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  • 2014

    • 14-54 FINRA Reminds Firms of Extended Hours Trading Disclosures

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      Extended Hours Trading Risk Disclosure

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Advertising
      Compliance
      Institutional
      Legal
      Operations
      Options
      Registered Representatives
      Risk
      Senior Management
      Trading
      Training
      Key Topics

      Extended Hours Trading Risk Disclosure
      Referenced Rules

      Rule 2265

      Executive Summary

      FINRA reminds firms of their obligations under FINRA Rule 2265 to disclose to a customer the material risks of extended hours trading. This disclosure should include the risks described in the Model Extended Hours Trading Risk Disclosure Statement in FINRA Rule 2265 as well as any additional disclosures as necessary to address product-specific or other specific needs.

      Questions concerning this Notice should be directed to Kathryn Moore, Associate General Counsel, Office of General Counsel, at (202) 728-8200 or Kathryn.Moore@finra.org.

      Background & Discussion

      While extended hours trading can provide customers with greater opportunities to trade securities and manage their portfolios, it also involves material risks that are specific to extended hours trading. FINRA is reminding firms of the disclosure requirements of FINRA Rule 2265 that highlight such risks to customers. The rule provides a Model Extended Hours Trading Risk Disclosure Statement (see Attachment A) that addresses six primary trading risks: (1) lower liquidity; (2) higher volatility; (3) changing prices; (4) unlinked markets; (5) an exaggerated effect from news announcements; and (6) wider spreads. As an alternative to the model disclosure, firms have flexibility in the developing the risk disclosure statement so long as, at a minimum, the six areas are addressed.

      In addition, FINRA Rule 2265(c) provides that firms must consider whether to develop and include additional disclosures in the extended hours trading risk disclosure statement as necessary to address product-specific or other specific needs. For example, the Securities and Exchange Commission has recently approved a Chicago Board Options Exchange (CBOE) proposal to adopt extended trading hours for certain listed options.1 As part of the proposal, CBOE will adopt Rule 6.1A (Extended Trading Hours) that, among other things, requires firms to make certain disclosures to customers as provided in Rule 6.1A(j) regarding material trading risks that exist during extended trading hours for such options.2 FINRA member firms that intend to participate in such extended trading hour sessions should review and consider these additional risks and disclose such risks to their customers who may trade options during extended trading hours. As noted above, pursuant to Rule 2265(c), FINRA member firms must consider these CBOE disclosures, as well as disclosures any other trading market might require, with respect to the risks of extended hours trading of specific products.


      1 See Securities Exchange Act Release No. 73704 (November 28, 2014) , 79 FR 72044 (December 4, 2014) (Notice of Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Adopt Extended Trading Hours for SPX and VIX, File No. SR-CBOE-2014-062).

      2 For example, CBOE Rule 6.1A(j) includes an additional risk in subparagraph (vi): "Risk of Lack of Calculation or Dissemination of Underlying Index Value or Intraday Indicative Value ("IIV") and Lack of Regular Trading in Securities Underlying Indexes. For certain products, an updated underlying index or portfolio value or IIV will not be calculated or publicly disseminated during Extended Trading Hours. Since the underlying index or portfolio value and IIV are not calculated or widely disseminated during Extended Trading Hours, an investor who is unable to calculate implied values for certain products during Extended Trading Hours may be at a disadvantage to market professionals. Additionally, securities underlying the indexes or portfolios will not be regularly trading as they are during Regular Trading Hours, or may not be trading at all. This may cause prices during Extended Trading Hours to not reflect the prices of those securities when they open for trading."


      Attachment A

      Model Extended Hours Trading Risk Disclosure Statement

      You should consider the following points before engaging in extended hours trading. "Extended hours trading" means trading outside of "regular trading hours." "Regular trading hours" generally means the time between 9:30 a.m. and 4:00 p.m. Eastern Standard Time.

      •   Risk of Lower Liquidity. Liquidity refers to the ability of market participants to buy and sell securities. Generally, the more orders that are available in a market, the greater the liquidity. Liquidity is important because with greater liquidity it is easier for investors to buy or sell securities, and as a result, investors are more likely to pay or receive a competitive price for securities purchased or sold. There may be lower liquidity in extended hours trading as compared to regular trading hours. As a result, your order may only be partially executed, or not at all.
      •   Risk of Higher Volatility. Volatility refers to the changes in price that securities undergo when trading. Generally, the higher the volatility of a security, the greater its price swings. There may be greater volatility in extended hours trading than in regular trading hours. As a result, your order may only be partially executed, or not at all, or you may receive an inferior price when engaging in extended hours trading than you would during regular trading hours.
      •   Risk of Changing Prices. The prices of securities traded in extended hours trading may not reflect the prices either at the end of regular trading hours, or upon the opening the next morning. As a result, you may receive an inferior price when engaging in extended hours trading than you would during regular trading hours.
      •   Risk of Unlinked Markets. Depending on the extended hours trading system or the time of day, the prices displayed on a particular extended hours trading system may not reflect the prices in other concurrently operating extended hours trading systems dealing in the same securities. Accordingly, you may receive an inferior price in one extended hours trading system than you would in another extended hours trading system.
      •   Risk of News Announcements. Normally, issuers make news announcements that may affect the price of their securities after regular trading hours. Similarly, important financial information is frequently announced outside of regular trading hours. In extended hours trading, these announcements may occur during trading, and if combined with lower liquidity and higher volatility, may cause an exaggerated and unsustainable effect on the price of a security.
      •   Risk of Wider Spreads. The spread refers to the difference in price between what you can buy a security for and what you can sell it for. Lower liquidity and higher volatility in extended hours trading may result in wider than normal spreads for a particular security.

    • 14-53 FINRA Reminds Alternative Trading Systems (ATSs) and ATS Subscribers of Their Trade Reporting Obligations in TRACE-Eligible Securities

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      Trade Reporting and Compliance Engine (TRACE)

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Fixed Income
      Legal
      Operations
      Systems
      Trading
      Training
      Key Topics

      Alternative Trading Systems
      Party to a Transaction
      Transaction Reporting
      Referenced Rules

      FINRA Rule 6710
      FINRA Rule 6730

      Executive Summary

      FINRA is publishing this Notice to remind firms of their TRACE trade reporting obligations for transactions in TRACE-eligible securities occurring through an ATS.

      Questions regarding this Notice should be directed to:

      •  Patrick Geraghty, Vice President, Market Regulation, at (240) 386-4973 or by email at patrick.geraghty@finra.org; or
      •  Racquel Russell, Associate General Counsel, Office of General Counsel, at (202) 728-8363 or by email at racquel.russell@finra.org.

      Background and Discussion

      FINRA Rule 6730 (Transaction Reporting) sets forth firms' trade reporting obligations with regard to transactions in TRACE-eligible securities.1 Pursuant to Rule 6730, each FINRA member firm that is a "party to a transaction" in a TRACE-eligible security is obligated to report the transaction to TRACE within the prescribed period of time (generally within 15 minutes). "Party to a transaction" means an introducing broker-dealer, if any, an executing broker-dealer or a customer.2 Thus, in transactions between firms, each firm is a party to the transaction and is required to report the trade.

      An ATS, which includes electronic communication networks, also is a party to a transaction and has a trade reporting obligation when a transaction in a TRACE-eligible security is executed through the ATS.3 Specifically, the ATS is required to report two transactions to TRACE: (1) the purchase of the securities from one counterparty and (2) the sale of the securities to the other counterparty. In addition, each counterparty, if a FINRA member firm, is required to report a buy or a sell, as applicable, identifying the ATS as the counterparty to each trade. Whether the ATS is involved in the clearance and settlement of a transaction does not change the TRACE trade reporting obligation for trades occurring through its system.

      FINRA is issuing this Notice to remind firms of their TRACE trade reporting obligations for transactions occurring on and through an ATS. It is critical for regulatory audit trail and transaction dissemination purposes that all firms (ATSs and their member subscribers) report consistently across all ATSs and that the ATS is properly included and identified as a party to the transaction.4

      Provided below are several examples of the reporting requirements for transactions executed through an ATS. In all cases, every sell report within each scenario is disseminated.

      Example #1: FINRA members D1 and D2 are subscribers to an ATS. D1 is displaying an offer on the ATS system for ABC bonds for a price at which D2 is willing to trade, so D2 accesses D1's offer, resulting in a trade. The following reports must be submitted to TRACE by the ATS:

      •   ATS reports a buy from D1
      •   ATS reports a sell to D2
      If both D1 and D2 trade on a proprietary basis, each dealer would submit a trade report to TRACE:
      •   D1 reports a sell to ATS as principal
      •   D2 reports a buy from ATS as principal

      Example #2: If, in the above scenario, D1's sale was as agent on behalf of a customer, then D1 would submit two trade reports to TRACE:

      •   D1 reports a buy from customer as agent
      •   D1 reports a sell to ATS as agent
      Likewise, if D2's purchase was as agent on behalf of a customer, D2 also would be required to submit two trade reports to TRACE:
      •   D2 reports a buy from ATS as agent
      •   D2 reports a sale to customer as agent

      Example #3: IA (a non-FINRA member) is an ATS subscriber and purchases bonds through the ATS from FINRA member D3. The following reports must be submitted to TRACE by each specified party:

      •   ATS reports a buy from D3
      •   ATS reports a sell to IA
      •   D3 reports a sell to ATS

      Example #4: D4, FINRA member firm and ATS subscriber, submits a request for a bid on ABC bonds through the ATS. FINRA member firm D5 submits a bid for the ABC bonds at a price that D4 chooses to accept. The following reports must be submitted to TRACE by each specified party:

      •   ATS reports a buy from D4
      •   ATS reports a sell to D5
      •   D4 reports a sell to ATS
      •   D5 reports a buy from ATS
      In addition, if D4's sale or D5's purchase was as agent on behalf of a customer, then the transaction with the customer also must be reported. For example, the following trade reports also may be required to be reported to TRACE, if applicable:
      •   D4 reports a buy from customer as agent
      •   D5 reports a sell to customer as agent

      As noted above, complete, accurate and timely reporting of transactions in TRACE-eligible securities is necessary both for price transparency as well as to enable FINRA to perform its oversight functions. Firms should review their trade reporting policies, procedures and protocols to ensure they are reporting properly to FINRA.


