisting of specified additions, revisions and rescissions, as set forth in this Notice—relate to Securities Exchange Act (SEA) Rules 15c3-1, 15c3-1b, 15c3-1d, 15c3-3 and 17a-5.

      Questions concerning this Notice should be directed to:

      •   Yui Chan, Managing Director, Risk Oversight and Operational Regulation (ROOR), at (646) 315-8426; or
      •   Susan DeMando Scott, Associate Vice President, ROOR, at (240) 386-4620.

      Background & Discussion

      SEC staff continues to communicate and issue written and oral interpretations of various SEC rules. FINRA previously published the Interpretations of Financial and Operational Rules on its website in Regulatory Notice 08-56. As FINRA noted in the Notice, the interpretations, referred to as the Interpretations of Financial and Operational Rules, are imbedded in the text of relevant rules and immediately follow the section of the rule that they interpret. The interpretations also retain the original date of publication or issuance and, if applicable, any subsequent publication or issuance date(s).

      The following sets forth the interpretation updates that are being made available. Page references refer to the hardcopy version. These interpretations are being updated with specified additions, revisions and rescissions and are available in portable digital format (pdf) FINRA's Interpretations of Financial and Operational Rules page.

      New interpretations that have been added:

      •   SEA Rule 15c3-1(c)(1)/26 (Fines and Other Monetary Penalties Assessed by a Governmental Agency or Self-Regulatory Organization) on page 158. This interpretation provides guidance as to the treatment of such items as either contingent or actual liabilities.
      •   SEA Rule 15c3-1(c)(2)(iv)(C)/075 (Treatment of an Unsecured Receivable Due From a Guaranteed Subsidiary) on page 294. This interpretation replaces an interpretation that has been rescinded (see SEA Rule 15c3-1(c)(2)(iv)(C)/07 (Intercompany Accounts with Guaranteed Subsidiaries) on page 292 and "Interpretations that have been rescinded" section of this Notice) and clarifies the net capital treatment of a receivable from a guaranteed subsidiary.
      •   SEA Rule 15c3-1(c)(2)(iv)(C)/17 (Investment Advisory Fees) on page 301. This interpretation provides conditions for allowable asset treatment of investment advisory fees in the computation of net capital.
      •   SEA Rule 15c3-1(c)(2)(iv)(E)/0211 (Monetary Penalty Resulting From the Voluntary Termination of a Clearing Agreement) on page 321. This interpretation clarifies the net capital implications to introducing broker-dealers when a voluntary termination of their clearing agreement results in a monetary penalty owed to their clearing broker-dealer. This guidance was previously published in Regulatory Notice 08-46.
      •   SEA Rule 15c3-1(c)(2)(iv)(E)/0212 (Clearing Agreements Containing a Termination Penalty Clause) on page 322. This interpretation addresses the net capital treatment of introducing firms' clearing deposits held by their clearing broker-dealers when their clearing agreement contains a termination penalty clause and discusses the conditions that must be satisfied in order for the clearing deposit to be treated as an allowable asset in the computation of the introducing firm's net capital. This guidance was previously published in Regulatory Notice 08-46.
      •   SEA Rule 15c3-1(c)(2)(vi)(D)/03 (Redeemable Securities of an Investment Company Registered Under the Investment Company Act of 1940) on page 452. This interpretation outlines the conditions under which redeemable securities of an investment company registered under the Investment Company Act of 1940 would be subject to a haircut deduction of 15 percent.
      •   SEA Rule 15c3-1(c)(2)(vii)/001 (FOCUS Reporting of Non-Marketable Inventory Positions) on page 550. This interpretation clarifies the proper net capital treatment and reporting of non-marketable inventory positions on the FOCUS Report.
      •   SEA Rule 15c3-1d(a)(2)(iii)/031 (Haircut Deduction on Foreign Currency Contributed as Collateral to a Secured Demand Note) on page 1305. This interpretation replaces a rescinded interpretation (see SEA Rule 15c3-1d(a)(2)(iii)/03 (Foreign Currency) on page 1305 and "Interpretations that have been rescinded" section of this Notice) and provides clarification of the haircuts applicable to foreign currency collateralizing a secured demand note.
      •   SEA Rule 17a-5(a)(2)(i)/03 (Retroactive Application of Changes in Accounting Principles) on page 3202. This interpretation provides guidance about FOCUS report, net capital and other calculations filing requirements when a broker-dealer adopts a new accounting principle on a retroactive basis, as well as the proper FOCUS reporting of adjustments resulting from such changes.

      Interpretations that have been revised:

      •   SEA Rule 15c3-1(c)(2)(iv)(E)/021 (Clearing Deposits of Introducing Brokers) on pages 320–321. This interpretation outlines updated requirements applicable to clearing deposits maintained at a clearing broker-dealer. This guidance was previously published in Regulatory Notice 08-46.
      •   The following four interpretations have been revised to reflect updated titles, revisions to the list of major foreign currencies and other minor clarifications:
      •   SEA Rule 15c3-1(c)(2)(vi)/08 (Haircut Deduction on a Foreign Currency Balance) on page 406.
      •   SEA Rule 15c3-1(c)(2)(vi)/09 (Haircut Deductions on Inventory Positions Denominated in a Foreign Currency) on page 407.
      •   SEA Rule 15c3-1b(a)(3)(ix)(C)/01 (Haircut Deduction on a Foreign Currency Balance) on page 1121.
      •   SEA Rule 15c3-1b(a)(3)(ix)(E)/01 (Forward Contracts in Foreign Currency) on page 1122.
      •   SEA Rule 15c3-3(Exhibit A—Item 4)/04 (Continuous Net Settlement Balances (CNS)—Fails to Receive) on page 2692. This interpretation clarifies the proper reporting of CNS fails to receive balances in the reserve formula computations.
      •   SEA Rule 15c3-3(Exhibit A—Item 12)/03 (Continuous Net Settlement Balances (CNS)—Fails to Deliver) on page 2751. This interpretation clarifies the proper reporting of CNS fails to deliver balances in the reserve formula computations.

      Interpretations that have been rescinded:

      •   SEA Rule 15c3-1(c)(2)(iv)(C)/07 (Intercompany Accounts with Guaranteed Subsidiaries) on page 292. This interpretation relating to the treatment of unsubordinated, unsecured amounts receivable from a guaranteed subsidiary has been replaced by a new interpretation (see SEA Rule 15c3-1(c)(2)(iv)(C)/075 (Treatment of an Unsecured Receivable Due From a Guaranteed Subsidiary) on page 294) (see "New interpretations that have been added" section of this Notice).
      •   SEA Rule 15c3-1(c)(2)(iv)(F)(3)(ii)/04 (Repurchase Transactions to Maturity) on page 355. This interpretation relating to haircuts on securities collateralizing repurchase transactions to maturity has been rescinded.
      •   SEA Rule 15c3-1d(a)(2)(iii)/03 (Foreign Currency) on page 1305. This interpretation relating to haircuts on a foreign currency collateralizing a secured demand note has been replaced with a new interpretation, SEA Rule 15c3-1d(a)(2)(iii)/031 (Haircut Deduction on Foreign Currency Contributed as Collateral to a Secured Demand Note) also on page 1305 (see "New interpretations that have been added" section of this Notice).

      For FINRA member firms and others that maintain the hardcopy version of the Interpretations of Financial and Operational Rules, the accompanying updated pages, containing the aforementioned interpretations, are being distributed as replacements for existing pages with the following filing instructions:

      SEA Rule Remove Old Pages Add New Pages
      15c3-1 158 158
      15c3-1 292 292
      15c3-1 294 294
      15c3-1 300–323 300–323
      15c3-1 355 355
      15c3-1 406–408 406–408
      15c3-1 452 452
      15c3-1 532–551 532–551
      15c3-1b 1121–1122 1121–1122
      15c3-1d 1304 1304–1305
      15c3-3 2692–2694 2692–2695
      15c3-3 2744–2752 2744–2752
      17a-5 3202–3206 3202–3206

    • 13-43 SEC Approves a Limited Exception From FINRA Rule 5131(b) to Permit Firms to Rely Upon a Written Representation From Certain Unaffiliated Private Funds; Effective Date: February 3, 2014

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      New Issue Allocations and Distributions

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Corporate Financing
      Legal
      Operations
      Senior Management
      Syndicate
      Underwriting
      Key Topics

      Allocations
      Conflicts of Interest
      Initial Public Offerings
      Investment Banking
      New Issues
      Public Offerings
      Spinning
      Referenced Rules & Notices

      FINRA Rule 5130
      FINRA Rule 5131
      Investment Advisers Act
      Section 202

      Executive Summary

      The SEC approved amendments to Supplementary Material .02 (Written Representations) to FINRA Rule 5131 (New Issue Allocations and Distributions) to provide a limited exception to facilitate firm compliance when allocating shares of a new issue to the accounts of certain unaffiliated private funds.1

      The text of the amendments can be found in the online FINRA Manual at www.finra.org/finramanual.

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

      Background and Discussion

      FINRA Rule 5131 (New Issue Allocations and Distributions) addresses potential abuses in the allocation and distribution of "new issues."2 Rule 5131(b) addresses the practice of "spinning," where a firm allocates shares of a new issue to the account of an executive officer or director of a public company3 or a covered non-public company4 (and materially supported persons)5 as an award for retaining the firm for investment banking business.6 The rule's spinning prohibitions generally apply to allocations to executive officers and directors:

      1. whose companies are current or recent (within the past 12 months) investment banking clients;
      2. where the person responsible for making the allocation decision knows or has reason to know that the firm intends to provide or expects to be retained for investment banking services by the company within the next three months; or
      3. on condition that the executive officer or director, on behalf of the company, will retain the firm for the performance of future investment banking services.

      Since the rule's inception, firms have been permitted to rely upon a written representation obtained within the prior 12 months from the beneficial owner of an account, or a person authorized to represent the beneficial owner, as to whether the beneficial owner is an executive officer or director (or materially supported person) and, if so, the name of the company on whose behalf the executive officer or director serves. FINRA believes that firms have found this provision useful in cases where the potentially covered person is a direct beneficial owner of the account that may receive the new issue allocation.

      However, firms have raised concerns regarding the difficulty involved in obtaining, tracking and aggregating information from accounts regarding indirect beneficial owners, such as participants in a fund of funds, for use in determining an account's eligibility to receive a new issue allocation.7 To address these concerns, FINRA has amended Rule 5131 to provide an exception, codified as Rule 5131.02(b) (Indirect Beneficial Owners), to ease compliance with the spinning provision in situations where the ability of an underwriter to confer any meaningful financial benefit to a particular investor by allocating new issue shares to the account is impracticable. Specifically, the new exception permits firms to rely upon a written representation obtained within the prior 12 months from a person authorized to represent an account that does not look through to the beneficial owners of any unaffiliated private fund invested in the account, except for beneficial owners that are control persons of the investment adviser to the private fund, that the unaffiliated private fund:

      •   is managed by an investment adviser;
      •   has assets greater than $50 million;
      •   owns less than 25 percent of the account and is not a fund in which a single investor has a beneficial interest of 25 percent or more; and
      •   was not formed for the specific purpose of investing in the account.

      Supplementary Material .02(b) further provides that an "unaffiliated private fund" is a "private fund," as defined in Section 202(a)(29) of the Investment Advisers Act,8 whose investment adviser does not have a control person9 in common with the investment adviser to the account. A control person of an investment adviser is a person with direct or indirect "control" over the investment adviser, as that term is defined in Form ADV.

      As is currently the case, a firm may rely upon a written representation pursuant to Supplementary Material .02 unless it believes, or has reason to believe, that the representation is inaccurate, and must maintain a copy of all records and information relating to whether an account is eligible to receive an allocation of the new issue in its files for at least three years following the firm's allocation to that account.

      Amended Rule 5131 becomes effective on February 3, 2014. For more information, see FINRA rule filing SR-FINRA-2013-037.


      1 See Securities Exchange Act Release No. 70957 (November 27, 2013); 78 FR 72946 (December 4, 2013) (Order Approving SR-FINRA-2013-037).

      2 Rule 5131 provides that "new issue" has the same meaning as in Rule 5130(i)(9), which generally includes any initial public offering of an "equity security," as defined in Section 3(a) (11) of the Exchange Act, made pursuant to a registration statement or offering circular, with enumerated exceptions.

      3 A "public company" is any company that is registered under Section 12 of the Exchange Act or files periodic reports pursuant to Section 15(d) thereof. See Rule 5131(e)(1).

      4 The rule defines a "covered non-public company" as any non-public company satisfying the following criteria: (i) income of at least $1 million in the last fiscal year or in two of the last three fiscal years and shareholders' equity of at least $15 million; (ii) shareholders' equity of at least $30 million and a two-year operating history; or (iii) total assets and total revenue of at least $75 million in the latest fiscal year or in two of the last three fiscal years. See Rule 5131(e)(3).

      5 "Material support" means directly or indirectly providing more than 25 percent of a person's income in the prior calendar year. Persons living in the same household are deemed to be providing each other with material support. See Rule 5131(e)(6).

      6 "Investment banking services" include, without imitation, acting as an underwriter, participating in a selling group in an offering for the issuer or otherwise acting in furtherance of a public offering of the issuer; acting as a financial adviser in a merger, acquisition or other corporate reorganization; providing venture capital, equity lines of credit, private investment, public equity transactions (PIPEs) or similar investments or otherwise acting in furtherance of a private offering of the issuer; or serving as placement agent for the issuer. See Rule 5131(e)(5).

      7 For example, firms have noted that broker-dealers normally do not know the identity of the beneficial owners of the fund of funds invested in the account.

      8 Section 202(a)(29) of the Investment Advisers Act of 1940 defines the term "private fund" as an issuer that would be an investment company, as defined in Section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3) (Investment Company Act), but for Section 3(c)(1) or 3(c)(7) of the Investment Company Act.

      9 A control person of an investment adviser is a person with direct or indirect "control" over the investment adviser, as that term is defined in Form ADV.

    • 13-42 FINRA Requests Comment on a Concept Proposal to Develop the Comprehensive Automated Risk Data System; Comment Period Expires: March 21, 2014

      View PDF

      Comprehensive Automated Risk Data System

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Legal
      Operations
      Risk
      Senior Management
      Technology
      Key Topics

      Reporting Requirements
      Referenced Rules & Notices

      FINRA Rule 2111
      FINRA Rule 8210
      NASD Rule 3150
      NTM 03-73

      Executive Summary

      FINRA is requesting comment on a concept proposal to develop a new Comprehensive Automated Risk Data System (CARDS), a rule-based program that would allow FINRA to collect on a standardized, automated and regular basis, account information, as well as account activity and security identification information that a firm maintains as part of its books and records. This Notice is intended to obtain the views of firms and others at the initial stage of determining how FINRA should obtain broader information to advance its supervision of firms and their associated persons.

      Questions concerning this Notice should be directed to:

      •    Daniel M. Sibears, Executive Vice President, Regulatory Operations/Shared Services, at (202) 728-6911;
      •   Jonathan Sokobin, Sr. Vice President, Office of the Chief Economist, at (202) 728-8248; or
      •   Victoria L. Crane, Associate General Counsel, Office of General Counsel, at (202) 728-8104.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by March 21, 2014.

      Comments must be submitted through one of 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 comments more efficiently, persons should use only one method to comment on the proposal.

      Important Notes: All comments received in response to this Notice will be made available to the public on the FINRA website. In general, FINRA will post comments as they are received.1

      Background and Discussion

      Technology is changing the way that FINRA examines firms and oversees the markets, by enabling FINRA to collect, process and analyze large quantities of information. Access to this information allows FINRA to analyze data in new ways that better protect investors and ensure market integrity. FINRA must take advantage of technological advancements to continue as an efficient and effective regulator.

      As discussed in more detail below, CARDS is a broad ranging initiative supporting a comprehensive approach to supervising firms. Initially, FINRA envisions using CARDS to collect specific retail customer information—i.e., information contained in required books and records—from clearing and self-clearing firms on a regular schedule. Introducing firms would be required to provide their clearing firms with specified information they control so that clearing firms can provide this information to FINRA in conjunction with other information the clearing firm provides. FINRA would use the information to run analytics that identify potential red flags of sales practice misconduct (e.g., churning, excessive commissions, pump and dump schemes, markups, mutual fund switching), as well as help FINRA identify potential business conduct problems with member firms, branches and registered representatives.

      In developing the CARDS concept, FINRA has begun to meet with industry participants and wishes to confer further with a broad cross-section of firms to identify a cost effective approach for submitting information from firm books and records. The information selected for submission to FINRA during the initial phase of CARDS would generally represent the same types of information FINRA currently collects on a firm-by-firm basis during the examination process. Based on experience with two major clearing firms with which FINRA tested the feasibility of an automated data acquisition program, FINRA believes that the vast majority of the information that CARDS would collect is already stored in an automated format at clearing and self-clearing firms and service bureaus. FINRA recognizes that the ability of firms to collect and submit the information efficiently in a standardized format may vary. As a result, FINRA envisions implementing CARDS through a phased approach over a reasonable period of time and is seeking comment regarding the structure of a phased approach.

      A. Current Information Collection

      FINRA's current risk-based national examination program is central to FINRA's efforts to protect investors. At its core, this examination program seeks to target potential business conduct abuses investors face. Currently, FINRA's examination program is a risk-based on-site approach that requires information collection for each examination on a firm-by-firm basis. FINRA collects firm data, such as purchase and sales blotters and customer account information, on an episodic basis.2 These information requests necessarily vary in content, scope and time period, and may overlap if FINRA issues more than one request to the same firm for different events (such as a simultaneous financial and operational or market regulation examination). Because firms do not regularly produce the information FINRA collects for individual sales practice examinations, FINRA does not have a data-based method of assessing business conduct patterns and trends across the industry. In addition, for individual examinations, firms need time to provide the information requested while an examination is in progress. Such situations reduce FINRA's ability to assess the risk areas on which to focus its examination program, as well as FINRA's ability to efficiently review individual firm activities prior to an examination. CARDS would support the use of advanced technologies, defined data and targeted analytics that would permit FINRA to appropriately focus examinations on problematic areas.

      Currently, FINRA information requests often require firms to produce information they maintain in multiple systems, requiring significant effort on the part of firms to comply. When FINRA is concerned about an investor protection threat, it may request information to be produced quickly, which increases the costs of the production. To respond to information requests, firms have indicated that they often must divert critical staff from their primary responsibilities, hire temporary staff, outsource the fulfillment effort to a third party or request special support from clearing firms. Though currently necessary to fulfill FINRA's responsibilities, individual information requests increase costs to firms, disrupt firms' business activities and slow FINRA examinations and inquiries.
      B. Proposal for Automated Submission of Account Information Requested by FINRA

      Innovations in information technology now allow the collection, processing and analysis of large quantities of information. CARDS is designed to use this technology to support a more effective examination program.

      CARDS' first phase is intended to increase FINRA's ability to use automated analytics on current and historical firm data to identify problematic sales practice activity. CARDS would enable FINRA to more efficiently review firm and industry activity and better focus its resources on key risks and exposures. Access to more comprehensive data would allow FINRA to better analyze customer dealing information on an individual firm basis, compare one firm's customer dealing activities against its peers', and understand industry-wide patterns and trends.

      In addition, CARDS is intended to reduce burdens on firms by eliminating intermittent information requests from FINRA for the information CARDS covers. FINRA would also analyze CARDS information before examining firms on-site, thereby potentially reducing the length of examiners' on-site visits to firms.

      To help inform this concept proposal, FINRA conducted two proofs of concept. One proof of concept collected information from individual firms to validate automated analytics designed to identify potentially problematic sales practice activities.3 The other proof of concept collected information from two clearing firms to test the feasibility of an automated data acquisition program.4

      These proofs of concept helped FINRA develop a new approach using automated analytics and an ongoing data acquisition program where information is regularly submitted by firms. FINRA applied analytics to individual firm data to identify potential red flags early in its examination preparation. Importantly, FINRA also developed a standard electronic data acquisition process that collected account, transactional and position data from two clearing firms on a recurring delivery schedule. By running the firm data through analytics for pattern detection, FINRA was able to more accurately identify risk areas. For example, the analytics showed FINRA that a firm was selling a new, high-risk product—a business in which the firm was not historically engaged and its financial reporting did not disclose. FINRA used information from another firm to identify suspicious pump and dump activity from several years prior to a clearing firm conversion.5

      While these proofs of concept have been informative, firm input is critical to further explore the opportunities and issues of collecting and analyzing customer dealing data on an ongoing basis. Thus, FINRA encourages comments generally on the concept proposal as well as in response to the specific questions set forth in the Request for Comments section below. In particular, FINRA requests comment on the economic impact of CARDS, including the costs and benefits of the proposal, and requests submission of data and quantified comments, where possible.
      C. Data Specifications

      As currently envisioned, once CARDS is implemented, clearing firms (on behalf of introducing firms) and self-clearing firms would submit in an automated, standardized format specific information relating to their customers' accounts and the customer accounts of each firm for which they clear. Such information would include, at a minimum:6
      •   Account Information: This information identifies account types associated with account activity, firms and their branches and associated persons responsible for supervision and sales. This information would be used for sales practice reviews such as quantitative suitability, commissions and markup/down, and penny stock activities.
      •   Account types and categories (e.g., retirement, brokerage, cash, margin, options, discretionary, day trading)
      •   Customer investment profile information (e.g., investment objective, date of birth)
      •   An identifier for beneficial owners or control persons7
      •   Servicing registered persons and locations (e.g., registered person CRD number and branch CRD number)
      •   Account Activity Information: In conjunction with account information, account activity information serves as the primary basis for risk identification related to suitability reviews, fraud detection, anti-money laundering and other sales practice-related reviews.
      •   Details of account activity (e.g., purchases and sales transactions, event dates)
      •   Additions/withdrawals, securities and account transfers
      •   Margin and balances
      •   Security Identification Information: Security identification information is required for FINRA to determine the characteristics of securities.
      •   Description of securities (e.g., CUSIP, symbol, description, name, ISIN, SEDOL)
      Introducing firms would not be required to transmit the specified information directly to FINRA, but would provide their clearing firms with information in their possession that is necessary for the clearing firms to comply with CARDS' information submission requirements. Clearing firms would not be responsible for ensuring the accuracy or completeness of the information provided to them by their introducing firms for submission to FINRA in compliance with the program. The initial phase of CARDS would focus on information that is already required to be created and maintained by either the clearing firm or the introducing firm.

      Any clearing or self-clearing firm submitting information would submit such information in a manner that would enable FINRA to distinguish between information pertaining to customer accounts of an introducing firm and information pertaining to customer accounts of any firm for which the introducing firm is acting as an intermediary in obtaining clearing services from a clearing or self-clearing firm.

      FINRA envisions that firms would submit the required information to FINRA on a regular schedule (such as daily or weekly) in a standardized format that would permit FINRA to run analytics for a particular day during the period being reported. A firm submitting information would be permitted to enter into an agreement with a third party to fulfill the firm's reporting obligations. However, notwithstanding the existence of such an agreement, each firm would remain responsible for complying with the information reporting requirements.8

      Given the value and sensitivity of the information to be collected via CARDS, it is essential that this information is protected from unauthorized disclosure or use. CARDS would incorporate current and effective information security methods to protect this information. FINRA welcomes comments regarding ways to further reduce security risks.

      FINRA requests comment generally on the data specifications described in this Notice, as well as in response to the specific questions in the Request for Comments section below.
      D. Phased Implementation Approach

      As currently envisioned, the first phase of CARDS would focus on business conduct for retail accounts, but FINRA is considering ways to further structure such an approach. For example, FINRA is considering whether the initial phase of CARDS should begin with a select group of firms and the collection of a subset of information.

      Based on information received in response to this Notice, FINRA would consider whether to include additional phases in implementing CARDS, and how to expand CARDS during any such later phases of its implementation.
      E. Economic Impact

      CARDS would require the submission to FINRA of account information, as well as account activity and security identification information by clearing firms (on behalf of introducing firms) and self-clearing firms. Introducing firms typically collect and retain information about the customer, including account information. Introducing firms may also have in their possession limited account activity and security identification information.

      FINRA understands that, currently, clearing firms' systems may collect and retain information for new accounts of their introducing firms, and create and retain account activity and security identification information for such firms. Clearing firms' systems differ in how they collect and store this information and may or may not have unused or open fields in their systems. As a result, clearing firms have in their systems some but not all the information that would be required by CARDS.
      1. Anticipated Benefits of the Proposal

      As discussed in more detail above, CARDS would be expected to reduce present regulatory costs and burdens on firms by reducing the need for manual, partial, overlapping and one-time regulatory report generation for the information required to be reported to CARDS. It would result in a standard technology interface that would enable firms and FINRA to create and maintain one set of computer programs for firms to submit and FINRA to collect the information required by CARDS.

      CARDS is intended to increase the effectiveness of the examination process by enabling FINRA to identify risks to efficiently target firm surveillance and examination programs. While FINRA has improved its approach over recent years to better gather firm information, standardized information collection and automated analytics would greatly strengthen that process.9 In addition, following FINRA's analyses of the information firms provide, FINRA could share its analyses, including performance benchmarks, with firms to help firms with their compliance and supervisory programs.

      CARDS would not supplant the legal, compliance and supervisory programs firms administer. Rather, a firm's compliance and supervisory programs would continue to have the obligation to conduct oversight to prevent and detect problems based on the full information firms hold.

      CARDS would also reduce FINRA's reliance upon, and eventually replace the use of, existing data systems and feeds, such as INSITE.10 FINRA is committed to a thorough analysis of existing as well as any future reporting requirements, such as those that may be required by the Consolidated Audit Trail (CAT), to eliminate duplication of reporting requirements as CARDS is implemented.
      2. Anticipated Costs of the Proposal

      Clearing firms would likely incur costs to build and maintain the infrastructure to submit the required information to FINRA. Clearing firms may also incur costs to monitor the information transmission. Introducing firms also would likely incur costs in providing additional information to their clearing firms to meet the new requirements. Introducing firms may face additional costs if they currently use open fields in the clearing firms' systems for their own business but are unable to do so going forward due to CARDS' information submission requirements. Both introducing and clearing firms may have to develop new procedures around information transmission and resolution.

      Firms would incur costs if CARDS requires historical data to be collected for account information that was not previously received by the clearing firm. The burden of the costs would depend on whether the obligation to update the information was the responsibility of the introducing or clearing firm.

      The potential costs may be affected by the frequency of the information transfers, whether the transfers are for complete datasets or only the changes between periods, and how the clearing or introducing firms create and maintain their information presently. As set forth in the Request for Comments section below, FINRA requests comment on the distinct costs that clearing and introducing firms would incur.
      3. Other Economic Impacts

      Once CARDS is implemented, FINRA intends to conduct a public retrospective review following an appropriate period to determine whether it is effectively achieving its intended purpose.

      Request for Comments

      FINRA seeks comments on the CARDS concept proposal, outlined above. In addition to general comments, FINRA specifically requests comments on the following questions. FINRA requests data and quantified comments where possible.

      1. Are there alternative methods for FINRA to achieve its goals as articulated? If so, what are those alternatives and why might they be better suited? Are there other information collection methods FINRA should consider either as an alternative, or as a supplement, to CARDS?
      2. What would be the primary sources of economic impact, including the potential costs and benefits, to clearing, self-clearing and introducing firms in developing, implementing and maintaining the systems that would be necessary to comply with the reporting requirements of CARDS? What systems would potentially have to be modified and what would be the anticipated costs? Would the primary sources of economic impact differ based on the size of the firm or differences in the business model?
      3. In addition to systems modifications, what other potential changes to firms' infrastructure would be necessary? For example, would firms need to hire additional personnel either on a temporary or full-time basis to implement CARDS?
      4. To what extent do firms believe that they would rely upon third parties to fulfill their reporting obligations? Should FINRA specify supervisory obligations for firms that enter into agreements with third parties to fulfill the firms' reporting requirements related to CARDS? How could FINRA use CARDS to reduce firm use of personnel or third parties to fulfill examination and reporting requirements?
      5. To what extent do introducing firms currently maintain customer profile and suitability information with their clearing firms? If introducing firms maintain such information with the clearing firm, to what extent do introducing firms use the clearing firms' data fields in providing the information to the clearing firms? If the clearing firms' data fields are not used, how do introducing firms provide the information to their clearing firms? What would be the potential costs to introducing firms in providing the data elements required by CARDS to their clearing firms? If the data is not currently maintained in a standardized form, how much effort would be required to standardize the data to ensure comparability? Although CARDS contemplates the transmission of information from clearing firms to FINRA, would introducing firms find it more efficient and cost effective to transmit the specified information (or portions thereof) directly to FINRA?
      6. The information provided to FINRA would include, at a minimum, account, account activity and security identification information. Is this information collected and maintained for all types of customers and products? To what extent is this information currently maintained in an automated format? To what extent is the information stored at clearing and self-clearing firms versus service bureaus?
      7. FINRA expects that as applicable securities laws and FINRA rules evolve and are amended to include additional books and records requirements, it would revise CARDS' data specification elements to include that information. FINRA is contemplating assessing whether revisions to the data elements would be necessary on a 12- to 18-month cycle. What would be the feasibility of a 12- to 18-month cycle and what could impact that feasibility? What could be the potential economic impact of a 12- to 18-month revision cycle?
      8. FINRA is considering submissions of the required information to FINRA on a regular schedule (such as weekly or daily) in a format that would permit FINRA to run analytics for a particular day during the period being reported. Should FINRA require a longer or shorter period of time for submission of the information to FINRA? Given the proposed purpose for collecting the information, what would be an appropriate schedule for submission of the information to FINRA? What would be the costs and benefits of a longer versus a shorter reporting schedule for submission of the information to FINRA? What would be the costs and benefits of requiring different submission schedules depending on the information to be provided to FINRA? For example, what would be the costs and benefits if FINRA were to require monthly submission of account information, but daily submission of account activity information?
      9. FINRA is considering a phased approach to implementing CARDS. It envisions that the first phase of CARDS would focus on business conduct for retail accounts. What are the ways in which the first phase could be structured to best achieve the goal of focusing it on business conduct for retail accounts?
      10. For purposes of the initial phase of CARDS, would firms be able to clearly distinguish between retail customers and others? What systems changes, if any, would be necessary to allow firms to limit the submission of information to retail account activity? What would be the economic impact on firms, including the costs and benefits of limiting the initial phase of CARDS to the submission of information relating to retail account activity only? Is it easier or harder to limit reporting to retail account activity? What other types of account activity should or should not be included in an initial phase of implementation? How should historical information versus new accounts be treated under a phased approach?
      11. Following FINRA's analyses of the datasets firms provide, would it be beneficial for firms to receive the data with performance benchmarks? If so, should FINRA make that data available directly or through vendors or clearing firms?

      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 FINRA information requests are triggered by expected events such as cycle examinations (approximately 1,700 to 2,400 per year depending on cyclical demands) and other non-routine events such as cause examinations, enforcement investigations and special sweeps that often cover similar periods.

      3 The proof of concept focused on the use of the Risk Analytic Development Tool (RDAT), an electronic data submission format tool. FINRA used the RDAT for 12 examinations in 2012. The RDAT proof of concept validated that the automated analytics contained in RDAT were successful in identifying potentially problematic sales practice activity in many of the examinations. In addition, the analytics were successful in providing a better understanding of the firm's business model, operations and sales activity, and improving the quality of business conduct reviews through comprehensive, automated analysis of all brokerage activity. However, the data acquisition process was burdensome on FINRA staff and member firms due to a lack of standardization and automation. As a result, it was not feasible to move to a broader implementation. Nonetheless, through the proof of concept, FINRA reviewed much larger data sets than through current examination techniques.

      4 FINRA engaged in the second proof of concept in early 2013. The goals of this proof of concept were to validate the operational and regulatory concerns with delivering the data; assess the data quality and availability of the desired data elements at the clearing firms; validate the interfaces of the analytics tools used in the program; and develop the internal business concept of operations around usage of the data.

      To date, FINRA has successfully implemented an automated data acquisition program by collecting information for a total of 300 introducing firms from the participating clearing firms. In particular, FINRA identified the required data elements that these firms then extracted from their systems and transmitted to FINRA.

      5 In August 2013, FINRA launched a pilot program that married RDAT with the information for the 300 introducing firms acquired from the clearing firms in the early 2013 proof of concept. The pilot includes 65 examinations, and involves examination teams from each FINRA district office. FINRA intends to continue collecting and analyzing information received as part of the pilot to better inform it about clearing firm information and capabilities and to assist it with articulating the data specifications for CARDS.

      6 FINRA expects that as applicable securities laws and FINRA rules evolve and are amended to include additional books and records requirements, it would revise CARDS' data specification elements to include that information.

      7 As FINRA develops CARDS, it intends to consider ways in which to gather account identifying information without disclosing account names or other personally identifiable information.

      8 FINRA notes that, in developing CARDS, it is not intending to amend FINRA's rules governing firm books and records requirements. See, e.g., FINRA Rule 4511(b) (providing that member firms shall preserve for a period of at least six years those FINRA books and records for which there is no specified period under the FINRA rules or applicable Exchange Act rules).

      9 For example, FINRA recently updated the FINRA Firm Gateway Records Request for cycle examinations and Information Request for other examinations (collectively "Records Requests") to facilitate the electronic request and fulfillment of electronic business documents. The Records Requests system includes a "Request Manager" that is a secure, encrypted channel for document requests and responses that also tracks the requested documents and allows firms to seethe status of all requested documents on one screen.

      10 INSITE, or "Integrated National Surveillance and Information Technology Enhancements," is an electronic information collection too that gathers data pursuant to NASD Rule 3150 (Reporting Requirements for Clearing Firms) via technical specifications and requirements published on FINRA's website (see INSITE web page).

    • 13-41 eFOCUS System Updates Applicable to Joint Broker-Dealers/Futures Commission Merchants; Effective Date: Monthly FOCUS Report Part II and Part II CSE Due on February 26, 2014, Covering the January 31, 2014, Reporting Period

      View PDF

      eFOCUS Reporting

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Accounting
      Compliance
      Legal
      Operations
      Regulatory Reporting
      Senior Management
      Key Topics

      eFOCUS Reporting
      Referenced Rules & Notices

      CFTC Regulation 1.10
      FINRA Rule 4521
      Regulatory Notice 10-46
      SEA Rule 17a-5

      Executive Summary

      Beginning with the monthly FOCUS Report that is due on February 26, 2014 (covering the January 31, 2014, reporting period), FINRA is updating specified reporting schedules under the eFOCUS system to incorporate several of the new financial reporting requirements the Commodity Futures Trading Commission (CFTC) has adopted. Each member firm that is a futures commission merchant (FCM) must file the updated schedules as part of its monthly FOCUS Reports. The modified version of the FOCUS Report Part II and Part II CSE, which will include the updated CFTC schedules, will be available through FINRA's eFOCUS system beginning Monday, February 10, 2014.

      Questions regarding this Notice should be directed to:

      •   Yui Chan, Managing Director, Risk Oversight & Operational Regulation (ROOR), at (646) 315-8426; or
      •   Susan DeMando Scott, Associate Vice President, ROOR, at (240) 386-4620.

      Background & Discussion

      In November 2013, the CFTC adopted amendments1 to the CFTC's Regulation 1.10 that, among other things, include requirements for FCMs to make specified disclosures under the following schedules in the CFTC's Form 1-FR-FCM:2

      •   Statement of Segregation Requirements and Funds in Segregation for Customers Trading on U.S. Commodity Exchanges (the "Segregation Schedule");
      •   Statement of Secured Amounts and Funds Held in Separate Accounts Pursuant to Commission Regulation 30.7 (the "Secured Amount Schedule"); and
      •   Statement of Cleared Swaps Customer Segregation Requirements and Funds in Cleared Swaps Customer Accounts Under Section 4d(f) of the Commodity Exchange Act (the "Cleared Swaps Segregation Schedule").

      The amendments to the Segregation Schedule and the Secured Amounts Schedule require each FCM to disclose the targeted amount of "residual interest"3 that the FCM seeks to maintain in customer segregated accounts and secured accounts as computed under CFTC regulations. The Cleared Swaps Segregation Schedule is the new schedule that the CFTC has adopted4 to further implement the cleared swaps segregation requirements set forth under Section 724(a) of the Dodd-Frank Act.5 FINRA notes that the new Cleared Swaps Segregation Schedule replaces the Statement of Sequestration Requirements and Funds in Cleared OTC Derivatives Sequestered Accounts as implemented pursuant to Regulatory Notice 10-46.

      Pursuant to FINRA Rule 4521(a), FINRA member firms that are FCMs must file the updated schedules in eFOCUS as set forth in the modified FOCUS Report Part II and Part II CSE, commencing with the monthly FOCUS Report Part II and Part II CSE that is due on February 26, 2014 (covering the January 31, 2014, reporting period). The modified version of the FOCUS Report Part II and Part II CSE, which will include the updated CFTC schedules, will be available through FINRA's eFOCUS system beginning Monday, February 10, 2014.6


      1 See CFTC Final Rule Release, Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations, 78 FR 68506 (November 14, 2013).

      2 CFTC Regulation 1.10 addresses the financial reporting requirements of FCMs and introducing brokers subject to the CFTC's jurisdiction. Form 1-FR-FCM is the CFTC's financial reporting form for FCMs under Regulation 1.10.

      3 As stated by the CFTC, "residual interest" refers to a cushion of proprietary funds that an FCM deposits into customer segregated and secured accounts to protect against becoming undersegregated or undersecured by failing to hold a sufficient amount of funds in such accounts to meet regulatory requirements. See 78 FR at 68513.

      4 See 78 FR at 68514. The CFTC stated that FCMs currently prepare a schedule comparable to the Cleared Swaps Segregation Schedule under applicable contract market or National Futures Association rules, and that the new schedule codifies existing practices. In this regard, FINRA implemented the Statement of Sequestration Requirements and Funds in Cleared OTC Derivatives Sequestered Accounts as announced in Regulatory Notice 10-46 (October 2010).

      5 Pub. L. No. 111-203, 124 Stat. 1376 (2010).

      6 The CFTC's amendments include specified revisions to the Statement of Financial Condition under Form 1-FR-FCM. See 78 FR at 68515. Member firms should note that FINRA is not adopting these revisions into the Statement of Financial Condition under eFOCUS.

    • 13-40 SEC Approves Amendments to Discovery Guide Used in Customer Arbitration Proceedings to Address Electronic Discovery, Product Cases and Affirmations; Effective Date: December 2, 2013

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      Discovery Guide

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Key Topics

      Affirmations
      Arbitration
      Code of Arbitration Procedure
      Discovery Guide
      Electronic Discovery
      Product Cases
      Referenced Rules & Notices

      Executive Summary

      The SEC approved amendments to the Discovery Guide used in customer arbitration proceedings.1 The amended guide provides arbitrators with guidance on resolving electronic discovery (e-discovery) disputes relating to the form for producing electronic documents. It explains how product cases are different from other customer cases and describes the types of documents that parties typically request in product cases. Finally, it clarifies the circumstances under which a party may request an affirmation when an opposing party does not produce documents specified in the guide.

      The amendments are effective on December 2, 2013, for all customer 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, Operations 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 guide supplements the discovery rules contained in the FINRA Code of Arbitration Procedure for Customer Disputes (Customer Code). It includes an introduction which describes the discovery process generally, and explains how arbitrators should apply the guide in arbitration proceedings. The introduction is followed by two Document Production Lists, one for firms/associated persons and one for customers, which enumerate the documents that parties should exchange without arbitrator or staff intervention. The guide only applies to customer arbitration proceedings, not to intra-industry cases. The SEC approved amendments to the guide to provide general guidance on e-discovery issues and product cases and to clarify the provision relating to affirmations made when a party does not produce documents specified in the guide.

      E-discovery

      The guide's introduction states that electronic files are documents within the meaning of the guide and that arbitrators decide any disputes that arise about the form in which a party produces a document. FINRA amended the guide to provide that parties are encouraged to discuss the form in which they intend to produce documents and, whenever possible, to agree to the form of production. The provision requires parties to produce electronic files in a "reasonably usable format." The term reasonably usable format refers, generally, to the format in which a party ordinarily maintains a document, or to a converted format that does not make it more difficult or burdensome for the requesting party to use in connection with the arbitration.

      The guide instructs arbitrators who are resolving contested motions about the form of production, to consider the totality of the circumstances, including, among other matters, the following three factors:

      •  for documents in a party's possession or custody, whether the chosen form of production is different from the form in which a document is ordinarily maintained;
      •  for documents that must be obtained from a third party (because they are not in a party's possession or custody), whether the chosen form of production is different from the form in which the third party provided it; and
      •  for documents converted from their original format, a party's reasons for choosing a particular form of production; how the documents may be affected by the conversion to a new format; and whether the requesting party's ability to use the documents is diminished by a change in the documents' appearance, searchability, metadata or maneuverability.2

      In conjunction with the new guidance on e-discovery, FINRA amended the guide's discussion on cost or burden of production. Currently, the guide states that if the arbitrators determine that the document is relevant or likely to lead to relevant evidence, they should consider whether there are alternatives that can lessen the impact of producing it, such as narrowing the time frame or scope of an item on the Document Production Lists, or determining whether another document can provide the same information. FINRA is mindful of the costs associated with e-discovery and amended the cost or burden of production provision to advise arbitrators that they may order a different form of production if it would lessen the impact of producing electronic documents.

      Product Cases

      FINRA amended the guide's introduction to add guidance on product cases. Product cases are unique customer cases that differ from other customer cases in several ways. The amended text provides that a product case is one in which one or more of the asserted claims centers around allegations regarding the widespread mismarketing or defective development of a specific security or specific group of securities. It enumerates some of the ways that product cases are different from other customer cases, including that:

      •  the volume of documents tends to be much greater;
      •  multiple investor claimants may seek the same documents;
      •  the documents are not client specific;
      •  the product at issue is more likely to be the subject of a regulatory investigation;
      •  the cases are more likely to involve a class action with documents subject to a mandatory hold;3
      •  the same documents may have been produced to multiple parties in other cases involving the same security or to regulators; and
      •  documents are more likely to relate to due diligence analyses performed by persons who did not handle the claimant's account.

      The guide explains that the two existing Document Production Lists may not provide all of the documents parties typically request in a product case relating to, among other things, a firm's creation of a product; due diligence reviews of a product; training on or marketing of a product; or post-approval review of a product. The text emphasizes that, in a product case, parties are not limited to the documents enumerated in the lists. It also emphasizes that the Customer Code provides a mechanism for parties to seek additional documents. Finally, the guidelines explain that parties do not always agree on whether a case is a product case, and the arbitrators may ask the parties to explain their rationale for asserting that a case is, or is not, a product case.

      Affirmations

      The guide provides for affirmations when a party indicates that there are no responsive documents in the party's possession, custody or control. The affirmation language provides that, upon the request of a party seeking documents, the customer, or appropriate person at the firm who has knowledge, must state that the party conducted a good faith search for the documents, describe the extent of the search and state that based on the search there are no requested documents.

      FINRA amended the affirmation language to make clear that a party may request an affirmation when an opposing party makes only a partial production. The revised language provides that, if a party does not produce a document specified in a list item on the applicable Document Production List, upon the request of the party seeking the document that was not produced, the customer or the appropriate person at the brokerage firm who has knowledge must affirm in writing that the party conducted a good faith search for the requested document. FINRA is also requiring a party to state the sources searched in the affirmation.

      Effective Date

      The amendments are effective on December 2, 2013, for all customer cases filed on or after the effective date.


      1 See Securities Exchange Act Rel. No. 70419 (September 16, 2013), 78 Federal Register 57916 (September 20, 2013) (File No. SR-FINRA-2013-024).

      2 FINRA provides guidance on the terms appearance, searchability, metadata, and maneuverability in its Discovery, Abuses and Sanctions training and The Arbitrator's Guide.

      3 A mandatory hold is an act by an entity to preserve documents and electronic information relevant to a lawsuit or government investigation.


      Attachment A

      New language is underlined; Deletions are in brackets

      * * * * *

      Discovery Guide

      This Discovery Guide and Document Production Lists supplement the discovery rules contained in the FINRA Code of Arbitration Procedure for Customer Disputes ("Customer Code") (See Rules 12505-12511).

      No requirement under the Discovery Guide supersedes any record retention requirement of any federal or state law or regulation or any rule of a self-regulatory organization.

      Flexibility in Discovery

      The Discovery Guide, including the Document Production Lists (Lists), serves as a guide for the parties and the arbitrators. While the parties and arbitrators should consider the documents described in the Lists presumptively discoverable, the parties and arbitrators retain their flexibility in the discovery process. Arbitrators can: order the production of documents not provided for by the Lists; order that parties do not have to produce certain documents on the Lists in a particular case; and alter the production schedule described in the 12500 series of rules. [Where additional documents are relevant in a particular case, parties can seek them in accordance with the time frames provided in the 12500 series of rules.]

      Cost or Burden of Production

      A party may object to producing a document on a List because of the cost or burden of production. If the party demonstrates that the cost or burden is disproportionate to the need for the document, the arbitrators should determine if the document is relevant or likely to lead to relevant evidence. If the arbitrators determine that the document is relevant or likely to lead to relevant evidence, they should consider whether there are alternatives that can lessen the impact, such as narrowing the time frame or scope of an item on the Lists, [or] determining whether another document can provide the same information, or ordering a different form of production.

      Requests for Additional Documents

      Where additional documents may be relevant in a particular case, parties can seek them in accordance with the time frames provided in the 12500 series of rules. Arbitrators must use their judgment in considering requests for additional documents and may not deny document requests solely on the ground[s] that the documents are not expressly listed in the Discovery Guide.

      Nothing in the Discovery Guide precludes the parties from voluntarily agreeing to an exchange of documents in a manner different from that set forth in the Discovery Guide. FINRA encourages the parties to agree to the voluntary exchange of documents and to stipulate to various matters. The fact that an item appears on the Lists does not shift the burden of establishing or defending any aspect of a claim.

      Only named parties must produce documents pursuant to the guidelines set forth herein. However, non-parties may be required to produce documents pursuant to a subpoena or an arbitration panel order to direct the production of documents (see Rule 12513). In addition, the arbitrators may use the Lists as guidance for discovery issues involving non-parties.

      Parties and arbitrators should recognize that not all firms have the same business operations model and certain items on the Lists may not apply to a particular case when the firm's business model (e.g. full service firm, discount broker, clearing firm, or online broker) is taken into consideration. In addition, certain items on the Customer List may not apply to a particular case depending on the claims asserted. Absent a written objection or party agreement, the parties shall exchange documents on the Lists within the time frames set forth in the Customer Code. Parties should raise any objections to the production of documents, based on an established privilege, in accordance with the time frames for objections set forth in the Customer Code.

      Form of Production

      The parties are encouraged to discuss the form(s) in which they intend to produce documents (hard copy production or electronic production in its original format or some other format) and, whenever possible, agree to the form(s) of production. Both hard copy documents and [E]electronic files are "documents" within the meaning of the Discovery Guide. Parties must produce electronic files in a reasonably usable format. The term reasonably usable format refers, generally, to the format in which a party ordinarily maintains a document, or to a converted format that does not make it more difficult or burdensome for the requesting party to use in connection with the arbitration.

      The arbitrators shall decide any dispute that arises concerning the form in which a document will be produced. When resolving contested motions relating to the form of production, arbitrators should consider the totality of the circumstances including, among other matters, the following in determining whether the electronic files are in a reasonably usable format:

      1. For documents in a party's possession or custody, whether the chosen form of production is different from the form in which a document is ordinarily maintained;
      2. For documents that must be obtained from a third party (because they are not in a party's possession or custody), whether the chosen form of production is different from the form in which the third party provided it; and
      3. For documents converted from their original format, a party's reason(s) for choosing a particular form of production; how the documents may be affected by the conversion to a new format; and whether the requesting party's ability to use the documents is diminished by a change in the documents' appearance, searchability, metadata, or maneuverability.

      Confidentiality

      If a party objects to document production on grounds of privacy or confidentiality, the arbitrators or one of the parties may suggest a stipulation between the parties that the documents in question will not be disclosed or used in any manner outside of the arbitration of the particular case, or the arbitrators may issue a confidentiality order. When deciding contested requests for confidentiality orders, arbitrators should consider the competing interests of the parties. The party asserting confidentiality has the burden of establishing that the documents in question require confidential treatment. In deciding questions about confidentiality, arbitrators should, taking into account the facts of a particular case, consider factors such as the following:

      1. Whether the disclosure would constitute an unwarranted invasion of personal privacy (e.g., an individual's Social Security number, or medical information).
      2. Whether there is a threat of harm attendant to disclosure of the information.
      3. Whether the information contains proprietary confidential business plans and procedures or trade secrets.
      4. Whether the information has previously been published or produced without confidentiality or is already in the public domain.
      5. Whether an excessively broad confidentiality order could be against the public interest or could otherwise impede the interests of justice.
      6. Whether there are legal or ethical issues which might be raised by excessive restrictions on the parties.

      Privileged Documents

      Parties are not required to produce documents that are otherwise subject to an established privilege, including the attorney-client privilege and the attorney work product doctrine. The arbitrators shall not issue an order or use a confidentiality agreement to require parties to produce documents otherwise subject to an established privilege, including attorney work product.

      Affirmation in the Event that [There Are No Responsive] a Party Does Not Produce Documents Specified in the Document Production Lists

      [If a party responds that there are no responsive documents in the party's possession, custody, or control,] If a party does not produce a document specified in a List item on the applicable Document Production List, upon the request of the party seeking the document that was not produced, the customer or the appropriate person in the brokerage firm who has knowledge, [upon the request of the party seeking the documents,] must: 1) [state] affirm in writing that the party conducted a good faith search for the requested document[s]; 2) describe the extent of the search including, but not limited to, stating the sources searched; and 3) state that, based on the search, the party does not have the requested document [there are no requested documents] in the party's possession, custody, or control. [In appropriate cases, t] The arbitrators may also order a party to provide such affirmations regarding discovery requests for documents beyond those contained in the Discovery Guide.

      No Obligation to Create Documents

      Parties are not required to create documents in response to items on the Lists that are not already in the parties' possession, custody, or control.

      Admissibility

      Production of documents in discovery does not create a presumption that the documents are admissible at the hearing. A party may object to the introduction of any document as evidence at the hearing to the same extent that a party can raise any other objection at an arbitration hearing.

      Product Cases

      Product cases are cases in which one or more of the asserted claims center around allegations regarding the widespread mismarketing or defective development of a specific security or specific group of securities. Product cases are different from other customer cases in several ways:

      1. The volume of documents tends to be much greater
      2. Multiple investor claimants may seek the same documents
      3. The documents are not client specific
      4. The product at issue is more likely to be the subject of a regulatory investigation
      5. The cases are more likely to involve a class action with documents subject to a mandatory hold
      6. The same documents may have been produced to multiple parties in other cases involving the same security or to regulators
      7. Documents are more likely to relate to due diligence analyses performed by persons who did not handle the claimant's account.

      In a product case, parties typically request documents relating to, among other things, a firm's: creation of a product; due diligence reviews of a product; training on or marketing of a product; or post-approval review of a product. The Document Production Lists may not provide all of the documents parties usually request in a product case. Pursuant to this Discovery Guide, parties are not limited to the documents enumerated in the Document Production Lists. As stated earlier in this Discovery Guide, where additional documents may be relevant in a particular case, parties can seek them in accordance with the time frames provided in the 12500 series of rules.

      Parties do not always agree on whether a claim centers around a product as defined above and may ask the arbitrators to make that determination. The arbitrators may ask the parties to explain their rationale for asserting that a claim is, or is not, a product case. Parties may also ask the arbitrators to resolve disputes concerning which additional documents they must produce, and the scope of the additional documents.

      Document Production Lists

      Throughout the Lists, FINRA refers to customers that are parties to an arbitration case as "customer parties" and other firm/associated persons' customers as "customers." The Guide provides separate Lists for firms/associated persons and for customer parties. For ease of reference, throughout the Lists, the terms "customer parties," "customers," "documents," "associated persons," "accounts," "claims" and "transactions" include the singular terms "customer party," "customer," "document," "associated person," "account," "claim" and "transaction," respectively. In addition, unless otherwise specifically stated, the term "firm" refers to a firm that is a party to the arbitration case.

      * * * * *

    • 13-39 SEC Approves Amendments to FINRA Rule 2360 (Options) and FINRA Rule 4210 (Margin Requirements) in Connection With Over-the-Counter Options Cleared by the OCC; Effective Date: November 7, 2013

      View PDF

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Institutional
      Internal Audit
      Legal
      Margin
      Operations
      Options
      Risk
      Senior Management
      Systems
      Trading
      Key Topics

      Conventional Options
      Listed Options
      Margin
      Options Clearing Corporation (OCC)
      Options Disclosure Document (ODD)
      Over-the-Counter (OTC) Options
      Standardized Options
      Referenced Rules & Notices

      FINRA Rule 2360
      FINRA Rule 4210

      Executive Summary

      The SEC approved amendments to treat over-the-counter (OTC) options cleared by The Options Clearing Corporation (OCC) as conventional options for purposes of FINRA Rule 2360 (Options) and as listed options for purposes of FINRA Rule 4210 (Margin Requirements)1. Accordingly, OCC cleared OTC options will be considered conventional options for purposes of position limit and reporting requirements and delivery of certain disclosure documents and will be considered listed options for purposes of margin requirements, including maintenance margin requirements and portfolio margin requirements. The effective date is November 7, 2013.

      The amended rule text is set forth in Attachment A.

      Questions concerning this Notice or FINRA Rule 2360 should be directed to:

      •   Max Tourtelot, Director, Options Regulation, at (917) 281-3133;
      •   James Turnbull, Associate Director, Options Regulation, at (917) 281-3177; or
      •   Kathryn Moore, Associate General Counsel, Office of General Counsel, at (202) 728-8200.

      Questions concerning FINRA Rule 4210 should be directed to:

      •   Glen Garofalo, Director, Credit Regulation, at (646) 315-8464;
      •   Steve Yannolo, Project Manager, Credit Regulation, at (646) 315-8621; or
      •   Patricia Dorn, Project Manager, Credit Regulation, at (646) 315-8559.

      Background & Discussion

      The SEC recently approved amendments to FINRA rules on options and margin requirements to address new rules established by OCC to clear and guarantee OTC options on the S&P 500 index.2 Because OCC-cleared OTC options have aspects similar to both standardized and conventional options, FINRA amended Rule 2360 (Options) and Rule 4210 (Margin Requirements), as discussed below, to provide for the proper application of the rules to OCC cleared OTC options.

      Rule 2360 (Options)

      FINRA Rule 2360 covers, among other things, the definitions, position limits, exercise limits, reporting, suitability and disclosure requirements related to options and options trading. The rule generally classifies options as either standardized3 or conventional.4 Historically, all standardized options have been traded on an exchange, and all conventional options have been traded OTC. To provide clarity and consistent treatment with OTC options more generally, FINRA amended Rule 2360 to treat OCC cleared OTC options as conventional options.

      FINRA amended several definitions to clarify this treatment. Specifically, FINRA defined an OCC cleared OTC option as "any put, call, straddle or other option or privilege that meets the definition of an þoption' under Rule 2360(a)(21) and is cleared by The Options Clearing Corporation, is entered into other than on or through the facilities of a national securities exchange, and is entered into exclusively by persons who are 'eligible contract participants' as defined in the Exchange Act."5 FINRA also clarified that the definitions of conventional option and conventional index option include OCC cleared OTC options.6 FINRA further amended the definitions of standardized equity option, standardized index option and FLEX equity option to specifically exclude OCC cleared OTC options.7 Finally, FINRA made minor amendments to the definition of expiration date in Rule 2360(a)(14) to reflect that the expiration date of OCC cleared OTC options may be customized by the parties to the trade in accordance with the rules of the OCC.

      Accordingly, for position limits and reporting requirements that differentiate between conventional and standardized options, OCC cleared OTC options will be considered conventional options. In addition, as with other conventional options, OCC cleared OTC options will not be subject to the requirement to deliver the Options Disclosure Statement (ODD) and the Special Statement for Uncovered Options Writers (Special Written Statement). FINRA amended Rule 2360(b)(11)(A) and Rule 2360(b)(16) to provide that the ODD and Special Written Statement are not required to be delivered by firms effecting a transaction in OCC cleared OTC options.

      Rule 4210 (Margin Requirements)

      For purposes of margin treatment, FINRA amended Rule 4210 to treat OCC cleared OTC options as it treats other cleared and guaranteed options, which to date have always been listed options,8 in light of the clearing and guaranteeing functions performed by the OCC. The beneficial margin treatment for an OCC cleared OTC option may only be applied by a firm after the OTC option has been accepted for clearing and guaranteed by the OCC.9

      Specifically, FINRA provided that a listed option means an option that is traded on a national securities exchange or issued and guaranteed by a registered clearing agency and shall include an OCC cleared OTC option as defined in FINRA Rule 2360. FINRA also amended the definition of OTC to provide that OTC options shall not include an OCC cleared OTC option. FINRA also made conforming amendments regarding portfolio margin requirements to provide that a listed option means an option that is traded on a national securities exchange or issued and guaranteed by a registered clearing agency and shall include an OCC cleared OTC option. Finally, FINRA amended Rule 4210(g)(2)(H) to clarify that an unlisted derivative would include, among other things, an index-based option that is neither traded on a national securities exchange nor issued or guaranteed by a registered clearing agency and shall not include an OCC cleared OTC option.