      1 Rule 6710 generally defines a "TRACE-Eligible Security" as: (1) a debt security that is U.S. dollardenominated and issued by a U.S. or foreign private issuer (and, if a "restricted security" as defined in Securities Act Rule 144(a)(3), sold pursuant to Securities Act Rule 144A); or (2) a debt security that is U.S. dollar-denominated and issued or guaranteed by an "Agency" as defined in Rule 6710(k) or a "Government-Sponsored Enterprise" as defined in Rule 6710(n).

      2 See FINRA Rule 6710(e).

      3 See question 7.4 in FINRA's Reporting of Corporate and Agencies Debt Frequently Asked Questions (FAQ): Who reports trades executed through electronic trading systems that are themselves broker-dealers? All FINRA members that are "parties to a transaction" have a trade reporting obligation under TRACE Rules. Where two FINRA members effect/execute a transaction through an electronic trading system that is registered as a broker-dealer, both members, as well as the electronic trading system would have a trade reporting obligation). See also Amendment No. 1 to File No. SR-FINRA-2013-042 (Proposed Rule to Require Alternative Trading Systems to Report Volume Information to FINRA and Use Unique Market Participant Identifiers).

      4 In addition, for purposes of the potential expansion of FINRA's ATS Volume Transparency initiative to include TRACE-eligible securities, ATSs must be reporting in compliance with the TRACE rules to ensure that the ATS volume information that is aggregated and disseminated is accurate, reliable and consistent across ATSs. See Regulatory Notice 14-07 (February 2014); see also Securities Exchange Act Release No. 71911 (April 9, 2014), 79 FR 21316 (April 15, 2014) (Notice of Filing and Immediate Effectiveness of SR-FINRA-2014-017).

    • 14-52 FINRA Requests Comment on a Proposed Rule Requiring Confirmation Disclosure of Pricing Information in Fixed Income Securities Transactions; Comment Period Expires: January 20, 2015

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      Pricing Disclosure in the Fixed Income Markets

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Trading
      Key Topics

      Fixed Income Securities
      Pricing Information
      Transaction Confirmations
      Referenced Rules & Notices

      FINRA Rule 2232
      SEA Rule 10b-10
      MSRB Regulatory Notice 2014-20

      Executive Summary

      FINRA is requesting comment on a proposed FINRA rule that would require firms to disclose additional information on customer confirmations for transactions in fixed income securities. Specifically, FINRA is proposing that, for same-day, retail-size principal transactions, firms disclose on the customer confirmation the price to the customer, the price to the member of a transaction in the same security, and the differential between those two prices. FINRA and the Municipal Securities Rulemaking Board (MSRB) have discussed a coordinated approach to potential rulemaking in this area. The MSRB also is publishing a notice soliciting comment on a similar proposal.

      The text of the proposed rules can be found in Attachment A.

      Questions concerning this Notice should be directed to:

      •  Patrick Geraghty, Vice President, Market Regulation, at (240) 386-4973;
      •  Cynthia Friedlander, Director, Fixed Income Regulation, Regulatory Operations at (202) 728-8133; or
      •  Andrew Madar, Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8056.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by January 20, 2015.

      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 or Exchange Act).2

      Background and Discussion

      As part of its oversight of corporate and agency bond transactions, FINRA monitors firms' pricing of transactions based on TRACE reports. FINRA has observed that a significant number of retail-sized transactions (100 bonds or less or bonds with a face value of $100,000 or less) appear to have offsetting trades by the member firm in very close conjunction. Specifically, using data from the third quarter of 2013 for corporate bonds, FINRA has observed that over 60 percent of retail-size customer trades had corresponding principal trades on the same trading day. In over 88 percent of these events, the principal and the customer trades occurred within thirty minutes of each other. FINRA also has observed that while many of these trades have apparent mark-ups within a close range, significant outliers exist, indicating that customers in those trades paid considerably more than customers in other similar trades.3 Although knowledgeable industrious customers could observe these trading patterns retrospectively using TRACE data, our understanding is that retail customers do not typically consult TRACE data. 4

      Customer confirmations already disclose the price to the customer of the bond transaction. FINRA believes that customers in retail-size trades would benefit from additional confirmation disclosure of the price of the offsetting trade by the firm and the differential between these prices when the offsetting trade is within the same trading day.

      Recent Developments

      In 2012, the Securities and Exchange Commission (SEC) issued a report on the municipal securities market, which surveyed the market structure and disclosure practices of the municipal securities market and made several recommendations including improving pre-trade and post-trade transparency and reinforcing existing dealer obligations.5 Among other things, the report recommended that the MSRB require municipal bond dealers to disclose to customers on confirmations for riskless principal transactions the amount of any mark-up or mark-down.6

      In addition, in a speech given on June 20, 2014, SEC Chair Mary Jo White broadly identified initiatives to address investor concerns in the fixed income markets.7 Among other things, Chair White stated that the SEC would work with FINRA and the MSRB to develop rules regarding the disclosure of mark-ups in "riskless principal" transactions for both corporate and municipal bonds8 to help customers assess the reasonableness of their dealer's compensation, as riskless principal transactions become more common in the fixed income markets.9

      Proposed Disclosure Requirement

      As described in more detail below, FINRA believes that enhancing the disclosure requirements for transactions in fixed income securities to include additional pricing information will benefit investors by providing them with more information to better evaluate their transactions. FINRA is therefore proposing to amend FINRA Rule 2232 to require customer confirmation disclosure of same-day pricing information for customer retail size transactions in corporate and agency debt securities.10

      Specifically, where a firm executes a sell (buy) transaction of "qualifying size" with a customer and executes a buy (sell) transaction as principal with one or multiple parties in the same security within the same trading day, where the size of the customer transaction(s) would otherwise be satisfied by the size of one or more same-day principal transaction(s), confirmation disclosure to the customer would be required. That disclosure would entail (i) the price to the customer; (ii) the price to the firm of the same-day trade; and (iii) the difference between those two prices.11 The rule would define "qualifying size" as a purchase or sale transaction of 100 bonds or less or bonds with a face value of $100,000 or less, based on reported quantity, which is designed to capture those trades that are retail in nature.

      The following examples address whether a transaction would trigger the proposed confirmation disclosure requirement:12

      Example 1

      •  10:00:00 AM Firm A purchases 50 XYZ bonds from a dealer at a price of 100 for $50,000.
      •  10:00:15 AM Firm A sells 50 XYZ bonds to one customer at a price of 102 for $51,000.

      Since the transaction involves the purchase of 50 bonds by the customer within the same trading day as Firm A's purchase of the same number of bonds, Firm A would be required to disclose on the customer confirmation the price to the firm (100), the price to the customer (102) and the differential between the two prices (2).

      Example 2

      •  10:00:00 AM Firm A purchases 500 XYZ bonds from a dealer at a price of 100 for $500,000.
      •  10:15:00 AM Firm A sells 100 XYZ bonds to 5 customers at a price of 102.50 for $102,500 per customer.

      Since the transactions involve the purchase of 100 bonds by each customer within the same trading day as Firm A's purchase of the same total number of bonds, Firm A would be required to disclose on the customer confirmations to each of the 5 customers the price to the firm (100), the price to the customer (102.50), and the differential between the two prices (2.50).

      Example 3

      •  10:00:00 AM Firm A purchases 500 XYZ bonds from a dealer at a price of 100 for $500,000.
      •  10:15:00 AM Firm A sells 30 XYZ bonds to 1 customer at a price of 102.50 for $30,750.

      Since the size of the customer transaction was satisfied by the size of the firm's principal transaction on the same day, Firm A would be required to disclose on the customer confirmation the price to the firm (100), the price to the customer (102.50), and the differential between the two prices (2.50).

      Example 4

      •  10:00:00 AM Firm A sells 100 XYZ bonds to a customer at a price of 102 for $102,000.
      •  10:15:00 AM Firm A buys 500 XYZ bonds from a dealer at a price of 100 for $500,000.

      Since the size of the customer's purchase of bonds from Firm A is satisfied by the size of Firm A's purchase of bonds within the same trading day, Firm A would be required to disclose on the customer confirmation the price to the firm (100), the price to the customer 102), and the differential between the two prices (2.00).

      Example 5

      •  10:00:00 AM Firm A purchases 500 XYZ bonds from a dealer at a price of 100 for $500,000.
      •  10:15:00 AM Firm A sells 500 XYZ bonds to a customer at a price of 102.50 for $512,500.

      Firm A would not be required to disclose the proposed pricing information on the customer confirmation because the size of the customer transaction exceeds the qualifying size disclosure threshold of 100 bonds or less.

      Example 6

      •  10:00:00 AM Firm A purchases 50 XYZ bonds from Customer 1 at a price of 98 for $49,000.
      •  10:30:00 AM Firm A sells 50 XYZ bonds to Customer 2 at a price of 102 for $51,000.