      The amendments are effective on November 7, 2013.


      1 See Securities Exchange Act Release No. 70619 (October 7, 2013), 78 FR 62722 (October 22, 2013) (SEC Order Approving File No. SR-FINRA-2013-027).

      2 See Securities Exchange Act Release No. 68434 (December 14, 2012), 77 FR 75243 (December 19, 2012) (Order Approving Proposed Rule Change, as Modified by Amendment No. 1 Thereto, and Notice of No Objection to Advance Notice, Modified by Amendment No. 1 Thereto, Relating to the Clearance and Settlement of Over-the-Counter Options; File No. SR-OCC-2012-14). The OCC has not yet implemented clearing of OTC options on the S&P BOO index.

      3 A standardized equity option is "any equity options contract issued, or subject to issuance, by The [OCC] that is not a FLEX Equity Option." See FINRA Rule 2360(a)(31). See also FINRA Rule 2360(a)(32) for the definition of standardized index option.

      4 A conventional option is "any option contract not issued, or subject to issuance, by The [OCC]." See FINRA Rule 2360(a)(9). See also FINRA Rule 2360(a)(8) for the definition of conventional index option.

      5 The definition reflects the OCC requirement that counterparties to OCC cleared OTC options must be "eligible contract participants" as defined in the Act. See note 2 and Section 6(f), Article XVII of the OCC By-Laws.

      6 See amended FINRA Rule 2360(a)(8) and (a)(9), respectively.

      7 See re-numbered FINRA Rule 2360(a)(32), (a)(33) and (a)(16), respectively.

      8 See FINRA Rule 4210(f)(2)(A)(xxiv) and FINRA Rule 4210(g)(2)(A) for the definition of "listed" and "listed option," respectively.

      9 The OCC intends that the trade data for an OTC option trade be submitted to an approved OCC vendor that will process the trade and submit it as a confirmed trade to OCC for clearing. The OCC then will confirm if the OTC option trade meets OCC's validation requirements and will notify the vendor, which will notify the submitting parties. FINRA understands that, if the option trade is rejected for clearing, the option remains subject to any applicable agreement between the original parties to the transaction, which may provide that (1) such rejected transaction shall remain a bilateral transaction between the parties subject to such agreement or other documentation as the parties have entered into for that purpose or (2) may be terminated. See note 2 and interpretation .02 of Section 6, Article VII of the OCC By-Laws. If the OTC option was rejected for clearing, but the option contract was not terminated by the parties and remained an OTC option contract, the firm would be required to apply the applicable OTC option margin requirements, not the listed option margin requirements. See FINRA Rule 4210(f)(2)(E)(iii).


      Attachment A

      New language is underlined; deletions are in brackets.

      2360. Options

      (a) Definitions

      The following terms shall, unless the context otherwise requires, have the stated meanings:
      (1) through (7) No Change.
      (8) Conventional Index Option—The term "conventional index option" means any options contract not issued, or subject to issuance, by The Options Clearing Corporation, or an OCC Cleared OTC Option, that, as of the trade date, overlies a basket or index of securities that:
      (A) through (B) No Change.
      (9) Conventional Option—The term "conventional option" shall mean: (A) any option contract not issued, or subject to issuance, by The Options Clearing Corporation; or (B) an OCC Cleared OTC Option.
      (10) through (13) No Change.
      (14) Expiration Date—The term "expiration date" of an option contract issued by The Options Clearing Corporation means the day and time fixed [by] in accordance with the rules of The Options Clearing Corporation for the expiration of [all]such option contracts having the same expiration month as such option contract]. The term "expiration date" of all other option contracts means the date specified thereon for such.
      (15) No Change.
      (16) FLEX Equity Option—The term "FLEX Equity Option" means any options contract issued, or subject to issuance by, The Options Clearing Corporation, other than an OCC Cleared OTC Option, whereby the parties to the transaction have the ability to negotiate the terms of the contract consistent with the rules of the exchange on which the options contract is traded.
      (17) through (18) No Change.
      (19) OCC Cleared OTC Option—The term "OCC Cleared OTC Option" means any put, call, straddle or other option or privilege that meets the definition of an "option" under Rule 2360(a)(21), and is cleared by The Options Clearing Corporation, is entered into other than on or through the facilities of a national securities exchange, and is entered into exclusively by persons who are "eligible contract participants" as defined in the Exchange Act.
      (19) through (21) renumbered as (20) through (22).

      [(22)](23) Options Contract—The term "options contract" means any option as defined in paragraph (a)[(20)](21). For purposes of paragraphs (b)(3) through (12), an option to purchase or sell common stock shall be deemed to cover 100 shares of such stock at the time the contract granting such option is written. If a stock option is granted covering some other number of shares, then for purposes of paragraphs (b)(3) through (12), it shall be deemed to constitute as many option contracts as that other number of shares divided by 100 (e.g., an option to buy or sell five hundred shares of common stock shall be considered as five option contracts). A stock option contract that, when written, grants the right to purchase or sell 100 shares of common stock shall continue to be considered as one contract throughout its life, notwithstanding that, pursuant to its terms, the number of shares that it covers may be adjusted to reflect stock dividends, stock splits, reverse splits, or other similar actions by the issuer of such stock.
      (23) through (30) renumbered as (24) through (31).
      [(31)](32) Standardized Equity Option—The term "standardized equity option" means any equity options contract issued, or subject to issuance by, The Options Clearing Corporation that is not a FLEX Equity Option and not an OCC Cleared OTC Option.

      [(32)](33) Standardized Index Option—The term "standardized index option" means any options contract issued, or subject to issuance, by The Options Clearing Corporation that is based upon an index and is not an OCC Cleared OTC Option.
      (33) through (38) renumbered as (34) through (39)
      (b) Requirements
      (1) Applicability

      This Rule shall be applicable to the extent appropriate unless otherwise stated herein: (A) to the conduct of accounts, the execution of transactions, and the handling of orders in exchange-listed options by members that are not members of an exchange on which the option executed is listed; (B) to the conduct of accounts, the execution of transactions, and the handling of orders in conventional options by all members; and (C) to other matters related to options trading.

      Subparagraphs (3) through (12) shall apply only to standardized and conventional options on common stock. Subparagraphs (13) through (24) shall apply to transactions in all options as defined in paragraph (a)[(20)](21), including common stock unless otherwise indicated herein.
      (2) through (10) No Change.
      (11) Delivery of Current Disclosure Documents
      (A)
      (i[1]) Characteristics and Risks of Standardized Options (the "ODD"). Every member shall deliver the current ODD to each customer at or prior to the time such customer's account is approved for trading options issued by The Options Clearing Corporation, other than an OCC Cleared OTC Option. Thereafter, a copy of each amendment to the ODD shall be distributed to each customer to whom the member previously delivered the ODD not later than the time a confirmation of a transaction in the category of options to which the amendment pertains is delivered to such customer.
      (ii[2]) Special Statement for Uncovered Option Writers ("Special Written Statement"). In the case of customers approved for writing uncovered short options transactions, the Special Written Statement required by paragraph (b)(16) shall be in a format prescribed by FINRA and delivered to customers in accordance with paragraph (b)(16). A copy of each new or revised Special Written Statement shall be distributed to each customer having an account approved for writing uncovered short options not later than the time a confirmation of a transaction is delivered to each customer who enters into a transaction in options issued by The Options Clearing Corporation, other than an OCC Cleared OTC Option.
      (iii[3]) FINRA will advise members when a new or revised current disclosure document meeting the requirements of SEA Rule 9b-1 is available.
      (B) through (C) No Change.
      (12) through (15) No Change.
      (16) Opening of Accounts
      (A) through (C) No Change.
      (D) Account Agreement

      Within fifteen (15) days after a customer's account has been approved for options trading, a member shall obtain from the customer a written agreement that the customer is aware of and agrees to be bound by FINRA rules applicable to the trading of option contracts and, if he desires to engage in transactions in options issued by The Options Clearing Corporation, other than solely for OCC Cleared OTC Options, that the customer has received a copy of the current disclosure document(s) required to be furnished under this subparagraph (16) and that he is aware of and agrees to be bound by the rules of The Options Clearing Corporation. In addition, the customer shall indicate on such written agreement that he is aware of and agrees not to violate the position limits established pursuant to paragraph (b)(3) and the exercise limits established pursuant to paragraph (b)(4).
      (E) No Change.
      (17) through (24) No Change.
      (c) No Change.

      ••• Supplementary Material: --------------

      .01 through .03 No Change.

      * * * * *

      4210. Margin Requirements

      (a) through (e) No Change.
      (f) Other Provisions
      (1) No Change.
      (2) Puts, Calls and Other Options, Currency Warrants, Currency Index Warrants and Stock Index Warrants
      (A) Definitions.

      Except where the context otherwise requires or as defined below, the definitions contained in section (a) of Rule 2360, "Options," shall apply to the terms used in this Rule.
      (i) through (xxiii) No Change.
      (xxiv) The term "listed" as used with reference to a call or put option contract means an option contract that is traded on a national securities exchange or[and] issued and guaranteed by a registered clearing agency and shall include an OCC Cleared OTC Option (as defined in Rule 2360).
      (xxv) through (xxvi) No Change.
      (xxvii) The term "OTC" 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 the carrying broker-dealer and shall not include OCC Cleared OTC Option (as defined in Rule 2360).
      (xxviii) through (xxxvi) No Change.
      (B) through (N) No Change.
      (3) through (10) No Change.
      (g) Portfolio Margin

      As an alternative to the "strategy-based" margin requirements set forth in paragraphs (a) through (f) of this Rule, members may elect to apply the portfolio margin requirements set forth in this paragraph (g) to all margin equity securities,1 listed options, security futures products (as defined in Section 3(a)(56) of the Exchange Act), unlisted derivatives, warrants, stock index warrants and related instruments (as defined in paragraph (g)(2)(D)), provided that the requirements of paragraph (g)(6)(B)(i) of this Rule are met.

      In addition, a member, provided that it is a Futures Commission Merchant ("FCM") and is either a clearing member of a futures clearing organization or has an affiliate that is a clearing member of a futures clearing organization, is permitted under this paragraph (g) to combine an eligible participant's related instruments with listed index options, unlisted derivatives, options on exchange traded funds ("ETF"), stock index warrants and underlying instruments and compute a margin requirement for such combined products on a portfolio margin basis.

      The portfolio margin provisions of this Rule shall not apply to Individual Retirement Accounts ("IRAs").
      (1) No Change.
      (2) Definitions

      For purposes of this paragraph (g), the following terms shall have the meanings specified below:
      (A) The term "listed option" means any equity-based or equity index-based option traded on a registered national securities exchange or issued and guaranteed by a registered clearing agency and shall include an OCC Cleared OTC Option (as defined in Rule 2360).
      (B) through (G) No Change.
      (H) The term "unlisted derivative" means any equity-based or equity index-based [unlisted] option, forward contract, or security-based swap that can be valued by a theoretical pricing model approved by the SEC and that is neither traded on a national securities exchange, nor issued and guaranteed by a registered clearing agency and shall not include an OCC Cleared OTC Option (as defined in Rule 2360).
      (3) through (15) No Change.
      (h) No Change.

      ••• Supplementary Material: --------------

      .01 No Change

      1 No Change.

    • 13-38 FINRA and ISG Extend Effective Date for Certain Electronic Blue Sheet Data Elements; Effective Date: May 1, 2014

      View PDF

      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
      Regulatory Notice 12-47
      Regulatory Notice 13-16
      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 13-16 to May 1, 2014. FINRA and the other ISG members have also extended the effective date for compliance with certain other data elements to be consistent with the exemptive relief provided by the SEC, which extended the compliance date for certain broker-dealer recordkeeping and reporting requirements of SEA Rule 13h-1 (Large Trader Rule) from November 1, 2013 to November 1, 20152.

      Attachment A to this Notice sets forth the EBS record layout, which, except for minor modifications noted below, remains unchanged from the version published in Regulatory Notice 13-16. Attachment B to this Notice outlines the Transaction Type Identifiers, which, except for minor modifications noted below, remains unchanged from the version published in Regulatory Notice 13-16.

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

      Discussion

      FINRA and the other ISG members have extended the effective date for compliance with certain new data elements for EBS identified in Regulatory Notice 13-16 to May 1, 2014. Specifically, for EBS requests from FINRA and other ISG members, the Primary Party Identifier and Contra Party Identifier fields identified in Regulatory Notice 13-16 are unchanged and the effective date for compliance has been extended to May 1, 2014, to allow broker-dealers additional time to implement changes to comply with the new requirements. The fields are reiterated below and in Attachment A to this Notice. Firms may voluntarily submit the values for Primary Party Identifier and Contra Party Identifier fields before May 1, 2014, and they will be accepted. For conventional EBS requests (not related to the Large Trader Rule), firms must provide the Order Execution Time in a similar manner to the SEC's Phase One and Phase Two requirements described in the SEC Extension Order and as described in more detail below; and the effective date for compliance has been extended to May 1, 2014. Firms may also voluntarily submit Large Trader Identification Number 1-3 and Large Trader Identification Qualifier values to FINRA and other ISG members at any time and they will be accepted.

      FINRA and the other ISG members have also extended the effective date for compliance with certain data elements to be consistent with the exemptive relief provided by the SEC, which extended the compliance date for certain broker-dealer recordkeeping and reporting requirements of the Large Trader Rule from November 1, 2013, to November 1, 2015. The SEC has grouped the Large Trader Rule into three phases for purposes of implementation.

      • Phase One required clearing broker-dealers for large traders to keep records of and report, upon the SEC's request, specified data concerning (1) proprietary trades by large traders that are U.S. registered broker-dealers; and (2) transactions effected by large traders through a sponsored access arrangement.3 Transaction data include both the large trader identification number (LTID) and execution time. The compliance date for Phase One was November 30, 2012.
      • Phase Two extends the recordkeeping and reporting requirements for clearing broker-dealers to transactions effected pursuant to a direct market access (DMA) arrangement.4 As with Phase One, this requires clearing broker-dealers to report Transaction Data that includes both LTID and execution time for DMA arrangements. Phase Two also include the prime broker or other carrying broker-dealer that carries an account for a Large Trader. These entities will have to report Transaction Data other than execution time, e.g., the applicable LTID. The compliance date for Phase Two is November 1, 2013.

      In addition, the recordkeeping and reporting requirements with respect to Unidentified Large Traders, and the related monitoring safe harbor provided by SEA Rule 13h-1(f), will apply to broker-dealers that carry an account for a large trader as of November 1, 2013.
      • The remaining types of large traders and the transactions not covered by Phases One and Two are covered by Phase Three. Phase Three will therefore apply to all other broker-dealers subject to the recordkeeping and reporting requirements of the Rule (i.e., broker-dealers that are large traders but do not self-clear, and broker-dealers effecting transactions directly or indirectly for a large trader where a non-broker-dealer carries the account for the large trader). The compliance date for Phase Three is November 1, 2015.

      As set forth above, by November 1, 2013, 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 outlined in Phase Two of the recordkeeping, reporting and monitoring requirements of SEA Rule 13h-1. Additionally, by November 1, 2015, 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 outlined in Phase Three of the recordkeeping, reporting and monitoring requirements of SEA Rule 13h-1. 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.

      The required EBS fields are set forth below and are unchanged from Regulatory Notice 13-16. 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. 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 13-16, the Employer SIC Code field has been withdrawn as an EBS requirement.

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

      • For the Requestor Code field, the value "I" was updated to include ISE Gemini.
      • For the Exchange Code field, the value "1" was added to represent ISE Gemini.

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

      • For equity securities, the values of "3", "4", "5", "G" and "V" were deleted.

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

      Blue Sheet Submission Methodology

      Currently, EBS requests are made under specific security symbols and option symbology. As noted in Regulatory Notice 13-16, firms will be required to submit EBS, when requested, using three additional formats:

      • account number and date;
      • account number, symbol and date; or
      • date range and Primary Party Identifier.

      Compliance with this requirement is similarly extended to May 1, 2014. As outlined in Regulatory Notice 13-16, 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., correspondent firm ABC for the month of January 2011.

      Additionally, 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) as outlined in Phase One and Two of the recordkeeping, reporting and monitoring requirements of SEA Rule 13h-1.

      Blue Sheet Testing

      FINRA's customer test website is available for firms to test whether the field format of their enhanced blue sheets data file is consistent with the EBS record layout before submitting it to production. The test website will not test whether the inputted values are complete or accurate. 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 that 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) is also available to receive blue sheet test files. 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 Area, Inc., BOX Options Exchange, LLC, Miami International Securities Exchange, LLC and ISE Gemini.

      2 The SEC issued an order temporarily exempting certain broker-dealers and certain transactions from recordkeeping and reporting requirements of the Large Trader Rule. See Securities Exchange Release No. 70150 (August 8, 2013), 78 FR 49556 (August 14, 2013) for further details (SEC Extension Order).

      3 A sponsored access arrangement is defined as one "where a broker-dealer permits a customer to enter orders into a trading center without using the broker-dealer's trading system (i.e., using the customer's own technology or that of a third party provider)." See Extension Order, supra note 3 at 49557.

      4 A direct market access arrangement is defined as "an arrangement whereby a broker-dealer permits customers to enter orders into a trading center but such orders flow through the broker-dealer's trading systems prior to reaching the trading center." See Extension Order, supra note 2 at 49560. In that order, the SEC noted that direct market access arrangements subject to recordkeeping and reporting in Phase Two, would include, for example, those where the large trader customer enters individual orders manually or through an algorithm under its control, but those orders flow through the broker-dealer's systems prior to reaching the trading center. Phase Two would not include, however, large trader customers that delegate to the broker-dealer the discretion to determine the price, size, timing, or routing of individual orders. 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 and ISE Gemini
             
            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.        
            7 = Miami International Securities
      Exchange
             
      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        
            1 = ISE Gemini        
            7 = Miami International Securities
      Exchange
             
      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
      Error Trade Q  
      Registered Trader Market Maker Transaction Regardless of the Clearing Number   P
      Voluntary Professional   W
      Joint Back Office   J

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

    • 13-37 Broker-Dealer, Investment Adviser Firm, Agent and Investment Adviser Representative, and Branch Renewals for 2014; Payment Deadline: December 13, 2013

      View PDF

      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

      Executive Summary

      The 2014 Renewal Program begins on November 11, 2013, 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, 2013 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 8, 2013, do not appear on the firm's Preliminary Renewal Statement. The only allowed date for post-dated termination filings is December 31, 2013.
      November 11, 2013 Preliminary Renewal Statements are available on Web CRD/IARD.
      December 13, 2013 Full payment of Preliminary Renewal Statements is due.
      January 2, 2014 Final Renewal Statements are available on Web CRD/ IARD.
      January 10, 2014 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, 2013, may cause the firm to become ineligible to do business in the jurisdictions where it is registered, effective January 1, 2014. 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, 2014.

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

      Background & Discussion

      Preliminary Renewal Statements

      Beginning November 11, 2013, 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 and branch 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), ISE GEMINI (GEMINI), 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, if applicable;
      • state broker-dealer firm, branch, and agent renewal fees, if applicable;
      • state investment adviser firm, branch and representative renewal fees, if applicable.

      FINRA must receive full payment of the Preliminary Renewal Statement fees no later than December 13, 2013.

      If payment is not received by December 13, 2013, 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 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 IARD system fees as determined by the SEC and/or the North American Securities Administrators Association (NASAA) for 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. Additionally, 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, GEMINI, 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 through 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 are encouraged to check their Renewal Statements to confirm payment has been received by FINRA and that the firm's Renewal Statement balance is paid in full. Firms have four payment methods available to pay renewal fees:

      1. FINRA's E-Bill System (replaced Web CRD/IARD E-Pay System)
      2. Wire Transfer
      3. Automatic FINRA Flex-Funding Account-to-Renewal Account Transfer
      4. Check

      Electronic Payment via E-Bill

      E-Bill allows a firm to authorize electronic payment directly from its designated bank account to its Renewal Account. Payments submitted by 8 p.m., Eastern Time (ET), should post within two business days to the firm's Renewal Account. FINRA does not charge for using E-Bill; however, firms should verify if their banks charge additional fees. Firms must enroll to use E-Bill. For your convenience, a hyperlink to E-Bill is on your firm's renewal statement.

      Wire Payment

      Firms may wire full payment of their Preliminary Renewal Statements. 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 Flex-Funding Account-to-Renewal Account Transfer

      Beginning on December 11, 2013, and through December 26, 2013, if a firm has sufficient funds available in its Flex-Funding Account to cover the total renewal fees due, then FINRA will automatically transfer funds from a firm's Flex-Funding Account to its Renewal Account. Please Note: If your firm does not want funds automatically transferred then ensure FINRA receives payment in your firm's Renewal Account using E-Bill or by wire transfer. Separately, if your firm needs to transfer funds between affiliated firms, you should submit a Web CRD/IARD Funds Transfer Request form. This automatic Flex-Funding Account-to-Renewal Account transfer process will also be applied daily beginning Jan. 13, 2014, until any outstanding renewal assessment is satisfied.

      Check

      All Web CRD/IARD check payments sent to FINRA are deposited into firms' Flex-Funding Accounts. If you mail a check to pay your firm's renewal fees, it will not be applied to your Renewal Account until December 11, 2013, when FINRA begins the automatic Flex-Funding Account-to-Renewal Account transfer noted above. For inclusion in the automatic transfer, please ensure that you have sufficient funds in your Flex-Funding Account to cover the total renewal fees due. If you would like your renewal payment to be applied before December 11, 2013, then you must pay using E-Bill or with a wire transfer directly to your 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.

      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-W9995
      Philadelphia, PA 19175-9995

      (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

      If your firm's accounting software (e.g., Quicken, Quickbooks) stores vendor addresses, please ensure it reflects the addresses shown above.

      Renewal Reports

      Beginning November 11, 2013, 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 the firm has provided them).
      • 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.
      • 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 they need 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, 2013. If a Form U5, BDW, BR Closing/Withdrawal or ADV-W filing indicates a termination date of December 31, 2013, 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, 2013, 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, 2013. Firms that submit post-dated termination filings by 11 p.m., ET, on November 8, 2013, 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 11, 2013, will not be assessed renewal fees for the terminated jurisdictions on their Final Renewal Statements in January 2014. 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 26, 2013.

      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, 2014, and Web CRD/IARD will assess new registration fees.

      Filing Form BDW

      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 26, 2013.

      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 8, 2013, 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 26, 2013.

      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 8, 2013, 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, 2014, 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, 2013. 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 firms' FINRA Flex-Funding Accounts on January 2, 2014. Firms that have a credit balance in their FINRA Flex-Funding Accounts may submit a refund request to FINRA.

      On or after January 2, 2014, 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, GEMINI, 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 January 10, 2014, 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 2014 Regulatory Notice.

    • 13-36 FINRA Revises the Investment Company and Variable Contracts Products Representative (Series 6) Examination Program; Implementation Date: December 16, 2013

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      Qualification Examinations

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Legal
      Operations
      Registration
      Training
      Key Topics

      Series 6 Qualification Examination
      Referenced Rules & Notices

      FINRA Rule 1250
      FINRA Rule 2111
      FINRA Rule 4510
      Information Notice 3/12/08
      NASD Rule 1032(a)
      NASD Rule 1032(b)
      NASD Rule 1070
      NYSE Rule 345.15(3) and its interpretation
      SEA Rule 17f-2
      SEA Section 15A(g)(3)
      Securities Act Section 3(a)(8)

      Executive Summary

      FINRA periodically reviews the content of qualification examinations to determine whether revisions are necessary or appropriate in view of changes—including changes to the laws, rules and regulations—pertaining to the subject matter the examinations cover. Based on this review process, FINRA has revised the Investment Company and Variable Contracts Products Representative (Series 6) examination program.1

      The changes are reflected in the Series 6 content outline on FINRA's website and will appear in Series 6 examinations administered on or after December 16, 2013.

      Questions regarding this Notice should be directed to:

      •   Omenka Nwamaka, Senior Qualifications Analyst, Testing and Continuing Education Department, at (240) 386-4678; or
      •   Eva Cichy, Senior Qualifications Analyst, Testing and Continuing Education Department, at (240) 386-4680.

      Background & Discussion

      Section 15A(g)(3) of the Securities Exchange Act of 19342 authorizes FINRA to prescribe standards of training, experience and competence for persons associated with FINRA-regulated firms. In accordance with that provision, FINRA has developed examinations that are designed to establish that persons associated with FINRA-regulated firms have attained specified levels of competence and knowledge, consistent with applicable registration requirements under FINRA rules.

      Pursuant to NASD Rule 1032(b)3 (Limited Representative—Investment Company and Variable Contracts Products), if a representative's activities are limited solely to redeemable securities of companies registered under the Investment Company Act of 1940 (Investment Company Act), securities of closed-end companies registered under the Investment Company Act during the period of original distribution, and variable contracts and insurance premium funding programs and other contracts issued by an insurance company (except contracts that are exempt securities pursuant to Section 3(a)(8) of the Securities Act of 1933), the representative may register and qualify as an Investment Company and Variable Contracts Products Representative instead of registering and qualifying as a General Securities Representative (Series 7) pursuant to NASD Rule 1032(a) (General Securities Representative).4 The Series 6 examination qualifies an individual to function as an Investment Company and Variable Contracts Products Representative.

      In consultation with a committee of industry representatives, FINRA recently undertook a review of the Series 6 examination program. As a result of this review, FINRA has revised the content outline to reflect changes to the laws, rules and regulations the examination covers and to incorporate the functions and associated tasks an Investment Company and Variable Contracts Products Representative currently performs. FINRA also has revised the format of the content outline.

      Revisions

      FINRA has divided the content outline into four major job functions and included specific tasks for each function. The following are the four major job functions and the number of questions associated with each function:

      Function 1: Regulatory fundamentals and business development, 22 questions;
      Function 2: Evaluates customers' financial information, identifies investment objectives, provides information on investment products, and makes suitable recommendations, 47 questions;
      Function 3: Opens, maintains, transfers and closes accounts and retains appropriate account records, 21 questions; and
      Function 4: Obtains, verifies, and confirms customer purchase and sale instructions, 10 questions.

      Each function also includes specific tasks describing activities associated with performing that function. There are four tasks (1.1–1.4) associated with Function 1; four tasks (2.1–2.4) associated with Function 2; three tasks (3.1–3.3) associated with Function 3; and two tasks (4.1–4.2) associated with Function 4.5 For example, one task (Task 2.1) is to gather customers' financial and non-financial information to identify, analyze and assess risk tolerance, investment experience and sophistication level.6 Further, the outline lists the knowledge required to perform each function and associated tasks (e.g., account authorizations and legal documents).7 In addition, where applicable, the outline lists the laws, rules and regulations a candidate is expected to know to perform each function and associated tasks. These include the applicable FINRA rules (e.g., FINRA Rule 1250), NASD rules (e.g., NASD Rule 1070) and SEC rules (e.g., SEA Rule 17f-2).8

      FINRA conducted a job analysis study of Investment Company and Variable Contracts Products Representatives, which included the use of a survey, in developing each function and associated tasks and updating the required knowledge set forth in the revised outline. The functions and associated tasks, which appear in the revised outline for the first time, reflect the day-to-day activities of an Investment Company and Variable Contracts Products Representative. FINRA also has revised the content outline to reflect changes to the laws, rules and regulations the examination covers. Among other revisions, FINRA has revised the content outline to reflect the adoption of rules in the consolidated FINRA rulebook (e.g., NASD Rule 2310 (Recommendations to Customers (Suitability)) and NASD Rule 3110 (Books and Records) were adopted as FINRA Rule 2111 (Suitability) and FINRA Rule 4510 Series (Books and Records), respectively).9 FINRA has adopted similar changes to the Series 6 selection specifications and question bank.

      Finally, FINRA has revised the format of the content outline, including the preface, sample questions and reference materials.

      The number of questions on the Series 6 examination will remain at 100 multiplechoice questions,10 and candidates will continue to have 135 minutes to complete the examination. A score of 70 percent is required to pass the examination, which is the same as the current passing score.

      Availability of Content Outline

      The revised Series 6 content outline is available on FINRA's website.


      1 See File No. SR-FINRA-2013-045, which was filed with the SEC for immediate effectiveness on October 16, 2013.

      2 15 U.S.C. 78o-3(g)(3).

      3 The current FINRA rulebook consists of (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the "Transitional Rulebook"). 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 March 12, 2008 (Rulebook Consolidation Process).

      4 See also Incorporated NYSE Rule 345.15(3) and Incorporated NYSE Rule Interpretation 345.15/02.

      5 See Exhibit 3a, Outline Pages 6-18.

      6 See Exhibit 3a, Outline Page 10.

      7 See Exhibit 3a, Outline Page 15.

      8 See Exhibit 3a, Outline Pages 6-7.

      9 See Rule Conversion Charts.

      10 Consistent with FINRA's practice of including "pre-test" questions on certain qualification examinations, which is designed to ensure that new examination questions meet acceptable testing standards prior to use for scoring purposes, the examination includes five additional, unidentified pre-test questions that do not contribute towards the candidate's score. Therefore, the examination actually consists of 105 questions, 100 of which are scored. The five pre-test questions are randomly distributed throughout the examination.

    • 13-35 SEC Approves Amendments to TRACE Rules and Dissemination Protocols to Disseminate Rule 144A Transactions in TRACE-Eligible Securities and Related Fees; Effective Date: June 30, 2014

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      Trade Reporting and Compliance Engine (TRACE)

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Fixed Income
      Legal
      Operations
      Systems
      Trading
      Training
      Key Topics

      Dissemination
      Rule 144A transactions
      TRACE-Eligible Securities
      TRACE Fees
      Referenced Rules & Notices

      FINRA Rule 6750
      FINRA Rule 7730
      Securities Act Rule 144A

      Executive Summary

      The SEC approved amendments to FINRA Rule 6750 and TRACE dissemination protocols that provide for the dissemination of transactions in TRACE-eligible securities that are effected pursuant to Securities Act Rule 144A (Rule 144A transactions). In addition, the SEC approved amendments to FINRA Rule 7730 to establish real-time and historic data sets for Rule 144A transactions.1 In a related rule filing, FINRA amended Rule 7730 to establish the fees for Rule 144A real-time and historic data at the same rates currently in effect for similar data sets.2

      The effective date is June 30, 2014.

      The amended rule text is available at www.finra.org/notices/13-35.

      Questions regarding this Notice may be directed to:

      •   Elliot Levine, Associate Vice President and Counsel, Transparency Services, at (202) 728-8405;
      •   Sharon Zackula, Associate Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8985; or
      •   Kathryn Moore, Associate General Counsel, OGC, at (202) 728-8200.

      Background and Discussion

      FINRA amended Rule 6750 and the dissemination protocols to provide for the dissemination of Rule 144A transactions in TRACE-eligible securities, provided the asset type (e.g., corporate bonds) is currently subject to dissemination under Rule 6750. In addition, FINRA amended Rule 7730 to establish real-time and historic data sets for Rule 144A transactions and related fees. FINRA also modified Rule 7730 to incorporate clarifying and technical amendments to various provisions. The more significant amendments to the FINRA rules are as follows:

      •   Dissemination. FINRA amended Rule 6750 to provide for the dissemination of Rule 144A transactions upon receipt of a transaction report. Under TRACE dissemination protocols, a Rule 144A transaction will be disseminated subject to the same dissemination cap that is currently in effect for a non-Rule 144A transaction involving the same type of security. Thus, for Rule 144A transactions in investment-grade corporate bonds, the dissemination cap is $5 million, which is the same dissemination cap that applies to non-Rule 144A transactions in such securities. Similarly, for Rule 144A transactions in non-investment grade corporate bonds, the dissemination cap is $1 million.3
      •   Fees. FINRA amended Rule 7730(c) and (d) to establish the Rule 144A Data Set for real-time TRACE data and the Historic Rule 144A Data Set and the fees for the data sets. The fees are set at the same rate currently in effect for the other real-time and historic data sets discussed in Rule 7730.4
      •   Clarifying Amendments. FINRA also incorporated a number of clarifying and technical amendments to Rule 7730, including modifications to Rule 7730(f)(4) to refine the definition of Historic TRACE Data; Rule 7730(a)(1)(B) to clarify the TRACE Web browser fees applicable to subscriptions involving more than two data sets; and Rule 7730(b)(1) (A) to clarify that the to be announced (TBA) transaction reporting fee of $1.50 applies to TBA transactions in SBA-backed ABS as well as TBA transactions in agency pass-through mortgage-backed securities.5

      1 See Securities Exchange Act Release No. 70345 (September 6, 2013), 78 FR 56251 (September 12, 2013) (SEC Order Granting Approval of Proposed Rule Change Relating to the Dissemination of Transactions in TRACE-Eligible Securities that are Effected Pursuant to Securities Act Rule 144A, File No. SR-FINRA-2013-029).

      2 See Securities Exchange Act Release No. 70691 (October 16, 2013), 78 FR 62788 (October 22, 2013) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to TRACE Fees for Securities Act Rule 144A Transaction Data, File No. SR-FINRA-2013-043).

      3 See SR-FINRA-2013-029. The terms Investment Grade and Non-Investment Grade are defined in FINRA Rule 6710(h) and FINRA Rule 6710(i), respectively.

      4 See SR-FINRA-2013-029 and SR-FINRA-2013-043.

      5 See SR-FINRA-2013-029 and SR-FINRA 2013-043. The terms agency pass-through mortgagebacked security, to be announced (TBA), and SBA-Backed ABS are defined in FINRA Rule 6710(v), FINRA Rule 6710(u), and FINRA Rule 6710(bb), respectively.

    • 13-34 FINRA Requests Comment on Proposed Funding Portal Rules and Related Forms; Comment Period Expires: February 3, 2014

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      Jumpstart Our Business Startups (JOBS) Act

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topics

      Crowdfunding
      Funding Portals
      JOBS Act
      Referenced Rules & Notices

      FINRA By-Laws
      FINRA Rule 2010
      FINRA Rule 2020
      FINRA Rule 2210
      FINRA Rule 2268
      FINRA Rule 3310
      FINRA Rule 4360
      FINRA Rule 4530
      FINRA Rule 8000 Series
      FINRA Rule 8312
      FINRA Rule 9000 Series
      FINRA Rule 9520
      FINRA Rule 12000 Series
      FINRA Rule 13000 Series
      FINRA Rule 14000 Series
      NASD Rule 1010 Series
      NASD Rule 1160
      NASD Rule 3010
      NTM 03-73
      Regulatory Notice 12-34

      Executive Summary

      FINRA is soliciting public comment on a set of proposed rules—referred to as the Funding Portal Rules—and related forms for SEC-registered funding portals1 that become FINRA members pursuant to the crowdfunding provisions of the JOBS Act.2

      The text of the proposed rules is available in Attachment A and the related forms are available as Attachments B through E.

      Questions regarding this Notice should be directed to:

      •   Patricia Albrecht, Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8026; or
      •   Adam 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 February 3, 2014.

      Comments must be submitted through one of 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 comments more efficiently, persons should use only one method to comment on the proposal.

      Important Notes: All comments received in response to this Notice will be made available to the public on the FINRA website. In general, 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 SEA Section 19(b).4

      Background & Discussion

      The JOBS Act, enacted in 2012 with the goal of increasing American job creation and economic growth, contains key provisions relating to securities offered or sold through "crowdfunding."5 Funding portals that engage in crowdfunding on behalf of issuers relying on the JOBS Act's "crowdfunding exemption"6 must register with the SEC and become a member of a national securities association.7 The JOBS Act prohibits funding portals from a variety of activities, including offering investment advice or recommendations, soliciting transactions for securities displayed on their websites, compensating employees for securities solicitations, and holding investor funds or securities.

      FINRA is proposing rules and related forms for funding portals. This proposal, which reflects the rules recently proposed by the SEC, would implement in our rules the provisions of the JOBS Act. FINRA has streamlined the proposed rules to the extent possible to reflect the limited scope of activity permitted by funding portals while also maintaining investor protection.

      In developing the proposed rules, FINRA has considered the comments that we received in response to Regulatory Notice 12-34 (FINRA Requests Comment on Proposed Regulation of Crowdfunding Activities). In January, FINRA made available on its website the Interim Form for Funding Portals (IFFP), an online form for intermediaries that intend to apply for membership with FINRA as funding portals. Prospective funding portal members were invited, on a voluntary basis, to submit information to FINRA using the IFFP and thereby help to inform FINRA's rulemaking process.8

      The proposed Funding Portal Rules consist of a set of seven rules—Funding Portal Rules 100, 110, 200, 300, 800, 900 and 12009—and related forms. Following are highlights of the proposed requirements.

      General Standards (Funding Portal Rule 100)

      Proposed Funding Portal Rule 100 provides that all funding portal members (i.e., including both funding portals and their associated persons) shall be subject to the FINRA By-Laws, unless the context requires otherwise, and the Funding Portal Rules. The rule further sets forth basic definitions modified as appropriate to apply to funding portal members.

      Funding Portal Application (Funding Portal Rule 110, Form FP-NMA, Form FP-CMA and FP-SD Schedule)

      Proposed Funding Portal Rule 110(a) sets forth the membership application process (MAP) for funding portals. The membership application process will enable FINRA to assess whether funding portals are capable of complying with applicable regulations. The rule is based on the current NASD Rule 1010 Series membership rules that apply to broker-dealers. However, the process for funding portals is simplified to reflect the limited nature of their business.

      Proposed Funding Portal Rule 110(a) thus would tailor the NASD Rule 1010 Series by:

      •   shortening the time frames for key events. For instance, the time frame for the Department of Member Regulation (Department) to provide a decision on a funding portal MAP application is 60 days after the application is filed (as opposed to 180 days in the broker-dealer MAP rules);
      •   streamlining and consolidating, from 14 to five, the NASD Rule 1010 Series standards for granting or denying an application. These five consolidated standards address a funding portal's: (1) ability to comply with applicable federal securities laws, rules and regulations and FINRA's Funding Portal Rules; (2) contractual or other arrangements and business relationships necessary to initiate operations; (3) supervisory system; (4) direct and indirect funding sources; and (5) recordkeeping system;
      •   providing that the membership interview may be conducted by video conference (or such other means as FINRA may specify);
      •   streamlining the process for appealing the Department's decision by reducing applicable filing and response time frames from 25 days for broker-dealers to 14 days and eliminating provisions providing for an appellate hearing; and
      •   narrowing the changes in ownership or control for which a funding portal member would be required to apply for approval.

      Funding portals will apply for membership using proposed Form FP-NMA10 and for changes in ownership and control using Form FP-CMA.11 They will submit statutory disqualification information using the FP-SD Schedule.12 The Form FP-NMA and Form FP-CMA require significantly less information than the broker-dealer counterpart forms, consistent with the limited scope of business to be conducted by funding portals.13

      Proposed Funding Portal Rule 110(b) sets forth a streamlined version of FINRA Rule 4360 (Fidelity Bonds) and requires funding portal members to maintain fidelity bond coverage. The rule addresses among other things the minimum required coverage, deductible provision and notification of cancellation, termination or substantial modification of coverage.

      Funding Portal Conduct (Funding Portal Rule 200)

      Based in large part on FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade), proposed Funding Portal Rule 200(a) requires a funding portal member, in the conduct of its business, to observe high standards of commercial honor and just and equitable principles of trade.

      Proposed Funding Portal Rule 200(b), based in large part on FINRA Rule 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices), prohibits a funding portal member from effecting any transaction in, or inducing the purchase or sale of, any security by means of, or by aiding or abetting,14 any manipulative, deceptive or other fraudulent device or contrivance.

      Proposed Funding Portal Rule 200(c) is an abbreviated version of FINRA Rule 2210 (Communications with the Public), essentially prohibiting false and misleading statements.

      Funding Portal Compliance (Funding Portal Rule 300)

      A funding portal member is required under proposed Funding Portal Rule 300(a) to establish and maintain a system to supervise the activities of each associated person of the funding portal member that is reasonably designed to achieve compliance with applicable securities laws and regulations and with the Funding Portal Rules. The rule is a streamlined version of current NASD Rule 3010 (Supervision) and is designed to permit funding portal members flexibility to tailor their supervisory systems to their business models.

      Proposed Funding Portal Rule 300(b) requires each funding portal member to implement a written anti-money laundering (AML) program. This is consistent with the SEC's proposed requirements and Chapter X of Title 31 of the Code of Federal Regulations.15 Accordingly, the proposed rule is similar to current FINRA Rule 3310 (Anti-Money Laundering Compliance Program); however, the proposed rule contemplates that all funding portals will be eligible to conduct the required independent testing for compliance every two years.

      Proposed Funding Portal Rule 300(c) requires funding portal members to report to FINRA (and the obligations of such members' associated persons to report to the member) regulatory proceedings, disciplinary and other events. The rule is largely based on current FINRA Rule 4530 (Reporting Requirements). Funding portal members would use the Funding Portal Rule 300(c) Form for their reporting requirements pursuant to the rule.16

      Based in large part on current NASD Rule 1160 (Contact Information Requirements), proposed Funding Portal Rule 300(d) requires funding portal members to report to FINRA all contact information required by FINRA through such means as FINRA may specify and to promptly update their required contact information.

      Investigations and Sanctions (Funding Portal Rule 800)

      Under proposed Funding Portal Rule 800(a), funding portal members will be subject to the FINRA Rule 8000 Series (Investigations and Sanctions), unless the context requires otherwise. Paragraph (b) of the proposed rule includes a streamlined version of FINRA Rule 8312 (FINRA BrokerCheck Disclosure). The rule provides that FINRA shall make available to the public information filed by a funding portal member that is currently or was previously registered with FINRA, and that, except as otherwise provided by the rule, FINRA shall make available any information reported on the funding portal's most recently filed SEC registration forms. Further, under the rule, FINRA shall make available information filed by a funding portal member indicating whether the funding portal member or any associated person of the funding portal member is subject to a statutory disqualification.

      Code of Procedure (Funding Portal Rule 900)

      Under proposed Funding Portal Rule 900(a), funding portal members will be subject to the FINRA Rule 9000 Series (Code of Procedure), unless the context requires otherwise. Paragraph (b) of the proposed rule includes a streamlined version of the current FINRA Rule 9520 Series (Eligibility Proceedings) and sets forth the procedures for a person to become or remain associated with a funding portal member notwithstanding the existence of a statutory disqualification, and for a funding portal member or person associated with a funding portal member to obtain relief from the eligibility or qualification requirements of the FINRA By-Laws or Funding Portal Rules.

      Arbitration and Mediation (Funding Portal Rule 1200)

      Under proposed Funding Portal Rule 1200(a), funding portal members will be subject to the FINRA Rule 12000 Series (Code of Arbitration Procedure for Customer Disputes), FINRA Rule 13000 Series (Code of Arbitration Procedure for Industry Disputes) and FINRA Rule 14000 Series (Code of Mediation Procedure), unless the context requires otherwise. Paragraph (b) of the proposed rule addresses the use by funding portal members of predispute arbitration agreements for investor accounts. The rule is a streamlined version of current FINRA Rule 2268 (Requirements When Using Predispute Arbitration Agreements for Customer Agreements).

      Request for Comment

      FINRA requests comment on all aspects of the proposed rules and related forms, including any potential costs and burdens that the proposal could impose on funding portals. FINRA particularly requests comment concerning the following issues:

      •   Do the proposed rules appropriately accommodate the scope of funding portal business as provided by the JOBS Act? If not, what other accommodations are appropriate and why?
      •   Do the proposed rules provide sufficient protections to investors who might use funding portals? If not, what additional protections are warranted and why?
      •   Is there any segment of the funding portal industry for which the rules will be more burdensome? Are these additional burdens justified by the business engaged in by these funding portals?
      •   The proposed rules do not impose licensing requirements on associated persons of funding portal members, as they do not appear necessary in light of the limited activities of funding portals. Should there be licensing requirements for associated persons of funding portals? Why or why not?
      •   What costs will be associated with the fidelity bond coverage required by proposed Funding Portal Rule 110(b)? Are there financial responsibility or net capital requirements that FINRA should adopt in addition to or in lieu of a fidelity bond requirement? Why or why not?
      •   As discussed earlier, proposed Funding Portal Rule 300(a) requires funding portal members to establish and maintain supervisory systems. Are there specific supervisory requirements that FINRA should adopt? Why or why not? What potential costs do prospective funding portal members expect in developing and implementing supervisory systems? Similarly, what costs do prospective funding portal members expect would be imposed by compliance with the proposed requirements to:
      •   develop and implement a written anti-money laundering program as specified under proposed Funding Portal Rule 300(b); and
      •   promptly report to FINRA the regulatory proceedings, disciplinary and other events as set forth under proposed Funding Portal Rule 300(c)?

      FINRA requests that commenters provide empirical data or other factual support for their comments wherever possible.


      1 The term "funding portal" is defined under Section 3(a)(80) of the Securities Exchange Act of 1934 (SEA), as revised by the JOBS Act. See Pub. L No. 112-106, 126 Stat. 306 (2012). The SEC has separately proposed rules to implement the provisions of the JOBS Act governing funding portals. Exchange Act Release No. 70741 (October 23, 2013).

      2 See Title III of the JOBS Act.

      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 Crowdfunding generally refers to the use of the Internet by small businesses to raise capital through limited investments from a large number of investors.

      6 See Section 4(a)(6) of the Securities Act of 1933, as amended bythe JOBS Act.

      7 The SEC's proposed Rule 400(a) under Regulation Crowdfunding requires in part that a funding portal must register with the Commission and become a member of FINRA or any other applicable national securities association registered under SEA Section 15A. FINRA is the only registered national securities association.

      8 See Exchange Act Release No. 68633 (January 11, 2013), 78 FR 4186 (January 18, 2013) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change; File No. SR-FINRA-2013-005).

      9 The text of the proposed rules is set forth in Attachment A.

      10 See Attachment B.

      11 See Attachment C.

      12 See Attachment D. Funding portals are required to keep statutory disqualification information current and to update the information promptly, but in any event not later than 10 days following any change in such information. Proposed Funding Portal Rule 110(a)(3)(B) sets forth this update requirement as to funding portal applicants; proposed Funding Portal Rule 800(b)(2) sets forth the requirement as to intermediaries once they become funding portal members.

      13 FINRA will separately address the specific membership application and other fees that apply to funding portals.

      14 FINRA notes that current FINRA Rule 2020 does not expressly include the term "aiding and abetting."

      15 See Exchange Act Release No. 70741 (October 23, 2013).

      16 See Attachment E.

    • 13-33 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 2013 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://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.

    • 13-32 SEC Approves Amendments to FINRA Rule 9217 to Include Additional Rule Violations Eligible for Disposition under FINRA's Minor Rule Violation Plan; Effective Date: September 26, 2013

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      Minor Rule Violations

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Senior Management
      Key Topics

      Code of Procedure
      Minor Rule Violation Plan
      Referenced Rules & Notices

      FINRA By-Laws Schedule A, Sec. 1(b)
      FINRA Rules 1250, 2251, 2266, 2360, 3160, 4360, 4370, 4524, 5110, 5121, 5122, 5190, 6181, 6182, 6250, 6380B, 6623, 6624, 6760, 7230B, 7260B, 7330, 7360, 7430 and 9217
      MSRB Rules G-2, G-3, G-6, G-8, G-9, G-10, G-21, G-27 and G-40
      NASD Rules 1021, 1150, 1160 and 3010
      SEA Rules 10b-10, 17a-3 and 17a-4
      SEC Regulation NMS Rules 605 and 606
      SEC Regulation SHO Rule 200(g)

      Executive Summary

      The Securities and Exchange Commission (SEC) approved amendments to FINRA Rule 9217 to include additional rules for disposition pursuant to FINRA's Minor Rule Violation Plan (MRVP). The additional rules are set forth in Attachment A. The amendment became effective September 26, 2013.

      The text of the amended rules is available at www.finra.org/notices/13-32.

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

      Background & Discussion

      FINRA Rule 9216(b) provides procedures for disposition of certain rule violations designated as minor rule violations pursuant to a plan declared effective by the SEC in accordance with Section 19(d)(1) of the Exchange Act and Rule 19d-1(c)(2) thereunder. FINRA's MRVP allows FINRA to impose a fine of up to $2,500 on any firm it regulates or person associated with a FINRA-regulated firm for a minor violation of an eligible rule. On September 26, 2013, the SEC approved amendments to expand Rule 9217, which sets forth the rules eligible for MRVP disposition.

      The purpose of the MRVP is to provide reasonable but meaningful sanctions for minor or technical violations of rules. The option to impose an MRVP sanction gives FINRA additional flexibility to administer its enforcement program in the most effective and efficient manner, while still fully meeting FINRA's remedial objectives in addressing violative conduct. For example, MRVP dispositions provide a useful tool for implementing the concept of progressive discipline to remediate misconduct.

      The inclusion of a rule in FINRA's MRVP does not minimize the importance of compliance with the rule. FINRA will continue to examine and surveil for compliance with eligible rules in a manner consistent with its examination programs and will determine on a case-by-case basis whether disposition pursuant to the MRVP is appropriate. The inclusion of a rule in the MRVP does not require FINRA to treat any particular violation of that rule pursuant to the MRVP. FINRA therefore retains the discretion to resolve minor violations as informal matters or through an Acceptance, Waiver and Consent or filing of a complaint, depending on the facts and circumstances. FINRA does not intend to develop a formula as to when a matter must be handled pursuant to the MRVP, as opposed to other alternatives, including informal action. Similarly, a firm or associated person is not required to accept an MRV disposition and may always avail itself of the procedural rights under FINRA rules to challenge an allegation in any complaint that may be filed.


      1 See Securities Exchange Act Release No. 70521 (September 26, 2013), 78 FR 60982 (October 2, 2013) (Order Approving File No. SR-FINRA-2013-033)


      Attachment A

      Additional Rules Included in FINRA's MRVP as of September 26, 2013

      (1) Schedule A. Sec. 1(b) of the FINRA By-Laws—Failure to make accurate payment of Trading Activity Fee.
      (2) Rule 1250(a)—Failure to comply with the Regulatory Element of the continuing education requirements.
      (3) Rule 2251(a)—Failure to timely forward proxy and other issuer-related materials.
      (4) Rule 2266—Failure to provide written notification of availability of SIPC information at account opening or annually thereafter.
      (5) Rule 2360(b)(5)—Failure to report options positions.
      (6) Rule 3160(a)(1), (3), (4) and (5)—Standards of conduct for conducting broker-dealer services on or off the premises of a financial institution pursuant to a networking arrangement, but excluding the networking agreement requirements.
      (7) Rule 4360(b)—Failure to maintain adequate fidelity bond coverage.
      (8) Rule 4370(a), (b), (c), (e) and (f)—Requirements to create, maintain and update a written business continuity plan and disclosure of such to customers.
      (9) Rule 4524—Failure to timely file or filing of incomplete reports or information.
      (10) Rule 5110(b)—Failure to timely file or filing of incomplete documents or information.
      (11) Rule 5121(a)—Failure to prominently disclose conflict of interest.
      (12) Rule 5121(b)(2)—Failure to give timely notification of termination or settlement of public offering, or failure to file net capital computation.
      (13) Rule 5122(b)(2)—Failure to timely file private placement documents.
      (14) Rule 5190—Failure to give timely notification of participation in offerings.
      (15) Rules 6380B, 7230B, 7260B, 7330, and 7360—Transaction reporting in equity and debt securities.
      (16) Rules 6181 and 6623—Failure to timely report transactions in NMS, OTC and restricted equity securities.
      (17) Rules 6182 and 6624—Failure to accurately mark short sale transactions in NMS and OTC equity securities.
      (18) Rule 6250—Failure to comply with quote and order access requirements for FINRA's Alternative Display Facility.
      (19) Rule 6760—Failure to give timely or complete notification concerning offerings of TRACE-Eligible Securities.
      (20) Rule 7430—Failure to synchronize business clocks used for recording date and time as required by applicable FINRA By-laws and rules.
      (21) NASD Rules 1021(d)—Failure to timely register.
      (22) NASD Rule 1150—Failure to review and update executive representative designation and contact information.
      (23) NASD Rule 1160—Failure to report or update contact information.
      (24) NASD Rule 3010—Failure to maintain adequate written supervisory procedures where the underlying conduct is subject to Rule 9217.
      (25) SEA Rules 17a-3(a) and 17a-4—Record retention rule violations.
      (26) SEA Rule 10b-10—Confirmation of Transactions.
      (27) Rule 200(g) of SEC Regulation SHO— Failure to accurately mark sell orders of equity securities.
      (28) Rule 605(a)(1) and (3) of SEC Regulation NMS—Failure to timely report or provide complete order execution information.
      (29) Rule 606 of SEC Regulation NMS—Failure to timely disclose or provide complete order routing information.
      (30) MSRB Rules G-2 and G-3 (b)(ii)(D)and (c)(ii)(D)—Failure to timely register.
      (31) MSRB Rule G-3(h)—Failure to comply with the continuing education requirements.
      (32) MSRB Rule G-6—Failure to maintain adequate fidelity bond coverage.
      (33) MSRB Rules G-8 and G-9—Record retention rule violations.
      (34) MSRB Rule G-10(a)—Failure to deliver investor brochure to customers promptly.
      (35) MSRB Rule G-21—Advertising.
      (36) MSRB Rule G-27(c)—Failure to maintain adequate written supervisory procedures where the underlying conduct is subject to Rule 9217.
      (37) MSRB Rule G-40(a) and (c)—Failure to designate and update electronic mail contact information for communications with MSRB.

    • 13-31 FINRA Highlights Examination Approaches, Common Findings and Effective Practices for Complying With its Suitability Rule

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      Suitability

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topics

      Suitability
      Referenced Rules & Notices

      FINRA Rule 2111
      FINRA Rule 3270
      FINRA Rule 4512
      NASD Rule 3010
      Regulatory Notice 11-02
      Regulatory Notice 11-25
      Regulatory Notice 12-25
      Regulatory Notice 12-55

      Executive Summary

      This Notice provides observations from recent FINRA examinations and highlights firms' experiences with FINRA Rule 2111 (Suitability), which became effective on July 9, 2012. It does not create new or alter the existing questions and answers, guidance or interpretations of FINRA Rule 2111 contained in prior Notices.

      The effective practices highlighted in this Notice are provided to help firms enhance compliance and supervision under the suitability rule. Adopting practices discussed in this Notice will not ensure rule compliance or result in a safe harbor, but we believe they are positive steps in building a strong compliance environment.

      Questions regarding this Notice may be directed to

      •   Daniel M. Sibears, Executive Vice President, Regulatory Operations/ Shared Services at (202) 728-6911; or
      •   Michael Rufino, Senior Vice President and Acting Head of Regulatory Operations/Sales Practice, at (212) 858-4487.

      Background

      FINRA Rule 2111 generally is modeled after former NASD Rule 2310, incorporates related case law, and includes a few new or modified obligations. The details of the rule requirements and related guidance are available in Regulatory Notices 11-02, 11-25, 12-25 and 12-55.

      The rule requires a firm or associated person to "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 member or associated person to ascertain the customer's investment profile." Firms and associated persons generally must attempt to obtain and analyze customer-specific information—such as customer's age, investment experience, time horizon, liquidity needs and risk tolerance—when making recommendations to customers. The rule also recites the three main suitability obligations:

      •   reasonable-basis (requires a firm or associated person to perform reasonable diligence to understand the nature of a recommended security or investment strategy involving a security, as well as its potential risks and rewards, and determine whether the recommendation is suitable for at least some investors based on that understanding);
      •   customer-specific (requires a firm or associated person to have a reasonable basis to believe that a recommendation is suitable for a particular customer based on that customer's investment profile); and
      •   quantitative (requires a firm or associated person who has actual or de facto control over a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive).

      The rule added recommended investment strategies involving a security or securities, including explicit recommendations to "hold" a security or securities.

      For an investment strategy that involves both a security and non-security component, a firm's suitability obligations apply to the security component but its suitability analysis must be informed by a general understanding of the non-security part of the strategy. A firm's general understanding of the non-security product would depend on the facts and circumstances; but ordinarily a firm would need to have only basic knowledge of the non-security product. In the case of a recommended investment strategy involving a security and an outside business activity, a firm's general understanding of the non-security component will be informed by the information and considerations required as part of a notice of an outside business activity pursuant to FINRA Rule 3270 (Outside Business Activities of Registered Persons).

      FINRA Rule 2111(b) provides an exemption to customer-specific suitability for recommendations to institutional customers if three criteria are satisfied. First, the customer must meet the FINRA Rule 4512(c) definition of "institutional account." Second, the firm must have "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." Third, the institutional customer must affirmatively indicate "that it is exercising independent judgment in evaluating the member's or associated person's recommendations." In relation to the third requirement, 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 document compliance with the institutional-customer exemption.

      To assist firms in preparing for the amended rule, FINRA issued Regulatory Notice 11-02, which announced the SEC's approval of the amendments, provided an initial effective date and discussed its requirements. Subsequently, firms posed a number of questions regarding the rule, leading FINRA to extend the effective date to July 9, 2012, and issue additional guidance in Regulatory Notices 11-25, 12-25 and 12-55. FINRA also prepared a New Account Application Template as a resource for firms and conducted a free webinar on April 18, 2012.