      Firm A would have disclosure requirements under the proposal to both customers. For Customer 1, Firm A would disclose the price to the firm (102), the price to the customer (98) and the differential between the two prices (4.00). For Customer 2, Firm A would disclose the price to the firm (98), the price to the customer (102) and the differential between the two prices (4.00).

      Example 7

      •  10:00:00 AM Firm A purchases 40 XYZ bonds from a dealer at a price of 100 for $40,000.
      •  15:30:00 PM Firm A purchases 60 XYZ bonds from another dealer at a price of 99 for $59,500.
      •  15:45:00 PM Firm A sells 100 XYZ bonds to 1 customer at a price of 99.70 for $99,700.

      Where multiple firm trades equal the amount of the customer trade, Firm A would be required to disclose on the customer confirmation the weighted average price of the firm trades to the firm (99.40), the price to the customer (99.70), and the differential between the two prices (0.30). Note: In this example, the two firm trades are the equivalent of the customer trade and therefore a weighted average price would be used. Example 9 below provides a scenario where there are multiple transactions as principal that could form the basis of the firm's corresponding transaction(s) with its customers.

      Example 8

      •  10:00:00 AM Firm A purchases 100 XYZ bonds from a dealer at a price of 100 for $100,000.
      •  10:15:00 AM Firm A sells 70 XYZ bonds to one customer at a price of 100 for $70,000.

      Firm A would be required to disclose on the customer confirmation the price to the firm (100), the price to the customer (100), and the differential between the two prices (0).

      Example 9

      •  10:00:00 AM Firm A purchases 200 XYZ bonds from a dealer at a price of 102.50 for $205,000.
      •  10:30:00 AM Firm A purchases 100 XYZ bonds from a dealer at a price of 104 for $104,000.
      •  13:30:00 PM Firm A purchases 500 XYZ bonds as part of an institutional trade at a price of 103.50 for $517,500.
      •  15:00:00 PM Firm A sells 100 XYZ bonds to a customer at a price of 104.50 for $104,500.

      Where the firm engages in multiple transactions as principal that form the basis of its transactions with customers but exceed the number of bonds of the customer trade, FINRA expects that the firm would consistently apply a last in, first out (LIFO) methodology that would refer to the last principal trade(s) that preceded the customer trade. Firm A would therefore be required to disclose on the customer confirmation the price to the firm of the last transaction (103.50), the price to the customer (104.50), and the differential between the two prices (1).

      Example 10

      •  10:00:00 AM Firm A sells 100 XYZ bonds to a customer at a price of 102 for $102,000.
      •  10:15:00 AM Firm A buys 500 XYZ bonds from a dealer at a price of 100 for $500,000.
      •  10:30:00 AM Firm A buys 200 XYZ bonds from a dealer at a price of 101 for $202,000.

      Where the firm engages in multiple transactions as principal that form the basis of its transactions with customers but exceed the number of bonds of the customer trade, FINRA expects that, in this scenario, the firm would consistently apply a methodology that would refer to the principal trade(s) in closest time proximity to the customer trade. Firm A would therefore be required to disclose on the customer confirmation the price to the firm of its first purchase (100), the price to the customer (102), and the differential between the two prices (2).

      Example 11

      •  15:30:00 PM (Trading Day 1) Firm A purchases 50 XYZ bonds from a dealer at a price of 100 for $50,000.
      •  10:00:00 AM (Trading Day 2) Firm A purchases 50 XYZ bonds from a dealer at a price of 102.50 for $51,250.
      •  10:15:00 AM (Trading Day 2) Firm A sells 50 XYZ bonds to 1 customer at a price of 103 for $51,500.

      Since the transaction involved the same-day purchase of 50 bonds by the customer, Firm A would be required to disclose on the customer confirmation the price to the firm (102.50), the price to the customer (103), and the differential between the two prices (0.50). The transaction that occurred on the previous trading day (Trading Day 1) would not be incorporated into the price disclosure.

      Example 12

      •  15:30:00 PM (Trading Day 1) Firm A purchases 200 XYZ bonds from a dealer at a price of 104 for $208,000.
      •  10:15:00 AM (Trading Day 2) Firm A sells 100 XYZ bonds to a customer at a price of 106 for $106,000.

      Firm A would not be required to disclose the pricing information on the customer confirmation since Firm A's position was acquired on a previous trading day before it was sold to the customer, and is therefore not subject to the disclosure requirement.

      Example 13

      •  15:30:00 PM (Trading Day 1) Firm A purchases 50 XYZ bonds from a dealer at a price of 100 for $50,000.
      •  10:00:00 AM (Trading Day 2) Firm A purchases 50 XYZ bonds from a dealer at a price of 101.50 for $50,750.
      •  10:15:00 AM (Trading Day 2) Firm A sells 100 XYZ bonds to 1 customer at a price of 102 for $102,000.

      Firm A would not be required to disclose the pricing information on the customer confirmation since the customer order could only be filled by the positions in XYZ that Firm A had acquired over two trading days. The transaction is therefore not subject to the disclosure requirement.

      Economic Impact Analysis

      Need for the Rule

      FINRA is concerned that investors in fixed income securities currently are limited in their ability to understand and compare transaction costs.13 FINRA believes that furnishing additional pricing-related information to customers as part of the customer confirmation will provide customers with meaningful and useful information.

      Economic Baseline

      The proposed disclosure will likely affect both broker-dealers and retail investors that engage in transactions in fixed income securities. Under SEC Rule 10b-10 and current FINRA rules, a broker-dealer acting as principal for its own account and trading fixed income securities with a customer is not required to disclose the difference between the price to the customer and the price of the broker-dealer's offsetting trade(s). In the absence of the proposal, customers would not be able to ascertain with certainty the specific price to the broker-dealer in connection with a customer trade.

      Retail customers currently receive some of the information considered in this proposal. Specifically, confirmation statements already include the price of bonds purchased. But the confirmation is not required to include information about the cost of the security to the firm. FINRA is aware that some broker-dealers may provide an indication of market value of the bond as part of the confirmation, where that market value reflects either a recent transaction price or a valuation for bonds that have not otherwise traded in close proximity to the customer trade.

      As previously noted, FINRA makes TRACE data available to the public, and retail customers may have access to recent trading histories through free finance Web portals, such as Yahoo Finance or FINRA's own website. But it is not possible to determine the value of the specific securities offered to the customer from the public sources.

      Benefits

      FINRA believes this additional pricing information will better enable customers to evaluate the cost and quality of the services firms provide by assisting customers in monitoring current same-day prices a firm and a customer pays or receives in connection with a transaction. The proposal will provide customers with pricing information that customers cannot currently obtain through TRACE data. FINRA further believes this type of information will promote transparency into firms' pricing practices and encourage communications between firms and their customers about pricing of their fixed income transactions. This proposal also may provide customers with additional information that may assist them in detecting practices that are possibly improper, which would supplement FINRA's own surveillance and enforcement program.14

      Costs

      FINRA recognizes that the proposal would impose burdens and costs on firms. Specifically, FINRA expects that the proposal would require firms to modify their systems to identify instances where firm and customer trades in the same security occur on the same trading day and to adopt a methodology to satisfy the disclosure requirement. Firms may need to record and monitor the decisions on the disclosure methodology. Firms would have to adopt compliance policies and procedures to ensure consistent and appropriate application of the methodology. Firms would also be required to calculate the price difference between the customer and firm trade, and to convey the firm price and differential to the customer price on the customer confirmation. FINRA understands some firms may use legacy systems for confirmations which may be costly to reprogram. FINRA staff will estimate the costs based on the information obtained through the public comment process.

      FINRA is requesting comment on the potential for the proposal to have an unintended negative impact on market behavior, such as whether the proposal could result in decreased liquidity in the fixed income market, for example, if firms were less likely to hold bonds in inventory, or if firms would reduce service in retail-size trades. Specifically, FINRA is seeking evidence of the likelihood and size of such an impact. FINRA also is soliciting comment on whether the proposal could create confusion for investors where an investor receives the proposed disclosure for some transactions (e.g., below the proposed size threshold and the firm and customer trades occur on the same trading day), but not for other transactions (e.g., above the proposed size threshold or where the firm and customer trades did not occur on the same trading day).

      Regulatory Alternatives

      FINRA also recognizes that there are alternatives to the proposed approach of requiring disclosure of pricing information for trades in the same security where the firm and the customer trades occur on the same trading day. For example, another possible approach would be to require disclosure of the same pricing information, but limited to "riskless principal" trades, which would be consistent with the amendments to Rule 10b-10 that were previously proposed by the SEC.15

      FINRA believes that there are increased benefits to requiring disclosure of pricing information for all trades in the same security where the firm and the customer trades occur on the same trading day, rather than limiting the proposal to only riskless principal trades. For example, FINRA believes using the proposed approach would result in the disclosure of pricing information for more retail-size trades, and that limiting the proposal to riskless principal transactions would exclude transactions where the pricing information would be valuable to the customer.16 FINRA also believes that, in trades in the same security where the firm and the customer trades occur on the same trading day, most of these trades occur in close time proximity to each other, which minimizes concerns that intervening news or market movement that occur between the component trades would create a corresponding change in the price differential between the components.17 FINRA believes that the close time proximity of the trades further supports that the pricing information would be valuable to investors.

      In addition, FINRA believes that the proposed approach may allow for a more mechanical approach by firms than the riskless principal or marking approaches, which may require firms to conduct a trade-by-trade analysis to determine whether a specific trade was riskless or not. FINRA therefore believes that the proposed approach will provide more certainty to firms regarding their confirmation disclosure obligations. To the extent there are questions as to the methodology a firm uses to determine whether a trade is subject to the disclosure requirement, especially where a firm engages in multiple transactions as principal that form the basis of its corresponding transactions with customers, FINRA is specifically soliciting comment on such question as set forth in the Request for Comments section below.