      Moreover, a consolidated suitability frequently asked questions (FAQ) document organized by topic is available at http://www.finra.org/Industry/Issues/Suitability/.

      To further support compliance with the rule, this Notice provides information concerning FINRA's examination approach, common findings and observations of effective practices implemented by firms. Effective practices predominantly implemented by smaller firms are also identified throughout this Notice.

      Examination Approach

      Examinations for compliance with the suitability rule typically begin with an analysis of a firm's controls. This is largely based on interviewing principals responsible for preparing the firm's policies and procedures for this area and, considering the products the firm sells and the types of customers with which the firm conducts business, assessing the firm's readiness to control risks related to suitability.

      FINRA examiners tested supervisory and compliance systems and determined that firms, in general, implemented reasonable approaches regarding suitability. The depth and breadth of FINRA examiner testing is generally determined by the supervisory systems and controls the firm developed, the products and strategies the firm recommends, the firm's business activities, the firm's customer base, and other relevant information considered by FINRA staff during the examination planning and execution process.

      During examinations, FINRA typically asks firms to respond to the following types of questions and information requests and to provide supporting documents:

      •   What employee training has the firm implemented regarding changes to the suitability rule?
      •   Does the firm offer training for associated persons to address investment strategies and hold recommendations?
      •   How does the firm define investment strategies, including hold recommendations, and how are these topics supervised?
      •   Describe the firm's supervisory and compliance procedures for reasonable-basis, customer-specific and quantitative suitability, such as:
      •   the manner in which the firm reasonably detects and prevents transactions in accounts for which customer investment profile information is unavailable or incomplete. To the extent that customer investment profile factors are not incorporated into account documentation, FINRA examiners may ask the firm to explain its efforts to obtain the profile information before making new recommendations to customers and, if any of the information is unavailable, how the firm determines whether there is a reasonable basis to believe that a recommendation is suitable;
      •   the way the firm identifies and supervises accounts using strategies, or accounts with concentrations of particular types of securities, that may not align with the customer's investment profile; and
      •   the manner in which the firm supervises explicit hold recommendations, including the method of documentation the firm uses when documentation occurs, as well as the information the firm considers in conducting the review.
      •   What tools (e.g., exception reports) does the firm use to identify in-and-out trading and high turnover rates and commission-equity ratios?
      •   How does the firm determine whether customers meet the definition of "institutional account" and are capable of evaluating investment risks independently?
      •   What protocols does the firm use to obtain an affirmative acknowledgement that an institutional customer is exercising independent judgment in evaluating the firm's or associated person's recommendations?
      •   If the firm uses portfolio analytic tools or models, how does the firm determine whether the tools or models make recommendations subject to the suitability rule or meet the criteria for the safe harbor in Rule 2111.03?
      •   Who develops these tools?
      •   Who uses them (clients, representatives or both)?
      •   How does the firm periodically review and test the effectiveness of the tools?
      •   If the tools or models make recommendations subject to the suitability rule, how are those recommendations supervised?

      After the information is obtained, FINRA examiners conduct a review of internal firm controls to determine whether firm procedures are followed. Examinations are expanded where material deviations are found between procedures and practices. In addition, examiners review transactions and related suitability documentation that raise red flags about potential unsuitable recommendations. Examples of red flag transactions include:

      •   those that appear to deviate from the firm's internal suitability guidelines for a particular security;
      •   a long-term investment for an investor with a short-term horizon;
      •   a speculative investment or strategy held in the account of an investor with a conservative investment objective; and
      •   the same security held in the account or strategy implemented for multiple investors of a particular representative despite customer profiles that differ.

      While examiners review documents used by firms to supervise suitability decisions and rule requirements, FINRA reminds firms that Rule 2111 generally does not impose explicit documentation requirements. As stated in Regulatory Notices 11-25, 12-25 and 12-55, firms may take a risk-based approach to document compliance with the suitability rule. The complexity and risks associated with a particular security or investment strategy will impact the level of documented analysis. Documented analysis may consist of the information obtained by the firm or associated person regarding a particular recommended security or investment strategy to ascertain the suitability of the investment based on the customer's investment profile. Another example of documented analysis could include the source materials obtained to assess potential risks and rewards associated with a recommended security or strategy. Similarly, documented analysis may include those records used to determine whether the recommendation is suitable for at least some investors.

      Common Findings

      The suitability rule amendments are still relatively new so many firms have not received a cycle examination or had a cycle examination conclude since the rule went into effect. Of the firms examined, most had updated policies, procedures and systems, trained staff and obtained additional customer investment profile information. Nonetheless, a small percentage of firms examined did not take a comprehensive approach to best ensure compliance with the rule.

      Among firms where FINRA found deficiencies, inadequate procedures for hold recommendations (e.g., how the firm supervises and, when necessary, documents such recommendations) was the most frequent deficiency. FINRA disposed of the vast majority of examinations with deficiencies through a Cautionary Action that cited firms for inadequate supervisory procedures under NASD Rule 3010 (Supervision). These informal dispositions reflect FINRA's commitment to recognize reasonable, good faith efforts by firms to update and remediate supervisory and compliance systems. FINRA would, of course, consider disciplinary action for more serious violations, such as unsuitable recommendations.

      A few examination findings were referred to FINRA's Enforcement Department and those matters involved suitability violations that were actionable under the predecessor suitability rule.

      Observations of Effective Practices

      The observations regarding effective practices discussed below recognize that there is no one-size-fits-all approach to compliance and supervision. Rather, the cited practices highlight measures that could bolster a firm's suitability-focused supervisory and compliance procedures. The relevance and feasibility of particular practices vary depending on factors such as a firm's size, business model, products offered and customer base. Firms are not bound by the practices discussed in this Notice and may employ other methods to achieve compliance with the suitability rule.

      Reasonable-Basis Suitability

      As referenced above, reasonable-basis suitability requires a firm or associated person to perform reasonable diligence to understand the nature of a recommended security or investment strategy involving a security, as well as its potential risks and rewards, and to determine whether the recommendation is suitable for at least some investors based on that understanding. FINRA observed during examinations that many firms have in place a new product vetting process that assists them in executing reasonable diligence obligations. While many large firms have extensive frameworks for assessing products, even smaller firms established investment committees to vet complex or risky products to determine whether the product met the reasonable-basis suitability standard for retail customers, and if so, the type of customer profile for which the product would be suitable if recommended.

      A firm's vetting of new products does not, standing alone, satisfy the need for associated persons to understand the securities and investment strategies they recommend to customers.1 In this regard, some firms post due diligence on products (and accompanying documents) to an internal website that associated persons can access when recommending a product. Such information includes audited financial statements, notes of interviews with key individuals of the product sponsor or issuer, and other information relevant to understanding the product and its features. Some firms use the vetting process to aid in product-focused training of their associated persons, supervisors and compliance staff.

      A number of firms require associated persons to complete instructor-led or online training prior to engaging in the sale of an approved product. Several firms also require associated persons to pass a test at the conclusion of product training. As an added feature, some firms also implement a mandatory waiting period before an associated person can retake a test that he has failed. Firms also routinely update associated persons on product features during sales meetings to communicate new information regarding the product.

      Customer-Specific Suitability

      Under the customer-specific suitability standard, the rule requires a broker-dealer or associated person to use reasonable diligence to obtain and analyze a customer's age, investment experience, time horizon, liquidity needs and risk tolerance, in addition to the customer-specific factors from the predecessor rule (other holdings, financial situation and needs, tax status and investment objectives).2 The rule requires a firm to seek to obtain and analyze the customer-specific factors listed in the rule when it makes recommendations of securities or investment strategies involving securities to new or existing customers, unless there is a documented reasonable basis to believe that one or more of the factors are not relevant to a customer's investment profile under the circumstances. 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.

      Many firms began collecting the additional information for new customers and supplementing existing customer investment profile information prior to the effective date of the amended rule by updating account forms and using electronic customer relationship management systems to capture this information. Overall, firms made significant technological changes to internal systems to capture the added customer profile data.

      Some firms supplemented the technological upgrades with business processes that reassessed their entire client base and challenged its representatives to meet goals for completing customer reviews within a specified timeframe by, for example, periodically posting results by branch office or region. Other firms collected the enhanced customer profile information on a rolling basis as they made new recommendations or conducted quarterly or annual investment reviews with customers. A number of firms implemented systems that flag customer accounts that have recommended transactions but do not have a complete customer investment profile. Some small firms have policies that, although not required by Rule 2111, prohibit recommended transactions unless the customer fully completes or updates account information with all of the factors listed in the amended rule. Here, the firm will designate such an account as restricted to non-recommended transactions if the customer withholds investment profile information.

      Some firms also bolstered compliance through heightened customer-specific suitability requirements or specific suitability profiles (e.g., customers who would qualify for complex options trading; customers who have a high-risk tolerance, low liquidity needs and substantial investment experience; customers where the recommended transaction represents a small percentage of a balanced portfolio). These heightened standards are designed to best ensure that a recommended security or strategy matches well with the customer's profile data. For example, some firms combine and assess more granular data focused on a customer's age, retirement status, limited investment experience and low dollar investments to determine whether a particular recommended security or strategy is appropriate or out of line.

      In some cases, firms implemented new policies and exception systems that flag vulnerable investors, typically those unable to sustain more than limited losses, such as individuals near or in retirement or other investors who rely on an income stream from an investment portfolio. Exceptions usually take into account factors such as the customer's profile, investment strategies and securities holdings. Some small firms reported conducting targeted educational discussions with vulnerable customers regarding products, markets and risks, as well as more frequent portfolio assessments.

      Quantitative Suitability

      Quantitative suitability requires a firm or associated person who has actual or de facto control over a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive. FINRA learned over the past year that it is typical for firms to rely on pre-rule amendment policies, procedures and systems to comply with this provision of the rule. In short, most firms already monitored customer accounts for churning and excessive trading.

      Still, some firms updated surveillance and monitoring systems, and exception reports, by incorporating other aspects of the rule changes into data analysis and exception reports, such as the additional customer profile information. This approach bolstered compliance with the quantitative suitability requirement. FINRA believes that firms could also evaluate whether their compensation arrangements could incent a salesperson to engage in excessive trading that is unsuitable (or, generally, to make unsuitable recommendations).

      Institutional-Customer Exemption

      FINRA observed that some firms with an institutional customer base use tailored account opening documents while others use separate forms or certifications to facilitate compliance with the institutional-customer exemption. Through these documents, the institutional customer acknowledges in writing that it will exercise independent judgment in evaluating recommendations. Alternatively, firms contact institutional customers to discuss affirmative indications and document that conversation. Third-party vendors are used by some firms to verify the institutional status and sophistication of customers. Where institutional customers do not confirm a willingness or capability to exercise independent judgment, some firms take additional steps to adhere to suitability standards. Specifically, an institutional customer may indicate that it will exercise independent judgment only on a trade-by-trade or asset-class-by-asset-class basis. Here, some firms verify and document the circumstances under which an institutional customer exercises independent judgment and flag recommendations that are not covered. To avoid potential suitability breaches with institutional customers, some broker-dealers decide to service only those institutional customers that have made the affirmative indication in terms of all potential trading activity in an account or will designate the account as restricted to non-recommended transactions.

      Hold and Other Investment Strategy Recommendations

      Although FINRA discovered instances of deficiencies regarding hold recommendations, some firms we examined implemented systems to achieve compliance with the hold and other investment strategy recommendation requirements of the rule. These systems include the following:

      •   a "hold ticket" or a "hold blotter" that captures hold and, in certain instances, other types of strategy recommendations;
      •   notes of discussions with clients regarding explicit hold or other strategy recommendations by associated persons maintained in customer files;
      •   firm branch office inspections focused on the documentation of hold and other strategy conversations with clients;
      •   modified new account forms to include specific investment strategies (determined by the firm) that could be identified if an associated person recommends them at the time of account opening;
      •   new or amended account opening forms that must be signed by the customer when associated persons recommend changes to a previously recommended account investment strategy; and
      •   a prohibition on associated persons engaging firm clients in the associated persons' outside business activities.

      As referenced, some firms integrate explicit hold recommendation reviews into branch office inspections. This helps firms determine whether internal procedures regarding hold recommendations are implemented by a particular branch and whether various branches are operating as expected or in an inconsistent manner. If the latter, remedial actions may follow at a regional or national level to better ensure that explicit hold recommendations are properly made, supervised and, when necessary, documented.

      Some small firms use clearing firm platforms to capture explicit hold recommendations or other strategies. The practice is for small firm representatives to rely on client notes capabilities offered by clearing firms. Notes capabilities permit registered representatives of small firms to capture the substance of conversations with clients at a granular level (e.g., substance and time of conversation, name of security or type of strategy) and thereby provide an audit trail. Moreover, some small firms counsel their registered representatives to use the notes functionality to capture whether recommendations were made relative to the transfer of positions from another broker-dealer. In particular, some small firms memorialize disclosures to customers that transferred securities—that the firm does not follow—will not be the subject of hold or sell recommendations.

      Common feedback from firms is that the hold and strategy aspects of the rule create behavioral and cultural challenges since, historically, it was not customary for registered representatives to consider an explicit hold as a recommendation or to document a strategy. In response, many firms have provided initial training on these aspects of the rule and conducted ongoing training by way of periodic sales meetings, continuing education, annual compliance meetings, onsite inspections and compliance alerts to remind their representatives of procedures on when and how to document hold and other strategy recommendations.

      FINRA reminds firms that Rule 2111 generally does not impose explicit documentation requirements. A firm may use a risk-based approach to documenting and supervising compliance with the suitability rule. The type or form of documentation that may be needed is dependent on the facts and circumstances of the investment strategy or hold recommendation, including the complexity and risks associated with the security or investment strategy at the time of the recommendation. Irrespective of the method a firm uses to capture hold and other strategy recommendations when necessary, the firm must have a supervisory system in place to adequately supervise investment strategies.

      Supervision

      FINRA examiners observed that firms use various approaches to establish and implement a system of reasonable supervision and compliance over the areas covered by the suitability rule. Examinations show that effective procedures delineate who is responsible for conducting a specific review, what will be reviewed, the frequency of reviews and required documentation to evidence the review. A notable practice is a standardized approach to monitoring and updating policies and procedures as functions, personnel and systems change within a firm.

      When customer accounts are following a particular investment strategy, firms take the strategy into consideration when determining the suitability of transactions meant to implement the strategy. This approach helps firms identify potential misalignments of strategies, recommendations and securities positions. To detect potential red flags based on securities positions, some small firms look beyond an individual customer's account. Firms look for concentrated positions of a security in the accounts serviced by specific registered representatives, or look across customer accounts or branch offices for an accumulation of a security that is not readily explained (e.g., a security not followed by the firm). These red flags then become the subject of review by the firm.

      Conclusion

      Examinations indicate that firms for the most part adopted policies, procedures and systems to address the requirements of the suitability rule. Ongoing and future examinations will determine whether this trend continues.

      Importantly, firms have responded to feedback received through examinations by addressing deficiencies. This leads to stronger internal controls around suitability practices. FINRA encourages firms to carefully consider the effective practices cited in this Notice in the near term rather than wait for a regulatory examination. In this manner, firms can determine whether additional efforts are warranted to improve approaches to suitability determinations and the supervision of recommendations. The combination of executive leadership, policies, procedures, suitability-related technologies, training and new product vetting will help ensure that customers are well served when recommendations are made and that the suitability rule serves its intended investor protection purpose.


      1 See Regulatory Notice 11-25 (May 2011) (FAQ 11).

      2 See FINRA Rule 2111(a) and Regulatory Notice 11-02 (January 2011) (discussion on SEC approved FINRA Rule 2111 and additional customer investment profile information that should be gathered and analyzed as part of a suitability analysis). As noted in Regulatory Notice 11-25 (May 2011) (additional guidance provided to firms on suitability and customer's investment profile),firms were not required to seek to obtain all the customer-specific factors listed in the rule by its implementation date.

    • 13-30 SEC Approves Amendments to Customer Arbitration Code to Simplify Panel Selection in Cases With Three Arbitrators; Effective Date: September 30, 2013

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      Arbitration Panel Composition

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Key Topics

      Arbitration
      Customer Code of Arbitration Procedure
      Panel Composition
      Referenced Rules & Notices

      Regulatory Notice 11-05
      FINRA Rule 12401
      FINRA Rule 12403

      Executive Summary

      The SEC approved amendments to FINRA Rule 12403 of the Code of Arbitration Procedure for Customer Disputes (Customer Code) to simplify the arbitration panel selection process in cases with three arbitrators.1 Under the amended rule, parties in all customer cases use the same panel composition method. Under this method, FINRA will provide the parties with lists of 10 chair-qualified public arbitrators, 10 public arbitrators and 10 non-public arbitrators. The parties may strike four arbitrators on the chair-qualified public list and four arbitrators on the public list. Any party may select an allpublic arbitration panel by striking all of the arbitrators on the non-public list. If a party wants a non-public arbitrator on the panel, the party can limit its strikes on the non-public list. Limiting strikes does not guarantee that FINRA will appoint a non-public arbitrator to the panel in every instance as explained below.

      The amendments are effective on September 30, 2013, for all customer cases filed on or after the effective date. The amendments are also effective for pending cases in which the 35-day time period for electing a panel composition method has not expired as follows: If a customer does not elect a panel composition method within the 35-day time period, panel composition will proceed under the amended rule, not under the default provision in the current rule.

      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, Operations 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

      Parties in arbitration participate in selecting the arbitrators who serve on their cases. Since February 1, 2011, FINRA has provided customers in cases with three arbitrators2 with a choice between two panel-composition methods.3 The first method—the Majority-Public Panel Option—provides for a mixed panel of one chair-qualified public arbitrator, one public arbitrator and one non-public arbitrator. The Majority-Public Panel Option is the panel-selection method FINRA used in the forum prior to February 1, 2011. The second method—the All-Public Panel Option—was added February 1, 2011, and permits any party to select an arbitration panel consisting of three public arbitrators. FINRA Rule 12403 provides that a customer (not a firm or associated person) may choose a panel-composition method in the statement of claim (or accompanying documentation) or at any time up to 35 days from service of the statement of claim. In the absence of an affirmative choice by the customer for the All-Public Panel Option, the Majority-Public Panel Option is the default composition method.

      FINRA staff reviewed the panel-composition elections customers made after implementation of the All-Public Panel Option. In the two years since implementation, customers in approximately three-quarters of eligible cases chose the All-Public Panel Option. Customers using the Majority-Public Panel Option did so by default 77 percent of the time, rather than by making an affirmative choice (i.e., these customers did not make an election in their statement of claim or accompanying documentation, and did not respond to a request that they elect a panel-composition method). After reviewing these data, FINRA became concerned that customers without attorneys, and attorneys new to the practice of securities arbitration, might be using the Majority-Public Panel Option because they were not familiar with the Customer Code or because they did not appreciate the significance of making an election. FINRA also reviewed the awards issued by mixed panels and all-public panels. The awards issued during the first two years since implementation show that customers were awarded damages significantly more often when an all-public panel decided their case.

      As a result of reviewing the election and award data, FINRA amended Rule 12403 to simplify the panel-selection process. Under the amended rule, FINRA no longer requires a customer to elect a panel-composition method. Parties in all customer cases with three arbitrators will get the same composition method. FINRA will provide the parties with lists of 10 chair-qualified public arbitrators, 10 public arbitrators and 10 non-public arbitrators. FINRA will permit each party to strike up to four arbitrators on the chair-qualified public list, up to four arbitrators on the public list, and any or all of the arbitrators on the non-public list. Any party may select an all-public arbitration panel by striking all of the arbitrators on the non-public list. If the parties collectively strike all of the non-public arbitrators on the list, or if no selected non-public arbitrators are available to serve, FINRA will not appoint a non-public arbitrator to the panel. If a party wants a non-public arbitrator on the panel, the party can limit its strikes on the non-public list, leaving any or all of the 10 non-public arbitrators on the list. However, leaving non-public arbitrators on the list does not guarantee that FINRA will appoint one to the panel. The parties may strike different non-public arbitrators from the list, and collectively they may strike all of the non-public arbitrators on the list. In addition, the selected non-public arbitrators may not be available to serve. Under these circumstances, FINRA will appoint an all-public panel unless the parties agree to request a supplemental list of non-public arbitrators.

      FINRA believes that forum users will benefit by having one panel-composition method for a number of reasons. First, having one panel-composition method simplifies the arbitrator-selection process for all parties and for FINRA staff, while leaving in place the method affirmatively chosen by customers in approximately three-quarters of customer cases. Second, it ensures that every party has an opportunity to see the list of non-public arbitrators and rank or strike any or all of the arbitrators on the list. Third, the proposal ensures that customers will not miss the opportunity to select an all-public panel if that would have been their preference.

      Cross References

      To implement the rule amendments, FINRA corrected several cross references.

      Effective Date

      The amendments are effective on September 30, 2013, for all customer cases filed on or after the effective date. The amendments are also effective for pending cases in which the 35-day time period for electing a panel-composition method has not expired as follows: If a customer does not elect a panel-composition method within the 35-day time period, panel composition will proceed under the amended rule, not under the default provision in the current rule.


      1 See Securities Exchange Act Rel. No. 70442 (September 18, 2013) (File No. SR-FINRA-2013-023).

      2 FINRA Rule 12401 provides that if the amount of a claim is more than $100,000, exclusive of interest and expenses, or is unspecified, or if the claim does not request money damages, the panel will consist of three arbitrators, unless the parties agree in writing to one arbitrator.

      3 See Regulatory Notice 11-05 (February 2011).


      Attachment A

      New language is underlined; Deletions are in brackets.

      Rule 12403. Cases with Three Arbitrators

      [(a)] Composition of Panels

      [The customer may elect to proceed with panel composition under either of the following options:
      (1) Composition Rules for Majority Public Panel

      Rule 12403(c) provides for limited strikes on each of the three lists. In each majority public panel case, the panel will consist of two public arbitrators and one non-public arbitrator.
      (2) Composition Rules for Optional All Public Panel

      Rule 12403(d) provides for limited strikes on the public and public chairperson lists and unlimited strikes on the non-public list. In optional all public panel cases, the panel may consist of three public arbitrators or two public arbitrators and one non-public arbitrator. Under this option, either party can ensure that the panel will have three public arbitrators by striking all of the arbitrators on the non-public list.
      (b) Customer Election
      (1) The customer may elect in writing to proceed under either the composition rules for majority public panel or the composition rules for optional all public panel in the customer's Statement of Claim, if the customer is a claimant, or at any time up to 35 days from service of the Statement of Claim.
      (2) When FINRA serves the Statement of Claim, FINRA will notify the customer in writing that the customer may elect the composition rules for the optional all public panel within 35 days from service of the Statement of Claim.
      (3) If the customer declines to make an affirmative election in writing by the 35-day deadline, the composition rules for majority public panel will apply.
      (c) Composition Rules for Majority Public Panel
      (1) Generating Lists
      (A) The Neutral List Selection System will generate:
      •   A list of 10 arbitrators from the FINRA non-public arbitrator roster;
      •   A list of 10 arbitrators from the FINRA public arbitrator roster; and
      •   A list of 10 public arbitrators from the FINRA chairperson roster.
      (B) The Neutral List Selection System will generate the chairperson list first. Chair-qualified arbitrators who were not selected for the chairperson list will be eligible for selection on the public list. An individual arbitrator cannot appear on both the chairperson list and the public list for the same case.
      (C) The Neutral List Selection System will exclude arbitrators from the lists based upon current conflicts of interest identified within the Neutral List Selection System.
      (2) Sending Lists to Parties
      (A) The Director will send the lists generated by the Neutral List Selection System to all parties at the same time, within approximately 30 days after the last answer is due. The parties will also receive employment history for the past 10 years and other background information for each arbitrator listed.
      (B) If a party requests additional information about an arbitrator, the Director will request the additional information from the arbitrator, and will send any response to all of the parties at the same time. When a party requests additional information, the Director may, but is not required to, toll the time for parties to return the ranked lists under Rule 12403(c)(3)(C).
      (3) Striking and Ranking Arbitrators
      (A) Each separately represented party may strike up to four of the arbitrators from each list for any reason by crossing through the names of the arbitrators. At least six names must remain on each list.
      (B) Each separately represented party shall rank all remaining arbitrators on the lists in order of preference, with a "1" indicating the party's first choice, a "2" indicating the party's second choice, and so on. Each list of arbitrators must be ranked separately.
      (C) The ranked lists must be returned to the Director no more than 20 days after the date upon which the Director sent the lists to the parties. If the Director does not receive a party's ranked lists within that time, the Director will proceed as though the party did not want to strike any arbitrator or have any preferences among the listed arbitrators.
      (D) Parties are not required to send a copy of their ranking list to the opposing parties.
      (4) Combining Lists

      For each arbitrator classification (public, non-public, and chairperson), the Director will prepare combined ranked lists of arbitrators based on the parties' numerical rankings, as follows:
      •   The Director will add the rankings of all claimants together, and the rankings of all respondents together, to produce separate combined ranked lists for the claimants and the respondents.
      •   The Director will then add the combined rankings of claimants and the respondents together, to produce a single combined ranking number for each arbitrator, excluding all arbitrators stricken by a party.
      •   The Director will create separate combined ranked lists for each arbitrator classification.
      (5) Appointment of Arbitrators; Discretion to Appoint Arbitrators Not on List
      (A) The Director will appoint:
      •   The highest-ranked available non-public arbitrator from the combined non-public arbitrator list;
      •   The highest-ranked available public arbitrator from the combined public arbitrator list, and
      •   The highest-ranked available public arbitrator from the combined chairperson list, who will serve as chairperson of the panel.
      (B) If the number of arbitrators available to serve from the combined lists is not sufficient to fill an initial panel, the Director will appoint one or more arbitrators of the required classification to complete the panel from names generated randomly by the Neutral List Selection System. If the Director must appoint a non-public arbitrator, the Director may not appoint a non-public arbitrator as defined in Rule 12100(p)(2) or (3), unless the parties agree otherwise. The Director will provide the parties information about the arbitrators as provided in Rule 12403(c)(2) and the parties will have the right to challenge the arbitrators as provided in Rule 12407.
      (C) Appointment of arbitrators occurs when the Director sends notice to the parties of the names of the arbitrators on the panel. Before making any decision as an arbitrator or attending a hearing session, the arbitrators must execute FINRA's arbitrator oath or affirmation.
      (6) Replacement of Arbitrators
      (A) If an arbitrator is removed, or becomes otherwise unable or unwilling to serve, the Director will appoint a replacement arbitrator in accordance with this rule, unless the parties agree in writing to proceed with only the remaining arbitrators.
      (B) The Director will appoint as a replacement arbitrator the arbitrator who is the most highly ranked available arbitrator of the required classification remaining on the combined list.
      (C) If there are no available arbitrators of the required classification on the consolidated list, the Director will appoint an arbitrator of the required classification to complete the panel from names generated by the Neutral List Selection System. The Director will provide the parties information about the arbitrator as provided in Rule 12403(c)(2) and the parties shall have the right to object to the arbitrator as provided in Rule 12407.
      (D) If the Director must appoint a non-public arbitrator under Rule 12403(c) (6)(C), the Director may not appoint a non-public arbitrator as defined in Rule 12100(p)(2) or (3), unless the parties agree otherwise.
      (d) Composition Rules for Optional All Public Panel]
      [(1)] (a) Generating Lists
      [(A)] (1) The Neutral List Selection System will generate:
      [•] (A) A list of 10 arbitrators from the FINRA non-public arbitrator roster;
      [•] (B) A list of 10 arbitrators from the FINRA public arbitrator roster; and
      [•] (C) A list of 10 public arbitrators from the FINRA chairperson roster.
      [(B)] (2) The Neutral List Selection System will generate the chairperson list first. Chair-qualified arbitrators who were not selected for the chairperson list will be eligible for selection on the public list. An individual arbitrator cannot appear on both the chairperson list and the public list for the same case.
      [(C)] (3) The Neutral List Selection System will exclude arbitrators from the lists based upon current conflicts of interest identified within the Neutral List Selection System.
      [(2)] (b) Sending Lists to Parties
      [(A)] (1) The Director will send the lists generated by the Neutral List Selection System to all parties at the same time, within approximately 30 days after the last answer is due. The parties will also receive employment history for the past 10 years and other background information for each arbitrator listed.
      [(B)] (2) If a party requests additional information about an arbitrator, the Director will request the additional information from the arbitrator, and will send any response to all of the parties at the same time. When a party requests additional information, the Director may, but is not required to, toll the time for parties to return the ranked lists under Rule [12403(d)(3)(C)] 12403(c)(3).
      [(3)] (c) Striking and Ranking Arbitrators
      [(A)] (1) Non-Public Arbitrator List
      [i.] (A) Each separately represented party may strike any or all of the arbitrators from the non-public arbitrator list by crossing through the names of the arbitrators.
      [ii.] (B) If any names remain on the non-public arbitrator list, each separately represented party shall rank all remaining arbitrators in order of preference, with a "1" indicating the party's first choice, a "2" indicating the party's second choice, and so on.
      [(B)] (2) Chairperson and Public Lists
      [i.] (A) Each separately represented party may strike up to four of the arbitrators from the chairperson list and up to four of the arbitrators from the public arbitrator list[s] for any reason by crossing through the names of the arbitrators. At least six names must remain on each list.
      [ii.] (B) Each separately represented party shall rank all remaining arbitrators on the lists in order of preference, with a "1" indicating the party's first choice, a "2" indicating the party's second choice, and so on. Each list of arbitrators must be ranked separately.
      [(C)] (3) The ranked lists must be returned to the Director no more than 20 days after the date upon which the Director sent the lists to the parties. If the Director does not receive a party's ranked lists within that time, the Director will proceed as though the party did not want to strike any arbitrator or have any preferences among the listed arbitrators. A party's failure to comply with the 20-day timeframe may result in the appointment of a panel consisting of two public arbitrators and one non-public arbitrator.
      [(D)] (4) Parties are not required to send a copy of their ranking list to the opposing parties.
      [(4)] (d) Combining Lists

      For each arbitrator classification (public, non-public, and chairperson), the Director will prepare combined ranked lists of arbitrators based on the parties' numerical rankings, as follows:
      [] (1) The Director will add the rankings of all claimants together, and the rankings of all respondents together, to produce separate combined ranked lists for the claimants and the respondents.
      [] (2) The Director will then add the combined rankings of claimants and the respondents together, to produce a single combined ranking number for each arbitrator, excluding all arbitrators stricken by a party.
      [] (3) The Director will create separate combined ranked lists for each arbitrator classification in cases with both public and non-public arbitrators.
      [(5)] (e) Appointment of Arbitrators; Discretion to Appoint Arbitrators Not on the List
      [(A)] (1) The Director will appoint:
      [] (A) The highest-ranked available non-public arbitrator from the combined non-public arbitrator list;
      [] (B) The highest-ranked available public arbitrator from the combined public arbitrator list, and
      [] (C) The highest-ranked available public arbitrator from the combined chairperson list, who will serve as chairperson of the panel.
      [(B)] (2) If the number of arbitrators available to serve from the combined public or chairperson lists is not sufficient to fill an initial panel, the Director will appoint one or more arbitrators of the required classification to complete the panel from names generated randomly by the Neutral List Selection System. The Director will provide the parties information about the arbitrators as provided in Rule [12403(d)(2)] 12403(b) and the parties will have the right to challenge the arbitrators as provided in Rule 12407.
      [(C)] (3) In cases in which the parties collectively strike all of the arbitrators appearing on the non-public list or when all remaining arbitrators on the non-public list are unable or unwilling to serve for any reason:
      [i.] (A) The Director will return to the public list and select the next highest ranked available arbitrator (after the public arbitrator position has been filled) to complete the three member panel.
      [ii.] (B) In the event no ranked arbitrators remain on the public list or when all remaining arbitrators on the public list are unable or unwilling to serve for any reason, FINRA will select the next highest ranked arbitrator appearing on the chair-qualified list (after the chair position has been filled) to complete the three member panel.
      [iii.] (C) If the number of arbitrators available to serve from the chair-qualified list and public list is not sufficient to fill an initial panel, the Director will appoint a public arbitrator to complete the panel from names generated randomly by the Neutral List Selection System. The Director will provide the parties information about the arbitrator as provided in Rule [12403(d)(2)] 12403(b) and the parties will have the right to challenge the arbitrator as provided in Rule 12407.
      [(D)] (4) Appointment of arbitrators occurs when the Director sends notice to the parties of the names of the arbitrators on the panel. Before making any decision as an arbitrator or attending a hearing session, the arbitrators must execute FINRA's arbitrator oath or affirmation.
      [(6)] (f) Replacement of Public Arbitrators
      [(A)] (1) If a public arbitrator is removed, or becomes otherwise unable or unwilling to serve, the Director will appoint a replacement arbitrator in accordance with this rule, unless the parties agree in writing to proceed with only the remaining arbitrators.
      [(B)] (2) The Director will appoint as a replacement arbitrator the public arbitrator who is the most highly ranked available public arbitrator remaining on the combined public list.
      [(C)] (3) If the next highest ranked available public arbitrator from the combined list is unable or unwilling to serve for any reason, the Director will return to the initial public list and appoint the next highest ranked available arbitrator to complete the three member panel.
      [(D)] (4) If all remaining arbitrators on the public list are unable or unwilling to serve for any reason, the Director will appoint a public arbitrator to complete the panel from names generated randomly by the Neutral List Selection System.
      [(E)] (5) The Director will provide the parties information about the arbitrator as provided in Rule [12403(d)(2)] 12403(b) and the parties shall have the right to object to the arbitrator as provided in Rule 12407.
      [(7)] (g) Replacement of a Chairperson
      [(A)] (1) If a chairperson is removed, or becomes otherwise unable or unwilling to serve, the Director will appoint a replacement arbitrator in accordance with this rule, unless the parties agree in writing to proceed with only the remaining arbitrators.
      [(B)] (2) The Director will appoint as a replacement arbitrator the chair-qualified arbitrator who is the most highly ranked available arbitrator remaining on the combined chair-qualified list.
      [(C)] (3) If the next highest ranked available chair-qualified arbitrator from the combined list is unable or unwilling to serve for any reason, the Director will return to the initial chair-qualified list and appoint the next highest ranked available arbitrator to complete the three member panel.
      [(D)] (4) If all remaining arbitrators on the chair-qualified list are unable or unwilling to serve for any reason, the Director will appoint a chair-qualified public arbitrator to complete the panel from names generated randomly by the Neutral List Selection System.
      [(E)] (5) The Director will provide the parties information about the arbitrator as provided in Rule [12403(d)(2)] 12403(b) and the parties shall have the right to object to the arbitrator as provided in Rule 12407.
      [(8)] (h) Replacement of Non-Public Arbitrators
      [(A)] (1) If a non-public arbitrator is removed, or becomes otherwise unable or unwilling to serve, the Director will appoint a replacement arbitrator in accordance with this rule, unless the parties agree in writing to proceed with only the remaining arbitrators.
      [(B)] (2) In cases in which the parties collectively do not strike all of the non-public arbitrators from the initial list, the Director will appoint as a replacement arbitrator the non-public arbitrator who is the most highly ranked available non-public arbitrator remaining on the combined non-public list.
      [(C)] (3) If the next highest ranked available non-public arbitrator is unable or unwilling to serve for any reason, the Director will return to the initial non-public list and appoint the next highest ranked available arbitrator to complete the three member panel.
      [(D)] (4) In the event no ranked arbitrators remain on the non-public list or when all remaining arbitrators on the non-public list are unable or unwilling to serve for any reason, the Director will return to the public list and select the next highest ranked available arbitrator to complete the three member panel.
      [i.] (A) In the event no ranked arbitrators remain on the public list or when all remaining arbitrators on the public list are unable or unwilling to serve for any reason, FINRA will select the next highest ranked arbitrator appearing on the chair-qualified list to complete the three member panel.
      [ii.] (B) In the event no ranked arbitrators remain on the chair-qualified list or when all remaining arbitrators on the chair-qualified list are unable or unwilling to serve for any reason, the Director will appoint a public arbitrator to complete the panel from names generated randomly by the Neutral List Selection System.
      [(E)] (5) The Director will provide the parties information about the arbitrator as provided in Rule [12403(d)(2)] 12403(b) and the parties shall have the right to object to the arbitrator as provided in Rule 12407.

      * * * * *

      12213. Hearing Locations
      (a) U.S. Hearing Location
      (1) No change.
      (2) Before arbitrator lists are sent to the parties under Rule 12402(c)[, Rule 12403(c) or Rule 12403(d)] or Rule 12403(b), the parties may agree in writing to a hearing location other than the one selected by the Director.
      (3)–(4) No change.
      (b) Foreign Hearing Location – No change.

      * * * * *

      12309. Amending Pleadings
      (a)–(b) No change.
      (c) Amendments to Add Parties

      Once the ranked arbitrator lists are due to the Director under Rule 12402(d)[,] or Rule 12403(c) [or Rule 12403(d)], no party may amend a pleading to add a new party to the arbitration until a panel has been appointed and the panel grants a motion to add the party. Motions to add a party after panel appointment must be served on all parties, including the party to be added, and the party to be added may respond to the motion in accordance with Rule 12503 without waiving any rights or objections under the Code.
      (d) No change.

      * * * * *

      12314. Combining Claims

      Before ranked arbitrator lists are due to the Director under Rule 12402(d)[,] or Rule 12403(c) [or Rule 12403(d)], the Director may combine separate but related claims into one arbitration. Once a panel has been appointed, the panel may reconsider the Director's decision upon motion of a party.

      * * * * *

      12404. Additional Parties
      (a) If a party is added to an arbitration after the Director sends the lists generated by the Neutral List Selection System to the parties, but before parties must return the ranked lists to the Director, the Director will send the lists to the newly added party, with employment history for the past 10 years and other background information for each arbitrator listed. The newly added party may rank and strike the arbitrators in accordance with Rules 12402(d)[,] or 12403(c)[(3), or 12403(d)(3)]. If the newly added party returns the lists within 20 days after the date upon which the Director sent the lists to the party, the Director will include the new party's lists when combining rankings under Rules 12402(e)[, 12403(c)(4), or 12403(d)(4)] or 12403(d). If the Director does not receive the list within that time, the Director will proceed as though the party did not want to strike any arbitrator or have any preference among the listed arbitrators.
      (b) Once the ranked lists are due to the Director under Rules 12402(d)(3)[, 12403(c)(3) (C), or 12403(d)(3)(C)] or Rule 12403(c)(3), no party may amend a pleading to add a new party to the arbitration until a panel is appointed and grants a motion to add the party. Motions to add a party must be served on all parties, including the party to be added, and the party to be added may respond to the motion in accordance with Rule 12503 without waiving any rights or objections under the Code. If the panel grants the motion to add the party, the newly added party may not strike and rank the arbitrators, but may challenge an arbitrator for cause in accordance with Rule 12407.

      * * * * *

      12800. Simplified Arbitration
      (a)–(d) No change.
      (e) Increases in Amount in Dispute

      If any pleading increases the amount in dispute to more than $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.

      * * * * *

      12903. Process Fees Paid by Members
      (a) Each member that is a party to an arbitration in which more than $25,000, exclusive of interest and expenses, is in dispute must pay:
      •  A non-refundable prehearing process fee of $750, due at the time the parties are sent arbitrator lists in accordance with Rule 12402(c)[, Rule 12403(c) or Rule 12403(d)] or Rule 12403(b); and
      •  No change.
      (b)–(c) No change.

      * * * * *

    • 13-29 FINRA Requests Comment on a Revised Proposal Regarding the Consolidated FINRA Rules Governing FINRA's Membership Application Proceedings; Comment Period Expires: November 4, 2013

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      Membership Application Proceedings

      Regulatory Notice
      Notice Type

      Request for Comment
      Consolidated Rulebook
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Systems
      Key Topics

      Continuing Membership Application
      Membership Agreement
      Membership Application Process
      Membership Rules
      New Member Application
      Safe Harbor for Business Expansions
      Referenced Rules & Notices

      FINRA By-Laws Art. I(rr) and Art. IV, Sect. 4(c)
      FINRA Rules 2111, 4120 and 4370
      NASD IM-1011-1, 1013-1 and 1013-2
      NASD Rule 1010 Series
      NASD Rules 1011, 1012, 1013, 1014, 1015, 1016, 1017, 1019 and 1090
      Notices to Members 97-19 and 98-38
      NYSE Rules 311, 312, 313, 321, 401 and 416
      NYSE Rule Interpretations 311(f) and (g), and 401/03 and /04
      Regulatory Notices 08-66, 09-42 and 10-01
      SEA Rules 15c3-1, 15c3-3, 17a-11 and 17f-2
      SEA Section 3(a)(39)

      Executive Summary

      FINRA seeks comment on a revised proposal to transfer the NASD Rule 1010 Series (Membership Proceedings), with substantive changes, into the Consolidated FINRA Rulebook as the FINRA Rule 1100 Series (Member Application). The revised proposal includes changes in response to comments on the prior proposal set forth in Regulatory Notice 10-01. The proposal also includes additional rule provisions to address regulatory issues identified by FINRA staff and codify existing membership-related interpretations and practices.

      The text of the proposed rules is set forth in Attachment A on our website at www.finra.org/notices/13-29.

      Questions concerning this Notice should be directed to:

      •   Joseph Sheirer, Director and Counsel II, Membership Application Program, at (212) 858-5132; or
      •   Patricia Albrecht, Associate General Counsel, Office of General Counsel, at (202) 728-8026.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by November 4, 2013.

      Comments must be submitted through one of 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 comments more efficiently, persons should use only one method to comment on the proposal.

      Important Notes: All comments received in response to this Notice will be made available to the public on the FINRA website. In general, 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 & Discussion

      FINRA's current membership rules, the NASD Rule 1010 Series, provide a means for FINRA, through its Membership Application Program (MAP), to assess the proposed business activities of potential and current member firms with the ultimate goal of ensuring that each applicant is capable of conducting its business in compliance with applicable rules and regulations, and that its business practices are consistent with just and equitable principles of trade.

      In January 2010, FINRA published Regulatory Notice 10-01, seeking comment on a proposal to transfer the NASD Rule 1010 Series, with substantive changes, into the Consolidated FINRA Rulebook as the FINRA Rule 1100 Series. Among other things, the proposed amendments revised the existing membership rules to streamline the standards of review for new member applications (NMAs) and continuing membership applications (CMAs), clarified administrative aspects of the membership process, updated or eliminated outdated terminology, required additional information (including affiliate information) about the applicant and incorporated provisions from the Incorporated NYSE membership rules. Regulatory Notice 10-01 also proposed eliminating much of the Incorporated NYSE membership rule requirements as redundant or obsolete. FINRA received nine comment letters in response to Regulatory Notice 10-01, and has revised the proposal as further detailed below. FINRA invites comment on all aspects of the proposal and specifically requests comment on the economic impact of the proposed rules.

      A. Proposed FINRA Rule 1111 (Definitions)

      NASD Rule 1011 (Definitions) sets forth the defined terms applicable to the MAP process. The proposal adopts NASD Rule 1011 as proposed FINRA Rule 1111 (Definitions) with the following changes.
      1. Proposed FINRA Rule 1111(a) ("Affiliate")

      Proposed FINRA Rule 1111(a) defines, for the first time, the term "Affiliate" to mean: (1) a person that directly or indirectly controls an applicant (excluding a natural person who controls an applicant solely in his or her role as a director, general partner, limited liability company (LLC) managing member or officer exercising executive responsibility (or occupies a similar status or performs a similar function)); or (2) an entity that is controlled by, or is under common control with, an applicant. This proposed definition is substantially similar to the definition of "Affiliate" previously proposed in Regulatory Notice 10-01, but includes a reference to "LLC managing member" to reflect that LLCs are an increasingly common organizational structure and that an LLC managing member performs a role similar to a general partner of a partnership.

      One commenter noted that the proposed definition differs from the Form BD's definition of "control affiliate"3 by excluding certain natural persons; however, FINRA does not believe that the proposed consolidated membership rule provisions applying to an applicant's affiliates must extend to natural persons that control an applicant solely due to their status as a director, general partner, LLC managing member or officer (or similar status or function).
      2. Proposed FINRA Rule 1111(c) ("Associated Person")

      Proposed FINRA Rule 1111(c) transfers NASD Rule 1011's definition of "Associated Person" but amends the definition to expressly include an LLC member as an associated person and provide a de minimis exception from the definition. Specifically, the proposed rule defines "Associated Person" to mean: (1) a natural person registered under FINRA rules; (2) a sole proprietor, or any partner, LLC member, officer, director, or branch manager of the applicant, or any person occupying a similar status or performing similar functions; (3) any employee of the applicant, except any person whose functions are solely clerical or ministerial; (4) any company, government or political subdivision or agency or instrumentality of a government controlled by or controlling the applicant; (5) any person directly or indirectly controlling the applicant whether or not such person is registered or exempt from registration under the FINRA By-Laws or FINRA rules; (6) any person engaged in investment banking or securities business controlled directly or indirectly by the applicant whether such person is registered or exempt from registration under the FINRA By-Laws or FINRA rules; or (7) any person who will be or is anticipated to be a person described in (1) through (6) above.4

      In addition, the term "Associated Person" would not include any person with a de minimis ownership interest (i.e., less than 10 percent) in an LLC, partnership or other type of legal business organization, unless that person is entitled under the business organization's constituent documents to 10 percent or more of the business organization's profits or distributions or otherwise has control of the applicant. This proposed de minimis ownership exclusion provides greater clarity regarding the associated person status of owners with small ownership interests in the applicant that do not otherwise control the applicant by virtue of an entitlement to significant portions of an applicant's profits or distributions or otherwise have the power, directly or indirectly, to control the applicant.

      As proposed in Regulatory Notice 10-01, the definition referred to "LLC managing member." In response to questions regarding whether the definition also would include non-managing LLC members, FINRA has replaced "LLC managing member" with "LLC member" to clarify that all LLC members would be considered associated persons, subject to the de minimis exception noted above. This approach is consistent with the inclusion of all partners in the definition of associated person.
      3. Proposed FINRA Rule 1111(d) ("control")

      Proposed FINRA Rule 1111(d) defines, for the first time, the term "control" to mean the power, directly or indirectly, to direct the management or policies of a person, whether through ownership of securities, by contract or otherwise. Any person is presumed to control another person if such person: (1) is a director, general partner, LLC managing member or officer exercising executive responsibility (or having similar status or functions); (2) directly or indirectly has the right to vote 25 percent or more of a class of voting security or has the power to sell or direct the sale of 25 percent or more of a class of voting securities; or (3) in the case of a partnership or LLC, has the right to receive upon dissolution, or has contributed, 25 percent or more of the capital.

      This definition differs from the definition proposed in Regulatory Notice 10-015 and responds to commenters' requests for clarity and suggestion that FINRA, for regulatory consistency, adopt Form BD's definition of "control." The proposed definition tracks the Form BD's "control" definition but replaces the references to "company" with "person," which is defined in FINRA Rule 0160 to include "any natural person, partnership, corporation, association, or other legal entity." In addition, the proposed definition includes references to "LLC" and "LLC managing member" to reflect that LLCs are an increasingly common organizational structure.
      4. NASD Rule 1011(k) ("material change in business operations")

      As discussed further below in the context of proposed FINRA Rule 1160, the proposal relocates with changes NASD Rule 1011(k)'s definition of the term "material change in business operations" to proposed FINRA Rule 1160, as that term establishes the standards for when a member firm has a material change in business operations that requires the filing of a CMA.
      5. Proposed FINRA Rule 1111(n) ("sales practice event")

      NASD Rule 1011(n) defines the term "sales practice event," which is used in the context of specific provisions within NASD Rules 1013 (requiring an NMA applicant to provide written acknowledgment of any heightened supervisory procedures or special educational programs expected to be required for any associated person whose record reflects disciplinary actions or sales practice events) and 1014 (standards of admission that include as a factor consideration of whether any of an applicant's associated persons have records reflecting disciplinary actions or sales practice events). Proposed FINRA Rule 1111(n) transfers NASD Rule 1011(n)'s definition but amends it to include "statutory disqualification" as defined in Section 3(a)(39) of the Securities Exchange Act of 1934 (SEA).

      Specifically, the proposed rule defines "sales practice event" to mean "any customer complaint, arbitration, 'statutory disqualification' as defined in [SEA Section 3(a)(39)], or civil litigation that has been reported to the Central Registration Depository, that currently is required to be reported to the Central Registration Depository, or otherwise has been reported to FINRA." As previously noted in Regulatory Notice 10-01, the proposed change would effectively expand the definition to include certain misconduct by an applicant or associated person, such as having been convicted of misdemeanor tax evasion, that it does not currently capture.
      6. Other Proposed FINRA Rule 1111 Definitions

      The proposal also makes minor amendments to the following current definitions being transferred to proposed FINRA Rule 1111:
      •   amending the definition of "Applicant" to clarify that, in the context of proposed FINRA Rule 1160, an applicant may also be referred to as a "member" (see proposed FINRA Rule 1111(b));
      •   adding the term "Executive Vice President(s)" to the definition of "Interested FINRA Staff" (see proposed FINRA Rule 1111(l)); and
      •   adding the term "LLC managing members" to the definition of the term "principal place of business" to reflect the existence of limited liability companies (see proposed FINRA Rule 1111(m)).
      The proposal transfers, with no substantive changes, the definitions of the terms "Department," "Director," "district," "district office," "FINRA Board," "FINRA Regulation Board," "Governor" and "Subcommittee" (see proposed FINRA Rule 1111(e) through (k) and (o), respectively).
      B. Proposed FINRA Rule 1112 (General Procedures)

      NASD Rule 1012 (General Provisions) sets forth the requirements for submitting MAP applications and supporting documentation. The proposal adopts NASD Rule 1012 as FINRA Rule 1112 (General Procedures) with the following changes.
      1. Proposed FINRA Rule 1112(a) (Filing by Applicant or Service by FINRA)

      Proposed FINRA Rule 1112(a) retains NASD Rule 1012(a)'s provisions requiring that NMA and CMA applicants file their respective applications in accordance with proposed FINRA Rule 1112 and submit in a timely manner the requisite application fees pursuant to Schedule A to the FINRA By-Laws.
      (a) Methods for Filing Application and Delivering Communications

      The proposed rule also retains Regulatory Notice 10-01's proposed provision allowing an applicant to file an application or any document or information requested by FINRA by first-class mail, overnight courier, hand delivery or electronic delivery (facsimile, email or a dedicated electronic filing system). In response to a commenter's suggestion that FINRA's responses be delivered electronically rather than by regular mail, FINRA has revised proposed FINRA Rule 1112(a) to provide FINRA with the same delivery methods for its communications as are afforded to applicants. Thus, the proposed change will allow FINRA to serve a notice or decision electronically.
      (b) Alternate Method for Determining Date of FINRA Service or Filing by Applicant

      Proposed FINRA Rule 1112(a) also retains NASD Rule 1012(a)'s provisions setting forth the manner in which service by FINRA or filing by an applicant shall be deemed complete. As proposed in Regulatory Notice 10-01, FINRA Rule 1112 provided that service or filing by electronic delivery shall be deemed complete on the date "recorded by FINRA's electronic systems for such communications." In response to commenters' concerns that the proposed rule does not provide methods for determining the date of completion in the event that there are failures or interruptions in FINRA's electronic systems, FINRA has revised this provision to include "or by other means of verification prescribed by FINRA."
      2. Proposed FINRA Rule 1112(b) (Lapse of Application)

      Proposed FINRA Rule 1112(b) retains NASD Rule 1012(b)'s provision providing that, absent a showing of good cause, an NMA or CMA will lapse if an applicant fails to respond fully within 60 days or 30 days, respectively, after service of an initial written request for information or documents. The proposed rule also retains the provision requiring a lapsed applicant that again wishes to seek membership or approval of a change in ownership, control or business operations to file a new NMA or CMA, including the timely submission of the requisite application fee pursuant to Schedule A to the FINRA By-Laws.
      (a) Time Period for Applicant to Respond to Request for Information

      As proposed in Regulatory Notice 10-01, under FINRA Rule 1112(b) an NMA would have lapsed if an applicant failed to respond within 30 days after service of an initial written request for information or documents. In response to commenters' concerns that the 30-day period would not provide new member applicants sufficient time to respond, FINRA is retaining NASD Rule 1012's current 60-day time frame. Consistent with NASD Rule 1012, and as proposed in Regulatory Notice 10-01, FINRA Rule 1112 continues to provide 30 days for NMA applicants to respond after service of any subsequent written request for information or documents and for CMA applicants to respond after service of any initial or subsequent written request.
      (b) Failure to Schedule or Pass Required Examinations

      As proposed in Regulatory Notice 10-01, FINRA Rule 1121 provided, for the first time, that an NMA or CMA would lapse, absent a showing of good cause, if an applicant failed to schedule the required examinations for its associated persons within 30 days after filing an NMA or CMA and ensure that such associated persons successfully complete their required qualification examinations within 120 days of filing the NMA or CMA. As revised, the proposal deletes these provisions in response to commenters' concerns regarding an applicant's ability to comply with the proposed requirements with respect to all of its associated persons, including applicants' associated persons who have not yet informed their existing employers of their departure.

      The proposed deletion, however, does not affect current (and proposed) FINRA membership rule provisions that an NMA or CMA will lapse or be denied if an applicant fails to respond fully to requests for evidence of qualification or is unable to demonstrate compliance with the standards in NASD Rule 1014 (Department Decision) (and proposed FINRA Rule 1130 (Basis for Department Decision)). NASD Rule 1014 (and proposed FINRA Rule 1130) requires, among other things, that an applicant and its associated persons have all licenses and registrations required by state and federal authorities and self-regulatory organizations (SROs).
      3. Proposed FINRA Rule 1112(c) through (e): Ex Parte Communications, Recusals or Disqualifications and Computation of Time

      Proposed FINRA Rule 1112(c) through (e) adopts NASD Rule 1012(c) through (e) without significant changes. These provisions address: (1) the prohibitions against ex parte communications that become effective when FINRA staff knows that an applicant intends to file a written request for review by the National Adjudicatory Council (NAC) under proposed FINRA Rule 1140; (2) the recusal or disqualification of a FINRA Board of Governors (FINRA Board) or NAC member that has a conflict of interest or bias in a matter governed by the proposed FINRA Rule 1100 Series; and (3) the meaning and computation method for the term "day," as it is used in the proposed FINRA Rule 1100 Series.
      4. Proposed FINRA Rule 1112.01 (Applications to be Kept Current)

      Proposed FINRA Rule 1112.01 provides that each applicant is under a duty throughout the application process to promptly correct, amend or modify any NMA or CMA filed with FINRA pursuant to the proposed FINRA membership rules that is or becomes inaccurate or misleading, by submitting supplementary amendments and documentation.
      C. Proposed FINRA Rule 1121 (New Member Application, Interview, and Department Decision)

      NASD Rule 1013 (New Member Application and Interview) sets forth the content and interview requirements for NMAs. The proposal adopts NASD Rule 1013 as FINRA Rule 1121 (New Member Application, Interview, and Department Decision) subject to the following changes.
      1. Proposed FINRA Rules 1121(a)(1) (Filing Requirements) and (a)(2) (Uniform Registration Forms)

      Proposed FINRA Rule 1121(a)(1) adopts NASD Rule 1013(a)(1)'s provisions requiring a new member applicant to file its application with the Department of Member Regulation (Department) in the manner prescribed by FINRA and detailing the required information an applicant must include in its application, such as the Form NMA, Form BD, fingerprint card for each associated person who will be subject to SEA Rule 17f-2, new member assessment report and specific information regarding an applicants' associated persons, business models, finances, recordkeeping system, continuing education training plan and supervisory structures. Proposed FINRA Rule 1121(a)(2) adopts without substantive changes the requirement that the applicant submit its uniform registration forms (e.g., Form U4, Form U5, amendments to Forms BD or U4).

      As further discussed below, proposed FINRA Rule 1121(a)(1) also includes provisions requiring additional information to be included in an NMA.
      (a) Constituent Documents

      Proposed FINRA Rule 1121(a)(1) retains without any changes the provision originally proposed in Regulatory Notice 10-01 requiring that an applicant provide its constituent documents, as applicable, including corporate resolutions, charters, by-laws, partnership agreements, operating agreements, certificates of LLC and any analogous documents.
      (b) Organizational Chart and Proposed FINRA Rule 1121.01 (Division of Member Firms)

      Proposed FINRA Rule 1121(a)(1) retains NASD Rule 1013(a)(1)'s requirement that the applicant provide an organizational chart. The proposal deletes the provision proposed in Regulatory Notice 10-01 requiring that the organizational chart identify the associated persons (by name and CRD number) to be responsible for the supervision and management of each applicant office, division and business line. FINRA, however, may request this information from an applicant if it becomes necessary to have such information to render a decision on an NMA. In addition, proposed FINRA Rule 1121.01, consistent with current NYSE requirements, prohibits an applicant from identifying in its organizational chart any divisions that are not separate legal entities by words such as "Company," Corporation" or Incorporation."6
      (c) Investment Advisory-Related Contractual Information

      Proposed FINRA Rule 1121(a)(1) adopts, without change, NASD Rule 1013(a) (1)'s requirement that an applicant provide "any plan to enter into contractual commitments, such as underwritings or other securities-related activities." The proposal deletes from the provision language previously proposed in Regulatory Notice 10-01 referencing "underwriting agreements or other activities, such as investment advisory business" because such activities are already captured by the existing rule text.
      (d) Affiliate Organizational Chart

      As proposed in Regulatory Notice 10-01, FINRA Rule 1121(a)(1) would have required an applicant to provide an affiliate organizational chart: (1) identifying the applicant and all of its affiliates; (2) providing a brief summary of each affiliate's principal activity; and (3) identifying the legal relationship between the applicant and each affiliate. In response to commenters' concerns, FINRA has narrowed the provision to require that a new member applicant provide an affiliate organizational chart identifying the applicant and any affiliate that controls the applicant, is controlled by the applicant or has one of the below enumerated business relationships for which the applicant must provide a detailed summary.
      (e) Summary of Affiliate Business Relationship

      Proposed FINRA Rule 1121(a)(1) requires an applicant to provide a detailed and comprehensive summary of the business relationship between the applicant and any affiliate:
      (1) with which the applicant consolidates financial statements for purposes of SEA Rule 15c3-1 (revised from the originally proposed criteria specifying affiliates whose financial information is consolidated with that of the applicant);
      (2) whose liabilities or obligations have been directly or indirectly guaranteed by the applicant;
      (3) that is the source of flow-through capital to the applicant in accordance with Appendix C of SEA Rule 15c3-1; or
      (4) that has the authority or the ability to withdraw or cause the withdrawal of capital from the applicant.
      Proposed FINRA Rule 1121 previously enumerated other types of affiliate business relationships for which an applicant would have been required to provide a detailed summary7 and required that evidence of such business relationship be provided, at FINRA's discretion, from the books and records of the applicant or any affiliate that is a party to such business relationship.

      Commenters said that the proposed reporting requirements were too broad and unduly burdensome, with commenters suggesting that FINRA limit the reporting requirements to only those affiliates materially affecting the applicant (e.g., providing operational support to the applicant, offering investment products and services, having a material impact on the applicant's financial, supervisory or compliance obligations). Commenters also raised concerns regarding the provision requiring that evidence of the business relationships be provided from the books and records of the applicant or the affiliate.

      In response to commenters' concerns, the proposal limits the list of affiliate business relationships to those business relationships that could impact an applicant's financial condition. In addition, proposed FINRA Rule 1121(a)(1) clarifies that the applicant shall provide the necessary information and evidence for the disclosed business relationships. In this regard, the revised affiliate business relationship criteria are limited to those relationships that can be evidenced by the applicant.

      Commenters also requested guidance regarding the content of a "detailed and comprehensive summary." With respect to the content of the "detailed and comprehensive summary" describing the business relationship between the applicant and the relevant affiliates, an applicant would be expected to identify: (1) the specific nature of the business relationship between the parties; (2) whether such relationships are governed by contract or other agreement; (3) the relationship's anticipated impact to the applicant; and (4) whether the affiliate has the ability to enter into transactions that impact the financial or operational condition or obligations of the applicant and, if so, a description of how the applicant would be impacted.
      (f) Anti-Money Laundering Procedures and Independent Audit Firm Identification

      Proposed FINRA Rule 1121(a)(1) retains without any changes the provision proposed in Regulatory Notice 10-01 requiring that an applicant for membership provide a copy of its anti-money laundering procedures, including the name of the associated persons responsible for implementation.

      FINRA is deleting a provision proposed in Regulatory Notice 10-01 that would have required that a new member applicant identify the independent audit firm (which, pursuant to SEC requirements, must be registered with the Public Company Accounting Oversight Board) to be engaged by the applicant, and provide the anticipated audit schedule and, if applicable, a copy of the applicant's most recent audit report. Because registered broker-dealers must file annually with the SEC specified financial statements certified by a public accounting firm, FINRA will have access to this information once the applicant is registered with the SEC.
      2. Proposed FINRA Rule 1121(a)(3) (Request for Additional Documents or Information)

      Proposed FINRA Rule 1121(a)(3) adopts NASD Rule 1013's provision requiring the Department, within 30 days after the filing of an application, to serve an initial request for additional documents or information necessary to render a decision on the application and providing a new member applicant with 60 days to respond after service of the initial request and with 30 days to respond after service of any subsequent request. As proposed in Regulatory Notice 10-01, the proposed rule would have provided only 30 days for an applicant to respond to an initial request. Retaining the original 60-day time period is consistent with proposed FINRA Rule 1112(b)'s retention, in response to comments to Regulatory Notice 10-01, of NASD Rule 1012(b)'s original 60-day period for new member applicants to respond to an initial or subsequent request for information before an application lapses.
      3. Proposed FINRA Rule 1121(a)(4) (Rejection of Application that is Not Substantially Complete) and Opportunity to Re-File NMA

      Proposed FINRA Rule 1121(a)(4) adopts NASD Rule 1013(a)'s provision that the Department may reject an application and deem it not to have been filed if the Department determines that an NMA is not substantially complete within 30 days of the application's filing. FINRA shall refund the application fee, less a $500 processing fee. If the applicant determines to continue to seek membership, the applicant must submit a new application and fee pursuant to Schedule A to the FINRA By-Laws.

      FINRA is deleting a provision proposed in Regulatory Notice 10-01 that would have provided a one-time opportunity for an applicant to re-file an NMA within 30 days of service of a written notice by the Department that the NMA is not substantially complete by submitting only a new Form NMA and the application fee, rather than the entire application and all supporting documents. The provision did not take into account the fact that FINRA's electronic filing processes require an applicant to submit all supporting documents when filing the Form NMA so that the electronic filing system may perform a completeness check prior to accepting the filing. If the filing is flagged as incomplete, the electronic filing system permits the applicant to correct any identified deficiencies, such as omitted information or documentation.
      4. Proposed FINRA Rule 1121(a)(5) (Application Timing)

      Proposed FINRA Rule 1121(a)(5) retains, without change, the provision proposed in Regulatory Notice 10-01 requiring that an applicant file its Form NMA no later than 180 days after submission of its Form BD or FINRA will deem the application process to be abandoned and refund the application fee, less a $250 processing fee. FINRA believes this provision will help eliminate the problem of membership applications remaining "in limbo" with both the SEC and FINRA because of applicants waiting six months or more after filing their Form BD and entitlement forms to file their Form NMA.
      5. Proposed FINRA Rule 1121(b) (Membership Interview)

      Proposed FINRA Rule 1121(b) adopts with changes NASD Rule 1013(b)'s provisions requiring the Department to conduct a membership interview with an applicant's representatives before the Department serves its decision on an NMA. The provisions include requirements that: (1) the Department serve an applicant with written notice specifying the date and time and required persons at least seven days before the membership interview; (2) the Department schedule the membership interview within 90 days after the filing of the NMA or within 30 days after the filing of all additional requested information or documents; (3) the membership interview be conducted in the FINRA district office where the applicant has or intends to have its principal place of business, unless otherwise agreed; (4) the applicant provide updated financial documents on or before the membership interview; (5) the Department review the application and proposed FINRA Rule 1130's standards with the applicant's representatives during the membership interview; and (6) the Department provide the applicant at the interview (or promptly serve on the applicant if received after the interview) with any information or documents obtained from sources other than the applicant on which the Department intends to base its decision.

      The proposal revises proposed FINRA Rule 1121(b) in several respects. Specifically, the proposal revises the provision requiring the Department to review the application and proposed FINRA Rule 1130's standards with the applicant's representatives during the membership interview to clarify that the applicant's representatives are those identified by the applicant pursuant to proposed FINRA Rule 1121's membership interview provisions. In addition, the proposal clarifies that the Department may also review such standards from time to time with other representatives of the applicant or other persons as deemed necessary by the Department. Also, the proposed rule includes language clarifying that the Department may conduct more than one NMA interview. This change clarifies the Department's authority to require participation in additional interviews, based on the facts and circumstances of each NMA.
      6. Proposed FINRA Rule 1121(c) through (h): Procedures Applicable to the Decision to Grant or Deny an NMA

      The proposal transfers from NASD Rule 1014 (Department Decision) to proposed FINRA Rule 1121(c) through (h) the procedural provisions applicable to the Department's decision to grant or deny an NMA. These provisions address: (1) the Department's consideration of whether the applicant and its associated persons meet the standards in proposed FINRA Rule 1130; (2) the applicable time frame and required content of the Department's decision and the applicant's right to file a written request for review if the Department fails to serve a timely decision; (3) the applicant's requirement to file an executed membership agreement if the Department grants an application; (4) the Department's requirement to serve its decision and membership agreement on the applicant in accordance with proposed FINRA Rule 1112; (5) the effectiveness of a membership agreement restriction unless removed, modified or stayed by the NAC, FINRA Board or the SEC; and (6) the Department's decision constituting FINRA's final action unless the applicant files a written request for review.

      The only proposed substantive change is to the provision specifying that if the Department fails to serve a decision on an NMA within the specified time period and the applicant files a written request with the FINRA Board for a decision, the FINRA Board may extend the time for issuing a decision by 90 days if the Department has shown good cause for the extension. Proposed FINRA Rule 1121 clarifies that the 90-day period begins from the FINRA Board's good cause determination.
      7. Proposed FINRA Rule 1121.02 (Membership Waive-In)

      Proposed FINRA Rule 1121.02 transfers NASD IM-1013-1 (Membership Waive-in Process for Certain New York Stock Exchange Member Organizations) and NASD IM-1013-2 (Membership Waive-in Process for Certain NYSE Alternext US LLC Member Organizations), the provisions permitting certain NYSE and NYSE MKT (identified in NASD IM-1013-2 as NYSE Alternext) member organizations to be eligible for a streamlined application process for FINRA membership, with the following changes. First, the proposal deletes the descriptions of the application processes, while retaining the provisions specifying that the waive-in members are subject to the FINRA By-Laws and Schedules to By-Laws, including Schedule A, the consolidated FINRA rules and the NYSE rules incorporated by FINRA. In addition, the proposed supplementary material clarifies that a waive-in member must execute a membership agreement prior to expanding its business operations. If the business expansion would be considered a material change in business operations, as that term is defined in proposed FINRA Rule 1160, proposed FINRA Rule 1121.02 requires the waive-in member to submit a CMA and obtain approval prior to engaging in the expanded business activity. Upon approval of such business expansion, the firm shall be subject to all NASD rules in addition to the consolidated FINRA rules and the NYSE rules incorporated by FINRA.
      D. Proposed FINRA Rule 1130 (Basis for Department Decision)

      Proposed FINRA Rule 1130 adopts NASD Rule 1014 (Department Decision), which sets forth the standards or criteria the Department uses to evaluate whether to grant or deny an NMA or CMA (e.g., completeness and accuracy of the application and supporting documentation, the acquisition of all requisite licenses and registrations, a sufficient level of net capital, the establishment of all necessary contractual agreements and business relationships, an adequate supervisory system). As further described below, the proposal streamlines and consolidates the standards to reduce their total number from 14 to 11 and makes other substantive changes.
      1. Proposed FINRA Rule 1130: Preamble

      Similar to NASD Rule 1013, proposed FINRA Rule 1130 provides that the Department shall determine whether an NMA or CMA applicant satisfies each of the evaluation standards after considering the applicant's NMA or CMA, any membership interviews, other information or documents provided by either the Department or the applicant and the public interest and protection of investors. Proposed FINRA Rule 1130 retains Regulatory Notice 10-01's proposed requirement that each NMA and CMA must address every evaluation standard outlined in the rule but permits an applicant to provide a written explanation regarding any standard that it believes is not applicable based on the nature and scope of its application. The final determination regarding the applicability of any standard will be made by the Department.
      2. Proposed FINRA Rule 1130(a): Application is Complete and Consistent with Applicable Laws and FINRA Rules

      Proposed FINRA Rule 1130(a) combines the standards in NASD Rule 1014(a)(1) and (14) to require that the Department determine whether the applicant has satisfied the standard that the applicant's NMA or CMA and all supporting documents are complete, accurate and consistent with the federal securities laws, the rules and regulations thereunder and FINRA rules.
      3. Proposed FINRA Rule 1130(b): Applicable Licenses and Registrations

      Proposed FINRA Rule 1130(b) adopts the standard in NASD Rule 1014(a)(2) that the Department determine whether the applicant and its associated persons have all licenses and registrations required by state and federal authorities and SROs and also includes the requirement that the applicant and its associated persons have paid all applicable fees.
      4. Proposed FINRA Rule 1130(c): Direct and Indirect Funding Sources

      Proposed FINRA Rule 1130 adds a new application evaluation standard requiring an applicant to fully disclose and establish through documentation satisfactory to FINRA all direct and indirect sources of its funding and providing that FINRA determine that such sources are otherwise consistent with the standards set forth in proposed FINRA Rule 1130.

      In Regulatory Notice 10-01, the proposed provision required FINRA to determine that an applicant's funding sources were "not objectionable." However, FINRA has revised the provision in response to commenters' concerns that the "not objectionable" review standard was too vague. In addition, FINRA has revised the provision to incorporate the MAP Group's review practice of evaluating both "direct and indirect" sources of an applicant's funding to determine whether those sources are consistent with the applicant's ownership chain and whether they present any regulatory concerns. For instance, the MAP Group has identified questionable indirect funding sources such as undocumented loans from statutorily disqualified persons, proceeds from sales of securities of an issuer not identified as an applicant's owner and contributions from persons with other regulatory history that do not rise to the level of a statutory disqualification but nevertheless present regulatory concerns.
      5. Proposed FINRA Rule 1130(d): Licensing, Regulatory or Disciplinary History of Applicant and its Affiliates

      Proposed FINRA Rule 1130(d) carries over NASD Rule 1014(a)(3)'s requirement that the Department determine whether the applicant and its associated persons are capable of complying with the federal securities laws, rules and regulations and FINRA rules and the factors the Department must consider in making this determination. These factors include whether an applicant or its associated persons have a licensing, regulatory or disciplinary history and whether a state or federal authority or SRO has provided information indicating that the applicant or its associated persons otherwise poses a threat to public investors. The Department also must consider these factors for any applicant's affiliate that controls the applicant, is controlled by the applicant or has a business relationship requiring disclosure pursuant to proposed FINRA Rule 1121.

      As proposed in Regulatory Notice 10-01, FINRA Rule 1121 would have required the Department to consider these factors for any affiliate of the applicant. However, in response to commenters' concerns, the proposal limits consideration to the types of affiliates outlined above. FINRA believes that the proposed requirement, as revised, is an important mechanism for evaluating the operations of each applicant.

      The other factors carried over from NASD Rule 1014(a)(3) that the Department must consider are whether: (1) an applicant or its associated persons' record reflects a sales practice event, a pending arbitration or a pending private civil action; (2) an associated person was terminated for cause or permitted to resign after an investigation of a federal or state securities law (or rule or regulation thereunder), an SRO rule or industry standard of conduct; and (3) an associated person was the subject of remedial action (e.g., special training, continuing education requirements, heightened supervision) by a state or federal authority or SRO. The proposal also relocates from NASD Rule 1014(a)(13) a provision requiring the Department to consider any information in FINRA's possession indicating that the applicant may seek to circumvent, evade or otherwise avoid compliance with the federal securities laws and regulations or FINRA rules.
      6. Proposed FINRA Rule 1130(e) through (g): Contracts, Facilities and Systems

      Proposed FINRA Rule 1130(e) through (g) are substantially similar to NASD Rule 1014(a) (4) through (6) and require that the Department consider whether the applicant has: (1) established all necessary contractual or other arrangements and business relationships (including adding a specific reference to "other brokers or dealers" to the listed entities ("banks, clearing corporations, service bureaus, or others")); (2) sufficient facilities for its operations (or has adequate plans to obtain such facilities); and (3) communications and operational systems for the purpose of conducting business with customers and other members that are adequate and provide reasonably for business continuity pursuant to FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information).
      7. Proposed FINRA Rule 1130(h): Financial and Operational Controls

      Proposed FINRA Rule 1130(h) carries over NASD Rule 1014(a)(7)'s requirement that the Department determine whether the applicant is capable of maintaining a level of net capital in excess of the minimum required net capital adequate to support the applicant's intended business operations on a continuing basis and that the Department may impose a reasonably determined higher net capital requirement after considering six enumerated factors. The factors include, among other things, any plan of the applicant to enter into contractual commitments, such as underwritings or other securities-related activities. The proposal in Regulatory Notice 10-01 had amended this requirement to include underwriting agreements or other activities, such as investment advisory business. In response to commenters' concerns, FINRA has revised the proposal to retain the current NASD Rule 1014 provision which references contractual commitments, such as underwritings and other securities-related activities. Proposed FINRA Rule 1130(h) also retains Regulatory Notice 10-01's provision incorporating into the standard the requirement that the applicant's financial and operational controls comply with SEA Rules 15c3-1 and 15c3-3.

      Proposed FINRA Rule 1130 also retains NASD Rule 1014(a)(7)'s provision requiring the Department to consider the factor of any other activity that an applicant will engage in that reasonably could have a material impact on the applicant's net capital within the first 12 months of business operations and extends that requirement to include the activity of the applicant or any affiliate that controls the applicant, is controlled by the applicant, or has a business relationship requiring disclosure pursuant to proposed FINRA Rule 1121. In Regulatory Notice 10-01, the proposed rule had extended the requirement to the activity of all of an applicant's affiliates. In response to commenters' concerns regarding the definition of "Affiliate," FINRA has revised the provision to limit consideration to the activity of those affiliates outlined above.

      In addition, proposed FINRA Rule 1130 retains NASD Rule 1014(a)(7)'s provision directing the Department to consider the amount of capital necessary for the applicant to meet expenses net of revenue for at least 12 months, based on reliable projections agreed to by the applicant and the Department.

      Further, proposed FINRA Rule 1130(h) retains without substantive changes NASD Rule 1014(a)(7)'s provisions detailing the following remaining factors the Department must consider when deciding whether to impose a reasonably determined higher net capital requirement: (1) the amount of net capital sufficient to avoid the early warning level reporting requirements (such as SEA Rule 17a-11 (Notification Provisions for Brokers and Dealers) and FINRA Rule 4120 (Regulatory Notification and Business Curtailment), as applicable); (2) any planned market making activities and the number of markets to be made, the type and volatility of products and the anticipated maximum inventory positions; and (3) any plan to distribute or maintain securities products in proprietary positions and the risks, volatility, liquidity and speculative nature of the products.
      8. Proposed FINRA Rule 1130(i): Supervisory System

      Proposed FINRA Rule 1130(i) carries over NASD Rule 1014(a)(8)'s requirement that the Department determine whether the applicant has a supervisory system designed to prevent and detect, to the extent practicable, violations of the federal securities laws, the rules and regulations thereunder and FINRA rules, taking into consideration enumerated factors. One factor includes whether the applicant will recommend securities to customers. Consistent with new FINRA Rule 2111 (Suitability), FINRA has revised the proposal to extend this factor to include whether the applicant will recommend "investment strategies involving a security."

      In addition, the proposal makes changes to the provision directing the Department to consider whether the applicant should be required to place associated persons on heightened supervision pursuant to Notice to Members 97-19 (April 1997) to clarify that the applicant will impose appropriate remedial action, such as special training, continuing education or heightened supervision on any associated persons whose record reflects one or more disciplinary actions or sales practice events.

      The proposal also retains without substantive changes the provisions outlining the other factors the Department must consider when evaluating the adequacy of the applicant's supervisory system. Those provisions require the Department to consider whether: (1) the number, location, experience and qualifications of an applicant's supervisory personnel are adequate; (2) the applicant has identified specific associated persons to supervise the applicant's functions and intended offices; (3) the applicant has identified functions for each associated person and adopted procedures to ensure appropriate state and FINRA registration of all persons whose functions are subject to such registration requirements; (4) each supervisory associated person has the relevant experience to perform the supervisory duties; (5) the applicant will solicit retail or institutional business; (6) a supervisor/principal's location or part-time status will affect the person's ability to be an effective supervisor; (7) a state or federal authority or SRO has previously imposed remedial action on an associated person; and (8) any identified condition that may have a material impact on the applicant's ability to detect or prevent violations of the federal securities laws or regulations and FINRA rules.
      9. Proposed FINRA Rule 1130(j) and (k): Recordkeeping and Continuing Education

      Proposed FINRA Rule 1130(j) and (k) transfer without substantive changes NASD Rules 1014(a)(11) and (a)(12), requiring the Department to consider, respectively, whether the applicant has an adequate recordkeeping system and training needs assessment and written continuing education training plan.
      E. Proposed FINRA Rule 1140 (Review by National Adjudicatory Council)

      NASD Rule 1015 (Review by National Adjudicatory Council) permits an applicant to submit to the NAC a request for review of an adverse decision. The proposal adopts NASD Rule 1015 as proposed FINRA Rule 1140, but increases the time for an applicant to file an appeal with the NAC from 25 days after service of the Department's decision to 30 days after service of the Department's decision and also increases from 10 days to 15 days the time for the Department to submit the record to the NAC. FINRA believes that increasing each period by five days will afford applicants and staff adequate time to prepare the substantial work and record required for appeals.

      The proposed rule does not carry over NASD Rule 1015's provision requiring the Department to maintain a record in the "membership application docket" for each request relating to appeals to the NAC, as the Department does not maintain such a docket.
      F. Proposed FINRA Rule 1150 (Discretionary Review by FINRA Board)

      NASD Rule 1016 (Discretionary Review by FINRA Board) permits a Governor of the FINRA Board to call for a discretionary review of a membership proceeding. The proposal adopts NASD Rule 1016 as proposed FINRA Rule 1150 with no substantive changes.
      G. Proposed FINRA Rule 1160 (Application for Approval of Change in Ownership, Control, or Business Operations Pursuant to a Continuation of or Withdrawal from Membership) and Related Supplementary Material

      Proposed FINRA Rule 1160 adopts with changes NASD Rule 1017 (Application for Approval of Change in Ownership, Control, or Business Operations), the membership rule requiring a member to file a CMA for approval of specific changes to its ownership, control or business operations. Proposed FINRA Rule 1160.01 (Safe Harbor from Application in Limited Circumstances) relocates with changes the contents of NASD IM-1011-1 (Safe Harbor for Business Expansion) as supplementary material to proposed FINRA Rule 1160.
      1. Proposed FINRA Rule 1160(a) (Events Requiring Application)

      Proposed FINRA Rule 1160(a) transfers with changes NASD Rule 1017(a)'s provisions outlining the events requiring a member to file a CMA.
      (a) Mergers and Acquisitions of Members

      The proposal transfers NASD Rule 1017(a)'s criteria requiring a CMA where there is a merger or direct or indirect acquisition of a member with or by another broker-dealer, but eliminates the current exceptions for mergers where both parties are NYSE members and for acquisitions where the acquiring member is an NYSE member. Instead, the proposed rule would require a CMA for any merger or acquisition with or of another broker-dealer, whether or not such broker-dealer is a FINRA member.8
      (b) Acquisition, Divestiture, Transfer, or Sale of Member's Assets, Business, or Line of Operation

      Proposed FINRA Rule 1160(a) amends existing NASD Rule 1017(a)'s criteria requiring a CMA where there is a change involving a direct or indirect acquisition or transfer of 25 percent or more in the aggregate of the member's assets, business or line of operation that generates revenue composing 25 percent or more in the aggregate of the member's earnings measured on a rolling 36-month basis. The proposed rule clarifies that the change would include purchases, divestitures or sales meeting the outlined threshold. The proposed rule further clarifies that assets may include, for example, cash, securities, notes, real estate ownership interests, inventories and accounts receivable and that the reference to any asset, business or line of operation includes customer accounts. The proposed rule, however, would not require a CMA for acquisitions or divestitures performed in the ordinary course of business operations where the member proposes to exchange one type of asset for another (e.g., turnover of proprietary inventory).
      (c) Change in Ownership Interest

      Proposed FINRA Rule 1160(a) transfers with changes NASD Rule 1017(a)'s criteria requiring a CMA for changes of 25 percent or more in a member's ownership. Specifically, the proposed rule requires a CMA for a change, directly or indirectly, in the equity ownership, partnership capital, LLC membership interest, or other ownership interest in the member that results in one person directly or indirectly owning, controlling, or holding a presently exercisable option to own or control, 25 percent or more of the equity, partnership capital, or other ownership interest in the member. This proposed change would not require a CMA for any ownership interest changes below 25 percent (e.g., a 10 percent LLC member or limited partnership ownership interest change) absent any facts and circumstances that would trigger other criteria requiring a CMA, such as a change in control person.
      (d) Change in Control Person

      Proposed FINRA Rule 1160(a) explicitly requires, for the first time, a CMA for any change, directly or indirectly, of control persons of the member, other than the appointment or election of a natural person as an officer or director of the member in the normal course of business, regardless of whether such change occurred as a result of a direct or indirect change in the equity ownership, partnership capital, LLC membership interest or other ownership interest in the member. The proposed change codifies FINRA's existing interpretation of NASD Rule 1017 as requiring a CMA in such situations. As discussed further below, proposed FINRA Rule 1160 provides the opportunity for an applicant to request a CMA waiver where the change of control persons would not result in any day-to-day change in the applicant's business activities, management, supervision, assets or liabilities.
      (e) Material Change in Business Operations

      Proposed FINRA Rule 1160(a) transfers NASD Rule 1017(a)'s provision requiring a CMA for a "material change in business operations" and, as noted above, relocates into the proposed rule with changes NASD Rule 1011(k)'s definition of the term "material change in business operations," which defines the term 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 (Net Capital Requirements for Brokers or Dealers). As proposed in Regulatory Notice 10-01, FINRA Rule 1160(a) retained these categories but also included as a material change in business operations: (1) any change in exemptive status claimed under SEA Rule 15c3-3(k) (Customer Protection—Reserves and Custody of Securities); (2) settling or clearing transactions for the applicant's own business or for other broker-dealers for the first time; or (3) carrying accounts of customers for the first time.

      The revised proposal retains all of the above categories as part of the definition of a "material change in business operations" and, consistent with current guidance, includes engaging for the first time in retail currency exchange activities or variable life settlements to retail customers.9 Thus, the proposal defines a "material change in business operations" as including, but not limited to: (1) removing or modifying a membership agreement restriction; (2) adding business activities that require a higher minimum net capital under SEA Rule 15c3-1; (3) any change in exemptive status claimed under SEA Rule 15c3-3(k); or (4) engaging, for the first time, in: (i) market making, (ii) underwriting, (iii) acting as a dealer, (iv) settling or clearing transactions for the applicant's own business, (v) settling or clearing transactions for other broker-dealers, (vi) carrying accounts of customers, (vii) retail foreign currency exchange activities, or (viii) variable life settlement sales to retail customers.
      2. Proposed FINRA Rule 1160(b) (Filing and Content of Application) and Related Supplementary Material

      Proposed FINRA Rule 1160 transfers with the following substantive changes NASD Rule 1017(b)'s provisions outlining a CMA's content and filing requirements.
      (a) Updated Information, Impact of Proposed Business Change and Consolidated CMA

      The proposal retains Regulatory Notice 10-01's requirement that the CMA identify and update any required NMA information that would be inaccurate or incomplete as a result of the proposed business change, as well as including a schedule and timeline for any systems changes and associated system testing. The proposal also retains Regulatory Notice 10-01's provision requiring, for the first time, that any CMA requesting approval of a change in ownership or control include details and supporting documentation regarding the ultimate sources of funding for the purchase, copies of any agreements relating to the change in ownership or control and whether the member's procedures and operations will be impacted by the change. In addition, proposed FINRA Rule 1160 would provide the Department discretion to require only one CMA in circumstances where a proposed business change would require two or more members to each file a CMA. In such circumstances, the Department may seek information and documentation from all members involved in the proposed business change.
      (b) CMA Waiver Request Process

      Proposed FINRA Rule 1160 provides that the Department may waive the CMA filing requirement for acquisitions or divestitures of the member's assets, businesses or lines of operation where the member is: (1) ceasing operation as a broker or dealer; (2) filing a Form BDW with the SEC; and (3) neither the member nor any of its associated persons is the subject of any claim (including, but not limited to, pending or settled arbitration or litigation actions) that could be disadvantaged by the proposed transaction. The proposed rule also provides that the Department may waive the CMA filing requirement for direct or indirect ownership or control changes where such changes do not result in any "day-to-day change in the business activities, management, supervision, assets, liabilities, or ultimate ownership or control of the member." As proposed in Regulatory Notice 10-01, the CMA waiver provisions originally provided that ownership or control changes qualifying for a CMA waiver would not result in any "practical change in the business activities, management, supervision, assets, liabilities, or ultimate ownership or control of the member."

      Several commenters supported the waiver provisions but requested that FINRA clarify the standard that the ownership or control change would not result in any "practical change" to the member's operations and provide more detail regarding how to obtain a waiver. In addition, a commenter questioned the application of the waiver provision where the member is filing a Form BDW since, according to the commenter, a firm planning to file a Form BDW is not a candidate for a CMA, which is an application for a continuing membership.

      In response, FINRA has revised the ownership or control change standard to replace the term "practical change" with "day-to-day change" and delete the requirement that the ownership or control change not result in any change in the member's "ultimate ownership or control." In addition, FINRA has revised proposed FINRA Rule 1160's title to reference withdrawals to clarify that the proposed rule's requirements would encompass some situations where a CMA applicant is also filing a Form BDW, consistent with FINRA's current interpretation of NASD Rule 1017. For example, in instances where there is a direct or indirect acquisition or divesture of 25 percent or more of a member's assets, the CMA process is necessary to ensure that such asset transfers are performed in a manner that will not harm investors or market integrity. However, as noted above, FINRA considers a CMA waiver to be appropriate in those limited situations where the member is also ceasing operations as a broker or dealer (including filing a Form BDW with the SEC) and neither the member nor any of its associated persons is the subject of any claim that could be disadvantaged by the proposed transaction.

      FINRA also has revised the proposal to add FINRA Rule 1160.01 (Waiver Requests) as supplementary material clarifying that the Department would generally grant a waiver where the member is only proposing a change in the: (1) member's legal structure (e.g., changing from a corporation to an LLC); (2) equity ownership, partnership capital, LLC membership interest or other ownership interest in an applicant held by a corporate legal structure that is due solely to a reorganization of ownership or control of the applicant within the corporate legal structure (e.g., reorganizing only to add a holding company to the corporate legal structure's ownership or control chain of the applicant); or (3) percentage of ownership interest, LLC membership interest or partnership capital of an applicant's existing owners or partners resulting in an owner or partner owning or controlling 25 percent or more of the ownership interest or partnership and that owner or partner has no disclosure or disciplinary issues in the preceding five years. In addition, with respect to the process for requesting a waiver, proposed FINRA Rule 1160.01 clarifies that a member seeking a CMA waiver must submit a written request to the Department in the manner prescribed in proposed FINRA Rule 1112(a)(3).
      3. Proposed FINRA Rule 1160(c) through (e): Interim Restrictions, Additional Information Requests and Not Substantially Complete Determination

      Proposed FINRA Rules 1160(c) through (e) transfer with limited changes NASD Rules 1017(c) through (e). Proposed FINRA Rule 1160(c) details when a member may effect a change in ownership or control prior to a CMA's approval or request the removal or modification of a membership agreement restriction. Proposed FINRA Rule 1160(d) generally provides that the Department may serve a request for additional information or documents within 30 days after the filing of a complete CMA. Proposed FINRA Rule 1160(e) details when the Department shall determine that a CMA is not substantially complete.
      4. Proposed FINRA Rule 1160(f) (Continuing Membership Application Interview)

      Proposed FINRA Rule 1160(f) carries over NASD Rule 1017(f) (Membership Interview), which permits the Department to require a continuing membership applicant to participate in an interview before the Department serves its decision on a CMA and includes language clarifying that the Department may conduct more than one CMA interview. This change clarifies the Department's authority to require participation in additional interviews, based on the facts and circumstances of each application. In addition, the proposed rule carries over with limited changes NASD Rule 1017(f)'s requirements that: (1) the Department serve an applicant with written notice specifying the date and time and required persons at least seven days before the CMA interview; (2) the membership interview be conducted in the FINRA district office where the applicant has or intends to have its principal place of business, unless otherwise agreed; (3) the Department review the CMA and proposed FINRA Rule 1130's standards with the applicant's representatives during the interview; and (4) the Department provide the applicant at the interview (or promptly serve on the applicant if received after the interview) with any information or documents obtained from sources other than the applicant on which the Department intends to base its decision.
      5. Proposed FINRA Rule 1160(g) (Department Decision)

      Proposed FINRA Rule 1160(g) transfers NASD Rule 1017(g) (Department Decision), which are the procedural provisions applicable to the Department's decision to grant or deny a CMA. The provisions include requirements that the Department must consider to determine whether the applicant and its associated persons meet the standards in proposed FINRA Rule 1130 and issue a written decision stating whether the CMA is granted or denied in whole or in part. Proposed FINRA Rule 1160 also includes language clarifying that the written decision shall include whether the CMA is subject to one or more restrictions reasonably designed to address a specific concern based on proposed FINRA Rule 1130's standards.

      In addition, proposed FINRA Rule 1160(g) transfers NASD Rule 1017(g)'s requirement that the Department issue a decision within 30 days after the conclusion of the CMA interview (or last such interview, if more than one is required) or the applicant's final filing of additional information or documents, whichever is later. In Regulatory Notice 10-01, the proposed rule extended this time frame from 30 days to 45 days. However, in response to commenters' objections to the extension, FINRA has retained the existing 30-day period for the Department to issue a written decision.

      The proposal transfers NASD Rule 1017(g)'s requirement that, if the Department fails to serve a decision on a CMA within the specified time period and the applicant files a written request with the FINRA Board for a decision, the FINRA Board may extend the time for issuing a decision by not more than 30 days if the Department shows good cause for the extension. Proposed FINRA Rule 1160 clarifies that the 30-day period begins from the date of the FINRA Board's good cause determination.

      Proposed FINRA Rule 1160(g) transfers NASD Rule 1017(g)'s requirement that the Department may require an applicant to file an executed membership agreement if it approves a CMA and includes a new provision requiring those CMA applicants without an existing membership agreement that will continue to operate (i.e., not file a Form BDW in connection with the application) to execute a membership agreement at the conclusion of the CMA review. FINRA has required all new members to enter into a membership agreement since August 1997. Prior to such time, members signed "restriction letters," when required. The proposed rule revision would eliminate the disparity in treatment of members based solely on the date on which they became a member. The required membership agreement for each member would be crafted to reflect all business activities conducted by the member, including those activities the member has previously engaged in and for which it has an adequate supervisory and operational structure. Implementing the requirement would result in a more clearly documented understanding between FINRA and its members regarding the scope of each member's business.
      6. Proposed FINRA Rules 1160(h) (Service and Effectiveness of Decision) and (i) (Effectiveness of Restriction)

      Proposed FINRA Rule 1160(h) transfers with only minor changes NASD Rule 1017(h), the provision detailing the manner in which the Department shall serve its decision on a CMA and the effectiveness of that decision pending any FINRA final action, unless otherwise directed by the NAC, the FINRA Board or the SEC. Proposed FINRA Rule 1160(i) is a new provision, previously proposed in Regulatory Notice 10-01, clarifying that a restriction on a CMA decision shall remain in effect and binds the applicant and all ownership or control successors unless removed or modified by a FINRA final action or stayed by the NAC, the FINRA Board or the SEC.
      7. Proposed FINRA Rules 1160(j) (Request for Review; Final Action) and (k) (Removal or Modification of Restriction on Department's Initiative)

      Proposed FINRA Rules 1160(j) and (k) transfer with no substantive changes the provisions in NASD Rules 1017(i) and (j) regarding an applicant's right to file a written request for review of the Department's CMA decision with the NAC and the Department's right to modify or remove a membership agreement restriction on its own initiative if the Department determines such action is appropriate.
      8. Proposed FINRA Rule 1160(l) (Denial of Application for Approval of Change in Ownership, Control, or Business Operations)

      Proposed FINRA Rule 1160(l) transfers with substantive changes NASD Rule 1017(k) (Lapse or Denial of Application for Approval of Change in Ownership), the provision requiring that if a CMA for a change in ownership lapses or is denied and all appeals are exhausted or waived, an applicant must, not more than 60 days after the lapse or exhaustion or waiver of appeal: (1) submit a new CMA and fee pursuant to Schedule A to the FINRA By-Laws; (2) unwind the transaction; or (3) file a Form BDW. As revised, proposed FINRA Rule 1160(l) applies to a CMA for any change in ownership, control or business operations that is denied, rather than applying to a CMA for a change in ownership that is lapsed or denied. Furthermore, proposed FINRA Rule 1160(l) eliminates the option of submitting a new CMA and requisite fee and adds a provision requiring an applicant with a denied CMA to cease any activities that required the CMA while retaining the other existing options of unwinding the transaction or filing a Form BDW. Thus, proposed FINRA Rule 1160 would provide applicants of a denied CMA with 60 days after the exhaustion or waiver of appeal, to cease the activities requiring the CMA, unwind the transaction or file a Form BDW. In addition, proposed FINRA Rule 1160 retains the provision permitting the Department, for good cause shown by the applicant, to lengthen the 60-day period or to shorten the 60-day period for the protection of investors.

      FINRA believes the revisions outlined above are critically important as it has encountered several instances where applicants have effected a change in ownership or control prior to the conclusion of a CMA proceeding but the staff later determines to deny the CMA. Such applicants have asserted that, under the current rules, they could submit a new CMA, and extend the time, without first having to cease their interim activities or unwind the transaction that prompted the original CMA.
      9. Proposed FINRA Rule 1160.01 (Safe Harbor from Application in Limited Circumstances)

      As noted above, proposed FINRA Rule 1160.01 adopts the contents of NASD IM-1011-1 (Safe Harbor for Business Expansion) as supplementary material to proposed FINRA Rule 1160. The safe harbor provides parameters for increases a member may make in the number of its sales personnel, office locations (registered and unregistered) or markets made within a one-year period that are presumed not to be considered a material change in business and thus do not require the filing of a CMA.

      As proposed in Regulatory Notice 10-01, the safe harbor was not available to a member that has a membership agreement containing a specific restriction or to any member that has a disciplinary history (as defined in the safe harbor). Several commenters disagreed with the proposed exclusion from the safe harbor for any member with any kind of membership agreement restriction. In response, FINRA has revised the supplementary material to permit a member to rely upon the safe harbor for those types of business expansions from which it is not restricted. This proposed change modifies existing practice which has prohibited any expansion in the safe harbor areas if any one type of expansion was restricted.
      G. Proposed FINRA Rule 1170 (Notice of Certain Member Changes)

      Proposed FINRA Rule 1170 requires each member to provide the Department with timely prior written notice of any:
      •   direct or indirect acquisition (including purchases or transfers) or divestitures (including sales or transfers) of 10 percent or more in the aggregate of the member's assets (including, but not limited to, cash, securities, notes, real estate ownership interests, inventories and accounts receivable) or any asset, business or line of operation (including customer accounts) that generates revenues composing 10 percent or more in the aggregate of the member's earnings measured on a rolling 36-month basis; or
      •   change, directly or indirectly, in the equity ownership, partnership capital, LLC membership interest or other ownership interest in the member that results in one person directly or indirectly owning, controlling or holding a presently exercisable option to own or control, 10 percent or more of the equity, partnership capital, LLC membership interest or other ownership interest in the member.
      For purposes of the proposed rule, "timely" means at least 30 days prior to the event except when 30 days is impracticable given the circumstances of the event, in which case the member must provide prior written notice as soon as practicable.

      In Regulatory Notice 10-01, proposed FINRA Rule 1170 also required timely prior written notice of eight additional notification events (e.g., a change or loss of a member's key personnel, a change in a member's service bureau, clearance activities or methods of bookkeeping).10 However, in response to commenters' concerns, including that certain event notification requirements would be duplicative of existing regulatory obligations (e.g., CMA filing requirements or other SEC or FINRA reporting requirements), too vague to implement without further clarification or overly burdensome, proposed FINRA Rule 1170 retains only the two event notifications detailed above, but is revised to more closely track the provisions in proposed FINRA Rule 1160 on which they are based.11 Proposed FINRA Rule 1170 also provided that, upon receiving notice of certain of the deleted notification events, the Department could determine that such event would substantively affect the member's business or resources and require the member to submit a CMA. Commenters requested further clarification of this provision. FINRA, however, has deleted this provision as unnecessary given the deletion of the corresponding events.

      Although commenters questioned the rationale for the advance notification requirements, FINRA believes that knowledge of transactions or patterns of transactions (whether or not coordinated) in a member's assets or ownership interests that occur below the 25 percent threshold for requiring a CMA is useful in maintaining effective oversight of member firms in order to identify potential regulatory issues. Such issues may include a pattern of ownership interest changes in a member that could indicate potential violative conduct warranting additional oversight, as would similarly-sized transactions where the member is removing assets from the firm. The proposed rule, however, would not require advance notification for acquisitions or divestitures where the member exchanges one type of asset for another in the ordinary conduct of its business (e.g., turnover of proprietary inventory).

      In addition, as proposed in Regulatory Notice 10-01, FINRA Rule 1170 would have required a member to provide, upon request, any information concerning its affiliates that an applicant or member would otherwise be required to provide under FINRA's membership rules. In response to commenters' concerns, FINRA has determined to delete this provision.
      H. Proposed FINRA Rule 1180 (Application to the SEC for Review)

      Proposed FINRA Rule 1180 transfers without significant changes NASD Rule 1019 (Application to Commission for Review), providing that: (1) a person aggrieved by any final FINRA action pursuant to proposed FINRA Rules 1140 or 1150 may apply for review to the SEC pursuant to Exchange Act Section 19(d)(2); and (2) the filing of an application for review shall not stay the effectiveness of a decision constituting a final action of FINRA unless the SEC orders otherwise.
      I. Proposed FINRA Rule 1190 (Foreign Members)

      Proposed FINRA Rule 1190 adopts paragraphs (a), (b) and (c) of NASD Rule 1090 (Foreign Members), without substantive change. These provisions impose specific requirements on members that do not maintain an office in the United States that is responsible for preparing and maintaining financial and other reports required to be filed by the SEC and FINRA. Proposed FINRA Rules 1190(a) through (c) require such members to: (1) prepare reports, and maintain a general ledger chart of accounts and any description thereof, in English and U.S. dollars; (2) reimburse FINRA for any expenses incurred in connection with examinations to the extent such expenses exceed the cost of examining a member located within the continental U.S. in the geographic location most distant from the district office of appropriate jurisdiction; and (3) ensure the availability of an individual fluent in English and knowledgeable in securities and financial matters to assist FINRA representatives during examinations.

      The proposal deletes NASD Rule 1090(d), which requires foreign members to "utilize, either directly or indirectly, the services of a broker/dealer registered with the Commission, a bank or a clearing agency registered with the Commission located in the United States in clearing all transactions involving members of the Association, except where both parties to a transaction agree otherwise." The provision has become outdated and such arrangements are better addressed by FINRA Rule 4311 (Carrying Agreements).
      J. Proposed Eliminated Requirements

      Finally, the proposal deletes Incorporated NYSE Rule 311 and Incorporated NYSE Rule Interpretations 311(f) and (g), Incorporated NYSE Rules 312, 313, 321, 416 and related supplementary materials and rule interpretations and Incorporated NYSE Rule Interpretation 401/03 as either redundant or obsolete.

      Request for Comment

      In addition to generally requesting comments, FINRA specifically requests comments regarding:

      1. whether the definitions of "Affiliate" and "control" in proposed FINRA Rule 1111(a) and (d), respectively, will increase or otherwise effect an applicant's costs;
      2. whether the de minimis exception in proposed FINRA Rule 1111(c)'s definition of "Associated Person" will result in cost savings for an applicant or present any specific regulatory or marketplace risks that could outweigh any expected cost benefits;
      3. any potential costs associated with proposed FINRA Rule 1111(n)'s definition of "sales practice event," which expands the term to include misconduct not currently included in NASD Rule 1011(n)'s definition of that term;
      4. any potential increased costs associated with proposed FINRA Rule 1130's new application evaluation standard requiring an applicant to fully disclose and establish through documentation all direct and indirect sources of its funding and providing that FINRA shall determine that such sources are otherwise consistent with the standards set forth in proposed FINRA Rule 1130;
      5. any unanticipated costs that applicants may incur due to proposed FINRA Rule 1160's codification of FINRA's interpretation of NASD Rule 1017 that a CMA is required for any change, directly or indirectly, of control persons of the member (other than the appointment or election of a natural person as an officer or director of the member in the normal course of business);
      6. any cost impacts applicants may expect due to proposed FINRA Rule 1160's CMA waiver provisions;
      7. any potential costs or burdens applicants may incur due to proposed FINRA Rule 1160's new provision requiring those CMA applicants without an existing membership agreement that will continue to operate (i.e., not file a Form BDW in connection with the application) to execute a membership agreement at the conclusion of the CMA review;
      8. any potential costs or burdens applicants may incur due to proposed FINRA Rule 1160's new provisions clarifying that a member firm that has submitted a CMA for approval of a change in ownership or control at least 30 days prior to making such change must unwind the ownership or control change if FINRA subsequently denies the CMA;
      9. any additional infrastructure requirements or increased costs members may incur to comply with proposed FINRA Rule 1170's notification requirements; and
      10. any additional or increased costs or burdens applicants or members may incur due to the proposal's requirements.

      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 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 Form BD (Explanation of Terms) (defining "control affiliate" to mean a "person named in Items 1/A, 9 or in Schedules A, B, or C as a control person or any other individual or organization that directly or indirectly controls, is under common control with, or is controlled by, the applicant, including any current employee, except one performing only clerical, administrative, support or similar functions, or who, regardless of title, performs no executive duties or has no senior policy making authority").

      4 This definition of "Associated Person" only applies to FINRA's membership rules. For other FINRA rules, the FINRA By-Laws definition of who is an "associated person of a member" applies. See FINRA By-Laws Art. I(rr) (defining "person associated with a member" or "associated person of a member"); see also Notice to Members 98-38 n.5 (May 1998) (citing the same By-Laws definition to clarify the term "associated person").

      5 As proposed in Regulatory Notice 10-01, FINRA Rule 1111 defined the term "control" for purposes of the membership rules as "the power to direct or cause the direction of the management or policies of a person whether through ownership of securities, by contract, or otherwise. A person is presumed to control another person if such person, directly or indirectly: (1) has the right to vote 25 percent or more of the voting securities; (2) is entitled to receive 25 percent or more of the net profits; or (3) is a director, general partner or officer (or person occupying a similar status or performing similar functions) of the other person. Any person that does not meet the provisions of subparagraph (1), (2) or (3) shall be presumed not to control such other person. Any presumption under this definition may be rebutted by evidence, but shall continue until a determination to the contrary has been made by FINRA."

      6 See Incorporated NYSE Rule Interpretation 311(g)/02 (Divisions of Member Organizations—Names) (requiring, among other things, that divisions that are not separate legal entities not be identified by the use of such words as "Company," "Corporation" or "Incorporation," which connote separate entities). As noted later, this is one of the provisions FINRA is proposing to delete as either redundant or obsolete.

      7 Proposed FINRA Rule 1121 originally required a detailed summary of any business relationship between an applicant and an affiliate:

      •   whose financial information is consolidated with that of the applicant;
      •   upon which the applicant or its customers rely for operational support or services that are used in connection with the applicant's securities, investment banking or investment advisory business;
      •   that has a mutually dependent financial relationship with the applicant, including any expense sharing agreements;
      •   that has a financial or marketing relationship with the applicant; or
      •   that provides any third-party products or services as part of any operation or function of the applicant required to be supervised by the applicant pursuant to FINRA rules.

      8 Eliminating NASD Rule 1017(a)'s exceptions from the criteria requiring a CMA for mergers where both parties are NYSE members and for acquisitions where the acquiring member is an NYSE member does not create a wholly new obligation for FINRA- members that are also NYSE members, as NYSE members have historically been required to submit information and documentation of such changes pursuant to Incorporated NYSE Rules 311 through 313 and 401, the interpretations to those rules and associated regulatory processes.

      9 See Regulatory Notice 09-42 (July 2009) (FINRA Reminds Firms of Their Obligations With Variable Life Settlement Activities) ("before engaging in variable life settlements, a firm must first file a [CMA] and receive approval of this change in business operations under NASD Rule 1017"); Regulatory Notice 08-66 (November 2008) (FINRA Addresses Firms' Retail Foreign Currency Exchange Activities) ("before engaging in over-the-counter forex business, a firm must first file for and receive approval of change in business operations under NASD Rule 1017").

      10 Proposed FINRA Rule 1170 also required timely prior written notice of any:

      •   addition, removal or substantial modification of a business relationship between the member and an affiliate requiring disclosure pursuant to proposed FINRA Rule 1121;
      •   change or loss of a member's key personnel (e.g., CEO, CFO, etc.);
      •   change in a member's service bureau, clearance activities or methods of bookkeeping or recordkeeping;
      •   expansion of business requiring the infusion of capital that is 25 percent or more of the member's net capital as calculated from the ending date of the member's previous FOCUS filing period, or requiring additional licenses, registrations, memberships or approvals as required by an SRO or another regulatory agency;
      •   expansion of business by adding products or services that are new in terms of the type of investments, transactions or risks from those business products or services offered by the member since the time of the last approval of a membership application;
      •   increase in the number of sales personnel, office locations or markets made beyond the scope of the safe harbor provisions of proposed FINRA Rule 1160.01;
      •   listing of the member (on an identified or anonymous basis) on any facility or medium that is designed to solicit offers or inquiry with respect to the possible purchase of the member in whole or in part, or the transfer of some or all of the member's assets; or
      •   discovery of any existing or impending condition(s) that the member reasonably believes could lead to capital, liquidity or operational problems or impairment of recordkeeping, clearance or control functions.

      11 FINRA will consider whether to address the notification of the deleted events in a separate rulemaking effort involving Incorporated NYSE Rule Interpretation 401/04 (Early Reporting of Developing Problems).

    • 13-28 FINRA Revises the Series 16 Examination Program; Implementation Date: October 28, 2013

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      Qualification Examinations

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Legal
      Operations
      Registration
      Training
      Key Topics

      Qualification Examination
      Supervisory Analyst (Series 16)
      Referenced Rules & Notices

      FINRA Rule 2210
      FINRA Rule 5280
      Information Notice 3/12/08
      NASD IM-2110-4
      NASD Rule 1050
      NASD Rule 2711
      NYSE Rule 344 and its Interpretation
      NYSE Rule 472
      SEA Section 15A(g)(3)
      Securities Act Rule 137

      Executive Summary

      FINRA periodically reviews the content of qualification examinations to determine whether revisions are necessary or appropriate in view of changes—including changes to the laws, rules and regulations—pertaining to the subject matter covered by the examinations. Based on this review process, FINRA has revised the Supervisory Analyst (Series 16) examination program.1

      The changes are reflected in the Series 16 content outline on FINRA's website, and will appear in Series 16 examinations administered on or after October 28, 2013.

      Questions regarding this Notice should be directed to:

      •    Christie MacLean, Qualifications Analyst, Testing and Continuing Education Department, at (212) 858-4079; or
      •    Vincent Rotolo, Qualifications Analyst, Testing and Continuing Education Department, at (212) 858-4195.

      Background & Discussion

      Section 15A(g)(3) of the Securities Exchange Act of 1934 authorizes FINRA to prescribe standards of training, experience and competence for persons associated with FINRA-regulated firms. In accordance with that provision, FINRA has developed examinations that are designed to establish that persons associated with FINRA-regulated firms have attained specified levels of competence and knowledge, consistent with applicable registration requirements under FINRA rules.

      Incorporated NYSE Rules 344, 344.11 and 472(a)(2)2 and NYSE Rule Interpretations 344/03 and /04 require an individual who is responsible for approving research reports at a dual member to be registered and qualified as a Supervisory Analyst.3 The individual is required to present evidence of appropriate experience (which is having at least three years prior experience within the immediately preceding six years involving securities or financial analysis) and pass the Supervisory Analyst (Series 16) qualification examination. Rather than passing the entire Supervisory Analyst qualification examination, the individual may obtain a waiver from Part II of the Supervisory Analyst qualification examination upon verification that the person has passed Level I of the Chartered Financial Analyst (CFA) examination. NYSE Rule 472(a)(2) further provides that where a Supervisory Analyst lacks technical expertise in a particular product area that is the subject of a research report, the content in the report may be co-approved by a product specialist; if no such expertise resides within the firm, the rule requires the firm to arrange approval by a qualified outside Supervisory Analyst.

      In consultation with a committee of industry representatives, FINRA recently undertook a review of the Series 16 examination program. As a result of this review, FINRA has revised the content outline to reflect changes to the laws, rules and regulations covered by the examination, and to incorporate the functions and associated tasks currently performed by a Supervisory Analyst. FINRA also has made changes to the format of the content outline.

      Revisions

      FINRA has renamed Part I and Part II of the outline and included two major job functions under each part. The following are the renamed parts and major job functions, with the associated number of questions:

      Part I. Regulations:

      Function 1: Review and approve research analysts' communications to ensure compliance with applicable SEC and FINRA rules and regulations, and firm policies and procedures (34 questions); and
      Function 2: Serve as liaison between the research department and other internal and external parties (16 questions).

      Part II. Valuation of Securities:

      Function 1: Review the content of the report to assess the accuracy, consistency and sources of data and calculations included in the report (16 questions); and
      Function 2: Review the content of the report to ensure a reasonable basis exists for the analyst's conclusions (e.g., price targets, recommendations, ratings, estimates, valuation parameters) (34 questions).

      Each function also includes specific tasks describing activities associated with performing that function. There are five tasks (T1 through T5) associated with Part I, Function 1; four tasks (T6 through T9) associated with Part I, Function 2; three tasks (T1 through T3) associated with Part II, Function 1; and six tasks (T4 through T9) associated with Part II, Function 2. For example, one such task (T5, Part I, Function 1) is to verify that a research report includes all applicable required disclosures. In addition, the outline lists with respect to Part I the laws, rules and regulations a candidate is expected to know to perform the functions and associated tasks outlined in that part. These include the applicable FINRA rules (e.g., FINRA Rule 2210), NASD rules (e.g., NASD Rule 2711), NYSE rules (e.g., NYSE Rule 344) and SEC rules (e.g., Securities Act Rule 137). Further, the outline lists with respect to Part II the technical and analytical knowledge (e.g., analysis of packaged securities) required to perform the functions and associated tasks outlined in that part.

      FINRA conducted a job analysis study of Supervisory Analysts, which included the use of a survey, in developing the functions and tasks and updating the required knowledge set forth in the revised outline. The functions and tasks, which appear in the revised outline for the first time, reflect the day-to-day activities of a Supervisory Analyst.

      FINRA also has revised the outline to reflect the adoption of rules in the consolidated FINRA rulebook (e.g., NASD IM-2110-4 (Trading Ahead of Research Reports) was consolidated as FINRA Rule 5280 (Trading Ahead of Research Reports)).4

      In conjunction with the changes to the content outline, FINRA has made changes to the weighting of questions on content outline topics and to the question bank for the Series 16 examination.

      Finally, FINRA has made changes to the format of the content outline, including the preface, sample questions and reference material.

      The number of questions on the Series 16 examination remains at 100 multiple-choice questions (50 multiple-choice questions for each part), and candidates continue to have one and one-half hours to complete Part I of the examination and two hours to complete Part II. A score of 72 percent is required to pass Part I of the examination, and a score of 74 percent is required to pass Part II, which are the same as the current passing scores.

      Availability of Content Outline

      The revised Series 16 content outline is available on FINRA's website.


      1 See File No. SR-FINRA-2013-032, which was filed with the SEC for immediate effectiveness on August 20, 2013.

      2 The current FINRA rulebook consists of (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the "Transitional Rulebook"). While the NASD Rules generally apply to all FINRA member firms, the Incorporated NYSE Rules apply only to those member firms of FINRA that are also member firms of the NYSE (dual members). The FINRA Rules apply to all FINRA member firms, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process, see Information Notice, March 12, 2008 (Rulebook Consolidation Process). For convenience, the Incorporated NYSE Rules are henceforth referred to as the NYSE Rules.

      3 In addition, pursuant to FINRA Rules and NASD Rules, a Supervisory Analyst may approve: (1) research reports on debt and equity securities; (2) retail communications that are excepted from the definition of "research report" under NASD Rule 2711(a)(9)(A); (3) other research that does not meet that definition of "research report" under NASD Rule 2711(a)(9), provided that the Supervisory Analyst has technical expertise in the particular product area and any other required registrations; (4) third-party research reports; and (5) globally-branded research reports prepared by foreign research analysts. See NASD Rule 1050(f)(3)(A); FINRA Rule 2210(b)(1)(B) and NASD Rule 2711(h)(13)(C). Accordingly, in addition to testing knowledge of applicable NYSE Rules, the Series 16 examination program tests knowledge of applicable FINRA Rules and NASD Rules.