      FINRA also appreciates the potential complexities of requiring confirmation disclosure for trades in the same security where the firm and the customer trades occur on the same trading day, especially from an operational perspective. Another alternative may be to require a firm to disclose on customer confirmations for principal retail-size bond trades the mark-up in the transaction based on a reasonable marking methodology consistently used by the firm in valuing the bonds for internal and other regulatory purposes. For near-time offsetting trades, the marking methodology would presumptively use cost unless a reasonable basis for using another price can be demonstrated. As set forth in the Request for Comments section below, FINRA is specifically soliciting comment on whether an alternative approach would be preferable to the proposed concept.

      As set forth above, FINRA recognizes that there are alternative forms and data points of pricing information that may be disclosed to retail customers, and specifically requests comment on such alternatives. Of the options that were considered, however, FINRA believes that, in trades in the same security where the firm and the customer trades occur on the same trading day, requiring firms to disclose the price to the firm, the price to the customer, and the corresponding differential will provide customers with comprehensive and beneficial information, while balancing the costs and burdens to firms of providing the disclosure.

      Request for Comments

      FINRA seeks comments on all aspects of the proposal as outlined above. In addition to general comments, FINRA specifically requests comments on the following questions. FINRA requests data and quantified comments where possible.

      1. What are the anticipated benefits to investors of providing the proposed disclosure?
      •  Would the proposed disclosures better enable customers to evaluate the cost and quality of the services firms provide, and help ensure customers receive fair and reasonable prices?
      •  Would the proposed disclosures provide investors with greater transparency into the compensation of their brokers or the costs associated with the execution of their fixed income trades?
      2. What kinds of costs would this requirement impose on firms, including the anticipated costs to firms in developing and implementing systems to comply with the proposal?
      •  What are the estimates of these costs and what are the assumptions that underlie those estimates? Are the estimates different for firms of different sizes and different business models?
      3. In addition to systems modifications, are there other potential changes to firms' infrastructure that would be necessary? What are those modifications?
      4. For which transactions should pricing disclosures be made?
      •  Does the proposal address the universe of transactions that should require confirmation disclosure?
      •  Should the proposal be expanded beyond corporate bonds and agency debt to apply to other categories of fixed income securities? If so, why, and if not, why not?
      •  Is it appropriate to only require a dealer to disclose pricing information when the customer trade is a retail trade? If so, should retail be defined by reference to the trade size, as in the proposal, or by some other standard, such as retail customers?
      •  Should the proposal be expanded to require the disclosure of pricing information for transactions where the customer trade is of qualifying size (100 bonds or less or bonds with a face amount of $100,000 or less), and where the firm trade is for a number of bonds that is less than the customer trade?
      •  Should there be any exclusions for certain types of transactions, notwithstanding the fact that they are retail-sized transactions? For example, should the proposed disclosures not be required for new issue trades?
      •  How would alternatives impact the costs and benefits of the proposal?
      5. Are there alternative forms of disclosure or methods to achieve the objectives of the proposal and are they better suited than the proposal?
      •  Should the disclosure include the percentage of the price differential or the firm's mark-up or mark-down on the transaction? Would the objectives of the proposal be achieved if a firm was only required to disclose the price paid or received by the firm in its transaction with a third party, and not the corresponding differential?
      •  Should the disclosure include a total dollar amount differential (i.e., a differential that calculates the total dollar amount differential based on the number of bonds purchased or sold by the customer), rather than solely the proposed price differential? What are potential benefits and drawbacks of using such a differential? To illustrate this possible approach, Example 1 above would be revised as follows:
      10:00:00 AM Firm A purchases 50 XYZ bonds from a dealer at a price of 100 for $50,000.

      10:00:15 AM Firm A sells 50 XYZ bonds to one customer at a price of 102 for $51,000.

      Firm A would be required to disclose on the customer confirmation the price to the firm (100), the price to the customer (102) and the total dollar amount differential between the two trades ($1,000). The total dollar amount differential is calculated by multiplying the differential between the prices of the firm and the customer trades (2) by the number of bonds in the customer trade (50) by a multiplier of 10.
      •  Rather than using the price to the firm, would the best available representation of current market price be more useful, particularly where the firm-side and customer-side transactions do not occur close in time? If so, given the infrequent trading in many bonds, what would be an acceptable reference price to use to measure the current market price?
      •  As mentioned previously, FINRA could require a firm to disclose on customer confirmations for principal retail-size bond trades the mark-up in the transaction based on a reasonable marking methodology consistently used by the firm in valuing the bonds for internal and other regulatory purposes. For near-time offsetting trades, the marking methodology would presumptively use cost unless a reasonable basis for using another price can be demonstrated.
      •  What would be the costs to firms to implement such an alternative disclosure? What are the assumptions that underlie those cost estimates?
      6. To what extent, if any, do firms already provide or make available such information or similar information to customers in any format? Should the proposal allow for alternative methods, if they provide substantially similar pricing information to customers?
      7. Should the concept of a "riskless principal" transaction be used in place of the proposed concept, and, if so, can "riskless principal" be defined in a manner that minimizes concerns that market participants would avoid the proposed disclosure requirements?
      •  Would it be feasible to define a riskless principal transaction for purposes of this proposal to include instances where a firm executed a buy or sell order while holding a potentially offsetting "soft" or "firm" order?
      •  Would it be feasible to define a riskless principal transaction to include instances where a firm held inventory for a specified length of time before the customer order was received, or instances where the offsetting trade occurred within 30 minutes of the first trade, assuming the firm was promptly reporting its trades?
      •  What would be the costs to firms to implement such an alternative disclosure? What are the assumptions that underlie those cost estimates?
      8. Should disclosure be subject to a de minimis standard, e.g., disclosure of a price differential below a specified threshold would not be required? If so, how should the existence of the threshold be communicated to customers so the customers understand that the trades have a differential? How would such a de minimis standard impact the costs and benefits associated with the proposal?
      9. When a firm executes multiple transactions as principal, which then form the basis of the firm's corresponding transactions with its customers, is the last in, first out (LIFO) approach the most appropriate methodology to use?
      •  Would it be appropriate to allow firms to have flexibility to establish their own methodology, consistent with the objectives of the proposal, which would be documented by the firm in its written policies and procedures and consistently applied? For example, is it appropriate to allow firms to utilize a reference price that is based on a same-day principal trade that does not meet the LIFO standard, where the size of that principal trade is more equivalent to the size of the customer trade? What other approaches might a firm adopt?
      10. When a firm executes a transaction as principal with a customer, such as in Example 6, where the firm buys 50 XYZ bonds from one customer and then sells 50 XYZ bonds to another customer, FINRA understands that the price paid to the customer may not represent the firm's true price of the trade, e.g., it may reflect a mark-down. For purposes of the proposed disclosure requirement, should firms be allowed to use a different price as the reference price in this scenario, assuming the firm is able to justify and document its decision?
      11. Are there other potential effects to markets and market participants of the proposal?
      •  Would the proposal alter the incentives and dynamics of the broker-customer relationship, cause firms to reduce service in retail-sized trades, or encourage firms to trade with customers as principal from inventory?
      •  Would applying the proposal to a limited set of securities on a pilot basis provide useful information, including whether firm behavior would change as a result of the disclosure requirement?
      •  How should FINRA measure and assess these potential effects against the benefits the proposal might create?
      12. Would it be appropriate or beneficial for firms to supplement the proposed disclosures by providing customers with an explanation of the pricing information or to provide customers with additional information relevant to execution quality? If so, what kind of documentation would be appropriate for this purpose? Should this practice be permitted or required?

      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) (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 note 16 infra.

      4 See note 13 infra.

      5 See U.S. Securities and Exchange Commission, Report on the Municipal Securities Market, dated July 31, 2012.

      6 As noted above, the MSRB is publishing a similar proposal regarding disclosure of information by dealers to their retail customers to help them independently assess the prices they are receiving from dealers and to better understand some of the factors associated with the costs of their transactions. The MSRB's proposal also broadly seeks input on alternative regulatory approaches, including mark-up and mark-down disclosure on confirmations for trades that could be considered riskless principal transactions.

      A mark-down is the amount by which the price of a security is reduced from the prevailing market price. A mark-up is the amount in excess of the prevailing market price that a customer pays a dealer when purchasing a security.

      7 See speech by Chair White, dated June 20, 2014, Intermediation in the Modern Securities Markets: Putting Technology and Competition to Work for Investors, Economic Club of New York, New York, NY.

      8 MSRB Rule G-15 governs customer confirmations for transactions in municipal securities.

      9 SEC Rule 10b-10 governs confirmations that must be delivered to customers in connection with transactions in equity and fixed income securities, except municipal securities. That rule generally requires that a broker-dealer acting in an agency capacity disclose the amount of any remuneration received or to be received from its customer in connection with a transaction in equity or fixed income securities. See 17 CFR 240.10b-10(a)(2)(i). When a broker-dealer is acting as principal, however, the disclosure requirements related to pricing information are different for equity and fixed income securities. When a broker-dealer is acting in a riskless principal capacity, Rule 10b-10 only requires a broker-dealer to disclose the amount of its mark-up or mark-down for transactions in equity securities. See 17 CFR 240.10b-10(a)(2)(ii). As a result, a customer receives different pricing information on its transaction confirmation depending on the type of security it is buying or selling.