      4 See also FINRA's Rule Conversion Charts.

    • 13-27 SEC Approves Amendments to FINRA Rule 8313 (Release of Disciplinary Complaints, Decisions and Other Information); Effective Date: December 16, 2013

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      Publicity Rule

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Internal Audit
      Legal
      Operations
      Registered Representatives
      Key Topics

      BrokerCheck
      Disciplinary Actions
      Disciplinary Complaints
      Disciplinary Decisions
      FINRA Disciplinary Actions Online Database
      Expedited Proceedings
      Membership Application Appeals
      Publicity Rule
      Release of Disciplinary and Other Information to the Public
      Statutory Disqualifications
      Summary Actions
      Temporary Cease and Desist Orders
      Referenced Rules & Notices

      NTM 97-42
      NASD Rules 1015 and 1016
      FINRA Rules 6490, 8312, 8313, and 8320
      FINRA Rule 9000 Series
      Exchange Act Section 19(d)
      Exchange Act Rule 19b-17
      Exchange Act Rule 19d-1(c)(1)
      Exchange Act Rule 19h-1
      MSRB Rule G-37

      Executive Summary

      The Securities and Exchange Commission (SEC) approved amendments to FINRA Rule 8313 (Release of Disciplinary Complaints, Decisions and Other Information), which governs the release of disciplinary and other information by FINRA to the public.1 The amendments establish general standards for the release of disciplinary information to the public to provide greater access, clarify the scope of information subject to FINRA Rule 8313 and eliminate provisions that do not address the release of information by FINRA to the public.

      The text of the amended rules is available at www.finra.org/notices/13-27.

      Questions concerning this Notice should be directed to Erika Lazar, Assistant General Counsel, Office of General Counsel, at (202) 728-8013 or erika.lazar@finra.org.

      Background & Discussion

      FINRA Rule 8313 (also referred to as the publicity rule) governs FINRA's release of disciplinary and other information to the public. The rule sets forth publicity thresholds, which determine the disciplinary complaints, disciplinary decisions and other information that may be released to the public, and requires some items to be released in redacted form. In May 2011, FINRA launched the FINRA Disciplinary Actions (FDAS) online database to provide the public with greater access to information regarding FINRA's disciplinary actions.

      The FDAS enables interested parties to access FINRA disciplinary actions dating back to early 2005 regarding a specific firm or associated person as well as actions that involve specific areas, including specific rule or statutory violations, products or business lines, or supervisory and compliance practices. Interested parties may search the database by entering search criteria, such as an individual's name, firm name, case number, date range, document type, document text (e.g., such terms as rule citations, product types, sanction) or CRD number.2 However, the disciplinary information available for publication in the FDAS (or otherwise available for release by FINRA) currently is limited by the publicity thresholds in Rule 8313.

      The SEC has approved amendments to Rule 8313 that further increase access to information regarding FINRA's disciplinary actions. The amendments eliminate the existing publicity thresholds, establish general standards for the release of disciplinary information to the public and clarify the scope of information subject to Rule 8313. FINRA believes that the amendments better align its publication standards with those of the SEC and allows for the release to the public of disciplinary information that is already publicly available in BrokerCheck. The significant changes are set out below; however, interested parties should carefully read the attached rule text for a complete and detailed understanding of the amendments.

      A. Disciplinary Complaints and Disciplinary Decisions

      Rule 8313 currently provides that in response to a request, FINRA will release any identified disciplinary complaint or disciplinary decision issued by FINRA to the requesting party. Absent a specific request for an identified complaint or decision, the rule provides publicity thresholds for the release of information with respect to disciplinary complaints and disciplinary decisions to the public.3 For complaints, the publicity thresholds limit the release of information to disciplinary complaints that contain an allegation of a violation of a "designated" statute, rule, or regulation of the SEC, FINRA, or the Municipal Securities Rulemaking Board (MSRB).4 The publicity thresholds for disciplinary decisions provide for the release to the public of information with respect to any disciplinary decision that: (1) imposes a suspension, cancellation or expulsion of a firm; (2) imposes a suspension or revocation of the registration of an associated person; (3) imposes a suspension or bar of a firm or associated person from association with all member firms; (4) imposes monetary sanctions of $10,000 or more upon a firm or associated person; or (5) contains an allegation of a violation of a designated rule.

      Rule 8313 also contains an omnibus provision that permits FINRA to release information on any disciplinary or other decision issued pursuant to the Rule 9000 Series not specifically enumerated, regardless of the sanctions imposed, with redacted names of the parties and other identifying information. In addition, FINRA may release to the public information with respect to any disciplinary complaint or disciplinary decision or group of complaints or decisions that involves a significant policy or enforcement determination where release of the information is deemed by FINRA's chief executive officer (CEO) (or such other senior officer as the CEO may designate) to be in the public interest. Rule 8313 includes redaction standards for the release of information with respect to disciplinary decisions where only certain respondents in a decision on appeal meet one or more of the publicity thresholds, or where an underlying Office of Hearing Officers (OHO) decision meets a publicity threshold, but a later National Adjudicatory Council (NAC) decision on the matter does not meet a threshold.

      The amendments eliminate the publicity thresholds in Rule 8313. In their place, the amendments adopt general standards for the release of disciplinary complaints, disciplinary decisions and other information to the public.5 Specifically, Rule 8313(a)(1) provides that FINRA shall release to the public a copy of, and at FINRA's discretion information with respect to, any disciplinary complaint or disciplinary decision issued by FINRA.6 Subject to limited exceptions discussed below, FINRA will release such information in unredacted form. The amendments also retain the provision addressing the release of "identified" disciplinary complaints and disciplinary decisions in Rule 8313(a)(1).7

      In general, FINRA believes that greater access to information regarding its disciplinary actions provides valuable guidance and information to firms, associated persons, other regulators and investors. Releasing detailed disciplinary information to the public can serve to deter and prevent future misconduct and to improve overall business standards in the securities industry. It also allows investors to consider firms' and representatives' disciplinary histories when considering whether to engage in business with them. In addition, firms may use such information to educate their associated persons about compliance matters, highlighting potential violations and related sanctions, as well as informing the firms' compliance procedures involving similar business lines, products or industry practices. Further, any firm or individual facing allegations of rule violations may access existing disciplinary decisions to gain greater insight on related facts and sanctions.

      FINRA also believes that the current publicity thresholds in Rule 8313 have created an inconsistency in FINRA's release of information given that information that may not be disclosed under the current rule is often publicly available through other sources. For example, the amendments allow FINRA to make available in the FDAS (or otherwise) disciplinary information that is available in BrokerCheck, but is not eligible for publication by FINRA under the current publicity thresholds.8 The general standards for disciplinary complaints and disciplinary decisions also better align FINRA's publication standards with the practices of the SEC and other regulators. The SEC publishes on its website copies of enforcement actions, including administrative proceedings and complaints filed in federal court, regardless of the type or nature of sanctions imposed. FINRA believes that to avoid confusion, the availability of disciplinary information generally should not differ among regulators. Interested parties should be able to review comparable disciplinary complaints and decisions irrespective of the forum in which the case is brought or the type or nature of sanctions imposed.

      In general, copies of and information with respect to disciplinary complaints and disciplinary decisions will continue to be released to the public through the FDAS and FINRA's monthly notice of Disciplinary and Other FINRA Actions. If a disciplinary complaint posted in the FDAS is dismissed or withdrawn, the order dismissing or withdrawing the complaint will accompany the complaint.9 With respect to the issuance of press releases in connection with disciplinary complaints, FINRA will retain its current practice of only issuing press releases in those situations where there is a significant policy or investor protection reason to do so.
      B. Temporary Cease and Desist Orders (TCDO)

      Rule 8313 currently states that FINRA shall release to the public information with respect to any TCDO. The amendments adopt this provision with minor changes in Rule 8313(a)(2) to provide that FINRA shall release to the public a copy of, and at FINRA's discretion information with respect to, any order or decision issued by FINRA under the Rule 9800 Series, which addresses TCDO.
      C. Statutory Disqualification Decisions

      Rule 8313 does not specifically address the release of statutory disqualification decisions to the public. Currently, FINRA releases information on statutory disqualification decisions issued by the NAC pursuant to the Rule 9520 Series with the names of firms and associated persons redacted under the authority of the omnibus provision noted above. The amendments adopt a provision in Rule 8313(a)(2) that provides for the release of unredacted copies of, and at FINRA's discretion information with respect to, statutory disqualification decisions, notifications and notices issued pursuant to the Rule 9520 Series by either the NAC or FINRA's Member Regulation Department that will be filed with the SEC.10

      As discussed above in the context of disciplinary complaints and disciplinary decisions, FINRA believes that subject to limited exceptions, information should be released to the public in unredacted form. Under the current publicity rule, FINRA releases information regarding the underlying conduct that led to a statutory disqualification, and the safeguards imposed, including restrictions on permissible activities and heightened supervisory plans; however, FINRA does not disclose the identity of the statutorily disqualified individuals or member firms. The amendments provide for the release of such identities because FINRA believes that it provides investors with valuable information about the individuals and firms with whom they conduct business. Further, to the extent that information regarding the underlying conduct that results in an individual or firm being subject to a statutory disqualification decision is reported to the CRD system, identifying information regarding such individuals and firms is available in BrokerCheck.
      D. Expedited Proceeding Decisions

      Rules 9552 through 955811 provide a procedural mechanism for FINRA to address certain types of misconduct (e.g., a failure to pay fees or dues, a failure to meet eligibility or qualification standards) more expeditiously than would be possible using the FINRA disciplinary process. Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series) allows firms and associated persons to request a hearing regarding the action that often results in a stay of the sanction or limitation. Rule 8313 currently states that FINRA may release to the public information with respect to any expedited proceeding decision issued pursuant to the Rule 9550 Series imposing a suspension or cancellation of a membership, or a suspension or bar of the association of a person with a member firm, unless FINRA determines otherwise. Separately, the "Notice to Membership" provisions in Rules 9552, 9553, 9554, 9555, 9556, 9558 and 9559 currently state that FINRA shall provide notice of any final FINRA action taken under the rules in the next notice of Disciplinary and Other FINRA Actions. The Notice to Membership provision in Rule 9557 requires notice when FINRA imposes a suspension pursuant to the rule, but does not reference final FINRA action because the procedural mechanisms in Rule 9557 differ from the other rules in the expedited proceedings series.

      The amendments consolidate the publication standards for expedited proceeding decisions in Rule 8313(a)(3). Consistent with the current Rule 9550 Series and FINRA practice, Rule 8313(a)(3) provides that FINRA shall release to the public information with respect to any suspension, cancellation, expulsion or bar that constitutes final FINRA action imposed pursuant to Rules 9552, 9553, 9554, 9555, 9556 and 9558, and information with respect to any suspension imposed pursuant to Rule 9557. The rule also provides for the release of copies of, and information with respect to, any decision issued pursuant to Rule 9559 that constitutes final FINRA action. Accordingly, the amendments delete the "Notice to Membership" provisions in Rules 9552 through 9559. In general, information with respect to expedited proceeding decisions will continue to be published in FINRA's monthly notice of Disciplinary and Other FINRA Actions.
      E. Summary Actions

      Rule 8313 currently does not specifically address the release of information regarding summary actions taken by FINRA pursuant to Rule 8320 (Payment of Fines, Other Monetary Sanctions, or Costs; Summary Action for Failure to Pay); however, FINRA generally releases summary information with respect to such actions in its monthly notice of Disciplinary and Other FINRA Actions. To codify FINRA practice, the amendments adopt in Rule 8313(a)(3) a provision that expressly states that FINRA will release to the public information with respect to the summary suspension or expulsion of a firm or the summary revocation of the registration of a person associated with a member firm for failure to pay fines, other monetary sanctions or costs pursuant to Rule 8320. FINRA believes that it is in the public interest to provide notice that a firm or a registered person is subject to sanctions by FINRA and may not have the authority to conduct business with customers or the public. In general, such information will continue to be published in FINRA's monthly notice of Disciplinary and Other FINRA Actions.
      F. Membership and Continuing Membership Application (MAP) Appeals

      Rule 8313 currently provides that FINRA shall release to the public, in the form issued by the NAC, information with respect to any MAP appeal decision issued by the NAC pursuant to NASD Rule 1015 (Review by National Adjudicatory Council). The NAC in its discretion may redact certain information from such decisions prior to their issuance. The amendments adopt this provision as Rule 8313(a)(4) with changes to, among other things, reflect FINRA's practice to release MAP appeal decisions in redacted form. The amendments also clarify that the release to the public of MAP appeal decisions issued by the FINRA Board pursuant to NASD Rule 1016 (Discretionary Review by FINRA Board) are governed by the publicity rule. New Rule 8313(a)(4) provides that FINRA shall release to the public a copy of, and at FINRA's discretion information with respect to, any MAP appeal decision issued by FINRA pursuant to NASD Rules 1015 and 1016. Copies of, and information with respect to, such decisions will be released to the public in redacted form; provided, however, the NAC or the Board, in its discretion, may determine to release the decisions and information in unredacted form.

      FINRA believes that continuing the practice of redacting MAP appeal decisions is appropriate given that as part of the MAP process, applicants typically are required to disclose, among other things, proprietary information, including business plans, financial plans and commercial agreements. In addition, denials of MAP applications often are related to firms' capacity limitations or similar operational concerns. Thus, FINRA believes that, as a general matter, the potential harm to firms in releasing denial decisions in unredacted form is not outweighed by any investor protection benefit.
      G. Permissive Publication of Certain Decisions and Notices

      The amendments add a new provision in Rule 8313(a)(5) that permits FINRA to release to the public a copy of, and information with respect to, any decision or notice issued pursuant to Rule 6490 (Processing of Company-Related Actions),12 the Rule 9600 Series (Procedures for Exemptions),13 the Rule 9700 Series (Procedures on Grievances Concerning the Automated Systems)14 and any other decision appealable to the SEC under Exchange Act Section 19(d). Consistent with current practice, FINRA does not plan to publish these decisions or notices on a wholesale basis; however, FINRA may determine that there is public benefit to releasing a specific decision or notice issued under these rules to provide guidance to other firms or to alert the public to an investor protection issue.15

      With respect to exemption decisions, the amendments permit, but do not require, exemption decisions issued under the Rule 9600 Series to be released to the public because Rule 9610, which governs the application for exemptive relief, authorizes firms to request relief from a diverse set of member conduct rules that have differing benefits to publication. Today, FINRA posts to its website exemption decisions for several rules listed in Rule 9610, in large part, to provide guidance to firms, investors and other interested parties to assist them in understanding the rationale for the decisions to grant or deny requests for exemptive relief.16

      The amendments broadly provide for the release of "any other decision" appealable to the SEC under Exchange Act Section 19(d) to avoid the need to make future amendments to Rule 8313 in the event of additional rulemaking that results in FINRA issuing decisions that may be appealed to the SEC under Exchange Act Section 19(d).
      H. Publication of Information Deemed by FINRA's CEO to be in the Public Interest

      As stated above, notwithstanding the existing publicity thresholds, Rule 8313 currently allows FINRA to release information with respect to any disciplinary complaint or disciplinary decision that involves a significant policy or enforcement determination where the release of such information is deemed by FINRA's CEO to be in the public interest. Consistent with these provisions, the amendments adopt Rule 8313(a)(6), which provides that FINRA may release to the public a copy of, and information with respect to, any complaint, decision, order, notification or notice issued under FINRA rules, where the release of such information is deemed by FINRA's CEO (or such other senior officer as the CEO may designate) to be in the public interest, in such format as he or she finds appropriate.
      I. Release Specifications

      Rule 8313 currently requires copies of, and information with respect to, disciplinary complaints and disciplinary decisions released to the public to be accompanied by certain disclosure statements regarding their status. FINRA requires these disclosures so that disciplinary complaints and disciplinary decisions released to the public are viewed in an appropriate context and to provide adequate protections to the parties named in the complaint or decision.

      The amendments retain in Rule 8313(b)(1) a modified version of the disclosure statement for copies of, and information with respect to, disciplinary complaints. Rule 8313(b)(1) provides that copies of, and information with respect to, any disciplinary complaint released to the public pursuant to Rule 8313(a) shall indicate that a disciplinary complaint represents the initiation of a formal proceeding by FINRA in which findings as to the allegations in the complaint have not been made and does not represent a decision as to any of the allegations contained in the complaint. FINRA believes that copies of, and information with respect to, disciplinary complaints released to the public should continue to be accompanied by a disclosure statement that alerts recipients that the alleged violations contained in FINRA's complaint have not resulted in a decision or finding against the respondent.

      In addition, the amendments consolidate and streamline the disclosure statements for copies of, and information with respect to, disciplinary decisions and expand the statement to cover any item released to the public pursuant to Rule 8313(a). In Rule 8313(b)(2), the amendments provide that copies of, and information with respect to, any disciplinary decision or other decision, order, notification or notice released to the public pursuant to Rule 8313(a) prior to the expiration of the time period provided for an appeal or call for review as permitted under FINRA rules or the Exchange Act, or while such an appeal or call for review is pending, shall indicate that the findings and sanctions imposed therein are subject to review and modification by FINRA or the SEC. FINRA believes that accompanying copies of, and information with respect to, disciplinary decisions released to the public with a disclosure statement provides necessary context to a non-final disciplinary action and alerts persons viewing such information as to the status of these actions. FINRA also believes that the consolidation and expansion of the disclosure statements in Rule 8313 serve to facilitate the release of disciplinary information to the public electronically in the FDAS because such disclosure will be clearly indicated in the FDAS, but will not accompany each complaint or decision.
      J. Discretion to Redact Certain Information or Waive Publication

      FINRA believes it is necessary in releasing information to the public to balance investor protection benefits with the harm that may result if certain confidential customer information or information that raises personal safety or privacy concerns is released to the public. Accordingly, the amendments add a new provision in Rule 8313(c)(1) that permits FINRA, notwithstanding the requirements of Rule 8313(a), to redact, on a case-by-case basis, information that contains confidential customer information, including customer identities, or information that raises significant identity theft, personal safety or privacy concerns that are not outweighed by investor protection concerns. FINRA takes the same approach with respect to the release of information in BrokerCheck.17 The amendments aim to broaden the information released by FINRA to the public to establish a principled basis for disclosure that meets FINRA's investor protection objectives, yet fairly addresses privacy interests.

      Similarly, the amendments adopt with minor changes a statement from current Rule 8313 that provides FINRA with discretion to waive the requirement to release a disciplinary or other decision under those extraordinary circumstances where the release of such information would violate fundamental notions of fairness or work an injustice. The amendments expand this provision in Rule 8313(c)(2) to provide that notwithstanding the requirement to release information to the public in Rule 8313(a), FINRA may determine, in its discretion, to waive the requirement to release a copy of, or information with respect to, any disciplinary complaint, disciplinary decision or other decision, order, notification or notice under those extraordinary circumstances where the release of such information would violate fundamental notions of fairness or work an injustice. FINRA does not believe that decisions should be treated differently than other items that are required to be released under paragraph (a) of Rule 8313.
      K. Notification of Appeals of FINRA Decisions

      Rule 8313 currently requires FINRA to provide notice to the membership and the press that a FINRA disciplinary decision that meets certain publicity thresholds is appealed to the SEC. The notice must be released as soon as possible after the SEC notifies FINRA of the appeal and it must state whether the effectiveness of the FINRA Board's decision has been stayed pending the outcome of proceedings before the SEC. The amendments adopt this provision with minor changes as Rule 8313(d), eliminating the publicity thresholds and the limitation on notification to the membership and the press. FINRA provides notification of appeals to the SEC, including information regarding whether sanctions imposed have been stayed during the pendency of the appeal, in the monthly notice of Disciplinary and Other FINRA Actions. FINRA also intends to indicate whether a disciplinary decision available in the FDAS has been appealed to the SEC. The FDAS also includes decisions issued by the SEC that relate to FINRA disciplinary actions that have been appealed.

      Rule 8313 currently requires FINRA to provide notice to the membership in the event an appeal to the courts is filed from an SEC disciplinary decision in a case previously appealed to it from a FINRA decision that meets certain publicity thresholds. The rule also provides that any order issued by the SEC imposing sanctions or fines on a firm that meets certain publicity thresholds must be released to the public through a notice containing the effective date of the order. The amendments delete these provisions because they limit notice based on the publicity thresholds that have been eliminated by the amendments, and such notifications are best addressed by the SEC.18
      L. Provisions Outside the Scope of Rule 8313

      To clarify the scope of Rule 8313, the amendments eliminate provisions that are outside the purview of the rule, which is intended solely to address the release of disciplinary and other information by FINRA to the public. The amendments delete paragraphs (d) through (k) of the rule because they address, for example, the effective date of certain disciplinary decisions and sanctions and when a decision is stayed on a call for review by the Board.19
      M. Effective Date

      The amendments become effective on December 16, 2013, and apply prospectively. As such, the revised standards in Rule 8313 will govern the release of disciplinary and other information for all new and pending matters as of the effective date.20 Following implementation, FINRA will use the amended disclosure statements in Rule 8313 when releasing disciplinary complaints and disciplinary decisions going forward, irrespective of the date of the action.

      1 See Securities Exchange Act Release No. 69825 (June 21, 2013), 78 FR 38771 (June 27, 2013) (Order Approving the Proposed Rule Change, as Modified by Amendment No. 1; File No. SR-FINRA-2013-018).

      2 The FDAS also includes decisions issued by the SEC and federal appellate courts that relate to FINRA disciplinary actions that have been appealed.

      3 Rule 8313 provides for the release of "information with respect to" disciplinary complaints and decisions in light of FINRA's practice to issue, in addition to the complaints or decisions themselves, information, for example, in press releases or summaries of complaints and decisions that meet the current publicity thresholds, or are otherwise permitted to be released underthe rule.

      4 FINRA has identified such rules in Notice to Members 97-42 (July 1997).

      5 In light of the elimination of the publicity thresholds, the amendments delete from Rule 8313 the redaction standards made necessary by the publicity thresholds.

      6 The amendments eliminate as unnecessary references to "groups of" disciplinary complaints and disciplinary decisions. See current Rule 8313(b)(1) and (c)(1). FINRA does not view the amended rule as distinguishing between the release of individual, versus groups of, disciplinary complaints and disciplinary decisions.

      7 For the purpose of the rule, the term "disciplinary complaint" means any complaint issued pursuant to the Rule 9200 Series (Disciplinary Proceedings) and the term "disciplinary decision" means any decision issued pursuant to the Rule 9000 Series, including decisions issued by the OHO, the NAC, or the FINRA Board (Board), orders accepting offers of settlement, and Letters of Acceptance, Waiver and Consent (AWCs). The term disciplinary decision does not include decisions issued pursuant to the Rule 9550 Series (Expedited Proceedings), Rule 9600 Series (Procedures for Exemptions), Rule 9700 Series (Procedures on Grievances Concerning the Automated Systems), or Rule 9800 Series (Temporary Cease and Desist Orders), or decisions, notifications, or notices issued pursuant to the Rule 9520 Series (Eligibility Proceedings), which are addressed by separate provisions in Rule 8313. Consistent with current practice, minor rule violation plan (MRVP) letters issued pursuantto Rule 9216 (Acceptance, Waiver, and Consent; Plan Pursuantto SEA Rule 19d-1(c)(2)) and Rule 9217 (Violations Appropriate for Disposition Under Plan Pursuant to SEA Rule 19d-1(c)(2)) are not subject to Rule 8313.

      8 The information about firms and registered persons made available through BrokerCheck is derived from the Central Registration Depository (CRD®). Information in the CRD system is obtained through the uniform registration forms. The disclosure questions in Section 14 of Form U4, among other things, require the reporting of regulatory complaints alleging, and any findings of, a violation of self-regulatory organization rules. As such, BrokerCheck reports may include unredacted summary information regarding a FINRA disciplinary action that FINRA is not permitted to release in the monthly notice of Disciplinary and Other FINRA Actions or in the FDAS under the current publicity thresholds.

      9 FINRA believes that including the subsequent decision or order helps to ensure that persons reviewing disciplinary and other information have a full understanding of the status of a filed disciplinary complaint. FINRA further notes that dismissed and withdrawn complaints are not removed from BrokerCheck, so they are already publicly available. Further, the proposal is consistent with SEC practice in the administrative proceeding forum. If an SEC administrative law judge (ALJ) or the SEC, on appeal, issues an opinion, or an ALJ grants a staff motion to withdraw a complaint, the original Order Instituting Proceeding is not removed from the public record.

      10 All statutory disqualification decisions issued by the NAC are filed with the SEC. In contrast, depending on the nature of the disqualifying event, Member Regulation may or may not have to file a notice of its approval of an application for relief (referred to as a 19h-1 notice or notification) with the SEC. For example, Member Regulation may approve the association of a person without filing a 19h-1 notice or notification with the SEC when the disqualifying event consists of an injunction that was entered more than 10 years ago. See also Exchange Act Rule 19h-1.

      11 See Rule 9552 (Failure to Provide Information or Keep Information Current), Rule 9553 (Failure to Pay FINRA Dues, Fees and Other Charges), Rule 9554 (Failure to Comply with an Arbitration Award or Related Settlement or an Order of Restitution or Settlement Providing for Restitution), Rule 9555 (Failure to Meet the Eligibility or Qualification Standards or Prerequisites for Access to Services), Rule 9556 (Failure to Comply with Temporary and Permanent Cease and Desist Orders), Rule 9557 (Procedures for Regulating Activities Under Rules 4110, 4120 and 4130 Regarding a Member Experiencing Financial or Operational Difficulties), and Rule 9558(Summary Proceedings for Actions Authorized by Section 15A(h)(3) of the Exchange Act).

      12 Under Rule 6490, FINRA's Operations Department reviews and processes documents related to announcements for Exchange Act Rule 10b-17 Actions and Other Company-Related Actions to facilitate the orderly trading and settlement of OTC securities.

      13 The Rule 9600 Series allows a firm seeking exemptive relief, as permitted under certain FINRA and NASD rules and MSRB Rule G-37,to file a written application with the appropriate department or staff of FINRA. The amendments make conforming amendments to Rule 9620, which governs exemption decisions issued under the Rule 9600 Series, to reflect the permissive nature of Rule 8313(a)(5).

      14 The Rule 9700 Series sets forth procedures for redress for persons aggrieved by the operations of any automated quotation, execution, or communication system owned or operated by FINRA, or its subsidiaries, and approved by the SEC, not otherwise provided for by the FINRA rules.

      15 In general, FINRA is not in the practice of releasing copies of, or information with respect to, decisions or notices addressing company-related actions or grievances concerning the automated systems.

      16 Consistent with current practice under the Rule 9600 Series, FINRA will continue to consider statements included by an applicant to show good cause to treat a decision as confidential in whole or in part.

      17 See Rule 8312(d) (FINRA BrokerCheck Disclosure) (FINRA reserves the right to exclude on a case-by-case basis, information that contains confidential customer information, offensive or potentially defamatory language or information that raises significant identity theft, personal safety or privacy concerns that are not outweighed by investor protection concerns).

      18 See note 2.

      19 The amendments move the rule language regarding the effectiveness of sanctions in Rule 8313(d) to new paragraph (f) in Rule 9268 (Decision of Hearing Panel or Extended Hearing Panel), which addresses hearing panel decisions, including their content and to whom they are disseminated. Although the language in Rule 9268(f) differs slightly from Rule 8313(d), the timing for the effectiveness of sanctions remains unchanged. The amendments also make conforming amendments to Rule 9268(b)(6).

      20 With respect to pending matters, the amended rule will govern, for example, a complaint filed prior to the effective date of the amendments where the matter is resolved on or after the effective date of the amendments.

    • 13-26 FINRA Updates Form for Filing Private Placements of Securities Pursuant to FINRA Rules 5122 and 5123

      View PDF

      Private Placements of Securities

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Corporate Finance
      Legal
      Operations
      Key Topics

      Private Placement Memorandum
      Private Placements
      Regulation D
      Referenced Rules & Notices

      FINRA Rule 5122
      FINRA Rule 5123
      Regulatory Notice 10-22
      SEA Rule 10b-9
      SEA Rule 15c2-4
      SEC Regulation D
      SEC Rule 506
      Securities Act Rule 144A

      Executive Summary

      FINRA has updated the form that firms must use to file offering documents and information pursuant to FINRA Rules 5123 (Private Placements of Securities) and 5122 (Private Placements of Securities Issued by Members). The updated form, which is available in the FINRA Firm Gateway, includes six new questions, which are further described in this Notice.1 FINRA also has updated the Private Placement Form Frequently Asked Questions (FAQ).

      Questions concerning this Notice should be directed to:

      •    Joseph E. Price, Senior Vice President, Corporate Financing Department, at (240) 386-4642; or
      •    Lisa Jones Toms, Senior Director and Counsel, Corporate Financing Department, at (240) 386-4623.

      Background & Discussion

      Effective December 3, 2012, firms are required to submit filings pursuant to FINRA Rules 5122 and 5123 through the Firm Gateway.2 Rule 5122 establishes standards on disclosure and use of proceeds and requires firms to file private placements offered or sold by a member firm or an associated person. Rule 5123 requires each firm that sells a security in a private placement (with certain exemptions) to file a copy of the offering document with FINRA within 15 calendar days of the date of the first sale.3 If a firm sells a private placement without using an offering document, then the firm must state that fact. Rules 5122 and 5123 require firms to file any materially amended versions of the documents originally filed.

      In Regulatory Notice 10-22, FINRA provided guidance on the scope of a firm's responsibility to conduct a reasonable investigation of the private placement issuer. As described in that Notice, the amount and nature of the investigation required depends, among other factors, upon the nature of the recommendation, the role of the firm in the transaction, its knowledge of and relationship to the issuer, and the size and stability of the issuer. Each firm must make a determination of the scope of its investigation based upon the facts and circumstances. In general, however, a firm may not rely upon the information provided by the issuer or its counsel in lieu of conducting its own reasonable investigation.4

      Private Placement Form

      On July 1, 2013, FINRA began using an updated Private Placement Form that includes six new questions that the firm making the filing must answer based on information contained in the offering document or if otherwise known by the firm completing the form. Firms participating in private placements often have information beyond what is disclosed in offering documents as a result of their suitability investigations or other reviews. However, to the extent a firm does not otherwise have knowledge that is responsive to a question, the form does not require firms to seek out the answers to the question. Rather, the filing broker-dealer can answer "yes," "no" or "unknown."5 When a firm has obtained information in its investigation of the private placement issuer such that the answers to the questions are known to the firm making the filing, they must be completed with a "yes" or "no" answer.6

      FINRA has added the following six questions to the form:

      •   Is this a contingency offering?
      •   Does the user have any independently audited financial statements for the issuer's most recent fiscal year?
      •   Is the issuer able to use offering proceeds to make or repay loans to, or purchase assets from, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor or any of the issuer's affiliates?
      •   Does the issuer have a board of directors comprised of a majority of independent directors or a general partner that is unaffiliated with the firm?
      •   Has the issuer engaged, or does the member anticipate that the issuer will engage, in a general solicitation in connection with the offering or sale of the securities?
      •   Has the issuer, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor, or any of the issuer's affiliates been the subject of SEC, FINRA, or state disciplinary actions or proceedings or criminal complaints within the last 10 years?

      The form also asks firms to select an industry category for the specified private placement. See Attachment A for a copy of the form.

      Review Priorities

      The form assists FINRA in prioritizing its review of private placement filings. The questions are not intended to set new standards of disclosure, due diligence or information gathering requirements for firms involved in the private placement offerings. Examples of information that can affect our review prioritization include the following:

      •   The private placement is a contingency offering in which no escrow agent is used, or an escrow agent that is used does not comply with Rule 15c2-4 under the Securities Exchange Act of 1934 (SEA). Many private placements are conducted as best efforts contingency offerings that must comply with various SEC rules, including SEA Rules 10b-9 and 15c2-4. SEA Rule 15c2-4 requires any broker-dealer that participates in a best efforts contingency offering to appoint a bank as escrow agent or deposit funds in a segregated bank account.
      •   An auditor has questioned whether the issuer can continue as a going concern.
      •   The offering is for interests in a pooled investment fund, the terms of which do not limit the use of offering proceeds to make or repay loans to, or purchase assets from, any insiders of the fund. Approximately 25 percent of SEC Rule 506 issuers are pooled investment funds.7
      •   The issuer, any officer, director or executive management, sponsor, general partner, manager, advisor or its affiliate has a relevant disciplinary history. This is true whether or not the relevant disciplinary history would disqualify the issuer from engaging in an SEC Regulation D offering.8
      •   In addition, some information may raise questions about the quality of the suitability analysis that the firm may have conducted.
      •   To assist firms, FINRA is providing additional guidance in the Private Placement Form FAQ.9 See Attachment B for a copy of the FAQ.

      1 See Securities Exchange Act Release No. 69843 (June 25, 2013); 78 FR 39367 (July 1, 2013) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2013-026).

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

      3 This 15-day time period corresponds with 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...").

      4 See, e.g., District Business Conduct Committee for District No. 4 v. Everest Securities, Inc., 1994 NASD Discip. LEXIS 188 (Sept. 2,1994), aff'd, 52 S.E.C. 9B8, 962–63 (Aug. 26, 1996), aff'd, 116 F.3d 123B, 1239 (8th Cir. 1997) ("reliance on others does not excuse [the respondents'] own lack of investigation").

      5 Since filers began using the new form on July 1, 2013, on average, 18 percent of filers have answered "unknown" to at least one of the six questions. Approximately 28 percent of filers have answered "unknown" to the question regarding whether the issuer, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor or any of the issuer's affiliates has been the subject of SEC, FINRA, or state disciplinary actions or proceedings or criminal complaints within the last 10 years. Approximately 8 percent have answered "unknown" to the question regarding whether the issuer has independently audited financial statements available for the issuer's most recent fiscal year.

      6 Rule 5123 requires firms to "provide FINRA with the required documents or notification and related information, if known, by filing an electronic form in the manner prescribed by FINRA." Filing information a firm knows is inaccurate would violate that requirement.

      7 See Vladimir Ivanov and Scott Bauguess, Capital Raising in the U.S.: An Analysis of Unregistered Offerings Using the Regulation D Exemption, 2009–2012 (July 2013), at 14, 19–20.

      8 See Securities Act Release No. 9414 (July 10, 2013), 78 FR 44730 (July 24, 2013) (Disqualification of Felons and Other "Bad Actors" from Rule 506 offerings).

      9 Concurrently with this Notice, FINRA is publishing a revised version of the Sale of Private Placements Frequently Asked Questions, which includes a section on the new filing questions, to provide members with further clarification on the purpose and scope of these questions. The Sale of Private Placements Frequently Asked Questions can be found on FINRA's website at www.finra.org/Industry/Compliance/RegulatoryFilings/PrivatePlacements/.


      Attachment A

      Attachment B

      Private Placement Form Frequently Asked Questions (FAQ)

      Beginning July 1, 2013, FINRA implemented an updated private placement form that includes six new questions, which require the firm making the filing to answer "yes," "no" or "unknown" based on information contained in the offering document or otherwise known by the firm making the filing. FINRA is providing the following FAQ regarding the form and updated questions.

      1. The form asks whether the offering being filed is a contingency offering. What is a "contingency offering?"

      For purposes of the form, a contingency offering is a private placement in which the actual closing or sale of securities in the private placement is contingent on an event, typically the receipt of orders for a minimum aggregate amount of securities by an expiration date. Filers participating in contingencey offerings must familiarize themselves with, and follow, the relevant SEC rules, including Rules 15c2-4 and 10b-9 under the Securities Exchange Act of 1934.
      2. When a firm completes the form and files offering documents on behalf of itself and other firms that are participating in the same offering, must the answers to the form's questions be based on the knowledge of all the firms or only the firm filing the form?

      The form provides that the firm submitting the filing must answer the questions "[b]ased on the information contained in the offering document (or if otherwise known by your firm)." The firm submitting the form must review the offering document in order to answer the questions. Firms participating in a private placement are required to conduct a reasonable investigation of the private placement issuer. The requirement to answer the form's questions imposes no new requirement on the filing firm to obtain information, beyond those responsibilities discussed in Regulatory Notice 10-22. Information about the issuer or the offering may have been be obtained by the filing firm from several sources. If information that can be used to answer the questions is known by the filing firm, it should be used to answer the questions regardless of whether it originated with another participating firm or any other entity.
      3. Is the firm making the filing required to obtain sufficient information so that it can answer "yes" or "no" to the questions instead of "unknown?"

      The form itself does not require firms to obtain information sufficient to answer questions yes or no. The scope of a firm's obligations to conduct a reasonable due diligence investigation of a private placement issuer is addressed in Regulatory Notice 10-22. Neither FINRA Rule 5123 nor the form imposes any additional requirement of investigation beyond what is discussed in that Notice.
      4. The form asks whether the issuer is "able to use offering proceeds to make or repay loans to, or purchase assets from, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor or any of the issuer's affiliates." If the offering documents do not address such use, but the issuer makes representations to the firm that such use of proceeds is impermissible, should the firm answer "no?"

      Firms participating in private placements often obtain information beyond what is disclosed in offering documents as a result of their own reviews and reasonable investigations. If the firm has information, including representations from the issuer, from which it concludes there are limits in place against such use of proceeds, the firm should answer "no."
      5. Why is the form's question regarding the issuer's disciplinary history different than the SEC's Rule 506 disqualification ("Bad Actor") provision?

      The SEC recently adopted amendments to Regulation D under the Securities Act of 1933 that require specific disclosure or make the exemption under Rule 506 unavailable if a "Covered Person" is subject to a "Disqualifying Event." The amendments provide nine types of Covered Persons and 18 separate Disqualifying Events. Disqualifying Events that occur before September 23, 2013, the effective date of the SEC's "Bad Actor" provision, must be disclosed to investors, and Disqualifying Events that occur on or after the effective date result in the offering being ineligible to rely on SEC Rule 506.

      The form asks whether the issuer, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor or any of the issuer's affiliates has been the subject of SEC, FINRA or state disciplinary actions or proceedings or criminal complaints within the last 10 years. The criteria of Covered Persons or Disqualifying Events that the SEC adopted in its Bad Actor provision are not relevant to the disciplinary history question on the form, which is used to assist FINRA in prioritizing the reviews of private placements, not to screen offerings for compliance with SEC requirements.
      6. What are "independently audited financial statements" for purposes of the form?

      Independently audited financial statements are financial statements prepared in accordance with generally accepted accounting principles, or GAAP, and audited by an independent certified public accountant in accordance with generally accepted auditing standards.
      7. Can a firm explain why a question in the form was answered in a particular way, or provide additional information not requested in the form?

      FINRA encourages firms to provide explanations or additional information, as appropriate, in the text box at the end of the form.
      8. Do the SEC's recent amendments that permit general solicitation for certain offerings under Rule 506 of Regulation D eliminate the filing requirements of Rule 5122 or 5123 for these offerings?

      No. Whether general solicitation is used to market a private placement is irrelevant to whether the offering must be filed pursuant to FINRA Rule 5122 or 5123.
      9. How will FINRA use the answer to the question about whether a Form D has been filed?

      The answer to the question assists FINRA in deciding whether to access the EDGAR database to review Form Ds.

    • 13-25 FINRA, the SEC and CFTC Issue Joint Advisory on Business Continuity Planning

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      Business Continuity Planning

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Key Topics

      Business Continuity Planning
      Referenced Rules & Notices

      FINRA Rule 4370

      Executive Summary

      Following Hurricane Sandy, which caused widespread damage on the northeast coast of the United States in October 2012, FINRA, the Securities and Exchange Commission's (SEC) Office of Compliance Inspections and Examinations and the Commodity Futures Trading Commission's (CFTC) Division of Swap Dealers and Intermediary Oversight jointly reviewed firms' business continuity and disaster recovery planning. FINRA, the SEC and CFTC are issuing the attached Business Continuity Planning advisory to encourage firms to review their business continuity plans and to provide best practices to help improve responses to, and to reduce recovery time after, significant large-scale events.

      Questions concerning this Notice may be directed to your firm's Regulatory Coordinator.

      Business Continuity Planning

      Hurricane Sandy caused significant and wide-ranging damage across the northeast coast of the United States on October 28 and October 29, 2012, which led to the closure of the equities and options markets on October 29 and October 30, 2012. These events prompted the Securities and Exchange Commission's Office of Compliance Inspections and Examinations ("SEC"), the Financial Industry Regulatory Authority ("FINRA"), and the Commodity Futures Trading Commission's Division of Swap Dealers and Intermediary Oversight ("CFTC") to jointly review the business continuity and disaster recovery planning of firms.

      The SEC, FINRA and CFTC contacted firms with a significant market presence to gain an understanding of how the firms were impacted by the events surrounding Hurricane Sandy; specific emphasis was given to firms' implementation of their business continuity plans ("BCPs") and disaster recovery procedures. The SEC, FINRA and CFTC communicated with several firms regarding the impact of Hurricane Sandy on trading, customer relations, financial and regulatory obligations, and technology, among other topics. As a result, the SEC, FINRA and CFTC compiled the following best practices and lessons learned.

      The regulators encourage firms to review their business continuity plans and consider implementing these best practices and lessons learned as appropriate to help improve responses to, and to reduce recovery time after, significant large scale events.

      Widespread Disruption Considerations

      •   Firms should consider the possibility of widespread lack of telecommunications, transportation, electricity, office space, fuel and water in their BCPs. Consideration should be given to multiple, redundant services and the proximity of vendors to the potential disaster area.
      •   Remote access is an important component of business continuity planning. Firms should consider their employees' ability to work from home during a crisis and determine what steps can be taken to ensure adequate staffing during a crisis event. Firms should also consider enhancing the capabilities of staff that work from home by identifying technology and communications products and services that could increase efficiency. Since the use of remote access relies heavily on fully functional telephone and internet service, firms should consider alternatives to telework in their BCPs, particularly for key control functions such as compliance, risk management, back office operations and financial and regulatory reporting.

      Alternative Locations Considerations

      •   When considering alternative locations (i.e., back-up data centers, back-up sites for operations, remote locations, etc.) firms should consider the implications of a region wide disruption. Firms are encouraged to consider geographic diversity when determining the physical location of alternative sites. An alternative site, particularly a system back-up location, in close proximity to the primary site may not sufficiently protect the firm from the effects of a region wide event. Firms should consider whether their primary site and alternative sites rely on the same critical utility services, such as electricity, transportation and telecommunications.
      •   Firms should consider the accessibility of alternative sites and the ability of staff to travel to the site in the event of a transit shutdown or closure of major roadways. Consideration should be given to staff ability to travel to remote locations, the methods of transportation to move staff to the site and living and lodging expenses related to relocating staff. Firms should further consider establishing pre-arranged contracts with shuttle service providers to facilitate the staffs transport to the work location. Also, familiarizing staff of the transportation alternatives prior to a contingency event may facilitate the process and help ensure that the transportation alternatives are efficiently used.
      •   Firms should consider the appropriate number of staff necessary at any alternative site to perform critical activities, including risk functions, control functions, finance and treasury activities, and ensure that adequate space is available. Firms should also consider including designations of key operations and supervisory staff to oversee activities.
      •   Firms should consider the generator capacity at the alternative site (i.e., Does it restore partial or full power?) and whether appropriate capacity is allocated to critical users, activities and systems in advance. Firms are also encouraged to explore the expansion of surplus generator capacity and fuel prior to a contingency event to support expanded business functionality.
      •   Firms should consider whether their alternate location site has adequate resources. Firms are encouraged to consider whether the site has sufficient staff workspace (e.g., desks, chairs, telephones, etc.), equipment (e.g., computers, printers, network connectivity, etc.) and supplies (e.g., paper, toner, etc.) to accommodate the staff and to carry on operations. In addition, firms should consider keeping their BCPs, contact lists and other necessary documents, procedures and manuals at the alternative site, ideally in paper form in the event that electronic files cannot be accessed.
      •   Firms should consider making pre-arrangements for reserving space at remote locations such as hotels or other office space and contemplate moving staff to the alternative location in advance of a significant BCP event.

      Vendor Relationships

      •   Firms should consider critical vendor relationships. Firms should consider examining whether vendors that provide critical services such as clearance and settlement, banking and finance, trading support, fuel, telecommunications, electricity and other utilities also have adequate BCPs. Firms should also consider taking into account that many of these providers could be impacted by the same communication, transportation and electricity challenges facing the firm.
      •   Firms should also consider categorizing vendors (low-risk, high-risk, etc.) and evaluate the risk in BCP plans. Firms should contemplate having pre-arranged contracts in place with multiple fuel suppliers and schedule deliveries in advance of an event.

      Telecommunications Services and Technology Considerations

      •   Reliance on a single telecommunications service provider may lead to significant communications disruptions when that service provider is unable to operate. Firms should consider contracting with multiple telecommunications carriers to provide a failover to a different carrier to maintain fax, voice mail, and landline and VoIP services. Firms should also consider evaluating how a telecommunication provider's contingency plans will affect the firm's ability to operate. Firms should consider using multiple telecommunication providers, secondary phone lines, cloud technology, temporary phone lines, mobile telecom units and Wi-Fi for staff without power, as well as back-up mobile phone services with different carriers. Firms are encouraged to provide customers, trading counterparties and regulators with updated contact information should alternate telephone lines be used.
      •   Firms should consider multiple alternative staffing scenarios including remote access, staff relocation or staffing at alternative sites. Firms should consider enhancing their telecommunications infrastructure to ensure that staff remains fully functional while working from home during brief and extended periods of time.

      Communication Plans

      Communications with Customers and Other External Third Parties

      •   Firms should consider a plan for providing customers and trading counterparties with contact information so that business can continue. Firms should consider taking measures to ensure that their website is kept up-to-date with information about the firm's operational status and general contact information during a disruption event. Introducing firms should consider publishing contact information for clearing firms on their websites to enable customers to execute liquidating orders or wire transfers through their clearing firms should the firm be inoperable. Clearing firms are encouraged to be in a position to authenticate the validity of customer requests.
      •   Firms should consider whether to establish relationships with multiple broker-dealers to facilitate alternative market entry points.
      •   Firms should consider implementing a communication plan that allows firms to better communicate and coordinate with regulators, exchanges, emergency officials and other firms. Such coordination should reduce the likelihood of inconsistent communications. Firms are encouraged to participate in industry groups and task forces that may assist firms in strengthening their communication plans.

      Communications with Staff

      •   Firms should consider establishing a centralized process for accounting for all staff members rather than relying on each business unit to contact staff individually. Firms should also update emergency contact lists frequently (e.g., as staff members are added or removed) so staff can be contacted with firm updates.
      •   Firms should consider adopting more diverse methods of communication with employees including allowing staff, particularly critical staff, to carry multiple communications devices on multiple carriers (e.g., multiple mobile phones, softphones and T-1 lines).

      Regulatory and Compliance Considerations

      •   Firms should consider time-sensitive regulatory requirements, since a crisis event can occur at any time. For example, some firms put a lower prioritization on month-end financial processes, which increased challenges due to the storm's proximity to month end, and caused delays in firms' production of certain month end data for regulatory computations and financial reporting.
      •   Firms should regularly update their BCPs to include new regulatory and SRO requirements. Firms run the risk of failing to comply with new regulatory and SRO requirements when their BCP is not regularly updated. For example, the Chicago Mercantile Exchange and National Futures Association enacted new requirements for the daily reporting of financial data in 2012. It appeared that this new requirement may not have been included in some firms' BCP processes and therefore may not have been properly prioritized.

      Review and Testing

      •   Firms should consider conducting full BCP tests and participating in industry testing, at least annually, but more frequently if changes are made. Firms should consider full staff BCP tests to evaluate whether all day-to-day functions, including trade processing, can be performed regardless of staff location. In addition, firms are encouraged to keep their BCPs up to date and to amend their BCPs to incorporate testing results.
      •   Regarding business continuity training, firms should consider conducting annual or more frequent training on their BCPs to familiarize all personnel with the plan and their critical pre-established roles.
      •   In addition, firms should consider incorporating stress tests into their BCPs. For example, firms could perform a stress test on their liquidity position and review the level of excess customer reserves. Based on this analysis, firms may be better prepared to adjust liquidity or excess reserves (e.g., term repos versus overnight, ability to liquidate money market funds, ability to meet margin calls in a potentially volatile market, adding excess segregation reserves) prior to an event.

    • 13-24 FINRA Announces Modifications Regarding Historic TRACE Data; Effective Date: July 22, 2013

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      Trade Reporting and Compliance Engine (TRACE)

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Fixed Income
      Research
      Trading
      Key Topics

      Agency Pass-Through Mortgage-Backed Securities
      Fees
      Historic ABS Data Set
      Historic TRACE Data
      SBA-Backed ABS
      Specified Pool Transactions
      To Be Announced (TBA) Transactions
      Referenced Rules & Notices

      FINRA Rule 6710
      FINRA Rule 7730
      Regulatory Notice 12-56
      Regulatory Notice 12-26
      Regulatory Notice 10-55
      Regulatory Notice 10-14

      Executive Summary

      Effective July 22, 2013, FINRA will make available information on historic transactions in agency pass-through mortgage-backed securities (MBS) and Small Business Administration-backed asset-backed securities (SBA-Backed ABS) traded in specified pool transactions (collectively, Specified Pool Transactions) and SBA-Backed ABS traded to be announced (TBA).1 The information that will be provided per transaction in Historic TRACE Data for ABS transactions is set forth in Attachment A to this Notice.2

      Questions concerning this Notice should be directed to:

      •    Ola Persson, Vice President, Transparency Services, at (212) 858-4796;
      •    Colin Phillips, Associate Director, Transparency Services, at (212) 858-4336; or
      •    Kathryn Moore, Associate General Counsel, Office of General Counsel, at (202) 974-2974.

      Background & Discussion

      FINRA currently provides access to historic transaction-level data (Historic TRACE Data) pursuant to FINRA Rule 7730(d). FINRA makes Historic TRACE Data available for a class of securities at the time the class becomes subject to real-time dissemination under FINRA Rule 6750. The available Historic TRACE Data includes all transactions that have been reported to TRACE in the class, provided the transaction data is at least 18 months old.

      Historic TRACE Data includes data from certain asset-backed securities transactions (Historic ABS Data Set). Currently, the Historic ABS Data Set includes transaction data for agency pass-through MBS traded in TBA transactions. Those transactions became eligible for inclusion in Historic TRACE Data on November 12, 2012, contemporaneously with the real-time dissemination of such transactions.3 The Historic ABS Data Set will expand to include Specified Pool Transactions and SBA-Backed ABS TBA transactions effective July 22, 2013, when real-time dissemination of such transactions begins.4

      Historic TRACE Data includes more information per transaction than FINRA disseminates in real-time TRACE market data.5 The data elements and fields that FINRA currently includes in Historic TRACE Data for each transaction are set forth in Attachment A to Regulatory Notice 10-14.

      Attachment A to this Notice sets forth the minor modifications to these data elements and fields for transactions in the Historic ABS Data Set due to the special characteristics of asset-backed securities.6 Among other changes, FINRA will include fields for factor and pool number(s) and omit the field for yield. The pool number and the CUSIP will be included in the per transaction information for transactions in the Historic ABS Data Set, including for Specified Pool Transactions as such transactions are added to the Historic ABS Data Set. While confidentiality concerns prevent real-time dissemination of such data fields for Specified Pool Transactions, the 18-month aging requirement sufficiently reduces those concerns to allow access to those fields in the Historic ABS Data Set.


      1 The terms agency pass-through mortgage-backed security, specified pool transaction, SBA-Backed ABS and to be announced (TBA) are defined in FINRA Rule 6710(v), FINRA Rule 6710(x), FINRA Rule 6710(bb), and FINRA Rule 6710(u), respectively.

      2 The terms Historic TRACE Data and Historic ABS Data Set are defined in FINRA Rule 7730(f)(4) and FINRA Rule 7730(d), respectively.

      3 TBA transactions in agency pass-through MBS, like all asset-backed securities, have been reported to TRACE since May 16, 2011. See Securities Exchange Act Release No. 66829 (April 18, 2012), 77 FR 24748 (April 25, 2012) (Order Granting Approval of Proposed Rule Change Relating to Post-Trade Transparency for Agency Pass-Through Mortgage-Backed Securities Traded TBA, File No. SR-FINRA-2012-020) and Regulatory Notice 12-26.

      4 See Securities Exchange Act Release No. 68084 (October 23, 2012), 77 FR 65436 (October 26, 2012) (Order Granting Approval of Proposed Rule Change Relating to Post-Trade Transparency for Agency Pass-Through Mortgage-Backed Securities Traded in Specified Pool Transactions and SBA-Backed Asset-Backed Securities Transactions, File No. SR-FINRA-2012-042) and Regulatory Notice 12-56.

      5 For example, Historic TRACE Data includes actual trade volumes, rather than capped volume amounts, which are disseminated as part of real-time TRACE data. Historic TRACE Data, however, does not include MPID information.

      6 See Attachment A. In Regulatory Notice 10-14, FINRA indicated that it would notify firms and other data users of any changes to the per transaction information it would provide in Historic TRACE Data.


      Attachment A

      Historic TRACE Data

      As previously published in Attachment A of Regulatory Notice 10-14, Historic TRACE Data includes the following transaction-level information:*

      •   bond identifier (FINRA symbol and CUSIP number);
      •   date/time: execution time for current day's transactions, and execution date and time for reports for as/of trades and reversals;
      •   price;
      •   yield;
      •   quantity (as reported and not subject to caps);
      •   indicators: when issued; commission; as/of; buy or sell; contra-party (dealer or customer); automatic give up (AGU); special price;
      •   buyer commission and seller commission;
      •   buyer capacity (principal or agency) and seller capacity (principal or agency);
      •   security type;
      •   dissemination flag; and
      •   other fields for trade status, days to settlement, additional modifiers or indicators regarding other conditions of sale or relating to reporting, and administrative messages, such as Message Sequence Number.

      The Historic ABS Data Set will include the following additional data elements and fields:**

      •   factor; and
      •   pool number.

      "Yield" will not be provided in the Historic ABS Data Set. (In addition, "yield direction" will not be provided as a field.)

      * Additional information about the fields and data elements available in Historic TRACE Data for the Historic Corporate Bond and Historic Agency Data Sets is located at "Historic TRACE Data: Enhanced Historical Time and Sales—Trade Record File Layout (Corporate Bond and Agency Debt Securities)" in the Technical Specifications.

      ** Additional information about the fields and data elements available for the Historic ABS Data Set is located at "Historic TRACE Data: Enhanced Historical Time and Sales—ABS Trade Record File Layout" in the Technical Specifications.

    • 13-23 FINRA Provides Guidance on Disclosure of Fees in Communications Concerning Retail Brokerage Accounts and Individual Retirement Accounts

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      Brokerage and Individual Retirement Account Fees

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Advertising
      Compliance
      Legal
      Registered Representatives
      Senior Management
      Key Topics

      Communications With the Public
      Individual Retirement Accounts
      Referenced Rules & Notices

      FINRA Rule 2210

      Executive Summary

      FINRA is issuing this Notice to provide guidance to firms on communications with the public concerning the fees associated with retail brokerage accounts and individual retirement accounts (IRA).

      Questions concerning this Notice should be directed to:

      •    Thomas A. Pappas, Vice President, Advertising Regulation, at (240) 386-4553; or
      •    Amy C. Sochard, Director, Advertising Regulation, at (240) 386-4508.

      Background and Discussion

      Many broker-dealers offer retail brokerage accounts and IRAs, including rollover services for investors who wish to transfer funds from existing qualified retirement plans. Firms frequently advertise features of their accounts in retail communications, including websites and social media, radio and television commercials, and print advertisements and brochures.

      Broker-dealers' marketing campaigns often emphasize that fees are not charged in connection with their retail brokerage accounts and IRAs. Nevertheless, while certain types of fees may not be charged, others will be. For example, accounts offered by broker-dealers may be subject to fees for opening, maintaining or closing accounts. In addition, investment products will have their own associated costs such as brokerage commissions, management fees and other product-level expenses. Further, retail brokerage accounts and IRAs may also be subject to additional fees for ancillary services provided by the broker-dealer.

      FINRA recognizes broker-dealers offer what they view as economical alternatives to give investors flexibility in the type of accounts available to them. FINRA is concerned, however, that some broker-dealers' communications that discuss fees may not be fair and balanced, and could be misleading. This Notice provides guidance to firms on communications with the public that include statements or claims regarding fees.

      "Free" or "No Fee" Claims

      FINRA has observed overly broad language in sales material of broker-dealer firms that implies there are no fees charged to investors who have accounts with the firms. In other instances, specific fees that are not charged are highlighted and separated from disclosure regarding other fees that may be charged. This kind of sales material may mislead investors regarding the cost of opening, maintaining or closing an account.

      Because closing and maintaining accounts typically involve some cost to investors, either associated with the account itself, the underlying investments or the services of the broker-dealer, it would generally be inconsistent with FINRA Rule 2210's requirements to claim or imply that accounts are "free." For example, referring to an IRA account as a "free IRA" or "no-fee IRA" where costs exist would fail to comply with Rule 2210's prohibition of false, exaggerated, unwarranted, promissory or misleading statements or claims.

      FINRA Rule 2210 requires that broker-dealers' communications are fair and balanced and do not omit material information that would cause them to be misleading. Rule 2210 also requires that communications provide a sound basis for evaluating the facts with respect to any product or service. Accordingly, claims regarding fees must be accompanied by clear disclosure of the types of fees that may be charged. For example, if an account offered by a broker-dealer involves account maintenance and closing fees, fees associated with the ownership of investments in the account or brokerage service fees, a stand-alone claim such as "Start investing for less with no account opening fees" would not comply with the rule. The claim could be compliant, however, if it explained other fees that applied. For example, the following modified claim may be fair and balanced: "Start investing for less with no account opening fee. Other account fees, fund expenses, brokerage commissions and service fees may apply."

      Some firms have published communications that feature prominent claims regarding an account's fee structure with only a footnote to disclose information about other fees that may apply. This type of presentation does not comply with FINRA Rule 2210(d)(1)(C), which provides that information may be placed in a legend or footnote only in the event that such placement would not inhibit an investor's understanding of the communication.

      A headline statement to the effect that a firm does not charge annual maintenance fees should include an explanation in close proximity to the headline of the conditions associated with the offer and the other fees that would apply. For example, communications could discuss the lack of an annual account maintenance fee as follows:

      "There is no annual maintenance fee if you keep a minimum balance of $5,000 in the account. Account opening and closing fees may apply depending on the amount invested and the timing of the account closure. There may be costs associated with the investments in the account such as loads, expenses or brokerage commissions. Fees for optional services may also apply. Click here for a full explanation of our fees."

      In this example, the hyperlink provided in the text "Click here" would take the reader to comprehensive fee disclosure.

    • 13-22 FINRA Revises the Series 55 Examination Program; Implementation Date: August 12, 2013

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      Qualification Examinations

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Legal
      Operations
      Registration
      Training
      Key Topics

      Equity Trader (Series 55)
      Qualification Examination
      Referenced Rules & Notices

      FINRA Rule 5320
      Information Notice 3/12/08
      Investment Company Act of 1940
      NASD IM-2110-2
      NASD Rule 1031(b)
      NASD Rule 1032(f)
      NASD Rule 2111
      SEA Section 15A(g)(3)

      Executive Summary

      FINRA periodically reviews the content of qualification examinations to determine whether revisions are necessary or appropriate in view of changes—including changes to the laws, rules and regulations—pertaining to the subject matter covered by the examinations. Based on this review process, FINRA has revised the Equity Trader (Series 55) examination program.1

      The changes are reflected in the Series 55 content outline on FINRA's website and will appear in the Series 55 examination starting on August 12, 2013.

      Questions regarding this Notice should be directed to:

      •   Patricia Monterosso, Lead Qualifications Analyst, Testing and Continuing Education Department, at (212) 858-4086; or
      •   Alexandra Toton, Lead Qualifications Analyst, Testing and Continuing Education Department, at (240) 386-4677.

      Background & Discussion

      Section 15A(g)(3) of the Securities Exchange Act of 1934 authorizes FINRA to prescribe standards of training, experience and competence for persons associated with FINRA-regulated firms. In accordance with that provision, FINRA has developed examinations that are designed to establish that persons associated with FINRA-regulated firms have attained specified levels of competence and knowledge, consistent with applicable registration requirements under FINRA rules.

      Each associated person of a firm who is included within the definition of representative in NASD Rule 1031(b) (Definition of Representative) is required to register with FINRA as an Equity Trader if, with respect to transactions in equity, preferred or convertible debt securities effected otherwise than on a securities exchange, the associated person is engaged in proprietary trading, the execution of transactions on an agency basis or the direct supervision of such activities.2 There is an exception from the Equity Trader requirement for any associated person of a firm whose trading activities are conducted principally on behalf of an investment company that is registered with the Securities and Exchange Commission pursuant to the Investment Company Act of 1940 and that controls, is controlled by, or is under common control with the firm. The Series 55 examination qualifies an individual to function as an Equity Trader. Before registration as an Equity Trader may become effective, the individual must be registered as either a General Securities Representative (Series 7) or Corporate Securities Representative (Series 62).

      In concert with a committee of industry representatives, FINRA recently undertook a review of the Series 55 examination program. As a result of this review, FINRA has revised the content outline to reflect changes to the laws, rules and regulations covered by the examination and to reflect the functions currently performed by an Equity Trader. Among other revisions, FINRA has revised the outline to reflect the adoption of rules in the consolidated FINRA rulebook (e.g., NASD IM-2110-2 (Trading Ahead of Customer Limit Order) and NASD Rule 2111 (Trading Ahead of Customer Market Orders) were consolidated as FINRA Rule 5320 (Prohibition Against Trading Ahead of Customer Orders)).3

      FINRA has divided the content outline into three major job functions that are performed by an Equity Trader. The following are the three major job functions, denoted Function 1 through Function 3, and the number of questions associated with each of the functions:

      •   Function 1: Trading, 45 questions;
      •   Function 2: Order Handling, 36 questions; and
      •   Function 3: Record Keeping and Regulatory Reporting, 19 questions.

      In addition, each function contains sections that describe the areas of knowledge required to perform that function, and each of these areas of knowledge contains subsections that list the laws, rules and regulations related to that particular area of knowledge.

      In conjunction with the changes to the content outline, FINRA also has made changes to the weighting of questions on content outline topics and to the question bank for the Series 55 examination.

      The number of questions on the Series 55 examination remains at 100 multiple-choice questions,4 and candidates continue to have three hours to complete the examination. Currently, a score of 70 percent is required to pass the examination. A score of 67 percent is required to pass the revised examination.

      Content Outline

      The revised Series 55 content outline is available on FINRA's website.


      1 See File No. SR-FINRA-2013-028, which was filed with the SEC for immediate effectiveness on June 27, 2013.

      2 See NASD Rule 1032(f) (Limited Representative—Equity Trader).

      3 The current FINRA rulebook consists of (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the "Transitional Rulebook"). While the NASD Rules generally apply to all FINRA member firms, the Incorporated NYSE Rules apply only to those member firms of FINRA that are also member firms of the NYSE (Dual Members). The FINRA Rules apply to all FINRA member firms, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process, see Information Notice, March 12, 2008 (Rulebook Consolidation Process). See also Rule Conversion Chart.

      4 Consistent with FINRA's practice of including "pre-test" questions on certain qualification examinations, which is designed to ensure that new examination questions meet acceptable testing standards prior to use for scoring purposes, the examination includes 10 additional, unidentified pre-test questions that do not contribute towards the candidate's score. Therefore, the examination actually consists of 110 questions, 100 of which are scored. The 10 pre-test questions are randomly distributed throughout the examination.

    • 13-21 SEC Approves Amendments to Arbitration Codes to Revise the Definition of Public Arbitrator; Effective Date: July 1, 2013

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      Public Arbitrator Definition

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Key Topics

      Arbitration
      Codes of Arbitration Procedure
      Definition of Public Arbitrator
      Referenced Rules & Notices

      FINRA Rule 12100
      FINRA Rule 13100

      Executive Summary

      The SEC approved amendments to the definition of public arbitrator in the Customer and Industry Codes of Arbitration Procedure.1 The amended definition excludes persons associated with a mutual fund or hedge fund from serving as public arbitrators and requires individuals to wait for two years after ending certain affiliations before FINRA may permit them to serve as public arbitrators.

      The amendments are effective on July 1, 2013, and apply to all cases in which FINRA has not sent to the parties lists of chair-qualified public arbitrators and public arbitrators for arbitrator selection.

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

      Questions concerning this Notice should be directed to:

      •    Barbara Brady, Vice President and Director, Neutral Management, Dispute Resolution, at (212) 858-4352 or barbara.brady@finra.org; or
      •    Margo A. Hassan, Assistant Chief Counsel, Dispute Resolution, at (212) 858-4481 or margo.hassan@finra.org.

      Background & Discussion

      FINRA classifies arbitrators under the Customer and Industry Codes of Arbitration Procedure (Codes) as either "non-public" or "public." Non-public arbitrators are affiliated with the securities industry either through their current or former employment in a securities business, or because they provide professional services to securities businesses. Public arbitrators do not have any significant affiliation with the securities industry; nor are they the spouses or immediate family members of an individual with a significant affiliation to the securities industry.

      Investor representatives raised concerns that they do not perceive certain arbitrators on FINRA's public arbitrator roster as public because of their background or experience. To address this perception, FINRA amended Rules 12100(u)(3) and 13100(u)(3), which currently exclude investment advisers from serving as public arbitrators, to exclude also persons associated with, including registered through, a mutual fund or hedge fund. In addition, FINRA amended the public arbitrator definition to add a two-year "cooling off" period before FINRA may permit certain individuals to serve as public arbitrators.

      Currently under the Codes, an individual may not serve as a public arbitrator if he or she is:

      1. an investment adviser;
      2. an attorney, accountant, or other professional whose firm derived 10 percent or more of its annual revenue in the past two years from certain financial industry entities;
      3. an attorney, accountant or other professional whose firm derived $50,000 or more in annual revenue in the past two years from professional services rendered to certain financial industry entities relating to any customer disputes concerning an investment account or transaction;
      4. employed by, or is the spouse or an immediate family member of a person who is employed by, an entity that directly or indirectly controls, is controlled by, or is under common control with, any partnership, corporation or other organization that is engaged in the securities business; or
      5. a director or officer of, or is the spouse or an immediate family member of a person who is a director or officer of, an entity that directly or indirectly controls, is controlled by, or is under common control with, any partnership, corporation or other organization that is engaged in the securities business.

      However, if the individual ends the affiliation that was the basis for the exclusion from the public roster, the individual may begin immediately serving as a public arbitrator. FINRA amended Rules 12100(u) and 13100(u) to provide that a person whom FINRA would not designate as a public arbitrator because of an affiliation under subparagraphs (3)–(7) (the exclusions detailed above) shall not be designated as a public arbitrator for two calendar years after ending the affiliation.2 As stated above, FINRA added persons associated with mutual funds and hedge funds to the exclusion noted in Rules 12100(u)(3) and 13100(u)(3). Therefore, the two-year cooling off period also applies to these individuals. FINRA believes that the amendments will improve its constituents' perception about the neutrality of the arbitrators on the public roster.

      Effective Date

      The amendments are effective on July 1, 2013, and apply to all cases in which FINRA has not sent to the parties lists of chair-qualified public arbitrators and public arbitrators for arbitrator selection.


      1. See Securities Exchange Act Rel. No. 69297 (April 4, 2013), 78 Federal Register 21449 (April 10, 2013) (File No. SR-FINRA-2013-003).

      2. FINRA will determine the cooling off period by making an individual wait for two full calendar years after the year in which the individual ended an affiliation. For example, if an arbitrator applicant left a firm that derived 10 percent or more of its annual revenue anytime in 2013, the applicant would be eligible to serve as a public arbitrator on January 1, 2016.


      ATTACHMENT A

      New language is underlined.

      Code of Arbitration Procedure for Customer Disputes

      12100. Definitions
      * * * * *
      (u) Public Arbitrator

      The term "public arbitrator" means a person who is otherwise qualified to serve as an arbitrator and:
      (1) is not engaged in the conduct or activities described in paragraphs (p)(1)–(4);
      (2) was not engaged in the conduct or activities described in paragraphs (p)(1)–(4) for a total of 20 years or more;
      (3) is not an investment adviser, or associated with, including registered through, a mutual fund or hedge fund;
      (4) is not an attorney, accountant, or other professional whose firm derived 10 percent or more of its annual revenue in the past two years from any persons or entities listed in paragraphs (p)(1)–(4);
      (5) is not an attorney, accountant, or other professional whose firm derived $50,000 or more in annual revenue in the past two years from professional services rendered to any persons or entities listed in paragraph (p)(1) relating to any customer disputes concerning an investment account or transaction, including but not limited to, law firm fees, accounting firm fees, and consulting fees;
      (6) is not employed by, and is not the spouse or an immediate family member of a person who is employed by, an entity that directly or indirectly controls, is controlled by, or is under common control with, any partnership, corporation, or other organization that is engaged in the securities business;
      (7) is not a director or officer of, and is not the spouse or an immediate family member of a person who is a director or officer of, an entity that directly or indirectly controls, is controlled by, or is under common control with, any partnership, corporation, or other organization that is engaged in the securities business; and
      (8) is not the spouse or an immediate family member of a person who is engaged in the conduct or activities described in paragraphs (p)(1)–(4). For purposes of this rule, the term immediate family member means:
      (A) a person's parent, stepparent, child, or stepchild;
      (B) a member of a person's household;
      (C) an individual to whom a person provides financial support of more than 50 percent of his or her annual income; or
      (D) a person who is claimed as a dependent for federal income tax purposes.
      A person whom FINRA would not designate as a public arbitrator because of an affiliation under subparagraphs (3)–(7) shall not be designated as a public arbitrator for two calendar years after ending the affiliation.

      For purposes of this rule, the term "revenue" shall not include mediation fees received by mediators who are also arbitrators, provided that the mediator acts in the capacity of a mediator and does not represent a party in the mediation.

      * * * * *

      Code of Arbitration Procedure for Industry Disputes

      13100. Definitions
      * * * * *
      (u) Public Arbitrator

      The term "public arbitrator" means a person who is otherwise qualified to serve as an arbitrator and:
      (1) is not engaged in the conduct or activities described in paragraphs (p)(1)–(4);
      (2) was not engaged in the conduct or activities described in paragraphs (p)(1)–(4) for a total of 20 years or more;
      (3) is not an investment adviser, or associated with, including registered through, a mutual fund or hedge fund;
      (4) is not an attorney, accountant, or other professional whose firm derived 10 percent or more of its annual revenue in the past two years from any persons or entities listed in paragraphs (p)(1)–(4);
      (5) is not an attorney, accountant, or other professional whose firm derived $50,000 or more in annual revenue in the past two years from professional services rendered to any persons or entities listed in paragraph (p)(1) relating to any customer disputes concerning an investment account or transaction, including but not limited to, law firm fees, accounting firm fees, and consulting fees;
      (6) is not employed by, and is not the spouse or an immediate family member of a person who is employed by, an entity that directly or indirectly controls, is controlled by, or is under common control with, any partnership, corporation, or other organization that is engaged in the securities business;
      (7) is not a director or officer of, and is not the spouse or an immediate family member of a person who is a director or officer of, an entity that directly or indirectly controls, is controlled by, or is under common control with, any partnership, corporation, or other organization that is engaged in the securities business; and
      (8) is not the spouse or an immediate family member of a person who is engaged in the conduct or activities described in paragraphs (p)(1)–(4). For purposes of this rule, the term immediate family member means:
      (A) a person's parent, stepparent, child, or stepchild;
      (B) a member of a person's household;
      (C) an individual to whom a person provides financial support of more than 50 percent of his or her annual income; or
      (D) a person who is claimed as a dependent for federal income tax purposes.
      A person whom FINRA would not designate as a public arbitrator because of an affiliation under subparagraphs (3)–(7) shall not be designated as a public arbitrator for two calendar years after ending the affiliation.

      For purposes of this rule, the term "revenue" shall not include mediation fees received by mediators who are also arbitrators, provided that the mediator acts in the capacity of a mediator and does not represent a party in the mediation.

      * * * * *

    • 13-20 FINRA Designates Additional Index Available for Conventional Equity Options Position Limits Calculation; Effective Date: June 27, 2013

      View PDF

      Options

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Institutional
      Legal
      Operations
      Options
      Senior Management
      Systems
      Trading
      Key Topics

      Conventional Equity Options
      Position Limits
      Referenced Rules & Notices

      Notice to Members 07-03
      FINRA Rule 2360

      Executive Summary

      Firms may calculate option position limits in accordance with volume and float criteria specified by FINRA for conventional equity options overlying securities that are part of an index designated by FINRA and submit a post-trade notice filing to FINRA. FINRA previously designated the FTSE All-World Index. Effective June 27, 2013, FINRA is designating, the NASDAQ Global Large Mid Cap Index to permit firms to use the volume and float criteria to calculate position limits for conventional equity options on securities in that index.

      Questions concerning this Notice should be directed to:

      •    Max Tourtelot, Director, Options Regulation, at (917) 281-3133;
      •    James Turnbull, Associate Director, Options Regulation, at (917) 281-3177; or
      •    Kathryn Moore, Associate General Counsel, Office of General Counsel, at (202) 974-2974.

      Background and Discussion

      FINRA Rule 2360(b)(3)(A) imposes a ceiling or position limit on the number of conventional and standardized equity options contracts in each class on the same side of the market (i.e., aggregating long calls and short puts, or long puts and short calls) that can be held or written by a firm, a person associated with a firm, a customer or a group of customers acting in concert.

      In general, position limits for conventional equity options are the same as the limits for standardized equity options that overlie the same security.1 However, because many foreign securities do not have standardized equity options overlying them, conventional equity options overlying foreign securities generally fall into the base tier of 25,000 contracts. Firms may apply to FINRA Market Regulation Department to obtain higher position limits based on the volume and float of the underlying security.

      FINRA Rule 2360(b)(3)(A)(viii)b allows firms to calculate on their own the position limits for conventional equity options overlying certain securities that are part of an index designated by FINRA. In Notice to Members 07-03, FINRA previously designated the FTSE All-World Index Series. As a result, firms may calculate position limits for options on those securities that are part of that index, using the same volume and float criteria as used by the options exchanges,2 and must submit a post-trade notice filing within one business day to FINRA.

      NTM 07-03 also noted that in the event that FINRA designates another index in addition to or instead of the FTSE All-World Index Series, FINRA would publish the designation in a Notice and provide firms at least 30 days written notice of the change.3 Effective June 27, 2013, FINRA designates the NASDAQ Global Large Mid Cap Index to serve as an additional index for purposes of calculating position limits on conventional equity options overlying foreign securities, subject to the volume and float criteria noted above. FINRA believes the designation of this additional index is consistent with the designation of the FTSE All-World Index in that the indexes are of similar geographic dispersion and composition including market capitalization sectors of large and mid-cap companies. The NASDAQ Global Large Mid Cap Index is a free-float adjusted market capitalization weighted index designed to include 90 percent of the investable public equity in certain developed and emerging countries, subject to a semi-annual rebalancing schedule.

      FINRA reminds firms that under the rule, if claiming a higher position limit, a firm must submit a post-trade notice filing within one business day to FINRA. The firm must submit the filing by email to the Market Regulation Department, at plhedge@finra.org, and must provide the necessary trade data or current float data to support the firm's position limit calculation as provided on the Increase Option Position Limit Notification Form. FINRA will review the firm's notice filing, and, if it determines that the firm incorrectly assigned a position limit, it will notify the firm and instruct it to promptly reduce its position to the appropriate limits as determined by FINRA.


      1. In general, position limits for standardized equity options are determined according to a five-tiered system in which more actively traded stocks with larger public floats are subject to higher position limits. FINRA rules do not specifically govern how a particular equity option falls within one of the tiers. Rather, the position-limit rule provides that the position limit established by the rules of an options exchange for a particular equity option is the applicable position limit for purposes of the FINRA rule. See e.g., Chicago Board Options Exchange Rule 4.11, Interpretations and Policies .02; NYSE MKT Rule 904, Commentary .07; NASDAQ OMX PHLX Rule 1001, Commentary 05; NYSE Arca Options Rule 6.8, Commentary 06; and International Securities Exchange Rule 412(d). However, the position limits for standardized and conventional options overlying specified exchange-traded funds are established in FINRA Rule 2360, Supplemental Material .03.

      2. See e.g., Chicago Board Options Exchange Rule 4.11, Interpretations and Policies .02; NYSE MKT Rule 904, Commentary .07; NASDAQ OMX PHLX Rule 1001, Commentary 05; NYSE Arca Options Rule 6.8, Commentary 06; and International Securities Exchange Rule 412(d).

      Options Position Limit Criteria (each as measured during the most recent six-month period)
      50,000 Trading volume of 20,000,000 shares; or Trading volume of 15,000,000 shares, and 40,000,000 shares currently outstanding.
      75,000 Trading volume of 40,000,000 shares; or Trading volume of 30,000,000 shares, and 120,000,000 shares currently outstanding.
      200,000 Trading volume of 80,000,000 shares; or Trading volume of 60,000,000 shares, and 240,000,000 shares currently outstanding.
      250,000 Trading volume of 100,000,000 shares; or Trading volume of 75,000,000 shares, and 300,000,000 shares currently outstanding.

      3. See Securities Exchange Act Release No. 54755 (November 15, 2006), 71 FR 67675, 67677 n.23 (November 22, 2006) (SEC Approval Order of File No. SR-NASD-2006-007) and NTM 07-03.

    • 13-19 SEC Approves Amendments to Require Firms to Report OTC Transactions in Equity Securities as Soon as Practicable, But No Later Than 10 Seconds, Following Execution; Effective Date: November 4, 2013

      View PDF

      Trade Reporting

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Systems
      Trading
      Key Topics

      Alternative Display Facility
      NMS Stocks
      OTC Equity Securities
      OTC Reporting Facility
      Trade Reporting
      Trade Reporting Facilities
      Referenced Rules & Notices

      FINRA Rule 6181
      FINRA Rule 6282
      FINRA Rule 6380A
      FINRA Rule 6380B
      FINRA Rule 6622
      FINRA Rule 6623
      FINRA Rule 7130
      FINRA Rule 7230A
      FINRA Rule 7230B

      Executive Summary

      Effective Monday, November 4, 2013, firms are required to report over-the-counter transactions in equity securities1 to FINRA as soon as practicable, but no later than 10 seconds, following execution. With respect to trades that are reported manually, FINRA will take into consideration the complexity and manual nature of the execution and reporting of the trade when reviewing for firm compliance with the new reporting time frame. The amendments also apply to trade cancellations, as well as stop stock and prior reference price trades.

      The amended rule text is available at www.finra.org/notices/13-19.

      Questions regarding this Notice may be directed to:

      •    Market Regulation, Legal Section, at (240) 386-5126;
      •    FINRA Operations at (866) 776-0800; or
      •    Office of General Counsel at (202) 728-8071.

      Background and Discussion

      The SEC recently approved amendments to the FINRA trade reporting rules regarding the time frame in which firms must report over-the-counter (OTC) transactions in equity securities executed during the hours that the FINRA trade reporting facilities are open.2 Under the amendments, such transactions must be reported to FINRA as soon as practicable, but no later than 10 seconds, following execution.3 In addition, the cancellation of trades executed during normal market hours and canceled during normal market hours on the date of execution must be reported as soon as practicable, but no later than 10 seconds, after the time of cancellation.4 Trades not reported within 10 seconds of execution, unless expressly subject to a different reporting requirement5 or excluded from the trade reporting rules altogether, are late, and such trades are not considered "last sale" eligible under the Consolidated Tape Association Plan (CTA Plan) and Nasdaq Unlisted Trading Privileges Plan (UTP Plan).6

      New Supplementary Material in FINRA Rules 6282, 6380A, 6380B and 6622 clarifies the requirement that firms report trades and trade cancellations "as soon as practicable." Firms must adopt policies and procedures reasonably designed to comply with this requirement and must implement systems that commence the trade reporting process without delay upon execution (or cancellation, as applicable). Where a firm has such reasonably designed policies, procedures and systems in place, the firm generally would not be viewed as violating the "as soon as practicable" requirement because of delays in trade reporting due to extrinsic factors that are not reasonably predictable and where the firm does not purposely intend to delay the reporting of the trade (e.g., TRF systems issues). Firms must not purposely withhold trade reports, e.g., by programming their systems to delay reporting until the last permissible second.

      With respect to the 10-second reporting requirement, FINRA will continue to look for a pattern or practice of unexcused late trade reporting before taking action against a firm. Pursuant to Rules 6181 and 6623, unexcused late reporting occurs when there are "repeated reports of executions submitted after the required time period without reasonable justification or exceptional circumstances." The rules also provide that "[e]xceptional circumstances will be determined on a case-by-case basis and may include instances of system failure by a member or service bureau, or unusual market conditions, such as extreme volatility in a security, or in the market as a whole."7 Firms that engage in a pattern or practice of unexcused late reporting (i.e., reporting later than 10 seconds after execution) may be charged with violating FINRA rules, notwithstanding that they have policies and procedures that contemplate commencing the trade reporting process without delay.

      FINRA believes that firms should automate their trade reporting processes to the greatest extent possible, consistent with their trading style used to provide best execution to customers, and where automation is not feasible, they should implement more efficient trade entry processes to meet the 10-second reporting requirement. FINRA expects that firms will periodically assess their systems and processes to ensure that they have implemented the most efficient policies and procedures for timely trade reporting.

      Manual Trade Reporting

      FINRA recognizes that there is a small universe of trades for which the trade details must be entered manually. For these trades, the trade reporting process might not be completed within 10 seconds following execution, even where the firm has established efficient reporting processes and commences to report the trade without delay. Accordingly, new Supplementary Material in Rules 6282, 6380A, 6380B and 6622 provides that in these cases, FINRA will take such factors as the complexity and manual nature of the execution and reporting of the trade into consideration in determining whether "reasonable justification" exists to excuse what otherwise may be deemed to be a pattern or practice of late trade reporting. Among other things, FINRA will consider the complexity of a trade (e.g., a volume-weighted average trade or an options-related trade) and size of a trade (e.g., a trade that involves a basket of securities), as well as the fact that some amount of time must elapse between the commencement of the manual trade reporting process and the reporting of the trade. The Supplementary Material applies only where the details of a trade must be manually entered or typed into a trade reporting system following execution. Firms must maintain, and provide upon request, documentation sufficient to demonstrate that a trade was reported late due to the manual nature of the trade entry process following execution.

      The amendments are effective on Monday, November 4, 2013.


      1. Specifically, these are OTC transactions in (1) NMS stocks, which are reported through the Alternative Display Facility (ADF) or a Trade Reporting Facility (TRF); and (2) OTC equity securities (i.e., non-NMS stocks such as OTC Bulletin Board securities), which are reported through the OTC Reporting Facility (ORF).

      2. See Securities Exchange Act Release No. 69561 (May 13, 2013), 78 FR 29190 (May 17, 2013) (Order Approving the Proposed Rule Change, as Modified by Amendment No. 1; File No. SR-FINRA-2013-013).

      3. See FINRA Rules 6282(a), 6380A(a), 6380B(a) and 6622(a).

      4. See FINRA Rules 6282(a); 6380A(a) and (g); 6380B(a) and (f); 6622(a) and (f); 7130(b); 7230A(b); 7230B(b); and 7330(b).

      Conforming changes also were made to replace the reference to 30 seconds with 10 seconds in the rules relating to the reporting of stop stock and prior reference price transactions. See FINRA Rules 6282(a)(4)(F) and (G), 6380A(a)(5)(F) and (G), 6380B(a)(5)(F) and (G), and 6622(a)(5)(F) and (G).

      5. For example, the amendments do not apply to the reporting requirements applicable to transactions in restricted equity securities, as defined in Rule 6420, effected under Securities Act Rule 144A, which transactions currently are subject to end of day reporting. See Rule 6622(a)(3).

      6. Trades reported for public dissemination purposes are transmitted to three "tapes" based on the listing venue of the security: New York Stock Exchange securities (Tape A), NYSE Arca, NYSE MKT and other regional exchange securities (Tape B), and Nasdaq Stock Market securities (Tape C). Tape A and Tape B are governed by the CTA Plan and Tape C is governed by the UTP Plan.

      7. FINRA notes that firms are expected to have sufficiently robust systems with adequate capacity to enable them to report within the time frame prescribed by FINRA rules. This includes periods of high volume that are regularly occurring or expected, such as market open and close, or where a firm is reporting a large basket of securities. Thus, for example, absent extraordinary circumstances or reasonable justification, a pattern or practice of late trade reporting at market open generally would not be considered "excused" under FINRA rules.

    • 13-18 FINRA Provides Guidance on Communications With the Public Concerning Unlisted Real Estate Investment Programs

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      Communications With the Public

      Regulatory Notice
      Notice Type

      Consolidated Rulebook
      Guidance
      Suggested Routing

      Advertising
      Compliance
      Legal
      Registered Representatives
      Senior Management
      Key Topics

      Communications With the Public
      Direct Participation Programs
      Real Estate Investment Trusts
      Referenced Rules & Notices

      FINRA Rule 2210
      FINRA Rule 2310

      Executive Summary

      FINRA is issuing this Notice to provide guidance to firms on communications with the public concerning unlisted real estate investment programs, including unlisted real estate investment trusts (REITs) and unlisted direct participation programs (DPPs) that invest in real estate.

      Questions concerning this Notice should be directed to:

      •    Thomas A. Pappas, Vice President & Director, Advertising Regulation, at (240) 386-4553; or
      •    Amy C. Sochard, Director, Advertising Regulation, at (240) 386-4508.

      Background and Discussion

      Many firms are currently offering customers real estate investment programs in the form of either unlisted REITs or unlisted DPPs. REITs are pass-through entities that offer investors an equity interest in a pool of real estate assets, including land, buildings, shopping centers, hotels and office properties, and, in some cases, mortgages secured by real estate. As defined in FINRA Rule 2310, DPPs are investment programs that provide for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution. DPPs include, among other investment vehicles, real estate programs that are not structured as REITs.1 For purposes of this Notice, unlisted real estate investment programs (real estate programs) means REITs or DPPs that invest in real estate assets or mortgages and that are not listed on a national securities exchange.2

      FINRA Rule 2210 requires that a broker-dealer's communications be fair, balanced and not misleading. Recent reviews by FINRA of communications with the public regarding real estate programs have revealed deficiencies. For example, some communications have contained inaccurate or misleading statements regarding the potential benefits of investing in real estate programs. Other communications have emphasized the distributions paid by a real estate program and failed to adequately explain that some of the distribution constitutes return of principal. In addition, some communications have not provided sufficient discussions of the risks associated with investing in the products in order to balance the presentation of benefits.

      This Notice provides guidance to firms on communications with the public concerning real estate programs.3

      Disclosure

      In describing real estate programs, firms must ensure that their communications accurately and fairly explain how the products operate. Descriptions of real estate programs in communications need to be consistent with the representations in the program's current prospectus. For example, communications that include discussion of a program's objectives that are inconsistent with the objectives included in the program's prospectus or that do not explain that there is no assurance that the objectives will be met would not meet Rule 2210's requirements.

      Since an investor's participation in a real estate program is an investment in the program and not a direct investment in real estate or any other assets owned by the program, communications that imply that they are direct investments also would be inconsistent with Rule 2210's requirements. Similarly, if a real estate program has not yet qualified under the U.S. tax code as a REIT, but is being marketed as a REIT, firms should ensure that the marketing communication discloses this fact and the possibility that the real estate program may not qualify as a REIT in the future.

      In applying Rule 2210's standards, FINRA requires firm communications that discuss the benefits of an investment also to include a discussion of its risks.4 Accordingly, firm communications concerning real estate programs must balance any presentation of the potential benefits of such investments with disclosure concerning potential risks. This balance will be achieved if risk disclosure is presented in a clear and prominent manner, commensurate with the discussion of benefits, and is not relegated to a footnote.5 Providing risk disclosure in a separate document, such as the prospectus, does not substitute for the required disclosure, even if a communication is accompanied or preceded by a prospectus.

      Distribution Rates

      Firm communications concerning real estate programs often include distribution rates. Some real estate programs fund a portion of their distributions through return of principal or loan proceeds. For example, a portion of a newer program's distributions might include a return of principal until its real estate assets are generating significant cash flows from operations.

      Rule 2210(d)(1)(B) prohibits firm communications from making any false, exaggerated, unwarranted, promissory or misleading claim. Accordingly, the rule prohibits firms from misrepresenting the amount or composition of a real estate program's distributions. Nor may firms state or imply that a distribution rate is a "yield" or "current yield" or that investment in the program is comparable to a fixed income investment such as a bond or note.

      Presentations of distribution rates will be deemed to comply with Rule 2210's requirements that communications be fair and balanced, provided that the presentations clearly and prominently disclose:

      •   that distribution payments are not guaranteed and may be modified at the program's discretion;
      •   if the distribution rate consists of return of principal (including offering proceeds) or borrowings, a breakdown of the components of the distribution rate showing what portion of the quoted percentage represents cash flows from the program's investments or operations, what portion represents return of principal and what portion represents borrowings;
      •   the time period during which the distributions have been funded from return of principal (including offering proceeds), borrowings or any sources other than cash flows from investment or operations;
      •   if the distributions include a return of principal, that by returning principal to investors, the program will have less money to invest, which may lower its overall return; and
      •   if the distributions include borrowed funds, that because borrowed funds were used to pay distributions, the distribution rate may not be sustainable.

      In order to be fair and balanced, firm communications concerning a real estate program may not include an annualized distribution rate until the program has paid distributions that are, on an annualized basis, at a minimum equal to that rate for at least two consecutive full quarterly periods.

      Stability/Volatility Claims

      Rule 2210(d)(1)(A) requires firm communications to provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry or service. In addition, Rule 2210(d)(1)(D) requires communications to be consistent with the risks of fluctuating prices and the uncertainty of dividends, rates of return and yield inherent to investments.

      Accordingly, a firm may not assert or imply in communications that the value of a real estate program is stable or that its volatility is limited without providing a sound basis to evaluate this claim. The fact that a program offers its securities at par value, or at another relatively stable price, does not evidence stability in the value of the underlying assets. A communication also may not state that the price at which the program is offered is stable or that its volatility is limited without disclosing that price stability does not indicate stability in the value of the underlying assets, which will fluctuate and may be worth less than the real estate program initially paid, and that the investor may not be able to sell the investment.

      Redemption Features and Liquidity Events

      Rule 2210(d)(1)(A) prohibits firms from omitting any material fact or qualification if the omission, in light of the context of the material presented, would cause the communications to be misleading. A communication could be misleading under this provision if it discusses a redemption feature without clearly and prominently explaining the restrictions and limitations of this feature, such as the fact that the real estate program's management may terminate or modify the ability to redeem. The fact that the real estate program has not satisfied all investor redemption requests in the past could be considered a fact that should be disclosed under this provision.

      Any discussion about potential liquidity events or the timing of such events must be factual and balanced. A communication may not be balanced if it fails to disclose that the date of any liquidity event is not guaranteed or, if applicable, that it may be changed at the program management's discretion.6

      Performance of Prior Related Real Estate Programs

      If a communication includes prior performance or other historical information about related or affiliated entities, this information may not be "cherry-picked" from other programs; information about all related or affiliated programs should be included with equal prominence. Moreover, firms should ensure that this information is presented to easily differentiate it from information about the current program. Of course, the information must be consistent with information in the program's prospectus.

      Use of Indices and Comparisons

      Communications concerning real estate programs often use a real estate index's performance to demonstrate the sector's risk or return characteristics. As discussed above, Rule 2210(d)(1)(B) prohibits firms from making false or misleading statements or claims. In addition, Rule 2210(d)(2) requires that any comparison in retail communications between investments or services 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.

      The use of any given index performance may be misleading if its underlying components do not correspond with those of the program's portfolio. For example, it would be misleading to cite the performance of an index of traded REITs to indicate how an unlisted REIT may perform.

      In order to make a fair comparison if a communication includes an appropriate index, the communication must indicate the performance is not that of a particular real estate program, and describe the index's components and any relevant differences with the program's portfolio investments.

      Pictures of Specific Properties

      Communications for a new program often include photographs or other images of properties owned by investments managed by the program's sponsor that are similar to properties the program expects to purchase. In order to be clear that investors will not acquire an interest in the pictured property, prominent text must accompany each depiction explaining that the property is owned by an investment managed by the sponsor and not the program. Once the real estate program has acquired a portfolio, the communication may include depictions of properties that are limited to investments owned by the program.

      A communication concerning a real estate program that holds real estate mortgages may include photographs or other images of properties in which the program has a security interest as long as the communication discloses that the program does not own the property and that the property is collateral for a loan owned by the program.

      Capitalization Rates

      A communication may include a capitalization rate for an individual property within a real estate program if the rate is based on current information contained in the prospectus, and the communication explains how the rate was calculated, that the rate applies to the individual property, and that it does not reflect a return or distribution from the REIT or DPP itself. As a general matter, however, it is misleading for a communication to include a rate that reflects a blending of multiple individual properties' capitalization rates. Individual properties within a program's portfolio typically will have different acquisition dates and their respective capitalization rates, which are generally based on the acquisition price of the property, may not reflect their current values. In addition, the individual properties' capitalization rates may reflect different calculation methodologies.


      1. See FINRA Rule 2310(a)(4) for a complete definition of "direct participation program."

      2. Real estate programs may be registered under the Securities Act of 1933 or may be offered pursuant to an exemption from such registration. The guidance in this Notice applies to communications regarding registered and non-registered real estate programs.

      3. On December 19, 2011, the SEC's Division of Corporation Finance issued CF Disclosure Guidance: Topic No. 3, which discusses the SEC staff's views on a number of issues regarding materials submitted to the SEC staff pursuant to Securities Act Industry Guide 5 (SEC Guidance). Guide 5 applies to real estate limited partnerships and unlisted REITs. The guidance in this Notice is intended to be consistent with the SEC Guidance.

      4. See FINRA Rule 2210(d)(1)(D).

      5. Information may be placed in a legend or footnote only in the event that such placement would not inhibit an investor's understanding of the communication. FINRA Rule 2210(d)(1)(C).

      6. Under FINRA Rule 2310(b)(3)(D), before executing a purchase transaction in a public offering of DPP or unlisted REIT securities, a firm or associated person must inform the prospective participant of all pertinent facts relating to the liquidity and marketability of the DPP or REIT securities during the term of the investment. Included in the pertinent facts must be information regarding whether the sponsor has offered prior DPPs or unlisted REITs for which offering materials disclosed a date or time period at which the DPP or REIT might be liquidated, and whether liquidation occurred around that date or during the time period. This requirement does not apply to securities offerings of certain DPPs that are either listed or reasonably expected to be listed on a national securities exchange.

    • 13-17 2013 GASB Accounting Support Fee to Fund the Governmental Accounting Standards Board

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      GASB Accounting Support Fee

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Government Securities
      Institutional
      Legal
      Municipal
      Operations
      Senior Management
      Systems
      Trading
      Key Topics

      Financial Accounting Foundation
      GASB Accounting Support Fee
      Governmental Accounting
      Standards Board
      Municipal Securities Transactions
      Referenced Rules & Notices

      Dodd-Frank Act Section 978
      FINRA By-Laws, Schedule A
      MSRB Rule G-14(b)
      Regulatory Notice 12-15
      Securities Act Section 19(g)

      Executive Summary

      In February 2012, pursuant to an SEC order, FINRA established an accounting support fee (GASB Accounting Support Fee) to adequately fund the annual budget of the Governmental Accounting Standards Board (GASB). The GASB Accounting Support Fee is collected on a quarterly basis from member firms that report trades to the Municipal Securities Rulemaking Board (MSRB). Each member firm's assessment is based on the member firm's portion of the total par value of municipal securities transactions reported by all FINRA member firms to the MSRB during the previous quarter. FINRA will assess and collect a total of $7,390,400 to adequately fund the GASB's annual budget by collecting $1,847,600 from its member firms each calendar quarter beginning in April 2013.

      Questions concerning this Notice should be directed to:

      •    Finance Department at (240) 386-5313; or
      •    Office of General Counsel at (202) 728-8071.

      Background & Discussion

      Pursuant to Section 14 of Schedule A to FINRA's By-Laws, which was adopted in response to the SEC's 2011 order under Section 19(g) of the Securities Act of 1933 (Securities Act),1 FINRA assesses a reasonable annual accounting support fee to adequately fund the annual budget of the GASB.2 The GASB Accounting Support Fee is assessed on a quarterly basis and is based on member firms' municipal securities trading volume reported to the MSRB during the previous calendar quarter. Each quarter, FINRA collects one-fourth of the annual GASB Accounting Support Fee from its members. A member firm's quarterly assessment reflects its portion of the total par value of municipal securities transactions reported to the MSRB by all FINRA member firms in the previous calendar quarter. To exclude firms with de minimis transactions in municipal securities in a given quarter from being assessed the fee, firms with a quarterly assessment of less than $25 are not charged the fee for that quarter, and any amounts originally assessed to those firms are reallocated among the firms with an assessment that quarter of $25 or more. Firms that do not engage in reportable municipal securities transactions during a particular calendar quarter are not subject to the GASB Accounting Support Fee for that quarter.

      For 2013, GASB's annual budget expenses of $9,600,400 will be partially funded from $2,210,000 of excess reserves of the Financial Accounting Foundation. As a result, the recoverable annual budgeted expense for purposes of the GASB Accounting Support Fee is $7,390,400;3 therefore, FINRA will collect $1,847,600 from member firms each quarter beginning in April 2013.4 Because some firms may seek to pass the GASB Accounting Support Fee onto customers engaged in municipal securities transactions, FINRA will continue to provide firms with an estimated fee rate (per $1,000 par value) based on the GASB recoverable annual budgeted expenses reported to FINRA for that year and historical municipal security trade reporting volumes so that firms will have a basis on which to establish a fee. Based on reported municipal trading activity by FINRA member firms in 2012 and the 2013 GASB budget, FINRA estimates that the GASB Accounting Support Fee for 2013 will be between $0.0020 and $0.0025 per $1,000 par value.

      Member firms are reminded that, if they choose to pass along the fee, they must ensure that any such fees are properly disclosed, including, if applicable, the fact that the fee is an estimate and that the firm ultimately may pay more or less than the fee charged to the customer. In addition, any disclosure used by a member firm cannot be misleading and must conform to FINRA rules, including just and equitable principles of trade, as well as any applicable MSRB rules.


      1. Securities Exchange Act Release No. 64462 (May 11, 2011), 76 FR 28247 (May 16, 2011). Section 19(g) of the Securities Act, as added by Section 978 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), gave the SEC the authority to require a national securities association to establish a reasonable annual accounting support fee to adequately fund the annual budget of the GASB and to draft the rules and procedures necessary to equitably assess the fee on the association's members. See 15 U.S.C. 77s(g); Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L No. 111-203, 124 Stat. 1376 (2010).

      2. See Securities Exchange Act Release No. 66454 (February 23, 2012), 77 FR 12340 (February 29, 2012); see also Regulatory Notice 12-15 (March 2012). In accordance with Section 19(g)(5)(B) of the Securities Act, collection of the GASB Accounting Support Fee shall not be construed to provide the SEC or FINRA direct or indirect oversight of the budget or technical agenda of the GASB or to affect the setting of generally accepted accounting principles by the GASB. See 15 U.S.C. 77s(g)(5)(B).

      3. For purposes of the GASB Accounting Support Fee, the annual budget of the GASB is the annual budget reviewed and approved according to the internal procedures of the Financial Accounting Foundation (FAF). See 15 U.S.C. 77s(g)(2). GASB's 2013 budget includes an administrative fee to FINRA of $30,000 that is intended to cover FINRA's costs associated with calculating, assessing, and collecting the GASB Accounting Support Fee. The amount of the administrative fee is reviewed and evaluated each year by FINRA and the FAF in light of FINRA's experience in assessing and collecting the GASB Accounting Support Fee and the actual costs incurred by FINRA.

      4. As required by Section 19(g) of the Securities Act, any GASB Accounting Support Fees collected by FINRA are remitted to the FAF and used to support the efforts of the GASB to establish standards of financial accounting and reporting applicable to state and local governments. See 15 U.S.C. 77s(g)(l), (3). Section 19(g)(4) of the Securities Act prohibits FINRA from collecting GASB Accounting Support Fees for a fiscal year in excess of GASB's recoverable annual budgeted expenses. See 15 U.S.C. 77s(g)(4).

    • 13-16 FINRA and ISG Extend Effective Date for Certain Electronic Blue Sheet Data Elements; Effective Date: November 1, 2013

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      Electronic Blue Sheet April 2013 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
      Regulatory Notice 12-47
      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 12-47 to November 1, 2013, to correspond to the recent extension by the SEC for compliance with certain broker-dealer recordkeeping and reporting requirements of SEA Rule 13h-1.2

      Attachment A to this Notice sets forth the EBS record layout and, except for minor modifications noted below, remains unchanged from the version published in Regulatory Notice 12-47. Attachment B to this Notice, which outlines the Transaction Type Identifiers, is unchanged from the version published in Regulatory Notice 12-47.

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

      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

      Consistent with the recent extension by the SEC for compliance with certain broker-dealer recordkeeping and reporting requirements of SEA Rule 13h-1, FINRA and the other ISG members have extended the effective date for compliance with certain new data elements identified in Regulatory Notice 12-47 to November 1, 2013, to allow broker-dealers additional time to implement changes to comply with the new requirements.

      For EBS requests from FINRA and other ISG members, the fields identified in Regulatory Notice 12-47 are unchanged and must be populated by November 1, 2013. The fields are reiterated below and in Attachment A to this Notice. Firms may voluntarily submit the values for Order Execution Time, Primary Party Identifier and Contra Party Identifier fields before November 1, 2013, and they will be accepted. Firms may also voluntarily submit Large Trader Identification Number 1-3 and Large Trader Identification Qualifier values to FINRA and other ISG members at any time and they will be accepted.

      For Large Trader requests from the SEC, the SEC has extended the effective date for certain requirements and their respective requirements to November 1, 2013.3 By November 1, 2013, 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 outlined in Phase Two of the recordkeeping, reporting and monitoring requirements of SEA Rule 13h-1. 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.

      The required EBS fields are set forth below and are unchanged from Regulatory Notice 12-47. 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. 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 (highlighted fields):

      •   For the Requestor Code and Exchange Code fields, the value "7" was added to represent the Miami International Securities Exchange.
      •   For the Requestor Code field, the value "Z = Other" was deleted.

      No modifications were made to Attachment B of this Notice.

      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 12-47, firms will be required to submit EBS, when requested, using three additional formats:

      •   account number and date;
      •   account number, symbol and date; or
      •   date range and Primary Party Identifier.

      Compliance with this requirement is similarly extended to November 1, 2013. As outlined in Regulatory Notice 12-47, 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.

      Additionally, 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) as outlined in Phase One of the recordkeeping, reporting and monitoring requirements of SEA Rule 13h-1.

      Blue Sheet Testing

      FINRA's customer test website is available for 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) is also available to receive blue sheet test files. 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., NewYork 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-1 to November 1, 2013. Please see Securities Exchange Release No. 69281 (April 3, 2013), 78 FR 20960 (April 8, 2013) 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.        
            7 = Miami International Securities Exchange        
      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        
            7 = Miami International Securities Exchange        
      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).

    • 13-15 SEC Approves Amendments to FINRA Rule 6730(d) (2) Requiring Firms to Report Factor in Asset-Backed Securities Transactions Executed in Agency Capacity and Subject to Commission Charges; 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

      Asset-Backed Securities
      Factor
      To Be Announced (TBA)
      Transaction Reporting
      Referenced Rules & Notices

      FINRA Rule 6710
      FINRA Rule 6730
      FINRA Rule 6750
      Regulatory Notice 12-56

      Executive Summary

      The SEC approved amendments to FINRA Rule 6730(d)(2) to require firms to report to TRACE the factor for each transaction in an asset-backed security (ABS) (except an ABS traded To Be Announced (TBA)),1 in the limited instances when firms effect such transactions as agent and charge a commission.2 The effective date is July 22, 2013.

      The amended rule text is set forth in Attachment A.

      Questions regarding this Notice may be directed to:

      •    Elliot Levine, Associate Vice President and Counsel, Transparency Services, at (202) 728-8405;
      •    Ola Persson, Vice President, Transparency Services, at (212) 858-4796;
      •    Patrick Geraghty, Vice President, Market Regulation, at (240) 386-4973;
      •    Sharon Zackula, Associate Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8985; or
      •    Kathryn Moore, Associate General Counsel, OGC, at (202) 974-2974.

      Background and Discussion

      Currently, under FINRA Rules 6730(c)(2) and (d)(2), firms must report the size of transactions in TRACE-eligible securities,3 including certain ABS, by reporting the total par or principal value of the debt securities traded. However, in a transaction in an ABS that is backed by mortgages or other assets that amortize over the life of the security (i.e., an amortizing ABS), instead of reporting the total par or principal value, a firm reports two items from which the size is calculable: (1) the original face value of the transaction; and (2) the factor, but only if the factor used to execute the transaction is not the most current factor that is publicly available at the time of execution of the transaction (a non-conforming factor).4

      FINRA amended FINRA Rule 6730(d)(2) to modify the requirement for reporting the size of a limited number of ABS transactions and to restate the current requirements. The modified requirement is set forth in FINRA Rule 6730(d)(2)(B)(iv) and requires a firm to report the factor to TRACE for every transaction in an ABS (except TBA transactions) in the limited instances when the firm effects that ABS transaction as agent and charges a commission. The amendment is necessary to ensure the accuracy of the disseminated price of an ABS transaction,5 which, if traded on an agency basis and subject to a commission charge, is calculated using the factor, the price and other information reported by a firm that is party to the transaction.

      FINRA also restated the current requirements of FINRA Rule 6730(d)(2) as paragraphs (d)(2)(A), (d)(2)(B)(i), (d)(2)(B)(ii) and (d)(2)(B)(iii). Paragraph (d)(2)(A) restates the current requirement that a firm report the total par value or principal value of a transaction in a TRACE-eligible security, except an ABS transaction. Paragraph (d)(2)(B), which applies to ABS transactions, restates the current requirements that a firm report:

      •   in paragraph (d)(2)(B)(i), for an ABS transaction traded TBA, the original face value of the security;
      •   in paragraph (d)(2)(B)(ii), for a transaction in an amortizing ABS (other than a TBA transaction), the original face value of the security and, if a member used a factor to execute the transaction that was not the most current factor publicly available at the time of execution, also the factor (except for those ABS transactions executed in agency capacity and subject to the new requirement in FINRA Rule 6730(d)(2)(B)(iv)); and,
      •   in paragraph (d)(2)(B)(iii), for a transaction in an ABS not subject to amortization, the total par value, principal value or original face value (except for those ABS transactions executed in agency capacity and subject to the new requirement in FINRA Rule 6730(d) (2)(B)(iv)).

      1 See FINRA Rule 6710(m) for the definition of asset-backed security; FINRA Rule 6710(u) for the definition of To Be Announced; and, as discussed below, FINRA Rule 6710(w) for the definition of factor.

      2 See Securities Exchange Act Release No. 69037 (March 5, 2013), 78 FR 15790 (March 12, 2013) (SEC Order Approving File No. SR-FINRA-2012-052).

      3 See FINRA Rule 6710(a) for the definition of TRACE-eligible security.

      4 As provided in FINRA Rule 6710(w), factor means the decimal value representing the proportion of the outstanding principal value or remaining face amount of a pool of assets underlying a security to the original principal value or original face amount of such assets.

      5 Specified pool transactions are subject to dissemination beginning on July 22, 2013. See Securities Exchange Act Release No. 68084 (October 23, 2012), 77 FR 65436 (October 26, 2012) (SEC Order Approving File No. SR-FINRA-2012-042 regarding a proposal to disseminate agency pass-through mortgage-backed securities traded in specified pool transactions and SBA-backed ABS traded TBA and in specified pool transactions) and Regulatory Notice 12-56 (announcing July 22, 2013, as the effective date of SR-FINRA-2012-042). FINRA also notes that transactions in additional ABS market segments may be disseminated under FINRA Rule 6750 in the future.


      Attachment A

      New language is underlined; deletions are in brackets.

      6730. Transaction Reporting
      (a) through (c) No Change.
      (d) Procedures for Reporting Price, Capacity, Volume
      (1) No Change.
      (2) Size (Volume)
      (A) General

      For a transaction in a TRACE-Eligible Security, except an Asset-Backed Security, [R]report the total par value or principal value of the security [bonds] traded.
      (B) Asset-Backed Securities
      (i) For a transaction in an Asset-Backed Security traded To Be Announced ("TBA transaction"), report the original face value of such security.
      (ii) For a transaction, other than a TBA transaction, in an Asset-Backed Security that is subject to amortization [amortizing Asset-Backed Securities where par value is not used to determine the size (volume) of a transaction], report the original face value of such security and, if a member uses a Factor to execute the transaction that is not the most current Factor publicly available at the Time of Execution, report the Factor used, except as provided in subparagraph (iv) below regarding certain transactions executed in an agency capacity.
      (iii) For a transaction in an Asset-Backed Security[ies] that does not amortize, report the total par value, [or] principal value or original face value of such security, except as provided in subparagraph (iv) below regarding certain transactions executed in an agency capacity.[of the transaction.]
      (iv) For a transaction, other than a TBA transaction, in an Asset-Backed Security that is executed in an agency capacity and subject to a commission charge, report the original face value of such security and the Factor used to execute the transaction.
      (3) and (4) No Change.

      • • • Supplementary Material: ---------------

      .01 Scope of Factor Reporting Requirement. For transactions, other than TBA transactions, in Asset-Backed Securities executed in an agency capacity and subject to a commission charge, members must report the Factor for every such transaction, including a transaction where the Factor is 1.0.

      * * * * *

    • 13-14 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 Spring 2013 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.

    • 13-13 SEC Approves Amendments to Rule 6440 Relating to Trading and Quotation Halts in OTC Equity Securities; Effective Date: May 9, 2013

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      Trading and Quotation Halts in OTC Equity Securities

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Systems
      Trading
      Key Topics

      OTC Equity Securities
      Trading Halts
      Referenced Rules & Notices

      FINRA 5260
      FINRA 6440
      SEA Rule 15c2-11.4

      Executive Summary

      The SEC approved amendments to FINRA Rule 6440 (Trading and Quotation Halt in OTC Equity Securities) to clarify that FINRA may (1) initiate a trading and quotation halt in an OTC equity security upon notice of a foreign regulatory halt for news pending, including notice from a reliable third-party source; (2) continue to halt trading and quoting in such OTC equity security until notice from the appropriate foreign regulatory authority is received that it has or intends to resume trading in the security, even if the halt is longer than 10 business days; and (3) extend a halt initiated for an extraordinary event beyond 10 business days if it determines that the basis for the halt still exists.1 The effective date is May 9, 2013.

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

      Questions regarding this Notice may be directed to:

      •    Kosha K. Dalal, Associate Vice President and Associate General Counsel, Office of General Counsel at (202) 728-6903; or
      •    FINRA Operations at (866) 776-0800.

      Background & Discussion

      The SEC approved amendments to FINRA Rule 6440, which provides authority for FINRA to initiate trading and quotation halts in OTC equity securities in circumstances where it is necessary to protect investors and the public.2 The rule provides authority to impose foreign regulatory halts, derivative halts and extraordinary event halts.

      Foreign Regulatory Halt

      Rule 6440, as amended, provides that FINRA may direct firms to halt trading and quotation in OTC equity securities if the OTC equity security or the OTC American Depositary Receipt (ADR) is listed on or registered with a foreign securities exchange or market, and the foreign securities exchange, market, or regulatory authority overseeing the issuer, exchange or market, halts trading in the security for regulatory reasons because of public interest concerns or for news pending. However, FINRA will not impose a trading and quotation halt if the foreign regulatory halt was imposed solely for a regulatory filing deficiency or operational reasons.

      Derivative Halt

      FINRA may direct firms to halt trading and quotation in OTC equity securities if the OTC equity security or the OTC ADR is a derivative or component of a security listed on or registered with a national securities exchange or foreign securities exchange or market (listed security) and the national securities exchange, or foreign securities exchange or market imposes a trading halt in the listed security.

      Extraordinary Event Halt

      FINRA may halt trading and quotation if FINRA determines that an extraordinary event has occurred or is ongoing that has had a material effect on the market for the OTC equity security or the OTC ADR or has caused or has the potential to cause major disruption to the marketplace or significant uncertainty in the settlement and clearance process.

      Procedures for Initiating Trading and Quotation Halts

      FINRA will initiate a trading and quotation halt in the OTC market for an OTC equity security upon notice of a foreign regulatory halt or derivative halt from:

      1. the national and foreign securities exchange or market on which the OTC equity security or the security underlying the OTC equity security is listed or registered;
      2. a regulatory authority overseeing the issuer, exchange or market; or
      3. another reliable third-party source where FINRA can validate the information provided.

      FINRA will verify third-party information relating to a trading and quotation halt in a foreign market before initiating a halt in the OTC equity security. In such cases, while FINRA will act promptly to coordinate the timing of the trading and quotation halt with other securities exchanges or regulators, the need for FINRA to receive notice and verify the accuracy of the information could result in a delay in both the initiation and expiration of a trading and quotation halt in the OTC equity security.

      FINRA Rule 6440(b) as amended, clarifies that FINRA may continue the halt in trading and quoting in the OTC market for the OTC equity security as a result of a foreign regulatory halt or derivative halt until FINRA receives notice that trading has resumed in the security on the national or foreign securities exchange on which it is listed or registered, even if the halt is longer than 10 business days.

      Supplementary Material .01 to Rule 6440, as amended, clarifies that FINRA may determine to extend an extraordinary event halt that has been initiated pursuant to the rule to continue in effect for subsequent periods of up to 10 business days each, if at the time of any such extension, FINRA finds that the basis for the halt still exists and determines that the continuation of the halt beyond the prior 10 business day period is necessary in the public interest and for the protection of investors.

      Notification of Trading and Quotation Halts

      FINRA will disseminate appropriate public notices regarding initiation and expiration of trading and quotation halts under Rule 6440. Notification of all trade and quote halts and resumptions will be posted to the Trade Halt section of FINRA's website.

      Current FINRA halt reason codes (U1, U2 and U3) will continue to apply.

      FINRA reminds firms that upon issuance of a notice, quotations in any quotation medium and trading by any firm is prohibited as set forth in FINRA Rule 5260 (Prohibition on Transactions, Publication of Quotations, or Publication of Indications of Interest During Trading Halts).3 In general, the trading halt notice (noting the beginning and end dates) will remain on FINRA's website for a period of time to inform the public and the trading community of the halt, and to allow ongoing compliance with SEA Rule 15c2-11.4.