      FINRA rules also require that firms send transaction confirmations to customers, but do not impose any additional disclosure requirements on firms related to pricing information beyond what is required under SEC Rule 10b-10. Rule 2232 requires that a member send a customer confirmation before or upon completion of a transaction for or with a customer, in accordance with the requirements of SEC Rule 10b-10. See Rule 2232(a). In addition, FINRA rules governing mark-ups and mark-downs set forth standards by which the amount of a mark-up or mark-down may be assessed, but do not require members to disclose the amount of the mark-up or mark-down. See Rule 2121.

      10 The rule defines a "corporate debt security" as a debt security that is United States (U.S.) dollar-denominated and issued by a U.S. or foreign private issuer and, if a "restricted security" as defined in Securities Act Rule 144(a)(3), sold pursuant to Securities Act Rule 144A, but does not include a Money Market Instrument as defined in Rule 6710(o). An "agency debt security" shall have the same meaning as in Rule 6710(1). The proposal would not apply to transactions in asset-backed securities, as defined in Rule 6710(m).

      11 As indicated previously, under Rule 10b-10, firms are already required to disclose on confirmations the price of the security that was bought or sold by the customer.

      12 Each of the following examples assumes a par value of $1,000 per bond. The disclosure requirements for bonds with a par value greater than $1,000 may vary, based on the number of bonds traded.

      13 Currently, customers may use TRACE to determine pricing information for a fixed income security that is eligible for TRACE reporting, including the last trade price, execution time and execution quantity, using either the issuer's name or the CUSIP number. While this information may provide the customer with a useful basis of comparison for its transaction, a customer would not be able to use TRACE data to ascertain with certainty the specific price to its broker-dealer in connection with its trade, or the actual amount of the mark-up or mark-down incurred in connection with its trade.

      In addition, investors would need to possess a certain degree of knowledge and skill to access and derive relevant information from TRACE. Therefore, existing TRACE data alone may not assist customers in fully understanding their trading costs.

      14 See Securities Exchange Act Release No. 33743 (March 9,1994), 59 FR 12767 (March 17, 1994) (noting the functions of the transaction confirmation).

      15 See Securities Exchange Act Release No. 33743 (March 9,1994), 59 FR 12767 (March 17, 1994). For purposes of requiring disclosure in equity securities where a broker or dealer is acting as principal for its own account, Rule 10b-10 requires disclosure where a broker or dealer, "after having received an order to buy from a customer... purchased the equity security from another person to offset a contemporaneous sale to such customer or, after having received an order to sell from a customer, the broker or dealer sold the security to another person to offset a contemporaneous purchase from such customer." See 17 CFR 240.10b-10(a)(2)(ii).

      16 Using TRACE data from 3Q13, FINRA has observed that the proposed approach would have resulted in 41 percent more retail-size trades receiving pricing information. FINRA has also observed that, using TRACE data from 2013, the price differentials for customer buy and sell orders (which can be an indicator of the firm's mark-up and mark-down practices), were of varying amounts within similar sized trades, and that varying price differentials were not limited to riskless principal trades. FINRA therefore believes that the disclosure of pricing information should apply to a wider range of customer transactions, and should not be limited to riskless principal trades.

      For example, for transactions of 10 to 40 bonds (or 10,000 to 40,000 par amount) in the Investment Grade category, the median calculated differential on customer sell orders was .42 percent, but the 95th percentile was 1.49 percent and the 99th percentile was 2.29 percent. For transactions of 40 to 70 bonds (or 40,000 par amount to 70,000 par amount) in the Investment Grade category, the median calculated differential was .38 percent, but the 95th percentile was 1.49 percent and the 99th percentile was 2.29 percent.

      Similarly, with respect to the calculated differential on customer buy orders, for transactions of 10 to 40 bonds (or 10,000 to 40,000 par amount) in the Investment Grade category, the median calculated differential on customer buy orders was .66 percent, but the 95th percentile was 2.15 percent and the 99th percentile was 2.71 percent. For transactions of 40 to 70 bonds (or 40,000 to 70,000 paramount) in the Investment Grade category, the median calculated differential was .63 percent, but the 95th percentile was 2.08 percent and the 99th percentile was 2.76 percent.

      This difference was also present in high yield and unrated securities.

      17 TRACE data from 3Q13 also indicated that approximately 95 percent of the same-day trades occurred within 30 minutes of each other.


      ATTACHMENT A

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

      FINRA Rules

      2230. Customer Account Statements and Confirmations

      2232. Customer Confirmations

      (a) A member shall, at or before the completion of any transaction in any security effected for or with an account of a customer, give or send to such customer written notification ("confirmation") in conformity with the requirements of SEA Rule 10b-10.
      (b) A confirmation given or sent pursuant to this Rule shall further disclose:
      (1) with respect to any transaction in any NMS stock, as defined in Rule 600 of SEC Regulation NMS, or any security subject to the reporting requirements of the FINRA Rule 6600 Series, other than direct participation programs as defined in FINRA Rule 6420, the settlement date of the transaction; [and]
      (2) with respect to any transaction in a callable equity security, that:
      (A) the security is a callable equity security; and
      (B) a customer may contact the member for more information concerning the security[.]; and
      (3) with respect to a sale to (purchase from) a customer of Qualifying Size involving a corporate or agency debt security, where the member also executes a buy (sell) transaction(s) as principal with one or multiple parties in the same security within the same trading day where the size of the principal transaction(s) executed on the same trading day would meet or exceed the size of the customer transaction:
      (A) the price to the member;
      (B) the price to the customer; and
      (C) the differential between the two prices in (A) and (B).
      (c) Definitions

      For purposes of this Rule, the term:
      (1) "corporate debt security" shall mean a debt security that is United States ("U.S.") dollar-denominated and issued by a U.S. or foreign private issuer and, if a "restricted security" as defined in Securities Act Rule 144(a)(3), sold pursuant to Securities Act Rule 144A, but does not include a Money Market Instrument as defined in Rule 6710(o) or an Asset-Backed Security as defined in Rule 6710(m);
      (2) "agency debt security" shall have the same meaning as in Rule 6710(l); and
      (3) "Qualifying Size" shall mean a transaction for the purchase or sale of 100 bonds or less or bonds with a face amount of $100,000 or less, based on reported quantity.

      * * * * *

    • 14-51 FINRA Requests Comment on Proposed FINRA Rules Requiring the Identification of Non-Member Broker-Dealers in Order Audit Trail System (OATS) Reports and the Reporting of Additional Order Information by Alternative Trading Systems (ATS); Comment Period Expires: January 13, 2015

      View PDF

      Equity Trading Initiatives: OATS and ATS Reporting Requirements

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Trading
      Key Topics

      Alternative Trading Systems
      Non-Member Broker-Dealers
      OATS
      Referenced Rules & Notices

      FINRA Rule 6250
      FINRA Rule 7440
      SEA Rule 15c3-5
      SEA Rule 301
      SEA Rule 302
      SEA Rule 613

      Executive Summary

      FINRA is requesting comment on proposed amendments to the OATS rules that would require member firms to report additional information to OATS. Specifically, FINRA is proposing to amend the OATS rules to require members to identify non-member broker-dealers when reporting orders received from such entities. FINRA is also proposing to require ATSs to provide FINRA with additional order book information using existing OATS interfaces.

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

      Questions concerning this Notice should be directed to:

      •    Shelly Bohlin, Vice President, Market Analysis and Audit Trail Group, Market Regulation, at (240) 386-5029; or
      •    Andrew Madar, Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8056.

      Updated December 24, 2014: The comment period has been extended to February 20, 2014.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by January 13, 2015.

      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 or Exchange Act).2

      Background and Discussion

      The proposals set forth in this Notice are two of seven FINRA initiatives relating to equity market structure and automated trading activities including high frequency trading (HFT).3 These initiatives are designed to increase the scope of trading information FINRA receives, provide more transparency into trading activities to market participants and investors and require firms engaged in electronic trading and their employees to be trained, educated and accountable for their role in equity trading. The first proposal would require FINRA members (Reporting Members) that are reporting an order received from a broker-dealer that is not a FINRA member (non-member broker-dealer) to identify the non-member broker-dealer as part of their OATS report. The second proposal would require ATSs to report additional information related to orders received by the ATS using existing OATS interfaces.

      Identification of Non-Member Broker-Dealers to OATS

      FINRA is proposing to require a Reporting Member that is reporting an order received from a non-member broker-dealer to identify the non-member broker-dealer as part of their OATS report. Currently, through the use of OATS and data provided to FINRA by exchanges, FINRA is able to identify with specificity the activity of FINRA member broker-dealers across market centers. However, FINRA cannot identify with specificity non-member broker-dealer activity in the over-the-counter market (OTC), or non-member broker-dealer sponsored access activity, since Reporting Members are not required to report non-member brokerdealers' identities to OATS.4 Consequently, FINRA is not able to consistently identify nonmember broker-dealer activity and therefore cannot see a complete view of such activities conducted through FINRA members.

      Although Reporting Members report orders they receive from non-member broker-dealers, these reports do not contain the identity of the non-member broker-dealer from which the order was received. Under the proposal, FINRA members receiving orders from non-member broker-dealers would be required to identify the non-member broker-dealer in their OATS reports.5 Members would identify the non-member broker-dealer by including a unique non-member identifier on the OATS report that will allow FINRA to obtain the identity of the non-member broker-dealer. This identifier would either be an existing SRO-assigned identifier such as a market participant identifier (MPID), or if a non-member broker-dealer does not have an SRO-assigned identifier that is available to FINRA, the Central Registration Depository (CRD) number of the non-member broker-dealer.6

      FINRA believes that this proposal will significantly improve its ability to support crossmarket surveillance and monitor OTC trading by specifically identifying broker-dealers responsible for order activity. FINRA members receive a substantial amount of order flow from non-member broker-dealers, particularly in connection with ATS and sponsored access activity,7 and this proposal will enable FINRA to identify and aggregate on an automated basis when a FINRA member's activities involve non-member broker-dealer activities.8 In addition, this additional information will allow FINRA to more readily detect potentially violative trading activity by those entities for potential enforcement action or referral to appropriate regulatory authorities as well as enable FINRA to more effectively determine whether members are complying with their regulatory obligations, including, for example, the implementation of effective risk management controls under SEA Rule 15c3-5.9 This requirement may also reduce the number of false alerts generated by surveillance patterns when non-member broker-dealer activity is included in surveillance information by permitting surveillance patterns to more accurately account for the specific broker-dealer that is responsible for the activity.

      FINRA recognizes that this proposal will require firms to obtain and submit a unique identifier when submitting an OATS report for an order received from a non-member broker-dealer. FINRA notes, however, that unique identifiers currently exist for nonmember broker-dealers, and are generally readily obtainable by the member firm trading with the non-member broker-dealer. FINRA also notes that some members already provide non-member broker-dealer identifiers for orders received from non-member brokerdealers.10 For these reasons, FINRA preliminarily believes that this proposal will not have a significant impact on Reporting Members or their reporting practices, but is soliciting comment on the impact of this proposal on Reporting Members.

      Reporting of Additional Order Information by ATSs

      ATSs currently submit order information relating to activity occurring on or through the ATS to FINRA through OATS.11 However, there are several data elements that are not required to be reported to OATS, such as order re-pricing events (e.g., an order that is pegged to the National Best Bid or Offer) and order display and reserve size. Because these components of, or changes to, an ATSs order book are not reported, FINRA is not able to use existing OATS data to fully reconstruct an ATS order book for surveillance purposes. Obtaining this additional information from ATSs would allow FINRA to use information in automated surveillance of ATSs, including trading manipulation surveillance.12

      To enhance its ability to surveil ATS activity on an automated basis, FINRA is proposing to require ATSs that exceed a certain volume threshold to report additional order information in a manner that will supplement and link to the information currently reported by an ATS to OATS. Rather than requiring ATSs to establish a separate reporting structure for this new data, it would be reported to FINRA using existing OATS interfaces, which FINRA believes will minimize any potential duplicative reporting.13

      The order reporting requirements would apply to any ATS (whether considered a "lit" ATS or a "dark pool")14 that accounts for more than 0.25 percent of consolidated market share in any security over a one-month period.15 Once an ATS has exceeded the threshold for one security, it would be required to report order information for all securities for which the ATS receives an order. An ATS that has triggered the reporting requirement would have to fall under the 0.25 percent threshold and remain there for six months before being relieved of its reporting obligation.

      Under the proposal, ATSs exceeding the volume requirement would be required to report all events and order attributes that would change the ATS's system quantity (the number of shares of an order, whether displayed or undisplayed, that can currently execute within the ATS), the displayed quantity, the highest (buy orders) or lowest (sell orders) price at which the order can currently execute within the ATS, and the displayed price for an order. An ATS also would provide, for every order, the ATS book sequence identifier and the associated OATS identifier, which will link information about that order to the related information and full lifecycle reported to OATS.16

      FINRA believes that this proposal will greatly enhance its ability to surveil activity occurring within an ATS, and by extension HFT and algorithmic trading activity more generally across markets. Among other things, the additional information provided under the proposal will enable FINRA to more effectively conduct automated surveillance involving ATSs, and to detect market-specific and cross-market manipulative activities. Given the significant role of ATSs in the current market structure, FINRA believes the proposed additional information will greatly enhance its ability to monitor and reconstruct trading activities occurring on or through an ATS.17

      FINRA recognizes that the proposal may create or increase costs related to technological capabilities or system enhancements for reporting and compliance for members that are ATSs or that operate ATSs that exceed the volume thresholds noted above. These members will have to transmit additional order information to FINRA on a daily basis. Consequently, FINRA is soliciting comment on the impact of this proposal on members as well as on whether other approaches to obtaining ATS order book information exist, and the benefits and economic impact of such approaches.

      Request for Comments

      FINRA seeks comments on the proposals outlined above. In addition to general comments, FINRA specifically requests comments on the following questions:

      Identification of Non-Member Broker-Dealers to OATS

      •    What kinds of costs would Reporting Members incur in complying with the proposed requirement to report the identity of non-member broker-dealers when receiving orders from such entities? Would these costs differ based on the member's business model? Please provide any estimates of these costs and associated assumptions underlying the estimates.
      •    Are there alternative methods or approaches that would provide FINRA with this same type of information? What are the economic impacts associated with these alternatives?
      •    What is the process by which a member firm obtains the identifier of a non-member broker-dealer? Would FINRA need to provide additional tools or information to Reporting Members in order for them to comply with the requirement?
      •    What other impacts would this proposal have on Reporting Members?

      Reporting of Additional Order Information by ATSs

      •    What are the potential impacts on members of the proposal to require the reporting of ATS order book information? What kinds of costs would members incur in connection with this proposal? Do these costs differ depending on the member's business model? Please provide any estimates of these costs and associated assumptions underlying the estimates.
      •    In reporting ATS order book information, would members be required to generate new order information? To the extent that members will be required to code and transmit ATS order book information pursuant to FINRA OATS specifications, what impact will this have on members?
      •    Should the proposal require the reporting of all ATS order book information, or is there a benefit to excluding lower-volume ATSs from the reporting requirement? Is the proposed volume threshold an appropriate measure or should the volume threshold be higher or lower? Are there alternative threshold measures that FINRA should consider? What are the economic impacts associated with different volume thresholds?
      •    Would other approaches to reporting ATS order book information provide FINRA with comparable information? To the extent that other alternatives exist, what are the benefits, shortcomings and economic impacts of such approaches?
      •    Instead of submitting ATS order book information through the existing OATS gateway, are there other approaches that should be considered? What are the benefits, shortcomings and economic impacts of such approaches?

      FINRA requests that commenters provide empirical data or other factual support for their comments wherever 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 FINRA September 19, 2014 news release "FINRA Board Approves Series of Equity Trading and Fixed Income Rulemaking Items."

      4 A FINRA member that provides sponsored access to a non-member broker-dealer has an OATS reporting obligation for each order sent to a national securities exchange pursuant to any such agreement. In this scenario, the FINRA member must report a New Order and a Route Report to the applicable exchange reflecting that the order was received from a non-member broker-dealer. See OATS FAQ C77.

      5 FINRA Rule 7440(c)(6) requires that, for orders routed from a member to a non-member broker-dealer, the identity of that non-member broker-dealer be reported. Currently, the OATS Technical Reporting Specifications require a specific identifier for each national securities exchange to which an order is routed be reported to OATS. However, only a generic identifier for non-members other than a national securities exchange is required. Consequently, the identity of the specific non-member broker-dealer to which an order is routed is not captured. The OATS Reporting Technical Specifications will be updated to require a member to provide either an SRO-assigned identifier or CRD number when routing an order to a non-member broker-dealer.

      6 Currently, all SEC-registered broker-dealers have an SRO-assigned identifier that is available to FINRA.

      7 For example, in the second quarter of 2014, more than 39 percent of new orders reported to OATS were reported as being received from a non-member broker-dealer. Of particular note, more than 49 percent of ATS orders and more than 63 percent of sponsored access orders were received from a non-member broker-dealer.

      8 For example, FINRA would be able to identify potential wash trades of a non-member broker-dealer, even if executed through two separate members.

      9 See 17 CFR 240.15c3-5.

      10 In the second quarter of 2014, ATSs reported the MPIDs of 19 non-FINRA member broker-dealers that submitted approximately 10.1 billion orders to those ATSs.

      11 An ATS is a system that meets the statutory definition of a national securities exchange, which includes a system that brings together buyers and sellers of securities, but that elects to register as a broker-dealer and be subject to the requirements set forth in Regulation ATS.

      12 FINRA already receives these data elements in the order book information provided to FINRA by its exchange clients under Regulatory Services Agreements, and this additional information would allow FINRA to have comparable information for both ATSs and exchanges.

      13 Similarly, an ATS that is registered as an Alternative Display Facility (ADF) Trading Center and displays quotations on the ADF, of which there currently is only one such ATS, is subject to separate order reporting requirements under Rule 6250, which require that the ADF Trading Center report order information that will link an order to a quote that is displayed on the ADF. For such ATSs, the proposed rule would incorporate certain reporting requirements of Rule 6250, but would not require duplicative reporting for an ADF Trading Center.

      14 A "lit" ATS displays subscriber orders and, if that ATS meets the applicable volume thresholds, makes its best bid and best offer available for publication in the consolidated quotation data. A "dark" ATS does not make such quotation information available within the ATS or for publication in the consolidated quotation data. See 17 CFR 242.301(b)(3).

      15 This is the same threshold that was proposed, although never adopted, by the SEC in its proposed rulemaking to lower the trading volume threshold in Regulation ATS that triggers the obligation for ATSs to display their bestpriced orders in the consolidated quotation data. See Securities Exchange Release No. 60997 (November 13, 2009), 74 FR 61208 (November 23 2009).

      16 For an ATS that displays quotations on the ADF, the rule will incorporate certain reporting requirements from Rule 6250, which require that the ADF Trading Center report order information that will link an order to a quote that is displayed on the ADF.

      17 FINRA notes that, for the period between May 12, 2014, through June 23, 2014, ATSs accounted for 16 percent of the volume of NMS stocks by shares traded.