      1. See Securities Exchange Act Release No. 68874; File No. SR–FINRA–2012–010 (Self- Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Amend FINRA Rule 6440 (Trading and Quotation Halt in OTC Equity Securities) February 8, 2013; 78 FR 10655 (February 14, 2013).

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

      3. If an OTC equity security is halted for an extended period of time, FINRA may deem the security inactive and delete its trading symbol. Firms are reminded that they may have on-going obligations under FINRA Rule 5260.

    • 13-12 FINRA Adopts Amendments Relating to Regulation NMS Plan to Address Extraordinary Market Volatility; Effective Date: April 8, 2013

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      Limit Up/Limit Down

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Systems
      Trading
      Key Topics

      Clearly Erroneous Transactions
      Limit Up/Limit Down (LULD)
      Market-Wide Circuit Breakers
      NMS Securities
      Quotations
      Trade Reporting
      Trade Reporting Facilities
      Trading Centers
      Trading Pauses
      Referenced Rules & Notices

      FINRA Rule 5260
      FINRA Rule 6121
      FINRA Rule 6190
      FINRA Rule 11892
      FINRA Rule 11894
      Regulation NMS

      Executive Summary

      On April 8, 2013, Phase I of the joint industry Regulation NMS Plan to Address Extraordinary Market Volatility will be implemented. This Notice provides a brief overview of the plan and recent amendments to FINRA rules to facilitate implementation, operation and member firm compliance with the plan. FINRA has also published a set of frequently asked questions providing additional guidance.

      The amended rule text is available at www.finra.org/notices/13-12.

      Questions regarding this Notice may be directed to:

      •    Market Regulation Legal Section at (240) 386-5126;
      •    FINRA Operations at (866) 776-0800; or
      •    Office of General Counsel at (202) 728-8071.

      Background and Discussion

      Overview of the Plan

      On May 31, 2012, the SEC approved the plan,1 which was filed by FINRA and the other self-regulatory organizations (SROs or participants) and is designed to address the type of sudden price movements that the market experienced on the afternoon of May 6, 2010. The plan provides for a market-wide limit up and limit down (LULD) mechanism to prevent trades in NMS stocks from occurring outside of specified price bands, coupled with trading pauses in the event of more significant and prolonged price moves.

      The plan prohibits the display of offers at prices below the lower price band and bids above the upper price band and the execution of trades outside the price bands. The price bands are a certain percentage away from a "reference price," which is the mean price of regular way, last sale eligible trades for the security over the immediately preceding five-minute period. The chart below sets forth the applicable percentage parameters according to NMS stock category (or tier) and reference price:

      Tier Reference Price Percentage Parameter
      Tier 1–S&P 500, Russell 1000 and selected ETPs More than $3.00 5%
      $0.75 and up to and including $3.00 20%
      Less than $0.75 Lesser of $0.15 or 75%
      Tier 2–All other NMS stocks (provided that all rights and warrants are excluded from the plan) More than $3.00 10%
      $0.75 and up to and including $3.00 20%
      Less than $0.75 Lesser of $0.15 or 75%
      Leveraged ETP Percentage above multiplied by the leverage ratio of the product

      To account for increased volatility around market open and market close, the percentage parameters are doubled from 9:30 to 9:45 a.m. and from 3:35 to 4:00 p.m. (or in the case of an early scheduled close, during the last 25 minutes of trading). The securities information processor (SIP) for each covered NMS stock calculates and disseminates the applicable upper and lower price bands during regular trading hours.

      When one side of the market for a security is outside the applicable price band (i.e., when the national best bid (NBB) is below the lower band or the national best offer (NBO) is above the upper band), the SIP will disseminate the NBB or NBO with a flag identifying it as non-executable. If the other side of the market reaches the applicable price band (i.e., when the NBB is equal to the upper band or the NBO is equal to the lower band), the market will enter a limit state, and the SIP will disseminate the NBB or NBO with a flag identifying it as a limit state quotation. Trading will exit the limit state if the entire size of all limit state quotations is executed or cancelled within 15 seconds of entering the limit state. If the market does not exit the limit state within 15 seconds, then the primary listing exchange for the security will declare a five-minute trading pause. The primary listing market may also declare a trading pause when a security is in a "straddle state," which occurs when the NBB is below the lower price band or the NBO is above the upper price band and the stock is not in a limit state. The plan sets forth procedures for reopening of trading following a trading pause, including in instances where the primary listing market is unable to reopen trading or does not report a reopening price within ten minutes after the declaration of the trading pause. During a trading pause, no trades in the paused security can be executed, but all bids and offers may be displayed.

      By its terms, the plan will be implemented as a one-year pilot in two phases. The initial date of plan operations is April 8, 2013. On that date, phase I implementation will begin in select Tier 1 NMS stock symbols, with full phase I implementation completed three months after the initial date of plan operations (or such earlier date as may be announced with at least 30 days notice). During phase I, the price bands will be calculated and disseminated between 9:45 a.m. and 3:30 p.m. Phase II will commence six months after the initial date of plan operations (or such earlier date as may be announced with at least 30 days notice). Upon phase II implementation, the plan will fully apply to all NMS stocks from 9:30 a.m. to 4:00 p.m. each trading day, except in the case of an early scheduled close.

      Amendments to FINRA Rules

      FINRA has amended its rules to facilitate the implementation, operation and member firm compliance with the plan. The amendments are discussed more fully below.

      Member Firm Compliance With the Plan

      The plan requires that each SRO participant adopt a rule requiring compliance by its members with the provisions of the plan, specifically that all trading centers in NMS stocks establish, maintain and enforce written policies and procedures that are reasonably designed to comply with LULD and trading pauses. On February 11, 2013, in furtherance of its obligations under the plan, FINRA filed with the SEC a proposed rule change for immediate effectiveness to: (1) adopt new FINRA Rule 6190 and (2) amend FINRA Rules 5260 and 6121.2 The amendments are effective on April 8, 2013.

      New Rule 6190

      New Rule 6190 (Compliance with Regulation NMS Plan to Address Extraordinary Market Volatility) requires member firms that are trading centers in NMS stocks to establish, maintain and enforce written policies and procedures that are reasonably designed to comply with the requirements of the plan and specifically to prevent: (1) the execution of trades at prices that are below the lower price band or above the upper price band for an NMS stock, except as permitted under the plan; (2) the display of offers below the lower price band and bids above the upper price band for an NMS stock; and (3) the execution of trades in an NMS stock during a trading pause. Pursuant to the plan, the term "trading center" has the meaning set forth in Regulation NMS under the Exchange Act.3

      In its filing, FINRA clarified that Rule 6190 applies to firms to the extent that they are trading centers and are acting as such with respect to any given trade or quotation. For example, Firm A is an OTC market maker and also a trading center. Firm A, in its capacity as an OTC market maker, receives a customer order to sell and routes the order to an exchange or other trading center. In that instance, Firm A could rely on the exchange or other trading center to ensure compliance with the plan, and for example, if the offer were displayed in violation of the plan, FINRA would not deem Firm A to be in violation of Rule 6190.

      The rule will be in effect during a pilot period to coincide with the pilot period for the plan (including any extensions to the pilot period for the plan).

      Amended Rule 5260

      Rule 5260 (Prohibition on Transactions, Publication of Quotations, or Publication of Indications of Interest During Trading Halts) generally prohibits firms from directly or indirectly effecting any transaction or publishing any quotation during a trading halt, including a trading pause. This rule was amended to permit the display of bids and offers during a trading pause, to the extent permitted under the plan.

      Amended Rule 6121

      As discussed above, the plan requires that the primary listing exchange declare a trading pause if the market does not exit a limit state within 15 seconds and also gives the primary listing exchange the discretion to declare a trading pause when a security is in a straddle state. Pursuant to the amendments, paragraph (a) of Rule 6121.01 (Trading Pauses) reflects the plan's trading pause provisions and clarifies that if trading in an NMS stock is permitted to resume after a trading pause under the plan, then FINRA may permit the resumption of OTC trading in the security if trading has commenced on at least one other national securities exchange (i.e., when a transaction has been executed on an exchange, not merely when quoting has commenced on the exchange). Consistent with its current policy, FINRA expects that in most cases, it will not resume OTC trading until the primary listing market resumes trading.4

      In addition, pursuant to the amendments, Rule 6121.01(b) provides that the current trading pause provisions, which provide for halts in individual NMS stocks due to extraordinary market volatility, continue to apply to Tier 1 and Tier 2 NMS stocks until the plan is implemented for those securities. As noted above, phase I of the plan begins on April 8, 2013, for certain Tier 1 NMS stocks. As of that date, Rule 6121.01(b) does not apply to those Tier 1 NMS stocks, but continues to apply to all other Tier 1 and Tier 2 NMS stocks. Upon full implementation of phase I, the trading pause provisions apply only to Tier 2 NMS stocks, and they will no longer be in effect upon full implementation of phase II of the plan.

      Pursuant to a separate proposed rule change filed on January 29, 2013, the operative date of the Market-Wide Circuit Breaker (MWCB) pilot under Rule 6121.02 is delayed until April 8, 2013, to correspond to the initial date of operations for the plan.5 The MWCB provisions reflect changes to the methodology for triggering market-wide circuit breakers for NMS stocks.6

      Clearly Erroneous Transactions

      On January 30, 2013, FINRA filed with the SEC a proposed rule change for immediate effectiveness to adopt new Supplementary Material .03 under Rule 11892 (Clearly Erroneous Transactions in Exchange-Listed Securities) in connection with the operation of the plan.7 The amendments became effective on the date of filing.

      New Rule 11892.03 provides that the existing provisions of Rule 11892 apply to all OTC transactions involving an exchange-listed security reported to FINRA, including transactions in NMS stocks subject to the plan (except as otherwise provided in Rule 11892.03). Notably, transactions that occur within the LULD price bands could be deemed clearly erroneous to the extent they fall within the existing clearly erroneous thresholds.8

      FINRA recognizes that a firm may experience a technology or systems problem that results in the execution of an OTC transaction in an NMS stock outside of the LULD price bands. To address this possibility, Rule 11892.03 provides that if a member firm's technology or systems issue results in any transaction being reported to FINRA outside of the LULD price bands, a FINRA officer, acting on his or her own motion, or at the request of a member firm, shall review and deem any such trades as clearly erroneous, provided that the firm satisfies the certification requirement of the rule. Specifically, a firm requesting review of one or more transactions outside of the LULD bands must certify, in the manner and form prescribed by FINRA, that the subject transactions were the result of the firm's bona fide technological or systems issue.9 Absent extraordinary circumstances, any action by a FINRA officer shall be taken in a timely fashion, generally within thirty minutes of the detection of the erroneous transaction. When extraordinary circumstances exist, any such action of the FINRA officer must be taken by no later than the start of normal market hours on the trading day following the date on which the execution(s) under review occurred.10 A transaction that is deemed clearly erroneous pursuant to Rule 11892.03 is appealable in accordance with the provisions of Rule 11894.

      In the event that the SIP experiences a technology or systems problem that prevents the dissemination of price bands, FINRA would make the determination of whether to deem transactions clearly erroneous based on paragraphs (a) and (b) of Rule 11892 and Rule 11892.01.


      1 See Securities Exchange Act Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012) (Approval Order; File No. 4-631).

      The plan was subsequently amended to, among other things, revise the implementation schedule. See Securities Exchange Act Release No. 68953 (February 20, 2013), 78 FR 13113 (February 26, 2013) (Notice of Filing and Immediate Effectiveness; File No. 4-631). A copy of the plan, as amended, is attached as Exhibit A to the Notice of Filing and Immediate Effectiveness.

      2 See Securities Exchange Act Release No. 68985 (February 25, 2013), 78 FR 13922 (March 1, 2013) (Notice of Filing and Immediate Effectiveness; File No. SR-FINRA-2013-016).

      3 Specifically, Rule 600(b)(78) of Regulation NMS defines "trading center" as a national securities exchange or national securities association that operates an SRO trading facility, an alternative trading system, an exchange market maker, an OTC market maker, or any other broker or dealer that executes orders internally by trading as principal or crossing orders as agent.

      4 See Regulatory Notice 10-30 (June 2010).

      5 See Securities Exchange Act Release No. 68778 (January 31, 2013), 78 FR 8668 (February 6, 2013) (Notice of Filing and Immediate Effectiveness; File No. SR-FINRA-2013-011).

      6 See Securities Exchange Act Release No. 67090 (May 31, 2012), 77 FR 33531 (June 6, 2012) (Approval Order; File No. SR-FINRA-2011-054).

      7 See Securities Exchange Act Release No. 68808 (February 1, 2013), 78 FR 9083 (February 7, 2013) (Notice of Filing and Immediate Effectiveness; File No. SR-FINRA-2013-012).

      The amendments also extend the effective date of the clearly erroneous pilot under Rule 11892 until September 30, 2013. The pilot provides for uniform treatment among the SROs: (1) of clearly erroneous execution reviews in multi-stock events involving twenty or more securities; and (2) in the event transactions occur that result in the issuance of an individual stocktrading pause by the primary market and subsequent transactions that occur before the trading pause is in effect for transactions otherwise than on an exchange.

      8 For example, assume that a Tier 1 NMS stock has a reference price of $100.00 pursuant to both the plan and Rule 11892. The lower price band would be $95.00 and the upper price band would be $105.00 under the plan. An OTC execution could occur at $96.00, which is within the plan's price bands. However, an execution at $96.00 could be subject to review as potentially clearly erroneous because it exceeds the 3 percent threshold under Rule 11892(b)(1) for securities priced above $50.00. Thus, the amendments maintain the status quo with respect to reviews of clearly erroneous transactions and the application of objective numerical guidelines by FINRA, and they do not change the discretion afforded to FINRA in connection with such reviews.

      9 FINRA will provide additional information, including the required certification form, on the LULD page of the FINRA website at www.finra.org/Industiy/Compliance/MarketTransparency/TRF/LULD.

      During for cause reviews of clearly erroneous trades or examinations of member firms, FINRA will review whether there is sufficient documentation to reasonably substantiate the certifications, as well as the firm's procedures for complying with the plan.

      10 FINRA notes that additional time may be required to, for example, obtain the required certification from a member firm, verify facts or coordinate with outside parties, including the SIP responsible for disseminating the price bands and other SROs. Thus, FINRA has maintained some flexibility to make a determination outside of the 30 minute guideline.

    • 13-11 FINRA Provides a Process for Waiving CMA Fees for Less Significant CMA Changes and Refunding of NMA and CMA Fees for Applications Withdrawn Within 30 Days After Filing; Effective Date: Immediately

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      Continuing Membership Application Fee Waiver Process

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Corporate Finance
      Legal
      Operations
      Senior Management
      Key Topics

      Continuing Membership Application Fee
      Continuing Membership Application Fee Waiver
      Form CMA
      Form NMA
      New Membership Application Fee
      Referenced Rules & Notices

      NASD Rule 1011
      NASD Rule 1012
      NASD Rule 1013
      NASD Rule 1017
      Section 4(i) of Schedule A to the FINRA By-Laws
      Regulatory Notice 12-33

      Executive Summary

      Effective immediately, FINRA will waive the requisite continuing membership application (CMA) fee where FINRA determines that a CMA is proposing less significant changes that do not require substantial staff review. Examples of changes that may qualify for a CMA fee waiver are described below. Also effective immediately, FINRA will refund the application fee (less a $500 processing fee) if an applicant withdraws a new membership application (NMA) or CMA within 30 days after filing the application with FINRA.1 The text of the rule amendments effecting these changes is set forth in Attachment A.

      Questions concerning this Notice should be directed to:

      •    Allison Reid, Associate Director, Membership Application Program (MAP), at (212) 858-4418;
      •    Lisa Robinson, Associate Director, MAP, at (212) 858-4764; or
      •    Joseph Sheirer, Director and Counsel II, MAP, at (212) 858-5132.

      Background & Discussion

      I. CMA Fee Waiver

      CMA applications are subject to an application fee under Section 4(i) of Schedule A to the FINRA By-Laws. Effective immediately, amendments to Section 4(i) of Schedule A provide that FINRA will waive the CMA fee where FINRA determines that the CMA is proposing less significant changes that do not require substantial staff review. Section 4(i) of Schedule A provides examples of changes in ownership, control or business operations that may qualify a CMA for a fee waiver. Specifically, a CMA may qualify for a fee waiver pursuant to Section 4(i) of Schedule A where the proposed change:

      •  does not make any day-to-day changes in the applicant's business activities, management, supervision, assets or liabilities, and the applicant is only proposing a change in the:
      •  applicant's legal structure (e.g., changing from a corporation to an LLC);
      •  equity ownership, partnership capital or other ownership interest in an applicant held by a corporate legal structure that is due solely to a reorganization of ownership or control of the applicant within the corporate legal structure (e.g., reorganizing only to add a holding company to the corporate legal structure's ownership or control chain of the applicant); or
      •  percentage of ownership interest or partnership capital of an applicant's existing owners or partners resulting in an owner or partner owning or controlling 25 percent or more of the ownership interest or partnership and that owner or partner has no disclosure or disciplinary issues in the preceding five years; or
      •  is filed by an applicant in connection with a direct or indirect acquisition or transfer of 25 percent or more in the aggregate of the applicant's assets or any asset, business or line of operation that generates revenues composing 25 percent or more in the aggregate of the applicant's earnings measured on a rolling 36-month basis where the applicant also is ceasing operations as a broker or dealer (including filing a Form BDW with the SEC) and there are either:
      •  no pending or unpaid settled customer related claims (including, but not limited to, pending or unpaid settled arbitration or litigation actions) against the applicant or any of its associated persons; or
      •  pending or unpaid settled customer related claims (including, but not limited to, pending or unpaid settled arbitration or litigation actions) against the applicant or its associated persons, but the applicant demonstrates in the CMA its ability to satisfy in full any unpaid customer related claim (e.g., sufficient capital or escrow funds, proof of adequate insurance for customer related claims).
      The changes in ownership, control or business operations listed above are examples of changes that may qualify for a CMA fee waiver pursuant to Section 4(i) of Schedule A.2 Other proposed changes in ownership, control or business operations also may qualify for a fee waiver where FINRA determines from the individual facts and circumstances of a CMA that the application is proposing less significant changes that do not require substantial staff review. An applicant may contact Member Regulation prior to filing a CMA to discuss whether a proposed change in business operations might qualify for a fee waiver. Firms may also consult with Member Regulation regarding whether changes they contemplate are sufficiently material even to require a CMA application.

      An applicant seeking a waiver of the CMA fee should submit its request to FINRA in writing as part of the supporting documentation in Standard 1 (Overview of the Applicants) submitted with the applicant's Form CMA.3 Form CMA's Standard 1 instructs the applicant to attach enumerated types of supporting documents. A waiver request should be attached in response to the request for "[a]ny other documentation that would be pertinent to FINRA's review of this Standard."4

      II. NMA and CMA Fee Refund

      Also effective immediately, amendments to NASD Rules 1013 (New Member Application and Interview)5 and 1017 provide that if an applicant withdraws an NMA or CMA within 30 days after filing the application, FINRA shall refund the application fee, less $500, which FINRA will retain as a processing fee. If the applicant determines to again seek membership or apply for approval of a change in ownership, control or business operations, the applicant must submit a new NMA or CMA (under NASD Rule 1013 or NASD Rule 1017, as applicable) and requisite application fee pursuant to Schedule A to the FINRA By-Laws.


      1 See Securities Exchange Act Release No. 68942 (February 15, 2013), 78 FR 12405 (February 22, 2013) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2013-013).

      2 FINRA expects that the listed changes typically will not be significant and will not require substantial staff review; however, whether FINRA grants a fee waiver for these changes will depend on the individual facts and circumstances of each CMA.

      3 NASD Rule 1017 requires an applicant for continuing membership to submit a standardized online Form CMA as part of its application. See Securities Exchange Act Release No. 67082 (May 31, 2012), 77 FR 33539 (June 6, 2012) (SR-FINRA-2012-018) (Order Granting Approval of SR-FINRA-2012-018 as Modified by Amendment No. 1, to Amend NASD Rules 1012 and 1017 to Adopt Form CMA); see also Regulatory Notice 12-33 (FINRA Amends Electronic Form NMA and Adopts New Electronic Form CMA Filing Requirements).

      4 Currently, FINRA invoices a CMA applicant after the applicant files the Form CMA and FINRA reviews the application to determine whether it is substantially complete. See NASD Rule 1017(d) (requiring a CMA to be rejected and deemed not filed if FINRA determines within 30 days after the filing of the CMA that the application is not substantially complete). During that time, FINRA also will review CMAs that include a fee waiver request to determine whether the CMA qualifies for the fee waiver pursuant to Section 4(i) to Schedule A.

      5 NASD Rule 1013 requires an applicant for FINRA membership to submit a standardized online Form NMA. FINRA recently revised the standardized online 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). See Securities Exchange Act Release No. 66555 (March 9, 2012), 77 FR 15445 (March 15, 2012) (Notice of Filing and Immediate Effectiveness of SR-FINRA-2012-017 to Amend Online Form NMA, the Standardized Membership Application Form Applicants Must File Pursuant to NASD Rule 1013); see also Regulatory Notice 12-33 (FINRA Amends Electronic Form NMA and Adopts New Electronic Form CMA Filing Requirements).


      Attachment A

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

      * * * * *

      SCHEDULE A TO THE BY-LAWS OF THE CORPORATION

      * * * * *

      Section 4 — Fees

      (a) through (h) No Change.
      (i)
      (1)–(2) No Change.
      (3) FINRA shall waive the fee assessed pursuant to paragraph (i)(1) for a continuing membership application where FINRA determines that such application is proposing less significant changes that do not require substantial staff review. For example, a continuing membership application may qualify for a fee waiver under this paragraph (i)(3) where the proposed change:
      (A) does not make any day-to-day changes in the applicant's business activities, management, supervision, assets, or liabilities, and the applicant is only proposing a change in the:
      (i) applicant's legal structure (e.g., changing from a corporation to an LLC);
      (ii) equity ownership, partnership capital, or other ownership interest in an applicant held by a corporate legal structure that is due solely to a reorganization of ownership or control of the applicant within the corporate legal structure (e.g., reorganizing only to add a holding company to the corporate legal structure's ownership or control chain of the applicant); or
      (iii) percentage of ownership interest or partnership capital of an applicant's existing owners or partners resulting in an owner or partner owning or controlling 25 percent or more of the ownership interest or partnership and that owner or partner has no disclosure or disciplinary issues in the preceding five years; or
      (B) is filed in connection with a direct or indirect acquisition or transfer of 25 percent or more in the aggregate of the applicant's assets or any asset, business, or line of operation that generates revenues composing 25 percent or more in the aggregate of the applicant's earnings, measured on a rolling 36-month basis, where the applicant also is ceasing operations as a broker or dealer (including filing a Form BDW with the SEC); and there are either:
      (i) no pending or unpaid settled customer related claims (including, but not limited to, pending or unpaid settled arbitration or litigation actions) against the applicant or any of its associated persons; or
      (ii) pending or unpaid settled customer related claims (including, but not limited to, pending or unpaid settled arbitration or litigation actions) against the applicant or its associated persons, but the applicant demonstrates in the continuing membership application its ability to satisfy in full any unpaid customer related claim (e.g., sufficient capital or escrow funds, proof of adequate insurance for customer related claims).

      * * * * *

      1000. MEMBERSHIP, REGISTRATION AND QUALIFICATION REQUIREMENTS

      * * * * *

      1010. Membership Proceedings

      * * * * *

      1013. New Member Application and Interview

      (a) Filing of Application
      (1) through (4) No Change.
      (5) Withdrawal of Application

      If an Applicant withdraws an application within 30 days after filing the application, FINRA shall refund the application fee, less $500, which shall be retained by FINRA as a processing fee. If the Applicant determines to again seek membership, the Applicant shall submit a new application under this Rule and fee pursuant to Schedule A to the FINRA By-Laws.
      (b) No Change.

      * * * * *

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

      (a) through (e) No Change.
      (f) Withdrawal of Application

      If an Applicant withdraws an application within 30 days after filing the application, FINRA shall refund the application fee, less $500, which shall be retained by FINRA as a processing fee. If the Applicant determines to again 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.

      (f) through (k) renumbered as (g) through (l).

      * * * * *

    • 13-10 SEC Approves Supplemental Schedule for Derivatives and Other Off-Balance Sheet Items*

      *Implementation Date: The initial supplemental schedule disclosing off-balance sheet information as of June 30, 2013, must be filed with FINRA on or before July 31, 2013.

      View PDF

      Supplemental FOCUS Information

      Regulatory Notice
      Notice Type

      New Supplemental Schedule
      Suggested Routing

      Compliance
      Finance
      Legal
      Operations
      Regulatory Reporting
      Senior Management
      Key Topics

      FOCUS Reporting
      Referenced Rules & Notices

      FINRA Rule 4524

      Executive Summary

      FINRA Rule 4524 (Supplemental FOCUS Information) requires each firm, as FINRA shall designate, to file additional financial or operational schedules or reports. The SEC has approved the adoption of a supplemental schedule for derivatives and other off-balance sheet items (OBS) that applies to carrying or clearing firms.1 The initial OBS disclosing a carrying or clearing firm's off-balance sheet information as of June 30, 2013, must be filed with FINRA on or before July 31, 2013.

      The OBS can be found at www.finra.org/notices/13-10.

      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.

      Added on June 6, 2013: The OBS has been updated to reflect a technical change requiring reporting in thousands. Use the updated version and its corresponding instructions when submitting the OBS through the eFOCUS platform.

      Background & Discussion

      FINRA Rule 4524 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. The SEC has approved the OBS for carrying or clearing firms. The OBS will enable FINRA to examine 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 OBS will allow FINRA to obtain more comprehensive and consistent information regarding carrying and clearing firms' off-balance sheet assets, liabilities and other commitments. The OBS requires 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 settlement transactions (including to be announced or TBA securities and delayed delivery/settlement transactions), underwriting and other financing commitments, and gross notional amounts in centrally cleared and non-centrally cleared derivative transactions. The OBS also includes instructions that provide definitions and guidance with respect to the information required to be reported.

      The OBS contains a de minimis exception for each reporting period. If the aggregate of all gross amounts of off-balance sheet items is less than 10 percent of the firm's excess net capital on the last day of the reporting period, the firm will not be required to file the OBS for the reporting period. A firm that claims the de minimis exception must affirmatively indicate through the eFOCUS system that no filing is required for the reporting period.

      Unless a carrying or clearing firm meets the de minimis exception as described above, it is required to file the OBS disclosing off-balance sheet information as of the last day of a reporting period within 22 business days of the end of each calendar quarter using the eFOCUS system available through FINRA's Firm Gateway. Firms must use their current FINRA entitlement user ID and password to access the Firm Gateway. Questions regarding access to the Firm Gateway should be directed to the firm's Super Account Administrator (SAA).2

      The initial OBS disclosing off-balance sheet information as of June 30, 2013, must be filed with FINRA on or before July 31, 2013.


      1. See Securities Exchange Act Release No. 68832 (February 5, 2013), 78 FR 9754 (February 11, 2013) (Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1; File No. SR-FINRA-2012-050).

      2. For more information about system entitlement and SAA, please visit FINRA's Entitlement Program page.

    • 13-09 SEC Approves Amendments to Establish Two Optional TRACE Data Delivery Services and Related Fees; Effective Date: June 10, 2013

      View PDF

      Trace Reporting and Compliance Engine (TRACE)

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Fixed Income
      Legal
      Operations
      Systems
      Trading
      Key Topics

      Automated Data Delivery System (ADDS)
      TRACE Data
      Referenced Rules & Notices

      FINRA Rule 7730

      Executive Summary

      The SEC approved amendments to FINRA Rule 7730 to establish two optional TRACE data delivery services and fees in connection with such services.1 The effective date is June 10, 2013.

      The amended rule text is set forth on Attachment A.

      Questions regarding this Notice may be directed to:

      •    Marie Griffin, Product Manager, Transparency Services, (202) 728-8207; or
      •    Noah Egorin, Director, Firm Compliance Tools, (202) 728-8068.

      Background and Discussion

      The FINRA Automated Data Delivery System (FINRA ADDS) is a secure website that provides a FINRA member firm, by market participant identifier (MPID), access to the MPID's TRACE trade journal files for a specified date (transaction reports).

      FINRA ADDS provides a report — a file containing all transaction reports to which the MPID was a party on a specified date — to an MPID in response to the MPID's request.2 The MPID may also request "reject" files (i.e., transaction reports submitted by the MPID that were not accepted by the system due to missing or inaccurate information). The transaction report date of the file requested must be within 30 calendar days of the date of the request. The FINRA ADDS service is free, and there are no limits on the number of requests for reports that a firm may make or the number of firm personnel associated with a specified MPID that may submit such requests.

      In response to requests from firms for increased flexibility to access more of a firm's TRACE transaction history, FINRA has established two additional, optional data delivery services, TRACE Data Delivery Plus and TRACE Data Delivery Secure File Transfer Protocol (SFTP), and fees in connection with such services.

      TRACE Data Delivery Plus

      TRACE Data Delivery Plus allows an MPID subscriber to:

      •  download reports on demand for transaction reports and reject files3 to which the MPID was a party that were reported or rejected more than 30 calendar days prior to the date of the MPID's request4 (i.e., transaction data not available through the free FINRA ADDS service) and within the prior two calendar years;5 and
      •  obtain automated daily delivery of the subscriber's TRACE transaction reports and reject files to the FINRA ADDS website (eliminating the need for the user to submit file requests).6

      Once a firm subscribes to the optional service, FINRA will assign the subscriber to one of four tiers based on the TRACE transactions reported in the previous year to which the MPID was a party. A subscriber will be charged a variable monthly fee based on: (1) the average number of transactions per month to which the MPID subscriber was a party that was reported to TRACE in the prior calendar year;7 and (2) the number of FINRA ADDS reports received in a given month for transaction reports and reject files that were reported or rejected more than 30 calendar days prior to the date of the MPID's request (i.e., transaction data not available through the free FINRA ADDS service) (Plus reports). The monthly fees for Plus reports are set forth in the table below:

      Tier Based on Average Number of Transactions per Month MPID Subscriber Was a Party to in Prior Calendar Year 0 — 5 Plus Reports Received per Month 6 — 25 Plus Reports Received per Month > 25 Plus Reports Received per Month
      Tier 1: 10,000 + $60 $80 $100
      Tier 2: 3,000 — 9,999 $40 $55 $70
      Tier 3: 500 — 2,999 $20 $30 $40
      Tier 4: < 500 $10 $15 $20

      TRACE Data Delivery SFTP

      The TRACE Data Delivery SFTP service provides an MPID subscriber with an automated interface to retrieve (without sending a request) its prior day's TRACE transaction reports and reject files daily from FINRA ADDS. The fee for the optional service is $200 per month, plus a one-time $250 set-up fee.


      1 See Securities Exchange Act Release No. 68675 (January 16, 2013), 78 FR4917 (January 23, 2013) (SEC Approval Order of File No. SR-FINRA-2012-053).

      2 The TRACE transaction reports in FINRA ADDS are available for two data archives — asset-backed securities transactions and separately for corporate bonds and agency debt securities (corporate/agency debt securities) transactions. FINRA ADDS generates a separate report for each data archive (asset-backed securities or corporate/agency debt securities) requested as well as a separate report for each date requested.

      3 For example, if on February 1, 2013, a subscriber requested its transaction activity in asset-backed securities and corporate/agency debt securities reported on December 3, 2012, and December 4, 2012, the subscriber will receive four reports — one for the asset-backed securities transactions reported on December 3, 2012, a second report for asset-backed securities transactions reported on December 4, 2012, and two additional reports for the corporate/agency debt securities transactions reported for the respective dates.

      4 As with the free FINRA ADDS service, firms interested in TRACE Data Delivery Plus must subscribe per MPID. To access transaction information for multiple MPIDs, a firm must obtain a subscription for each MPID.

      5 Transactions in corporate and agency debt securities became available on FINRA ADDS as a result of the migration of the reporting of these securities and related data functions from egacy TRACE technology to the Multi-Product Platform (MPP), which occurred on February 6, 2012. See Regulatory Notice 11-53 (November 2011). Accordingly, the FINRA ADDS transaction reports for corporate and agency debt securities transactions are available only for transactions that are reported on or after February 6, 2012, and will be maintained on FINRA ADDS for two rolling calendar years. Firms began reporting transactions in asset-backed securities to TRACE on May 16, 2011. See Regulatory Notice 11-20 (May 2011). As with corporate and agency debt securities transaction reports, asset-backed securities transaction reports will be maintained on FINRA ADDS for two rolling calendar years (i.e., on June 10, 2013, a firm may request data from June 9, 2013, back to June 10, 2011).

      6 The automated daily delivery of the subscriber's TRACE trade journal files to the website does not constitute a request for a report for purposes of calculating the monthly fee.

      7 Once assigned to a tier, a subscriber remains in the tier for the remainder of the calendar year. For example, an MPID that subscribes in September 2012 will be assigned to a tier based upon the TRACE transactions reported in 2011 to which the MPID was a party, and will remain in that tier until December 31, 2012. In 2013, the MPID will be re-evaluated and assigned to a tier for 2013 fee purposes, based upon the MPID's trading in TRACE-eligible securities in 2012.


      Attachment A

      New text is underlined; deletions are in brackets.

      7730. Trade Reporting and Compliance Engine (TRACE)

      The following charges shall be paid by participants for the use of the Trade Reporting and Compliance Engine ("TRACE"):

      System Fees Transaction Reporting Fees Data Fees
      Level I Trade Report Only Web Browser Access — $20/month per user ID

      Level II Full Service Web Browser Access — Subscription for a single user ID or the first user ID — $50/month (includes one Data Set); $80/month (includes two Data Sets)

      Subscription for additional user IDs — $80/month per user ID (includes one Data Set); $140/month per user ID (includes two Data Sets)
      Trades up to and including $200,000 par value — $0.475/trade. (For Asset-Backed Securities where par value is not used to determine the size (volume) of a transaction, for purposes of trade reporting fees, size (volume) is the lesser of original face value or Remaining Principal Balance (or the equivalent) at the Time of Execution of the transaction.)

      Trades over $200,000 and up to and including $999,999.99 par value — $0.000002375 times the par value of the transaction (i.e., $0.002375/$1000). (See note above regarding certain Asset-Backed Securities.)

      Trades of $1,000,000 par value or more — $2.375/trade. (See note above regarding certain Asset-Backed Securities.)

      All transactions in Asset-Backed Securities that are Agency Pass-Through Mortgage-Backed Securities traded to be announced ("TBA") ("TBA transactions") — $1.50/trade.
      Market Data: Professional Real-Time Data Display — $60/month per display application per Data Set of Real-Time TRACE transaction data, except as may be subject to a waiver set forth below, or a flat fee of $7,500/month per Data Set of Real-Time TRACE transaction data, entitling Professionals to make unlimited internal use of such Data Set(s) through any number of display applications.
      CTCI/FIX/Third Party — $25/month/ per firm Cancel/Correct — $1.50/trade Market Data: Vendor Real-Time Data Feed — $1,500/month per Data Set of Real-Time TRACE transaction data for receipt of continuous Real-Time TRACE transaction data in such Data Sets, except for qualifying Tax-Exempt Organizations, or $250/month per Data Set of Snapshot Real-Time TRACE transaction data for daily receipt of such Data Set(s).
        "As/of" Trade Late — $3/trade Market Data: Vendor Real-Time Data Feed — $400/month per Data Set of Real-Time TRACE transaction data for such Data Set(s) for qualifying Tax-Exempt Organizations.
          Market Data: Non-Professional Real-Time Data Display — No charge.
          Historic TRACE Data: Set-Up Fee — a single fee of $2,000 for development and set-up to receive Historic TRACE Data, except for qualifying Tax-Exempt Organizations.
          Historic TRACE Data: Set-Up Fee — a single fee of $1,000 for development and set-up to receive Historic TRACE Data for qualifying Tax-Exempt Organizations.
          Historic TRACE Data: Fee — $2,000/ calendar year per Data Set for receipt of Historic TRACE Data, except for qualifying Tax-Exempt Organizations. The data is enabled for internal use and internal and/or external display application. Bulk re-distribution of data is not permitted.
          Historic TRACE Data: Bulk Re-Distribution Fee — except for qualifying Tax-Exempt Organizations, $1/CUSIP per calendar year (or part thereof) within a single Data Set of Historic TRACE Data per each recipient of re-distributed data; maximum fee per Data Set of $1,000/ calendar year (or part thereof) per each recipient of re-distributed data.
          Historic TRACE Data: Bulk Re-Distribution Fee — for qualifying Tax-Exempt Organizations, $500/calendar year per Data Set for receipt of Historic TRACE Data. The data is enabled for internal use and internal and/or external display application. Bulk re-distribution of data is permitted with certain restrictions.
          FINRA ADDS: TRACE Data Delivery Plus

      A variable monthly fee charged per MPID subscriber, based upon the average number of transactions per month to which the MPID subscriber was a party in the prior calendar year, and the number of Plus reports received by the MPID subscriber per month

      (see paragraph (g))
          FINRA ADDS: TRACE Data Delivery SFTP

      $250 per MPID — one time set-up fee; and

      $200 per MPID per month
      (a) through (f) No Change.
      (g) FINRA ADDS Fees

      The FINRA Automated Data Delivery System ("FINRA ADDS") provides a member access to TRACE trade journal files. The following fees are for two optional FINRA ADDS services: TRACE Data Delivery Plus and TRACE Data Delivery Secure File Transfer Protocol.
      (1) TRACE Data Delivery Plus Fee

      The TRACE Data Delivery Plus fee is charged per month to a market participant identifier ("MPID") that is a subscriber, for TRACE Data Delivery Plus reports ("Plus reports") provided to the MPID in response to requests by the MPID. (Plus reports do not include a report in response to a request for a TRACE trade journal file for a specified date, if the specified date is within 30 calendar days of the date of the request, which are provided to an MPID at no charge.) The fee is based on the average number of transactions per month to which the MPID was a party in the prior calendar year, which number is used to assign the MPID to one of the four tiers, and the number of Plus reports the subscriber receives in a month as follows:

      Tier Based on Average Number of Transactions per Month MPID Subscriber Was a Party to in Prior Calendar Year 0 — 5 Plus Reports Received per Month 6 — 25 Plus Reports Received per Month > 25 Plus Reports Received per Month
      Tier 1: 10,000 + $60 $80 $100
      Tier 2: 3,000 — 9,999 $40 $55 $70
      Tier 3: 500 — 2,999 $20 $30 $40
      Tier 4: < 500 $10 $15 $20
      (2) TRACE Data Delivery Secure File Transfer Protocol Fee

      The TRACE Data Delivery Secure File Transfer Protocol ("TRACE Data Delivery SFTP") fees are charged to a market participant identifier ("MPID") that is a subscriber and are:
      (A) Set-Up Fee — a one-time fee of $250 per MPID that subscribes to the service.
      (B) Monthly Fee — a monthly fee of $200 per MPID that subscribes to the service.

      1 No Change.

      2 No Change.

    • 13-08 FINRA Amends Rule 4530 to Eliminate Duplicative Reporting and Provide the Option to File Required Documents Online Using a New Form; Implementation Dates: March 4, 2013, and July 1, 2013

      View PDF

      Reporting Requirements

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Systems
      Key Topics

      Disclosure Events
      Filing Requirements
      FINRA Findings and Actions
      Form U4
      Online Filing
      Reporting Requirements
      Referenced Rules & Notices

      FINRA Rule 4530
      Regulatory Notice 11-10

      Executive Summary

      FINRA has amended Rule 4530 to provide member firms:

      •    an exception for reporting information that is reported on the Form U4;
      •    an exception for reporting findings and actions by FINRA; and
      •    the option of filing required documents online using a new form.1

      The implementation date for the exception for reporting information that is reported on the Form U4 (Rule 4530(e)) and the exception for reporting findings and actions by FINRA (Rule 4530.10) is March 4, 2013. The implementation date for the option of filing required documents online using the new form (Rule 4530(g)) is July 1, 2013.

      The text of the amendment is set forth in Attachment A. The data fields in the new form, including explanations of selected fields, are set forth in Attachment B.

      Questions concerning this Notice should be directed to Afshin Atabaki, Associate General Counsel, Office of General Counsel, at (202) 728-8902.

      Technical questions regarding the Form U4 exception should be directed to FINRA's Gateway Call Center at (301) 590-6500. Technical questions regarding the online filing option and the new form should be directed to the FINRA Help Desk at (800) 321-6273.

      Background & Discussion

      FINRA Rule 4530 (Reporting Requirements) requires member firms to report to FINRA specified events, such as findings by a regulatory body, and quarterly statistical and summary information regarding written customer complaints.2 The rule also requires firms to file with FINRA copies of specified criminal actions, civil complaints and arbitration claims.

      Exception for Information Reported on the Form U4

      Currently, under Rule 4530(e), a firm is not required to report a specified event if it reports that event on the Form U5 (Uniform Termination Notice for Securities Industry Registration), consistent with the requirements of that form.3 This provision is intended to eliminate duplicative reporting of information that is reported on the Form U5. FINRA has amended Rule 4530(e) to provide a similar exception for specified events reported on the Form U4 (Uniform Application for Securities Industry Registration or Transfer). The process for satisfying the Form U4 exception, however, will be slightly different, in part because of differences in the reporting criteria between Form U4 and Rule 4530 events.4

      To satisfy the Form U4 exception, a member firm will be required to affirmatively indicate that the data reported on a Form U4 Disclosure Reporting Page (DRP) through the Central Registration Depository (CRD®) also be applied to satisfy its corresponding FINRA Rule 4530 reporting obligation. Specifically, FINRA will enable filers to designate through functionality (i.e., checkboxes) in the CRD system that the data reported on the following specified Form U4 DRPs also be applied to satisfy the corresponding requirement under Rule 4530(a)(1): (1) Criminal; (2) Regulatory Action; (3) Civil Judicial; and (4) Customer Complaint/Arbitration/Civil Litigation.5

      Firms can elect to use this new functionality or can continue to report an event via the Rule 4530 application in the FINRA Firm Gateway. Finally, similar to the Form U5 exception, the Form U4 exception will not apply to the reporting of quarterly statistical and summary customer complaint information pursuant to Rule 4530(d).

      Exception for FINRA Findings and Actions

      Rule 4530(a)(1)(A) requires a member firm to report external findings regarding the firm or an associated person. Rules 4530(a)(1)(C) and (D) require a member firm to report regulatory actions against the firm or an associated person. Rules 4530(a)(1)(A), (C) and (D) do not expressly exclude findings and actions by FINRA. However, because FINRA staff has access to such information through its own systems, FINRA has added Supplementary Material .10 to Rule 4530 to provide that, for purposes of Rules 4530(a)(1)(A), (C) and (D) only, member firms are not required to report findings and actions by FINRA. This exception is generally consistent with the exception under Rule 4530(f) for arbitration claims filed in the FINRA Dispute Resolution forum.

      Availability of Online Filings and New Form

      Rule 4530(f) requires firms to promptly file with FINRA copies of specified criminal actions, civil complaints and arbitration claims.6 Firms currently have the option of filing the required documents either electronically (as a scanned email attachment or scanned and saved on a disk) or in paper form, but they do not have the option of filing these documents with FINRA online. FINRA has adopted Rule 4530(g) to give firms the option of filing the documents required under Rule 4530(f) online via FINRA's Firm Gateway. To facilitate online filings, FINRA has created a new form, which will be available through the Firm Gateway on July 1, 2013.7 Member firms that choose to file their documents online will be required to complete the mandatory fields on the new online form, such as the name and telephone number of the contact person and the name of the complainant or plaintiff, and attach to the form a scanned copy of the documents required under Rule 4530(f), in a format such as portable document format (PDF).

      Firms will continue to have the option of filing the documents required under Rule 4530(f) via mail or email. In addition, the requirement to provide limited summary information regarding the documents applies only to firms that choose to file the documents with FINRA online using the new form; the requirement does not apply to firms that use other permissible electronic means (e.g., email) to file the documents with FINRA.

      Implementation Dates

      The Rule 4530(e) amendment (with respect to the Form U4 exception) and new Rule 4530.10 (with respect to the exception for FINRA findings and actions) will be implemented on March 4, 2013. New Rule 4530(g) (with respect to the online filing option using the new form) will be implemented on July 1, 2013.


      1 See Securities Exchange Act Release No. 68701 (January 18, 2013), 78 FR 5532 (January 25, 2013) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to FINRA Rule 4530 (Reporting Requirements); File No. SR-FINRA-2013-006).

      2 The specified events and customer complaint information must be electronically reported to FINRA via an application on FINRA's Firm Gateway. See Regulatory Notice 11-10 (March 2011).

      3 This exception does not apply to the reporting of quarterly statistical and summary customer complaint information under the rule.

      4 For example, a registered person's Form U4 must be amended to report pending arbitration claims initiated by a customer where the registered person is the subject of such a claim, the customer alleges sales practice violations, and the customer claims damages in the amount of $5,000 or more. A member firm must report such a matter promptly (in general, not later than 30 days after the firm is served with the customer claim) and before the claim has a final disposition. In contrast, FINRA Rule 4530(a)(1)(G) requires the reporting of such matters only when there has been a final disposition that results in an award or a settlement for an amount exceeding $15,000.

      5 Rules 4530(a)(1)(A) through (H), which address the reporting of regulatory, criminal and civil actions generally correspond with information that is reported on the Form U4. There is no corresponding provision on the Form U4 for matters reportable under Rule 4530(a)(2) (disciplinary actions taken by a member firm against an associated person) or Rule 4530(b) (a member firm's internal conclusions of violations).

      6 Rule 4530 provides an exception for any arbitration claim that is originally filed in the FINRA Dispute Resolution forum and for those documents that have already been requested by FINRA's Registration and Disclosure (RAD) staff, provided that the firm produces those requested documents to RAD staff within 30 days after receipt of such request.

      7 For data fields and explanations of selected fields in the new form, see Attachment B.


      Attachment A

      New language is underlined; deletions are in brackets

      4530. Reporting Requirements

      (a) through (d) No Change.
      (e) Nothing contained in this Rule shall eliminate, reduce or otherwise abrogate the responsibilities of a member or person associated with a member to promptly disclose required information on the Forms BD, U4 or U5, as applicable, to make any other required filings or to respond to FINRA with respect to any customer complaint, examination or inquiry. In addition, members are required to comply with the reporting obligations under paragraphs (a), (b) and (d) of this Rule, regardless of whether the information is reported or disclosed pursuant to any other rule or requirement, including the requirements of the Form[s] BD [or U4]. However, a member need not report: (1) an event otherwise required to be reported under paragraph (a)(1) of this Rule if the member discloses the event on the Form U4, consistent with the requirements of that form, and indicates, in such manner and format that FINRA may require, that such disclosure satisfies the requirements of paragraph (a)(1) of this Rule, as applicable; or (2) an event otherwise required to be reported under paragraphs (a) or (b) of this Rule if the member discloses the event on the Form U5, consistent with the requirements of that form.
      (f) No Change.
      (g) Members may file electronically, in such manner and format as specified by FINRA, the documents required by paragraph (f); provided, however, that the filings shall be accompanied by summary information regarding the documents in such detail as specified by FINRA.
      [(g)] (h) Members shall not be required to comply separately with paragraph (f) in the event that any of the documents required by paragraph (f) have been the subject of a request by FINRA's Registration and Disclosure staff, provided that the member produces those requested documents to the Registration and Disclosure staff not later than 30 days after receipt of such request. This paragraph does not supersede any FINRA rule or policy that requires production of documents specified in paragraph (f) sooner than 30 days after receipt of a request by the Registration and Disclosure staff.

      • • • Supplementary Material:---------------

      .01 through .09 No Change.
      .10 Findings and Actions by FINRA. For purposes of paragraphs (a)(1)(A), (C) and (D) of this Rule only, members are not required to report findings and actions by FINRA.

      Attachment B

      Data Fields and Explanations of Selected Fields in Rule 4530(g) Online Form [PDF Format]

    • 13-07 FINRA Requests Comment on Proposed FINRA Rules Governing Markups, Commissions and Fees; Comment Period Expires: April 1, 2013

      View PDF

      Markups, Commissions and Fees

      Regulatory Notice
      Notice Type

      Request for Comment
      Consolidated FINRA Rulebook
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Key Topics

      5% Policy
      Commissions
      Government Securities
      Markups and Markdowns
      Rulebook Consolidation
      Service Charges and Fees
      Referenced Rules & Notices

      FINRA Rule 0150
      FINRA Rule 2010
      FINRA Rule 2111
      NASD IM-2310-3
      NASD IM-2440-1
      NASD IM-2440-2
      NASD Rule 2430
      NASD Rule 2440
      NYSE Rule 375 and Interpretation 375/01
      Regulatory Notice 11-08
      SEA Section 3
      SEA Section 19

      Executive Summary

      As part of the process to develop a new, consolidated rulebook (the Consolidated FINRA Rulebook),1 FINRA is requesting comment on proposed FINRA rules governing markups, markdowns, commissions and fees. FINRA initially sought comment on the proposed rules in Regulatory Notice 11-08. In response to the comments received, FINRA is proposing several changes to the proposed rules. These changes include, among other things, amendments to: (1) retain the 5% markup policy in NASD IM-2440-1 (Mark-Up Policy); (2) revise certain of the relevant factors used to determine the reasonableness of markups and commissions; (3) eliminate the requirement to provide commission schedules for equity securities transactions to retail customers; and (4) extend the proposed markup rules to transactions in certain government securities. This Notice requests comment on the revised proposal.

      The text of the proposed rules can be found at www.finra.org/notices/13-07.

      Questions concerning this Notice should be directed to:

      •   Sharon Zackula, Associate Vice President & Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8985; and
      •   Erika Lazar, Assistant General Counsel, OGC, at (202) 728-8013.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by April 1, 2013.

      Comments must be submitted through one of 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 comments more efficiently, persons should use only one method to comment on the proposal.

      Important Notes: All comments received in response to this Notice will be made available to the public on the FINRA website. In general, 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

      In Regulatory Notice 11-08, FINRA sought comment on an initial proposal regarding proposed FINRA Rules 2121 (Fair Prices and Markups, Markdowns and Commissions) and 2122 (Markups and Markdowns for Transactions in Debt Securities, Except Municipal Securities) governing markups, markdowns and commissions (the proposed markup rules), and proposed FINRA Rule 2123 (Charges and Fees for Services Performed) governing fees. The proposed FINRA rules are derived from NASD Rule 2440 (Fair Prices and Commissions), NASD IM-2440-1 (Mark-Up Policy), NASD IM-2440-2 (Additional Mark-Up Policy for Transactions in Debt Securities, Except Municipal Securities), NASD Rule 2430 (Charges for Services Performed), and Incorporated NYSE Rule 375 (Missing the Market).4 FINRA received 25 comment letters in response to Regulatory Notice 11-08.5 FINRA now seeks comments on a revised proposal.

      Differences Between the Initial and Revised Proposals

      The significant differences between the initial proposal and the revised proposal are set forth below; however, interested parties should carefully read the proposed rule text for a complete and detailed understanding of the revised proposal.

      •  The revised proposal amends proposed FINRA Rule 2121 to:
      •  retain the 5% policy and related concepts from NASD IM-2440-1. In the initial proposal, FINRA proposed to delete the 5% policy and all related statements;
      •  establish a rebuttable presumption that a markup, markdown or commission in excess of 5 percent is unfair and unreasonable;
      •  modify the "relevant factors" that member firms should take into consideration in determining the fairness of a markup, markdown or commission to provide additional guidance and, in some instances, expand the scope of the factor; and
      •  delete previously proposed FINRA Rule 2121(e), a requirement that member firms provide commission schedule(s) for equity securities transactions to retail customers.
      •  The revised proposal amends proposed FINRA Rule 2122 to update the criteria applicable to eligible qualified institutional buyers (QIB) purchasing or selling non-investment grade debt securities, whose transactions are excluded under the markup rules. The amendments would incorporate the standards regarding institutional suitability in FINRA Rule 2111(Suitability), rather than NASD IM-2310-3, which has been superseded.6
      •  The revised proposal amends proposed FINRA Rule 2123 to provide additional examples of charges and fees that are subject to the rule and include natural persons advised by an investment adviser and other natural persons as "retail customers" for the purposes of the rule.
      •  Finally, the revised proposal includes an amendment to FINRA Rule 0150 (Application of Rules to Exempted Securities Except Municipal Securities) that extends the proposed markup rules to transactions in government securities as defined in Exchange Act Section 3(a)(42) (excluding U.S. Treasury securities as defined in FINRA Rule 6710(p)).

      Revised Proposal

      A. Fair Prices and Markups, Markdowns and Commissions (Proposed FINRA Rule 2121)

      Consistent with the initial proposal, FINRA proposes to consolidate and transfer NASD Rule 2440, NASD IM-2440-1 and NYSE Rule 375 to the Consolidated FINRA Rulebook as new FINRA Rule 2121. FINRA is proposing minor substantive changes to NASD Rule 2440 and NYSE Rule 375, and significant changes to NASD IM-2440-1.7 As set forth in the initial proposal, FINRA proposes not to incorporate NYSE Rule Interpretation 375/01, which addresses the execution of an order when a member firm has missed the market, into the proposed markup rules.8 The revised proposal includes additional substantive amendments to proposed FINRA Rule 2121, which are described in detail below.9
      1. Fair and Reasonable Markups, Markdowns and Commissions (Proposed FINRA Rule 2121(a))

      In general, NASD Rule 2440 requires that securities be sold to or purchased from customers at fair prices and, if a member firm acts as agent, be subject to fair commissions or commission-equivalent charges. Fairness is judged by the facts and circumstances of the particular transaction. NASD Rule 2440 also lists certain circumstances and factors that are relevant in determining a markup, markdown or commission.

      Consistent with the initial proposal, FINRA proposes to transfer NASD Rule 2440 as proposed FINRA Rule 2121(a), subject to minor changes, to the Consolidated FINRA Rulebook. Proposed FINRA Rule 2121(a) requires, in any securities transaction, if a member firm acts as principal and buys for the member's account from its customer, or sells from the member's account to its customer, that the member firm must buy or sell at a price which is fair and reasonable, taking into consideration all relevant facts and circumstances, including market conditions with respect to such security at the time of the transaction, the expense involved, and the fact that the member firm is entitled to remuneration. If a member firm acts as agent for the member's customer in any securities transaction, the member firm must not charge its customer more than a fair and reasonable commission, commission-equivalent fee, or service charge, taking into consideration all relevant facts and circumstances, including market conditions with respect to such security at the time of the transaction, the expense of executing the order, and the value of any service the member firm may have rendered by reason of its experience in and knowledge of such security and the market for the security.
      2. Retaining the "5% Policy" and Related Concepts
      (Proposed FINRA Rule 2121(b)(1))


      NASD IM-2440-1 addresses the 5% policy. The preamble to NASD IM-2440-1 states that the question of fair markups (or spreads) is one for which there is no definitive answer or single interpretation because a markup that may be considered fair in one transaction could be unfair in another transaction, based on the different circumstances of the two transactions. The preamble also refers to a 1943 survey of the FINRA (then NASD) membership, in which 71 percent of respondents indicated that transactions were executed with markups of 5 percent or less.10 The Board of Governors then determined that in most transactions, markups of 5 percent or less would fall within the "fair and reasonable" standard and adopted the 5% policy as guidance. In addition, NASD IM-2440-1(a) provides several general considerations, including statements that the 5% policy is a guide and not a rule and that a markup pattern of 5 percent or even less may be considered unfair or unreasonable under the 5% policy.

      In the initial proposal, FINRA proposed to delete the 5% policy and to provide "Markup Threshold Guidance" in a separate Regulatory Notice, which would set forth quantitative guidance regarding markup, markdown and commission thresholds that, if exceeded, would be subject to additional regulatory scrutiny. A majority of the comments received on the initial proposal opposed the elimination of the 5% policy.11 These commenters stated that the 5% policy generally has been effective in regulating broker-dealers for over 70 years and eliminating it would reduce investor protection, harm investors, and be interpreted by unscrupulous industry members as an invitation to charge excessive or abusive markups and commissions. These commenters urged FINRA to retain the 5% policy (or a similar quantitative standard) in the proposed markup rules because it helps firms in establishing effective supervisory and compliance procedures and setting upper benchmarks applicable to almost all transactions (e.g., the 5% policy aids compliance personnel in surveillance efforts using automated tools, such as exception reports). The commenters also noted that it protects investors from excessive markups and commissions and assists them in challenging excessive markup and commission charges in arbitration and other proceedings. Several commenters suggested that the 5% policy should be revised to include an alternative quantitative standard if the current policy is outdated.

      In light of the concerns raised by the comments on the initial proposal, FINRA proposes to retain the 5% policy as FINRA Rule 2121(b)(1).12 Proposed FINRA Rule 2121(b)(1) incorporates the general considerations from NASD IM-2440-1(a) that the 5% policy is a guide, not a rule and that a markup pattern of 5 percent or less may be considered unfair or unreasonable under the 5% policy. In addition, proposed FINRA Rule 2121(b)(1) provides that when a member firm charges a markup, markdown or commission in excess of 5 percent, a presumption exists that it is unfair and unreasonable. A member firm may overcome the presumption by demonstrating that the markup, markdown or commission is fair and reasonable based on the relevant factors set forth in proposed FINRA Rule 2121(c), which is based on NASD IM-2440-1(b). All relevant factors may be considered to determine if a member firm has rebutted the presumption; provided, however, the presumption may not be rebutted based solely on the member firm's disclosure to a customer of the firm's markup, markdown or commission (made in compliance with the revised disclosure requirements in proposed FINRA Rule 2121(c)(5)).

      Notwithstanding the revised proposal to retain the 5% policy, FINRA recognizes that 5 percent is significantly higher than the average markup, markdown or commission currently charged by most member firms in customer transactions. Since 1943, advances in information and communication technologies, and member firms' front and back office technologies, have significantly reduced execution costs. As a result, markups, markdowns and commissions also have decreased in many investment products. In addition, customers generally have multiple execution options, and competition among market professionals has driven down the amount of markup, markdown or commission a member firm will charge. Accordingly, although proposed FINRA Rule 2121 would retain the 5% policy, member firms should not view the provision as establishing a specific ceiling or cap below which most markups, markdowns or commissions will not be viewed as excessive (or will not be questioned).
      3. Other General Considerations
      (Proposed FINRA Rules 2121(b)(2) through (b)(5))

      Consistent with the initial proposal, the revised proposal transfers to FINRA Rule 2121(b) (General Considerations) the general considerations in NASD IM-2440-1(a)(2) and (a)(5) with minor changes. The revised proposal transfers NASD IM-2440-1(a)(3) and (c)(2) with clarifying changes that were not included in the initial proposal.13
      •  Proposed FINRA Rule 2121(b)(2), based on NASD IM-2440-1(a)(2), provides that a member firm may consider its expenses, but shall not justify markups, markdowns or commissions on the basis of expenses that are excessive.
      •  Proposed FINRA Rule 2121(b)(3), based on NASD IM-2440-1(a)(3), provides that the difference between the customer's price (including the markup or markdown) and the prevailing market price is the amount (or percentage) to be considered when determining if a member firm has dealt fairly with its customer in a principal transaction. Unless other bona fide, more credible evidence of the prevailing market price can be evidenced, for a markup, a member firm's own contemporaneous cost is the best indication of the prevailing market price of a security, and for a markdown, a member firm's own contemporaneous proceeds are the best indication of the prevailing market price of a security.
      •  Proposed FINRA Rule 2121(b)(4), based on NASD IM-2440-1(c)(2), provides that except in riskless principal trades or nearly contemporaneous trades in which a security is held in a member's inventory very briefly, if a member firm sells a security to a customer from inventory, the amount of the markup would be determined on the basis of the markup over the bona fide representative current market price, and the profit or loss to the member firm from market appreciation or depreciation before, or after, the date of the transaction with the customer would not ordinarily enter into the determination of the amount or fairness of the markup.
      •  Proposed FINRA Rule 2121(b)(5), based on NASD IM-2440-1(a)(5), provides that a determination of the fairness of a markup, markdown or commission must be based on a consideration of all the relevant factors, of which the percentage of markup, markdown or commission is only one.
      4. Relevant Factors (Proposed FINRA Rule 2121(c))

      In the initial proposal, FINRA proposed to transfer as FINRA Rule 2121(c) (Relevant Factors) the non-exclusive list of seven relevant factors in NASD IM-2440-1(b) that a member firm should take into consideration in determining if a markup, markdown or commission is fair and reasonable. FINRA now proposes minor changes to three of the factors to provide additional guidance and, in some cases, to expand the scope of the factor:
      •  In the initial proposal, FINRA Rule 2121(c)(2) (The Availability of the Security in the Market), based on NASD IM-2440-1(b)(2), stated that, in the case of an inactive security, the effort and cost of buying or selling the security, or any other unusual circumstances connected with its acquisition or sale, may be a factor in determining the amount (or percentage) of the markup, markdown or commission. The revised proposal expands this provision to provide that the effort and cost of buying or selling a security may be a factor in determining the amount (or percentage) of a markup, markdown or commission if a security is difficult to locate or source, is inactive or infrequently traded, is subject to market liquidity restraints relative to the size of the transaction sought to be executed, or if there are unusual circumstances connected with a security's acquisition or sale, e.g., the security is acquired through a foreign intermediary.
      •  In the initial proposal, FINRA Rule 2121(c)(4) (The Amount of Money Involved in a Transaction), based on NASD IM-2440-1(b)(4), stated that a transaction that involves a small amount of money may warrant a higher percentage of markup, markdown or commission to cover expenses of handling. The revised proposal adds language to provide that a transaction that involves a large amount of money may warrant a lower percentage of markup, markdown or commission where the expenses of handling the transaction do not rise by virtue of the size of the transaction.
      •  In the initial proposal, FINRA Rule 2121(c)(5) (Disclosure), based on NASD IM-2440-1(b) (5), stated that where a member discloses the amount of the commission charged in an agency transaction, or the markup or markdown made in a principal transaction, to a customer before the transaction is effected, such disclosure may be considered in determining if a member deals fairly with a customer. The revised proposal clarifies that for disclosure to be considered in determining if a member deals fairly with a customer, a member firm must disclose the total dollar amount and percentage of the commission charged in an agency transaction, or the total dollar amount and percentage of markup or markdown made in a principal transaction to a customer before the transaction is effected. Consistent with the initial proposal, disclosure itself does not justify a markup, markdown or commission that is unfair or unreasonable in light of all other relevant facts and circumstances surrounding the transaction.
      Consistent with the initial proposal, FINRA proposes to transfer to FINRA Rule 2121(c) the following four factors with minor, stylistic changes:
      •  NASD IM-2440-1(b)(1) would transfer as proposed FINRA Rule 2121(c)(1) (The Type of Security Involved);
      •  NASD IM-2440-1(b)(3) would transfer as proposed FINRA Rule 2121(c)(3) (The Price of the Security);
      •  NASD IM-2440-1(b)(6) would transfer as proposed FINRA Rule 2121(c)(6) (The Pattern of Markups); and
      •  NASD IM-2440-1(b)(7) would transfer as proposed FINRA 2121(c)(7) (The Nature of the Member's Business).
      5. Transactions to Which the Rule is Not Applicable (Proposed FINRA Rule 2121(d))

      Consistent with the initial proposal, FINRA Rule 2121(d) provides that FINRA Rule 2121 is not applicable to: (1) the sale of securities where a prospectus or offering circular must be delivered and the securities are sold at the specific public offering price, based on NASD IM-2440-1(d); and (2) a transaction in a non-investment grade debt security with a QIB that meets the conditions set forth in proposed FINRA Rule 2122(b)(9), which is described below.
      6. Deletion of the "Proceeds Provision"

      When a customer sells one security and buys a second security at the same time, using the proceeds of the securities position liquidated to pay for the second position, the "proceeds provision" in NASD IM-2440-1(c)(5) requires that both trades be treated as a single transaction for markup, markdown and commission purposes, with the result that the total remuneration for both transactions generally cannot exceed the remuneration amount for a single transaction. Consistent with the initial proposal, FINRA proposes not to incorporate the proceeds provision in NASD IM-2440-1(c)(5) in the proposed markup rules.

      FINRA received eight comment letters opposing the elimination of the proceeds provision and two comment letters in favor of eliminating it.14 The commenters that opposed deleting the proceeds provision stated that the provision prevents member firms from "double dipping," serves as a deterrent to churning and, if deleted, would encourage unscrupulous broker-dealers to engage in serial transactions to generate maximum commission income. Some of the commenters suggested that FINRA clarify the proceeds provision, or provide guidance, instead of deleting it.

      FINRA has carefully considered the comments and continues to believe that the proceeds provision should not be incorporated in the proposed markup rules because it includes a standard that is not susceptible to consistent and fair application.15 In FINRA's view, the more practical approach is to determine transaction remuneration on a fair basis for each transaction and to address the commenters' concerns by continuing to monitor accounts for possible churning and other fraudulent trading, or trading that is in violation of just and equitable principles of trade.
      7. Deletion of Initial Proposal Regarding Commission Schedules (Proposed FINRA Rule 2121(e))

      FINRA Rule 2121(e) in the initial proposal added a new requirement to the markup rules regarding transaction-based remuneration. In general, the proposed provision required member firms to establish and make available to retail customers the schedule(s) of standard commission charges for transactions in equity securities with retail customers. Commenters on the initial proposal objected to the new requirement stating, among other things, that the requirement would be duplicative of information currently provided to customers, commissions vary widely by account type, posting commission schedules would set a floor instead of fostering competition, and posting commission schedules would be counter-productive in this era of negotiated commissions.16 In light of the commenters' concerns, FINRA proposes to delete the proposed requirement.
      8. Notice of "Missing the Market" and Consent to Commission Charge (Proposed FINRA Rule 2121(e))

      In the initial proposal, FINRA proposed to incorporate NYSE Rule 375 as proposed FINRA Rule 2121(f) (Notice of "Missing the Market" and Consent to Commission Charge) with minor changes in the Consolidated FINRA Rulebook. In the revised proposal, the provision is renumbered as proposed FINRA Rule 2121(e) and, consistent with the initial proposal, provides that a member firm that accepts an order for execution as agent and, by reason of neglect to execute the order or otherwise, trades with the customer as principal, shall not charge the customer a commission, without the knowledge and consent of the customer.17
      B. Markups and Markdowns for Transactions in Debt Securities, Except Municipal Securities (Proposed FINRA Rule 2122)

      NASD IM-2440-2 addresses: (1) additional standards applicable to the determination of a markup or a markdown in a transaction with a customer in a debt security; (2) the procedures to identify prevailing market price; (3) the role of the dealer's contemporaneous cost in determining prevailing market price; and (4) characteristics of "similar securities" and the role of similar securities in determining a markup or a markdown. In the initial proposal, FINRA proposed to transfer NASD IM-2440-2 to the Consolidated FINRA Rulebook as proposed FINRA Rule 2122 without significant changes.18 FINRA now proposes to incorporate the following additional amendments.

      In proposed FINRA Rule 2122(b)(5) and proposed FINRA Rule 2122(b)(6), based on NASD IM-2440-2(b)(5) and (b)(6), FINRA proposes to clarify several statements in the existing provisions that apply when a dealer looks to alternative measures to determine the prevailing market price of a security that the dealer purchases from, or sells to, a customer.

      In the initial proposal, FINRA Rule 2122(b)(9), based on NASD IM-2440-2(b)(9), provided that member firms engaged in customer transactions that meet the following conditions are not subject to the requirements governing markups and markdowns for such transactions: (1) the transaction is effected with a QIB;19 (2) the transaction involves a non-investment grade debt security;20 and (3) the dealer has determined, after considering the factors set forth in NASD IM-2310-3 (Suitability Obligations to Institutional Customers), 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. The revised proposal updates the third criterion in proposed FINRA Rule 2122(b)(9) to delete references to NASD IM-2310-3, which was rescinded on July 9, 2012, align the criterion with the standards regarding institutional suitability in FINRA Rule 2111(Suitability), which took effect on July 9, 2012,21 and expand the standards to apply to an authorized agent of a QIB.

      Specifically, under the revised proposal, the third criterion requires that a dealer have a reasonable basis to believe that a QIB purchasing or selling a non-investment grade debt security is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies involving a security or securities, and the QIB affirmatively must indicate that it is exercising independent judgment in deciding to enter into the transaction. In addition, if a QIB has delegated decision-making authority to an agent, such as an investment adviser or a bond trust department, the factors would be applied to the agent.
      C. Charges and Fees for Services Performed (Proposed FINRA Rule 2123)

      NASD Rule 2430 requires that charges and fees for services must be reasonable and not unfairly discriminate among customers, and it applies to all charges and fees for services provided by a member firm that are not related to the execution of a transaction.

      In the initial proposal, and as described in more detail in Regulatory Notice 11-08, FINRA proposed to adopt NASD Rule 2430 as FINRA Rule 2123 (Charges and Fees for Services Performed) in the Consolidated FINRA Rulebook with a significant change to require member firms to establish and make available to retail customers their schedule(s) of standard charges and fees for services. The initial proposal defined a retail customer as a customer that does not qualify as an "institutional account" as defined in Rule 4512(c).22 The revised proposal makes two changes to proposed FINRA Rule 2123.

      The revised proposal provides in proposed FINRA Rule 2123(a) additional examples of charges and fees for miscellaneous services performed that are subject to the proposed rule, including charges and fees for setting up a new account, research, customer portfolio analysis, tax advice and calculation of required minimum distribution. In addition, the revised proposal modifies the definition of a "retail customer" in proposed FINRA Rule 2123(b), which requires that disclosures regarding charges and fees be made to retail customers. Under the modified definition, a retail customer would mean a customer that does not qualify as an "institutional account" as defined in Rule 4512(c), except any natural person or any natural person advised by a registered investment adviser.
      D. Application of the Proposed Markup Rules to Transactions in Government Securities (FINRA Rule 0150)

      FINRA Rule 0150(c) enumerates the FINRA and NASD rules that apply to transactions in, and business activities relating to, exempted securities, except municipal securities, conducted by member firms. The rule does not include the current markup rules23 and, in general, cases alleging excessive markups, markdowns or commissions in transactions in exempted securities, other than municipal securities, are brought under FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).24

      In the revised proposal, FINRA proposes to amend FINRA Rule 0150 (Application of Rules to Exempted Securities Except Municipal Securities) to extend the proposed markup rules to transactions in government securities (as defined in Exchange Act Section 3(a) (42)), except U.S. Treasury securities (as defined in FINRA Rule 6710(p)).25 Extension of the proposed markup rules to transactions in government securities is consistent with action contemplated since the SEC's 1996 Approval Order, approving the application of certain FINRA (then NASD) rules to transactions in exempted securities, other than municipal securities.26 In addition, FINRA collects extensive information about government securities (i.e., agency debentures and agency asset-backed securities), other than U.S. Treasury securities, in TRACE trade reports, and actively surveils the markets in such securities.

      Market Makers

      FINRA notes that proposed FINRA Rules 2121 and 2122 (like the current markup rules) do not address a market maker's allowance, subject to the limitations in regulation, to capture the trading spread between the bid and the ask prices and nothing in proposed FINRA Rules 2121 and 2122 affects that body of law and regulation.


      1 The current FINRA rulebook consists of: (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the Transitional Rulebook). While the NASD Rules generally apply to all FINRA member firms, 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 member firms, 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 Consolidation Process). For convenience, the Incorporated NYSE Rules are referred to as the NYSE Rules.

      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 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 imited 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 NASD Rule 2440, NASD IM-2440-1, and NASD IM-2440-2 govern markups, markdowns and commissions in transactions with customers. Fees or charges that are not transaction-related (e.g., charges for safekeeping or collecting dividends or interest for a customer) are governed by NASD Rule 2430 (Charges for Services Performed). NYSE Rule 375 (Missing the Market) addresses instances where, by reason of neglect to execute the order or otherwise, a member firm takes or supplies for its own account the securities named in the order. The rules are summarized in Regulator Notice 11-08.

      5 The comments received in response to Regulatory Notice 11-08 are available on FINRA's website at www.finra.org/notices/11-08.

      6 FINRA Rule 2111 took effect on July 9, 2012, and superseded NASD Rule 2310 (Recommendations to Customers (Suitability)), NASD IM-2310-1 (Possible Application of SEC Rules 15g-1 through 15g-9), NASD IM-2310-2 (Fair Dealing with Customers), and NASD IM-2310-3 (Suitability Obligations to Institutional Customers).

      7 NASD Rule 2440, NASD IM-2440-1 and NYSE Rule 375 would be deleted with the adoption of proposed FINRA Rule 2121.

      8 As discussed in more detail in Regulatory Notice 11-08, FINRA would delete NYSE Rule Interpretation 375/01, which provides that a member firm that has "missed the market" should contact the customer, inform the customer of the circumstances and permit the customer to choose one of two ways that the member firm then will use to fill the order.

      9 This Notice does not address certain amendments discussed in Regulatory Notice 11-08 that are not changing under the revised proposal. For example, consistent with the initial proposal, FINRA proposes several conforming changes to FINRA Rule 2121 to add the term "reasonable" when referring to markups, markdowns and commissions that must be "fair" to incorporate the more widely used phrase "fair and reasonable."

      10 The results are based on the 82 percent of the membership that responded to the survey.

      11 See, e.g., Law Office of Scott T. Beall (Beall), Law Office of Steve A. Buchwalter, P.C. (Buchwalter), Churchill Financial, LLC (Churchill), Compliance-by-Proxy (CBP), Cornell Securities Law Clinic (Cornell), Barry D. Estell (Estell), William Gladden (Gladden), Ledbetter & Associates P.A. (Ledbetter), North American Securities Administrators Association (NASAA), Public Investors Arbitration Bar Association (PIABA), Jeffrey R. Sonn, Esq. (Sonn), St. John's School of Law Clinic (St. John's), and Wells Fargo Advisors (WFA). Six commenters favored retiring the 5% policy. See letters from Securities Industry and Financial Markets Association (SIFMA), Financial Services Institute (FSI), Cambridge Investment Research (Cambridge), JW Korth, Moloney Securities, Inc. (Moloney), and National Planning Holdings, Inc. (NPH). However, three of the commenters, SIFMA, FSI and Cambridge, stated that the 5% policy should not be withdrawn unless FINRA provided to the membership, before or at the same time, the "Markup Threshold Guidance" or similar guidance.

      12 In light of the proposal to retain the 5% policy, FINRA does not intend at this time to provide "Markup Threshold Guidance" in a separate Regulatory Notice.

      13 FINRA Rule 2121(b)(1) through (b)(4) as initially proposed would be renumbered, respectively, as proposed FINRA Rule 2121(b)(2) through (b)(5).

      14 See letters from Beall, Buchwalter, Cornell, Estell, Gladden, Ledbetter, NASAA, and PIABA opposing the deletion of the proceeds provision. See letters from SIFMA and Roberts & Ryan Investments, Inc. (R&R) in favor of deleting the provision.

      15 For example, it is not always clear when two transactions occurring close in time are related (the two transactions may represent unrelated investment decisions) or how close in time transactions must be to be considered "proceeds" transactions. In addition, the proceeds provision may not be applied when a customer decides to sell a position at one member firm and purchase a position at another member firm.

      16 See, e.g., letters from Cambridge, CBP, Churchill, FSI, Moloney, NPH, Regal Bay Investment Groups, R& R, SIFMA, and WFA opposing the requirement to provide equity commission schedules to retail customers; letter from Juanita D. Hanley noting certain limitations of the proposed requirement; and letters from Cornell, St John's, NASAA, and Sonn supporting the proposed requirement.

      17 Proposed FINRA Rule 2121(e) would be a new requirement for former NASD-only members. As discussed in the initial proposal, FINRA proposes to transfer these requirements because there are no similar requirements in the NASD markup rules regarding whether, and under what circumstances, a member firm may charge a commission if a member "misses the market."

      18 NASD IM-2440-2 would be deleted with the adoption of FINRA Rule 2122.

      19 See 17 CFR § 230.144A(a)(1).

      20 For the purpose of the rule, the proposal would adopt the definition of "non-investment grade debt security" in NASD IM-2440-2(b)(9) with no change.

      21 See supra note 6.

      22 NASD Rule 2430 would be deleted with the adoption of FINRA Rule 2123. See Regulator Notice 11-08. See also Notice to Members 92-11 (Fees and Charges for Services).

      23 This is largely for historical reasons. The Government Securities Act Amendments of 1993 (GSAA) eliminated the statutory limitations on NASD's authority to apply sales practice rules to transactions in exempted securities, except municipal securities. NASD undertook to review the specific application of certain of its rules, including the NASD markup rules then in effect (Rules 2440 and IM-2440-1), to the government securities market. See Notice to Members 96-66 (October 1996). NASD IM-2440-2 (the debt markup interpretation)-approved in 2007- had not been adopted at the time FINRA Rule 0150 (then NASD Rule 0116) went into effect. See Securities Exchange Act Release No. 44631 (July 31, 2001), 66 FR 41283 (August 7, 2001) (Order Approving File No. SR-NASD-2000-038 (NASD Rule 0116)); see also Securities Exchange Act Release No. 55638 (April 16, 2007), 72 FR 20150 (April 23, 2007) (Order Approving File No. SR-NASD-2003-141 (NASD IM-2440-2)).

      24 In Notice to Members 96-66, FINRA noted that actions for conduct generally encompassed by the NASD markup rules, among others, in the government securities market may be brought under FINRA Rule 2010. See also Securities Exchange Act Release No. 37588 (August 20, 1996), 61 FR 44100 (August 27, 1996) (Order Approving File No. SR-NASD-95-39) (1996 Approval Order).

      25 "U.S. Treasury security" is defined in FINRA Rule 6710(p) to mean a security issued by the U.S. Department of the Treasury to fund the operations of the federal government or to retire such outstanding securities.

      26 See supra note 24, the 1996 Approval Order at 61 FR 44104.

    • 13-06 SEC Approves Amendments to Rule 8210

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      SEC Approves Amendments to Rule 8210

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topics

      Information and Testimony
      Inspection and Copying of Books and Records
      Referenced Rules & Notices

      FINRA Rule 8210
      NTM 99-77

      Executive Summary

      The SEC approved amendments to FINRA Rule 82101 to:

      •   clarify the scope of FINRA's authority under Rule 8210 to inspect and copy the books, records and accounts of member firms, associated persons and persons subject to FINRA's jurisdiction;
      •   specify the method of service for certain unregistered persons under the rule; and
      •   authorize service of requests under the rule on attorneys who are representing firms, associated persons or persons subject to FINRA's jurisdiction.

      The text of the amended rule, including Supplementary Material, is set forth in Attachment A. The amendments are effective on February 25, 2013.

      Questions concerning this Notice should be directed to:

      •   Alan Lawhead, Vice President and Director, Appellate Group, at (202) 728-8853; or
      •   Matthew E. Vitek, Assistant General Counsel, Office of General Counsel, at (202) 728-8156.

    • 13-05 FINRA Requests Comment on a Proposed Supplemental Schedule for Inventory Positions

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      Supplemental FOCUS Information

      Regulatory Notice
      Notice Type

      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

      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. FINRA requests comment on one such proposed schedule, a supplemental schedule for inventory positions.

      The text of the proposed supplemental schedule can be found at www.finra. org/notices/13-05.

      Questions concerning this Notice should be directed to:

      •    Kris Dailey, Vice President, Risk Oversight & Operational Regulation, at (646) 315-8434; or
      •    Matthew E. Vitek, Assistant General Counsel, Office of General Counsel, at (202) 728-8156.

    • 13-04 SEC Approves Amendments to Arbitration Codes Relating to Subpoenas and Orders to Direct the Appearance of Witnesses and Production of Documents Without Subpoenas; Effective Date: February 18, 2013

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      Subpoenas and Orders to Appear or Produce Documents

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Key Topics

      Arbitration
      Code of Arbitration Procedure
      Discovery
      Orders to Appear or Produce Documents
      Subpoenas
      Referenced Rules & Notices

      Rule 12512
      Rule 12513
      Rule 13512
      Rule 13513

      Executive Summary

      The Customer and Industry Codes of Arbitration Procedure (Codes) provide arbitrators with the authority to issue subpoenas for the appearance of witnesses and the production of documents. The Codes also authorize arbitrators to order FINRA member firms and their employees and associated persons to produce documents and/or to appear as witnesses without using the subpoena process. The SEC approved amendments to the Codes which direct arbitrators, in most instances, to issue orders (arbitrator orders), instead of issuing subpoenas, when industry parties seek the appearance of witnesses or the production of documents from non-party firms or their employees or associated persons.

      The amendments add procedures for non-parties to object to subpoenas and for parties and non-parties to object to arbitrator orders of production. They also standardize procedures under the Codes relating to service of motions for subpoenas and arbitrator orders; service of issued subpoenas and arbitrator orders; and time frames for responding to subpoenas and arbitrator orders, making them operationally consistent.1

      The amendments are effective on February 18, 2013, for all motions filed on or after the effective date that request a subpoena under Rule 12512 or 13512, or an arbitrator order under Rule 12513 or 13513.

      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, Operations, 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

      Subpoenas

      The Codes give arbitrators the authority to issue subpoenas to parties and non-parties. Subpoena Rules 12512 and 13512 set forth procedures for a party to make a motion for a subpoena. The subpoena rules also detail how a party may object to a subpoena and reply to an objection. Finally, the subpoena rules describe how parties must share documents produced under a subpoena.

      The subpoena rules do not address who bears the production costs under a subpoena. In practice, arbitrators resolve disputes between parties, and between parties and non-parties, relating to costs associated with subpoenas. The subpoena rules do not provide a procedure for non-parties to object to subpoenas served upon them. As a matter of practice, FINRA permits non-parties to file objections to subpoenas. The objections may include a request for the arbitrators to determine who pays the costs of production.

      Arbitrator Orders

      The Codes authorize arbitrators to order firms, their employees or their associated persons to produce documents and/or to appear as witnesses without using the subpoena process. Unlike the subpoena rules, Rules 12513 and 13513 (order rules) expressly address the costs relating to production by non-party firms and their employees/associated persons. The order rules provide that, unless the panel directs otherwise, the party requesting the appearance of witnesses or the production of documents from non-parties pays the reasonable costs of the appearance and/or production.

      Amendments to the Subpoena Rules

      FINRA believes that a party firm's responsibility to reimburse a non-party firm (or its employees or associated persons) for production costs should be the same regardless of whether the party firm requests a subpoena or an arbitrator order. FINRA also believes that firms and associated persons are better served by requesting an arbitrator order. Arbitrator orders offer an efficient mechanism for obtaining the appearance of witnesses and production of documents from firms and their employees. While the Codes provide an enforcement mechanism for subpoenas and arbitrator orders,2 typically, once an arbitrator issues a subpoena, non-compliance is handled away from the arbitration forum through the courts. However, non-compliance relating to an arbitrator order is handled by the arbitrators who are familiar with the case. Another advantage to using an arbitrator order is that arbitrator orders are not subject to the geographical limitations contained in subpoena statutes. Arbitrator orders are cost effective because forum users avoid the costs and risks associated with court proceedings.

      Since the Codes provide a mechanism through the order rules for seeking production of documents and witnesses without resorting to the subpoena process, FINRA amended the subpoena rules to provide that unless circumstances dictate the need for a subpoena, arbitrators may not issue subpoenas to non-party firms and/or employees or associated persons of non-party firms at the request of party firms and/or employees or associated persons of party firms. The amendments state that if the arbitrators determine that the request for the appearance of witnesses or the production of documents should be granted, then the arbitrators should order the appearance of such persons or the production of documents from such persons or non-party firms under the order rules. An arbitrator might order a subpoena if, for example, a firm failed to produce documents pursuant to an arbitrator order, or if a former associated person of a firm has left the industry and the arbitrator believes that an order would not be effective.

      The amendments add new Rules 12512(g) and 13512(g) to address costs when a party firm and/or employee or associated person requests a subpoena directed to a non-party firm and/or employee or associated person. Under the new rules, if an arbitrator issues a subpoena, the party firm requesting the subpoena shall pay the reasonable costs of the non-party's appearance and/or production, unless the panel directs otherwise.

      Finally, the amendments add new Rules 12512(e) and 13512(e) to provide a mechanism for non-parties to object to a subpoena they receive. Under the new provisions, if a non-party receiving a subpoena objects to the scope or propriety of the subpoena, the non-party may, within 10 calendar days of service of the subpoena, file written objections with the director of Arbitration. The party that requested the subpoena may respond to the objections within 10 calendar days of receipt of the objections. These new provisions codify FINRA's current practice concerning non-party objections to subpoenas.

      Amendments to the Order Rules

      As described above, the order rules authorize arbitrators to order firms, their employees, or their associated persons to produce documents and/or to appear as witnesses without using the subpoena process. The rules also provide that unless the panel directs otherwise, the party requesting the appearance of witnesses or the production of documents from non-parties pays the reasonable costs of the appearance and/or production.

      FINRA amended the order rules to incorporate the procedures outlined in the subpoena rules for making, objecting to and serving motions. In addition, FINRA amended the order rules to provide for non-party objections to an arbitrator's order.

      Effective Date

      The amendments are effective on February 18, 2013, for all motions filed on or after the effective date that request a subpoena under Rule 12512 or 13512, or an arbitrator order under Rule 12513 or 13513.


      1 See Securities Exchange Act Rel. No. 68404 (December 11, 2012), 77 Federal Register 74712 (December 17, 2012) (File No. SR-FINRA-2012-041).

      2 IM-12000 states that it may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Rule 2010 for a member or a person associated with a member to fail to appear or to produce any document in his possession or control as directed pursuant to provisions of the Code (see Customer Code of Arbitration Procedure Part I — Interpretative Material, Definitions, Organization and Authority).


      ATTACHMENT A

      New language is underlined; deletions are in brackets

      Customer Code

      12512. Subpoenas

      (a) To the fullest extent possible, parties should produce documents and make witnesses available to each other without the use of subpoenas.
      (1) Arbitrators shall have the authority to issue subpoenas for the production of documents or the appearance of witnesses.
      (2) Unless circumstances dictate the need for a subpoena, arbitrators shall not issue subpoenas to non-party FINRA members and/or employees or associated persons of non-party FINRA members at the request of FINRA members and/or employees or associated persons of FINRA members. If the arbitrators determine that the request for the appearance of witnesses or the production of documents should be granted, the arbitrators should order the appearance of such persons or the production of documents from such persons or non-party FINRA members under Rule 12513.
      (b) A party may make a written motion requesting that an arbitrator issue a subpoena to a party or a non-party. The motion must include a draft subpoena and must be filed with the Director, with an additional copy for the arbitrator. The requesting party must serve the motion and draft subpoena on each other party, at the same time and in the same manner as on the Director. The requesting party may not serve the motion or draft subpoena on a non-party.
      (c) If a party receiving a motion and draft subpoena objects to the scope or propriety of the subpoena, that party shall, within 10 calendar days of service of the motion, file written objections with the Director, with an additional copy for the arbitrator, and shall serve copies on all other parties at the same time and in the same manner as on the Director. The party that requested the subpoena may respond to the objections within 10 calendar days of receipt of the objections. After considering all objections, the arbitrator responsible for deciding discovery-related motions shall rule promptly on the issuance and scope of the subpoena.
      (d) If the arbitrator issues a subpoena, the party that requested the subpoena must serve the subpoena at the same time and in the same manner on all parties and, if applicable, on any non-party receiving the subpoena.
      (e) If a non-party receiving a subpoena objects to the scope or propriety of the subpoena, the non-party may, within 10 calendar days of service of the subpoena, file written objections with the Director. The Director shall forward a copy of the written objections to the arbitrator and all other parties. The party that requested the subpoena may respond to the objections within 10 calendar days of receipt of the objections. After considering all objections, the arbitrator responsible for issuing the subpoena shall rule promptly on the objections.
      [(e)] (f) Any party that receives documents in response to a subpoena served on a non-party shall provide notice to all other parties within five days of receipt of the documents. Thereafter, any party may request copies of such documents and, if such a request is made, the documents must be provided within 10 calendar days following receipt of the request.
      (g) If the arbitrators issue a subpoena to a non-party FINRA member and/or any employee or associated person of a non-party FINRA member at the request of a FINRA member and/or employee or associated person of a FINRA member, the party requesting the subpoena shall pay the reasonable costs of the non-party's appearance and/or production, unless the panel directs otherwise.

      12513. Authority of Panel to Direct Appearances of Associated Person Witnesses and Production of Documents Without Subpoenas

      (a) Upon motion of a party, the panel may order the following without the use of subpoenas:
      •   The appearance of any employee or associated person of a member of FINRA; or
      •   The production of any documents in the possession or control of such persons or members.
      (b) The motion must include a draft order and must be filed with the Director, with an additional copy for the arbitrator. The requesting party must serve the motion and draft order on each other party, at the same time and in the same manner as on the Director. The requesting party may not serve the motion or draft order on a non-party.
      (c) If a party receiving a motion and draft order objects to the scope or propriety of the order, that party shall, within 10 calendar days of service of the motion, file written objections with the Director, with an additional copy for the arbitrator, and shall serve copies on all other parties at the same time and in the same manner as on the Director. The party that requested the order may respond to the objections within 10 calendar days of receipt of the objections. After considering all objections, the arbitrator responsible for deciding discovery-related motions shall rule promptly on the issuance and scope of the order.
      (d) If the arbitrator issues an order, the party that requested the order must serve the order at the same time and in the same manner on all parties and, if applicable, on any non-party receiving the order.
      (e) If a non-party receiving an order objects to the scope or propriety of the order, the non-party may, within 10 calendar days of service of the order, file written objections with the Director. The Director shall forward a copy of the written objections to the arbitrator and all other parties. The party that requested the order may respond to the objections within 10 calendar days of receipt of the objections. After considering all objections, the arbitrator responsible for issuing the order shall rule promptly on the objections.
      (f) Any party that receives documents in response to an order served on a non-party shall provide notice to all other parties within five days of receipt of the documents. Thereafter, any party may request copies of such documents and, if such a request is made, the documents must be provided within 10 calendar days following receipt of the request.
      [(b)] (g) Unless the panel directs otherwise, the party requesting the appearance of witnesses by, or the production of documents from, non-parties under this rule shall pay the reasonable costs of the appearance and/or production.

      Industry Code

      13512. Subpoenas

      (a) To the fullest extent possible, parties should produce documents and make witnesses available to each other without the use of subpoenas.
      (1) Arbitrators shall have the authority to issue subpoenas for the production of documents or the appearance of witnesses.
      (2) Unless circumstances dictate the need for a subpoena, arbitrators shall not issue subpoenas to non-party FINRA members and/or employees or associated persons of non-party FINRA members at the request of FINRA members and/or employees or associated persons of FINRA members. If the arbitrators determine that the request for the appearance of witnesses or the production of documents should be granted, the arbitrators should order the appearance of such persons or the production of documents from such persons or non-party FINRA members under Rule 13513.
      (b) A party may make a written motion requesting that an arbitrator issue a subpoena to a party or a non-party. The motion must include a draft subpoena and must be filed with the Director, with an additional copy for the arbitrator. The requesting party must serve the motion and draft subpoena on each other party, at the same time and in the same manner as on the Director. The requesting party may not serve the motion or draft subpoena on a non-party.
      (c) If a party receiving a motion and draft subpoena objects to the scope or propriety of the subpoena, that party shall, within 10 calendar days of service of the motion, file written objections with the Director, with an additional copy for the arbitrator, and shall serve copies on all other parties at the same time and in the same manner as on the Director. The party that requested the subpoena may respond to the objections within 10 calendar days of receipt of the objections. After considering all objections, the arbitrator responsible for deciding discovery-related motions shall rule promptly on the issuance and scope of the subpoena.
      (d) If the arbitrator issues a subpoena, the party that requested the subpoena must serve the subpoena at the same time and in the same manner on all parties and, if applicable, on any non-party receiving the subpoena.
      (e) If a non-party receiving a subpoena objects to the scope or propriety of the subpoena, the non-party may, within 10 calendar days of service of the subpoena, file written objections with the Director. The Director shall forward a copy of the written objections to the arbitrator and all other parties. The party that requested the subpoena may respond to the objections within 10 calendar days of receipt of the objections. After considering all objections, the arbitrator responsible for issuing the subpoena shall rule promptly on the objections.
      [(e)] (f) Any party that receives documents in response to a subpoena served on a non-party shall provide notice to all other parties within five days of receipt of the documents. Thereafter, any party may request copies of such documents and, if such a request is made, the documents must be provided within 10 calendar days following receipt of the request.
      (g) If the arbitrators issue a subpoena to a non-party FINRA member and/or any employee or associated person of a non-party FINRA member at the request of a FINRA member and/or employee or associated person of a FINRA member, the party requesting the subpoena shall pay the reasonable costs of the non-party's appearance and/or production, unless the panel directs otherwise.

      13513. Authority of Panel to Direct Appearances of Associated Person Witnesses and Production of Documents Without Subpoenas

      (a) Upon motion of a party, the panel may order the following without the use of subpoenas:
      •   The appearance of any employee or associated person of a member of FINRA; or
      •   The production of any documents in the possession or control of such persons or members.
      (b) The motion must include a draft order and must be filed with the Director, with an additional copy for the arbitrator. The requesting party must serve the motion and draft order on each other party, at the same time and in the same manner as on the Director. The requesting party may not serve the motion or draft order on a non-party.
      (c) If a party receiving a motion and draft order objects to the scope or propriety of the order, that party shall, within 10 calendar days of service of the motion, file written objections with the Director, with an additional copy for the arbitrator, and shall serve copies on all other parties at the same time and in the same manner as on the Director. The party that requested the order may respond to the objections within 10 calendar days of receipt of the objections. After considering all objections, the arbitrator responsible for deciding discovery-related motions shall rule promptly on the issuance and scope of the order.
      (d) If the arbitrator issues an order, the party that requested the order must serve the order at the same time and in the same manner on all parties and, if applicable, on any non-party receiving the order.
      (e) If a non-party receiving an order objects to the scope or propriety of the order, the non-party may, within 10 calendar days of service of the order, file written objections with the Director. The Director shall forward a copy of the written objections to the arbitrator and all other parties. The party that requested the order may respond to the objections within 10 calendar days of receipt of the objections. After considering all objections, the arbitrator responsible for issuing the order shall rule promptly on the objections.
      (f) Any party that receives documents in response to an order served on a non-party shall provide notice to all other parties within five days of receipt of the documents. Thereafter, any party may request copies of such documents and, if such a request is made, the documents must be provided within 10 calendar days following receipt of the request.
      [(b)] (g) Unless the panel directs otherwise, the party requesting the appearance of witnesses by, or the production of documents from, non-parties under this rule shall pay the reasonable costs of the appearance and/or production.

    • 13-03 FINRA Provides Guidance on New Rules Governing Communications With the Public

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      Communications With the Public

      Regulatory Notice
      Notice Type

      Consolidated Rulebook
      Guidance
      Suggested Routing

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

      Advertising
      Communications With the Public
      Referenced Rules & Notices
      FINRA Rule 2200 Series
      Regulatory Notice 12-29
       

      FINRA staff has received a number of questions since it published Regulatory Notice 12-29, which announced SEC approval of FINRA's new rule on communications with the public. The new communications rules become effective February 4, 2013. To provide additional guidance on compliance with the new rules, FINRA has published a set of questions and answers on the Advertising Regulation page on the FINRA website.

      Questions concerning this Notice should be directed to:

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

    • 13-02 FINRA Requests Comment on a Proposed Rule to Require Disclosure of Conflicts of Interest Relating to Recruitment Compensation Practices; Comment Period Expires: March 5, 2013

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      Recruitment Compensation Practices

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Legal
      Operations
      Registered Representatives
      Senior Management
      Key Topics

      Compensation
      Conflicts of Interest
      Customer Account Transfers
      Disclosure
      Referenced Rules & Notices

      FINRA Rule 4512

      Executive Summary

      Many member firms offer significant financial incentives to recruit registered representatives to join their firms, yet these compensation arrangements are not disclosed to customers when they are asked to transfer their accounts to a representative's new firm. To address conflicts of interest relating to recruitment compensation practices, FINRA seeks comment on a proposed rule that would require specific disclosure by the recruiting member firm of the financial incentives a representative receives as part of his or her relationship with the new firm. The recruiting member firm would be required to provide the disclosure before a former retail customer of the representative makes a final determination to transfer an account to the new firm.

      The text of the proposed rule can be found at www.finra.org/notices/13-02.

      Questions concerning this Notice should be directed to:

      •    Philip Shaikun, Associate Vice President, Office of General Counsel (OGC), at (202) 728-8451; and
      •    Erika Lazar, Assistant General Counsel, OGC, at (202) 728-8013.

      Update on March 20, 2013: This letter was submitted by 499 individuals. Please contact FINRA to request a list of commenters.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by March 5, 2013.

      Comments must be submitted through one of 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 comments more efficiently, persons should use only one method to comment on the proposal.

      Important Notes: All comments received in response to this Notice will be made available to the public on the FINRA website. In general, 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 & Discussion

      A number of securities firms offer enhanced compensation packages to induce registered representatives to move from one firm to another. These inducements typically take the form of some combination of upfront bonuses, forgivable loans, transition assistance and back-end production bonuses. Such financial incentives may amount to as much as two to three times the commissions and fees produced by a representative in the previous year.3 FINRA understands that currently the prominent factor in structuring recruitment compensation packages or transition assistance is the representative's "trailing twelve," i.e., the most recent 12-month gross production or revenue.

      These recruitment programs raise conflicts of interest that often are not disclosed when registered representatives encourage former customers to move to their new firm. Instead, many representatives typically address only the platform, products and services of the new firm. To inform customers of the conflicts raised by recruitment packages, FINRA is requesting comment on a proposed rule to require detailed disclosure of the recruitment incentives provided to a registered representative in conjunction with a move to a new firm.

      Enhanced Compensation Packages

      In general, enhanced compensation packages offered to recruit a representative to leave one firm and join another provide an additional and significant layer of compensation on top of the commission payout grid compensation that the representative receives based on production at the new firm. The disclosure proposal applies only to that additional layer of compensation. The amount and structure of these additional arrangements depend on multiple factors, including the firm from which the representative is transferring, the representative's book of business, and the representative's years of service. Most recruitment compensation is calculated based on the representative's trailing production at the previous firm. Recruitment compensation packages also may depend on the business model of the firm offering the package.

      Incentives at some firms appear to tend toward transition assistance, which may include moving expenses, leasing space, furniture, staff and termination fees associated with moving accounts. Other firms offer an upfront bonus that takes the form of a one-time signing bonus or a forgivable loan, based on a percentage of the representative's trailing twelve. To encourage an extended commitment to the new firm, some firms offer representatives a combination of a forgivable loan and an annual bonus in which the representative signs a promissory note for an upfront loan and receives an annual bonus that equals the annual installment due on the loan at the time the loan payment is due.4 Firms also may offer a bonus based on a percentage of assets brought over from the representative's former firm, or bonuses (or bonus and loan combination packages) based on the representative's production of new business at the new firm, which are known as "back-end" or "production" bonuses, structured to encourage a representative to remain at the new firm.

      Concerns Regarding Enhanced Compensation Packages

      Enhanced compensation packages offered to recruit representatives have been the subject of regulatory concern in the past. SEC Chairman Schapiro identified potential conflicts raised by recruitment compensation practices in 2009 in an open letter to broker-dealer CEOs.5 The letter noted that:

      Some types of enhanced compensation practices may lead registered representatives to believe that they must sell securities at a sufficiently high level to justify special arrangements that they have been given. Those pressures may in turn create incentives to engage in conduct that may violate obligations to investors. For example, if a registered representative is aware that he or she will receive enhanced compensation for hitting increased commission targets, the registered representative could be motivated to churn customer accounts, recommend unsuitable investment products or otherwise engage in activity that generates commission revenue but is not in investors' interest.

      FINRA understands that in response to the 2009 letter, for a time many firms restructured recruitment compensation arrangements to avoid incentivizing such activities. While there may be legitimate business rationales for offering enhanced compensation and transition assistance to registered persons, these practices continue to raise conflicts of interest.6 The proposed rule focuses on the undisclosed conflict that representatives have received lucrative financial incentives, often based on trailing production, to move firms, and customers that are solicited to follow their representatives are not directly notified of these practices. FINRA believes that customers would benefit from knowing the incentives that may have led their representative to change firms before they transfer an account to a new firm. Therefore, the proposed rule would provide transparency to customers at the previous firm before they contract to transfer their accounts to the representative's new firm.

      Proposal

      FINRA believes that customers would benefit from being told the material conflicts arising from a registered person being paid recruiting incentives to change firms. To that end, FINRA requests comment on a proposed rule that would require a member firm (recruiting member) that provides, or has agreed to provide, to a registered person enhanced compensation in connection with the transfer to the recruiting member of the securities employment (or association) of the registered person from another financial services industry firm (previous firm) to disclose, for one year following the date the registered person associates with the recruiting member, the details of such enhanced compensation to any former customer with an account assigned to the registered person at the previous firm who (1) is individually contacted by the recruiting member or registered person, either orally or in writing, regarding the transfer of the securities employment (or association) of the registered person to the recruiting member; or (2) seeks to transfer an account from the previous firm to a broker-dealer account assigned to the registered person with the recruiting member.

      The proposal would require disclosure of the details of enhanced compensation to be made orally or in writing at the time of first individualized contact by the recruiting member or registered person with the former customer after the registered person has terminated his or her association with the previous firm. If such disclosure is made orally, or if the customer seeks to transfer an account from the previous firm to a broker-dealer account assigned to the registered person with the recruiting member and no individualized contact with that customer has occurred (e.g., the customer learns of the registered person's move from a general announcement or other sources), the recruiting member would be required to provide written disclosure to the customer with the account transfer approval documentation. The written disclosure must be clear and prominent, and must include information with respect to the timing, amount and nature of the enhanced compensation arrangement. For example, a general disclosure in small type that a registered person received an unspecified bonus in connection with his or her employment at a new firm would not be sufficient under the proposal.

      For purposes of the proposed rule, the term "enhanced compensation" means compensation paid in connection with the transfer of securities employment (or association) to the recruiting member other than the compensation normally paid by the recruiting member to its established registered persons. Enhanced compensation includes but is not limited to signing bonuses, upfront or back-end bonuses, loans, accelerated payouts, transition assistance and similar arrangements, paid in connection with the transfer of securities employment (or association) to the recruiting member. It would not include, for example, the receipt of a higher payout at the recruiting member that was not otherwise related to the transfer of securities employment (or association). In addition, for purposes of the proposed rule, the term "financial services industry" means any industry regulated by the SEC, Commodity Futures Trading Commission, state securities authorities, federal or state banking authorities, state insurance authorities, or substantially equivalent foreign regulatory authorities.

      The proposed rule would exclude disclosure to customer accounts that meet the definition of an institutional account pursuant to FINRA Rule 4512(c), except any natural person or a natural person advised by a registered investment adviser.7 Furthermore, a member would not be required to disclose enhanced compensation in an amount less than $50,000. The de minimis exception for enhanced compensation under $50,000 is intended to allow firms to offset a registered person's ordinary costs in the transition process, since such compensation does not raise the same degree of conflicts of interest as more lucrative enhanced compensation arrangements.

      Request for Comment

      In addition to generally requesting comments, FINRA specifically requests comment regarding whether the proposed rule should:

      •  require written disclosure at first individualized contact in all instances, rather than allowing oral disclosure at this point;
      •  apply to all customers recruited by the transferring registered person during the year after transfer;
      •  apply to any new broker-dealer account assigned to the registered person with the recruiting member opened by a former customer of the registered person in addition to accounts transferring from the previous firm;
      •  require the registered person to disclose the details of any enhanced compensation to be received in connection with a transfer of securities employment (or association) to a recruiting member to any customer individually contacted by the registered person regarding such transfer while the registered person is still at the previous firm;
      •  include a requirement that a customer affirm receipt of the disclosure at or before account opening at the new firm. FINRA is interested, in particular, in the potential for such a requirement to delay the account opening process in a manner that could disadvantage customers;
      •  apply to a time period different from the proposed one year following the date the registered person associates with the recruiting member;
      •  establish an amount different from the proposed $50,000 for a de minimis exception; or
      •  apply an alternative approach that would require a general upfront disclosure by the recruiting member or registered person that the registered person is receiving, or will receive, material enhanced compensation in connection with the transfer of securities employment (or association) to the recruiting member and that additional specific information regarding the details of such compensation is available at a specified location on its website or upon request.

      FINRA also specifically requests comments on the economic impact and expected beneficial results of the proposed rule.

      •  What direct costs for the recruiting member will result from the rule?
      •  What indirect costs will arise for the recruiting member or its transferring persons?
      •  What benefits would result for individual investors and their agents? How extensive are these benefits?
      •  Are the costs imposed by the rule warranted by the potential harm to customers arising from the payment by member firms of recruitment compensation to incentivize representatives to change firms without disclosure of such incentives to transferring customers?
      •  Is the proposed rule well designed to reduce conflicts related to recruitment compensation practices?
      •  How will the rule change business practices and competition among firms with respect to recruiting and compensation practices? Will these impacts differentially affect small or specialized broker-dealers?
      •  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 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, e.g., J. Horowitz, What Meltdown? Broker Bidding Wars Are Back, Reuters, April 11, 2012.

      4 For example, a recruiting member may offer a representative a combination loan and bonus agreement where the representative signs a promissory note for $900,000 with a term of nine years. The representative receives the loan up front and is expected to pay nine annual installments of $100,000 plus interest until maturity. On the date the annual installment is due on the loan, the member firm pays the representative a bonus in the exact amount of the loan payment due, including principal and interest.

      5 See Open Letter to Broker-Dealer CEOs from SEC Chairman Mary L. Schapiro, dated August 31, 2009.

      6 FINRA notes that we are currently discussing with several major firms how they identify and manage conflicts of interest. See Targeted Examination Letters Re: Conflicts of Interest (July 2012).

      7 FINRA Rule 4512(c) defines institutional account to mean the account of (1) a bank, savings and loan association, insurance company, or registered investment company; (2) 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 (3) any other person (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million.

    • 13-01 Final Renewal Statements for Broker-Dealers, Investment Adviser Firms, Agents and Investment Adviser Representatives, and Branches; Payment Deadline: February 1, 2013

      View PDF

      BD and IA Renewals for 2013

      Regulatory Notice
      Notice Type

      Renewals
      Suggested Routing

      Compliance
      Finance
      Legal
      Operations
      Registered Representatives
      Registration
      Senior Management
      Key Topics

      IARDTM
      Registration
      Renewals
      Web CRD®
      Referenced Rules & Notices

      NTM 02-48

      Executive Summary

      FINRA is issuing this Notice to help firms review, reconcile and respond to their Final Renewal Statements as well as view the reports that are currently available in Web CRD/IARD for the annual registration renewal process. The payment deadline is February 1, 2013.

      Questions concerning this Notice should be directed to the FINRA Call Center at (301) 869-6699.

      Background & Discussion

      Final Renewal Statements

      On January 2, 2013, Final Renewal Statements and reports became available for viewing and printing in Web CRD/IARD. These statements reflect the final status of broker-dealer, registered representative, investment adviser firm, investment adviser representative, and branch registrations and/or notice filings as of December 31, 2012. Any adjustments in fees owed because of registration terminations, approvals, firm IA registrations, reporting status or notice filings subsequent to the Preliminary Renewal Statement are included in this final reconciled statement.

      If the amount assessed on the Final Renewal Statement is greater than the amount assessed on the Preliminary Renewal Statement, the additional renewal fees are due by February 1, 2013. If the amount assessed on the Final Renewal Statement is less than the amount assessed on the Preliminary Renewal Statement, FINRA has issued a credit to the firm's Web CRD/IARD Daily Account.

      The Final Renewal Statements include the following fees (if applicable):

      •   Web CRD system processing fees;
      •   FINRA branch office fees;
      •   FINRA branch renewal processing fees;
      •   BATS Y-Exchange, Inc. (BATS-YX), BATS Z-Exchange, Inc. (BATS-ZX), BOX Options Exchange, LLC (BOX), 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), National Stock Exchange (NSX), New York Stock Exchange (NYSE), NYSE MKT LLC (AMEX), NYSE Arca, Inc. (ARCA), NASDAQ OMX BX, Inc. (BX), NASDAQ OMX PHLX, Inc. (PHLX), NASDAQ Stock Exchange (NQX) maintenance fees;
      •   state agent renewal fees;
      •   state BD renewal 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 Final Renewal Statement fees by February 1, 2013.

      Renewal Payment

      A Final Renewal Statement that reflects a zero balance requires no further action by the firm. If you believe your firm overpaid and is due a renewal refund, please check your firm's Daily Account to verify FINRA transferred the overpayment. FINRA transferred all renewal overpayments to each firms' Daily Accounts on January 2, 2013. To request a refund check, please send an email to finrarefunds@finra.org. The email must be sent by an appropriate firm signatory and include:

      •   the firm CRD Number;
      •   the amount of the refund requested; and
      •   the firm's daily account balance as verification.

      If the Final Renewal Statement reflects an amount due, FINRA must receive payment no later than February 1, 2013. Firms have four payment options:

      1. Web CRD/IARD E-Pay;
      2. wire transfer;
      3. Automatic Daily Account-to-Renewal Account Transfer; or
      4. check.

      Web CRD/IARD E-Pay

      The Web CRD/IARD E-Pay application is accessible from the Final Renewal Statement and the FINRA or IARD websites. E-Pay allows a firm to make an electronic payment from a designated bank account to its Web CRD/IARD Renewal Account. Please note that in order for funds to be posted to a firm's Renewal Account by February 1, 2013, firms must submit payment electronically, no later than 8 p.m. Eastern Time (ET) on January 30, 2013.

      Wire Payment

      A firm may wire full payment for its Final Renewal Statement by requesting its bank to initiate the wire transfer to "BNY Mellon Financial Corporation." A firm should provide its bank the following information:

      Transfer funds to: BNY Mellon Financial Corporation
      ABA Number: 031000037
      Beneficiary: FINRA
      FINRA Account Number: 8-234-353
      Reference Number: Firm CRD number and "Renewals"

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

      •   Inform your bank to credit funds to the FINRA bank account and use only your firm's CRD Number and the word "Renewal" as a reference.
      •   Record the Confirmation Number of the wire transfer given to you by your bank. You will need this if you choose to call your bank later to confirm the wire transfer.
      •   Send your wire transfer by 2 p.m., ET. Your firm may confirm receipt by reviewing your Renewal Account online or calling the FINRA Gateway Call Center at (301) 869-6699 the following business day.

      Automatic Daily Account-to-Renewal Account Transfer

      To facilitate payment of renewal fees, FINRA will automatically transfer funds from a firm's Daily Account to its Renewal Account beginning on January 11, 2013, through February 3, 2013, to cover outstanding fees assessed on Final Renewal Statements. FINRA will transfer funds only if a firm has sufficient funds available in its Daily Account to cover the full amount owed.

      Please Note: If your firm does not want funds automatically transferred, ensure that FINRA receives your payment by January 10, 2013. Separately, if your firm wishes to transfer funds between affiliated firms, submit a Web CRD/IARD Account Transfer Form available on the FINRA website prior to the renewal deadline.

      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 you mail a check to pay your firm's renewal fees, it will not be applied to your Renewal Account until January 11, 2013, when FINRA begins the automatic Daily Account-to-Renewal Account transfer noted above. For inclusion in the automatic transfer, please ensure that you have sufficient funds in your Daily Account to cover the total renewal fees due. If you would like your renewal payment to be applied before January 11, then you must pay using Web CRD/IARD E-Pay or with a wire transfer directly to your Renewal Account.

      •   Print and enclose a copy of the first page of your online Final Renewal Statement.
      •   Make checks payable to FINRA and write your firm's CRD Number on the memo line of the check.
      •   Processing of check payments may take up to two business days. Please account for mail delivery and payment processing time when sending payment.
      •   You can query Web CRD/IARD to verify that your check has been processed in the "Deposit Detail" of your Daily Account.
      •   Funds deposited into your firm's Daily Account will be transferred to your firm's Renewal Account as part of the automatic transfer process during the specified periods (January 11 – February 4, 2013).

      Check Payment Addresses

      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. Make sure you copy the appropriate address exactly as it appears below. If you exclude any of the information, it may delay the receipt of your payment.

      US Mail Express/Overnight Delivery
      FINRA
      P.O. Box 7777-9995
      Philadelphia, PA 19175-0001

      (Note: This P.O. Box will not accept courier or overnight deliveries.)
      FINRA/CRD
      Attn: 9995
      500 Ross Street 154-0455
      Pittsburgh, PA 15262

      Provide the following phone number if one is required for the recipient: (301) 869-6699

      Renewal Reports

      Renewal reports include all individual registrations renewed for 2013; however, they do not include registrations that were "pending approval" or "deficient" at year-end. Firms should examine their reports carefully to ensure that all registration approvals are correct. FINRA also suggests that firms include these reports in firms' permanent records.

      •   Firm Renewal Report: This report lists all renewed personnel with FINRA and participating regulators. Individuals whose registrations are "approved" with any of these regulators during November and December will be included in this report, while registrations that are still pending or deficient will not be included. Firms should use this report to reconcile their records for renewal purposes.
      •   Branches Renewal Report: This report lists each branch registered with FINRA and other regulators that renew branches registered with them through Web CRD/IARD for which the firm was assessed a fee. Firms should use this report to reconcile their records for renewal purposes.

      Discrepancies

      If a firm finds any discrepancies between its records and those maintained on Web CRD/ IARD, the firm must report the discrepancy to FINRA. Firms must report all discrepancies by February 1, 2013. Copies of appropriate documentation from the firm's Web CRD/ IARD queues, such as a Web CRD-generated notice of termination, notification of deficient condition or notice of approval, should be readily available upon request by FINRA. Documentation should be mailed to:

      FINRA
      Registration Management
      9509 Key West Ave
      Rockville, MD 20850

      The Renewal Program Bulletin contains detailed instructions to help firms complete the renewal process. This publication is available at www.finra.org/renewals.