      ATTACHMENT A

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

      FINRA Rules

      4554. Alternative Trading Systems—Recording and Reporting Requirements of Order and Execution Information for NMS Stocks
      (a) Subject to the terms and conditions contained herein, each Qualifying ATS must record each item of information described below for each order it receives in an NMS stock, as defined in Rule 600(b)(47) of SEC Regulation NMS, from a subscriber or from another broker-dealer. For purposes of this Rule, the term "order" includes a broker-dealer's proprietary quotes that are transmitted to an ATS. All Qualifying ATSs must report this information to FINRA as specified below.
      (1) Order Receipt:
      All orders received by a Qualifying ATS must be recorded and reported to OATS pursuant to FINRA Rules 7440 and 7450. The following additional fields must also be recorded and reported to FINRA by the Qualifying ATS when reporting receipt of the order to OATS:
      (A) unique identifier assigned to the order by the ATS, as applicable;
      (B) the time the order was communicated to the ATS matching engine if different than the time of receipt reported pursuant to FINRA Rule 7440(b)(16), and the time when the order was placed on the book for execution, with such information reported in the finest increment (e.g., milliseconds) that is captured in the system of such ATS;
      (C) ATS book sequence id for the event;
      (D) whether the order was marketable upon arrival;
      (E) whether the order was not marketable and was placed on the book;
      (F) display quantity;
      (G) total quantity available for execution at the ATS at the time the order was received by the ATS;
      (H) price at which the order was displayed and/or price at which order was placed on the ATS book (e.g., if not displayed);
      (I) specific pricing instructions such as pegging, including specific benchmarks;
      (J) highest (buy orders) or lowest (sell orders) price at which the order can currently execute within the ATS;
      (K) order display instructions and limits, such as the maximum number of shares for the order that can be displayed at any given time, display range, etc.; and
      (L) any other information as specified by FINRA or the SEC.
      (2) ATS book sequence ID, when the Qualifying ATS reports any of the following events to OATS pursuant to FINRA Rules 7440 and 7450:
      (A) order executions at the ATS;
      (B) order cancellations;
      (C) order modifications; and
      (D) order transmittal to another market center.
      (3) ATS Book Price and Size Changes
      (A) whether price and/or size of shares available for execution changed (e.g., price change or size change);
      (B) the order receiving firm order ID, as that term is described in Rule 7440(b)(1) and the OATS Reporting Technical Specifications;
      (C) unique identifier assigned to the order by the ATS, as applicable;
      (D) price or size change timestamp;
      (E) reason for price and/or size change;
      (F) ATS book sequence id for the event;
      (G) new display quantity and total quantity of the order executable at ATS resulting from the order event update;
      (H) new limit and displayed price and the new highest (lowest) price of the buy (sell) order resulting from the order update event;
      (I) new order display limits, such as a new display range resulting from the order update event; and
      (J) any other information as specified by FINRA.
      The information described in subparagraphs (1) through (3) must be reported to FINRA by no later than 8:00 a.m. Eastern Time on the calendar day following of receipt of the order in an electronic form as prescribed by FINRA.
      (b) Qualifying ATSs that are also registered as ADF Trading Centers, as defined in Rule 6220, must also record and report to FINRA, as specified below, the following information for each bid or offer displayed on the ADF:
      (1) symbol;
      (2) quote identifier provided to the ADF Facility;
      (3) quote generation timestamp;
      (4) the Order Receiving Firm Order ID, as that term is described in Rule 7440(b) (1) and the OATS Reporting Technical Specifications for each order that is part of the displayed bid or offer;
      (5) unique identifier assigned to the order by the ATS, as applicable, for each order that is part of the displayed bid or offer; and
      (6) any other information as specified by FINRA or the SEC. The information described in paragraph (b) shall be reported to FINRA no later than 8:00 a.m. Eastern Time on the calendar day following receipt of the order in an electronic form as prescribed by FINRA; provided, however, that an ATS that is also registered as an ADF Trading Center must report any information described in this paragraph (b) to FINRA immediately upon request. Any information related to time must be reported in the finest increment (e.g., milliseconds) that is captured in the system of such ATS.
      (c) "Qualifying ATS" means any ATS, as defined in Rule 300 of SEC Regulation ATS, that accounts for more than 0.25% of consolidated market share in any NMS stock over a one-month period. Once an ATS has exceeded the threshold for one NMS stock, it will be required to report order information for all NMS stocks for which the ATS receives an order. Once an ATS is deemed a Qualifying ATS, it must fall under the 0.25% market share threshold, and remain below that threshold for six months, to no longer be considered a Qualifying ATS and be relieved of its reporting obligation.
      (d) Members shall transmit this information in such form as prescribed by FINRA.
      *   *   *   *   *

      6250. Quote and Order Access Requirements

      (a) through (b) No Change
      (c) An ADF Trading Center that is an ATS must report the information required in Rule 4554. For each bid or offer displayed by [an ADF Trading Center] a Registered Reporting ADF Market Maker on the ADF, the [ADF Trading Center] Registered Reporting ADF Market Maker must record and report to FINRA the following information in such form as prescribed by FINRA.
      (1) All [ADF Trading Centers] Registered Reporting ADF Market Makers must record and report the following information for each order that is part of a displayed bid or offer, including:
      (A) through (M) No Change
      (2) All [ADF Trading Centers] Registered Reporting ADF Market Makers must also record and report the execution details, if any, of each order that is part of a displayed bid or offer, including:
      (A) through (L) No Change

      The information described in paragraphs (1) and (2) shall be reported to FINRA in "next day" file submission, with such information reported to FINRA no later than 8:00 a.m. Eastern Time on the day following receipt of the order; provided, however, that an [ADF Trading Center] Registered Reporting ADF Market Maker must report any information described in paragraphs (1) and (2) to FINRA immediately upon request. Any information related to time must be reported in the finest increment (e.g., milliseconds) that is captured in the [ADF Trading Center's] Registered Reporting ADF Market Maker's system.

      *   *   *   *   *

      7440. Recording of Order Information

      (a) Procedures

      No Change.
      (b) Order Origination and Receipt

      Unless otherwise indicated, the following order information must be recorded under this Rule when an order is received or originated. For purposes of this Rule, the order origination or receipt time is the time the order is received from the customer.
      (1) through (18) No Change.
      (19) where the Reporting Member receives an order from a broker-dealer that is not a member, identification of the non-member broker-dealer; and
      ([19]20) if the member is relying on the exception provided in Rule 5320.02 with respect to the order, the unique identification of any appropriate information barriers in place at the department within the member where the order was received or originated.
      (c) Order Transmittal

      No Change.
      *   *   *   *   *

    • 14-50 FINRA Requests Comment on a Proposal to Establish a "Pay-to-Play" Rule; Comment Period Expires: December 15, 2014

      View PDF

      Political Contributions

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Government Securities
      Legal
      Municipal
      Registered Representatives
      Senior Management
      Key Topics

      Disclosure
      Political Contributions
      Recordkeeping
      Referenced Rules & Notices

      Advisers Act Rule 204-2
      Advisers Act Rule 204-4
      Advisers Act Rule 206(4)-3
      Advisers Act Rule 206(4)-5
      MSRB Regulatory Notice 2014-15
      MSRB Rule G-37
      SEA Rule 15Ba1-1

      Executive Summary

      FINRA is requesting comment on a proposal to establish "pay-to-play"1 and related rules that would regulate the activities of member firms that engage in distribution or solicitation activities for compensation with government entities on behalf of investment advisers that provide or are seeking to provide investment advisory services to such government entities within two years after a contribution to an official of the government entity is made by the member firm or a covered associate. This proposal responds to Rule 206(4)-5 under the Investment Advisers Act of 1940 (Advisers Act), which includes a provision that, upon its compliance date, will prohibit an investment adviser and its covered associates from providing or agreeing to provide, directly or indirectly, payment to a member firm to solicit a government entity for investment advisory services on behalf of the investment adviser unless the member firm is subject to a FINRA pay-to-play rule. Specifically, FINRA is seeking comment on three proposed new rules: Rule 2271 (Disclosure Requirement for Government Distribution and Solicitation Activities); Rule 2390 (Engaging in Distribution and Solicitation Activities with Government Entities); and Rule 4580 (Books and Records Requirements for Government Distribution and Solicitation Activities).

      The text of the proposed rule can be found at www.finra.org/notices/14-50.

      Questions concerning this Notice should be directed to 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 December 15, 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.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 or Exchange Act).3

      Background & Discussion

      In July 2010, the SEC adopted Advisers Act Rule 206(4)-5 addressing pay-to-play practices by investment advisers (the SEC Pay-to-Play Rule).4 The SEC Pay-to-Play Rule prohibits an investment adviser from providing advisory services for compensation to a government entity for two years after the adviser or its covered associates make a contribution to an official of the government entity, unless an exception or exemption applies. In addition, it prohibits an investment adviser from soliciting from others, or coordinating, contributions to government entity officials or payments to political parties where the adviser is providing or seeking to provide investment advisory services to a government entity.

      The SEC Pay-to-Play Rule also prohibits an investment adviser and its covered associates from providing or agreeing to provide, directly or indirectly, payment to any person to solicit a government entity for investment advisory services on behalf of the investment adviser unless the person is a "regulated person." A "regulated person" includes a member firm, provided that: (a) FINRA rules prohibit member firms from engaging in distribution or solicitation activities if political contributions have been made; and (b) the SEC finds that such rules impose substantially equivalent or more stringent restrictions on member firms than the SEC Pay-to-Play Rule imposes on investment advisers and that such rules are consistent with the objectives of the SEC Pay-to-Play Rule.5 This SEC ban on third party solicitations will be effective nine months after the compliance date of a final rule adopted by the SEC by which municipal advisors must register under the SEA.6 The SEC adopted such a final rule on September 20, 2013, with a compliance date of July 1, 2014.7

      Based on this regulatory framework, FINRA is proposing a pay-to-play rule, Rule 2390, modeled on the SEC Pay-to-Play Rule that would impose substantially equivalent or more stringent restrictions on member firms engaging in distribution or solicitation activities than the SEC Pay-to-Play Rule imposes on investment advisers. FINRA is also proposing rules that would impose recordkeeping and disclosure requirements on member firms in connection with political contributions.8

      The proposed rules would establish a comprehensive regime to regulate the activities of member firms that engage in distribution or solicitation activities with government entities on behalf of investment advisers. FINRA believes that establishing requirements for member firms that are modeled on the SEC's Pay-to-Play-Rule is a more effective regulatory response to the concerns the SEC identified in the SEC Pay-to-Play Rule Adopting Release regarding third-party solicitations than an outright ban on such activity. For example, in the SEC Pay-to-Play Rule Adopting Release, the SEC stated that solicitors9 or "placement agents"10 have played a central role in actions that it and other authorities have brought involving pay-to-play schemes.11 The SEC noted that in several instances, advisers allegedly made significant payments to placement agents and other intermediaries in order to influence the award of advisory contracts.12 The SEC also acknowledged the difficulties that advisers face in monitoring or controlling the activities of their third-party solicitors.13 Accordingly, the proposed rules are intended to enable member firms to continue to engage in distribution and solicitation activities with government entities on behalf of investment advisers while at the same time deterring member firms from engaging in pay-to-play practices.14

      Proposed Pay-to-Play Rule

      A. Two-Year Time Out

      Proposed Rule 2390(a) would prohibit a covered member from engaging in distribution or solicitation15 activities for compensation with a government entity on behalf of an investment adviser that provides or is seeking to provide investment advisory services to such government entity within two years after a contribution to an official of the government entity is made by the covered member or a covered associate (including a person who becomes a covered associate within the two years after the contribution is made). As discussed in more detail below, the terms and scope of this prohibition are modeled on the SEC Pay-to-Play Rule.16

      The proposed rule would not ban or limit the amount of political contributions a covered member or its covered associates could make. Instead, it would impose a two-year time out on engaging in distribution or solicitation activities for compensation with a government entity on behalf of an investment adviser after the covered member or its covered associates make a contribution to an official of the government entity. Consistent with the two-year time out in the SEC Pay-to-Play Rule, the two-year time out in the proposed rule is intended to discourage covered members from participating in pay-to-play practices by requiring a cooling-off period during which the effects of a political contribution on the selection process can be expected to dissipate.
      1. Covered Members

      Proposed Rule 2390(h)(4) defines a "covered member" to mean "any member except when that member is engaging in activities that would cause the member to be a municipal advisor as defined in Exchange Act Section 15B(e)(4), SEA Rule 15Ba1-1(d) (1) through (4) and other rules and regulations thereunder." As noted above, the SEC Pay-to-Play Rule includes within its definition of "regulated person" SEC-registered municipal advisors, subject to specified conditions.17 Specifically, the SEC Pay-to-Play Rule prohibits an investment adviser from providing or agreeing to provide, directly or indirectly, payment to an SEC-registered municipal advisor unless the municipal advisor is subject to a Municipal Securities Rulemaking Board (MSRB) pay-to-play rule.18

      A member firm that solicits a government entity for investment advisory services on behalf of an unaffiliated investment adviser may be required to register with the SEC as a municipal advisor as a result of such activity.19 Under such circumstances, MSRB rules applicable to municipal advisors, including any pay-to-play rule adopted by the MSRB, would apply to the member firm.20 On the other hand, if the member firm solicits a government entity on behalf of an affiliated investment adviser, such activity would not cause the firm to be a municipal advisor. Under such circumstances, the member firm would be a "covered member" subject to the requirements of the proposed rule.21
      2. Investment Advisers

      The proposed rule would apply to covered members acting on behalf of any investment adviser registered (or required to be registered) with the SEC, or unregistered in reliance on the exemption available under Section 203(b)(3) of the Advisers Act for foreign private advisers, or that is an exempt reporting adviser under Advisers Act Rule 204-4(a).22 The proposed rule's definition of "investment adviser" is consistent with the definition of "investment adviser" in the SEC Pay-to-Play Rule.23 Thus, it would not apply to member firms acting on behalf of advisers that are registered with state securities authorities instead of the SEC, or advisers that are unregistered in reliance on exemptions other than Section 203(b)(3) of the Advisers Act.
      3. Official of a Government Entity

      An official of a government entity would include an incumbent, candidate or successful candidate for elective office of a government entity if the office is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser or has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser.24 Government entities would include all state and local governments, their agencies and instrumentalities, and all public pension plans and other collective government funds, including participant-directed plans such as 403(b),25 457,26 and 529 plans.27

      Thus, the two-year time out would be triggered by contributions, not only to elected officials who have legal authority to hire the adviser, but also to elected officials (such as persons with appointment authority) who can influence the hiring of the adviser. As noted in the SEC Pay-to-Play Rule Adopting Release, a person appointed by an elected official is likely to be subject to that official's influences and recommendations. It is the scope of authority of the particular office of an official, not the influence actually exercised by the individual that would determine whether the individual has influence over the awarding of an investment advisory contract under the definition.28
      4. Contributions

      The proposed rule's time out provisions would be triggered by contributions made by a covered member or any of its covered associates. A contribution would include a gift, subscription, loan, advance, deposit of money, or anything of value made for the purpose of influencing the election for a federal, state or local office, including any payments for debts incurred in such an election. It would also include transition or inaugural expenses incurred by a successful candidate for state or local office.29 Consistent with the SEC Pay-to-Play Rule, FINRA would not consider a donation of time by an individual to be a contribution, provided the covered member has not solicited the individual's efforts and the covered member's resources, such as office space and telephones, are not used.30 Similarly, FINRA would not consider a charitable donation made by a covered member to an organization that qualifies for an exemption from federal taxation under the Internal Revenue Code,31 or its equivalent in a foreign jurisdiction, at the request of an official of a government entity to be a contribution for purposes of the proposed rule.32
      5. Covered Associates

      As stated in the SEC Pay-to-Play Rule Adopting Release, contributions made to influence the selection process are typically made not by the firm itself, but by officers and employees of the firm who have a direct economic stake in the business relationship with the government client.33 Accordingly, consistent with the SEC Pay-to-Play Rule, under the proposed rule, contributions by each of these persons, which the proposed rule describes as "covered associates," would trigger the two-year time out.34

      In addition, a covered associate would include a political action committee, or PAC, controlled by the covered member or any of its covered associates as a PAC is often used to make political contributions.35 Under the proposed rule, FINRA would consider a covered member or its covered associates to have "control" over a PAC if the covered member or covered associate has the ability to direct or cause the direction of governance or operations of the PAC.
      6. "Look Back"

      Consistent with the SEC Pay-to-Play Rule, the proposed rule would attribute to a covered member contributions made by a person within two years (or, in some cases, six months) of becoming a covered associate. This "look back" would apply to any person who becomes a covered associate, including a current employee who has been transferred or promoted to a position covered by the proposed rule. A person would become a "covered associate" for purposes of the proposed rule's "look back" provision at the time he or she is hired or promoted to a position that meets the definition of a "covered associate."

      Thus, when an employee becomes a covered associate, the covered member must "look back" in time to that employee's contributions to determine whether the time out applies to the covered member. If, for example, the contributions were made more than two years (or, pursuant to the exception described below for new covered associates, six months) prior to the employee becoming a covered associate, the time out has run. If the contribution was made less than two years (or six months, as applicable) from the time the person becomes a covered associate, the proposed rule would prohibit the covered member that hires or promotes the contributing covered associate from receiving compensation for engaging in distribution or solicitation activities from the hiring or promotion date until the two-year period has run.

      In no case would the prohibition imposed be longer than two years from the date the covered associate made the contribution. Thus, if, for example, the covered associate becomes employed (and engages in solicitation activities) one year and six months after the contribution was made, the covered member would be subject to the proposed rule's prohibition for the remaining six months of the two-year period. This "look back" provision, which is consistent with the SEC Pay-to-Play Rule, is designed to prevent covered members from circumventing the rule by influencing the selection process by hiring persons who have made political contributions.36
      B. Disgorgement

      If a covered member engages in distribution or solicitation activities for compensation with a government entity on behalf of an investment adviser within two years after a political contribution has been made to an official of the government entity, proposed Rule 2390(b)(1) would make clear that the covered member cannot receive any compensation or other remuneration pertaining to, or arising from, the distribution or solicitation activities from the investment adviser, a covered investment pool advised by the adviser or the government entity.

      In addition, proposed Rule 2390(b)(2) would require that the covered member pay, in the order listed, any compensation or other remuneration received by the covered member pertaining to, or arising from, distribution or solicitation activities during the two-year time out to: (A) a covered investment pool in which the government entity was solicited to invest, as applicable; (B) the government entity; (C) any appropriate entity designated in writing by the government entity if the government entity or covered investment pool cannot receive such payments; or (D) the FINRA Investor Education Foundation, if the government entity or covered investment pool cannot receive such payments and the government entity cannot or does not designate in writing any other appropriate entity. Proposed Rule 2390(b)(3) would prohibit covered members from entering into arrangements with an investment adviser or government entity to recoup the disgorged compensation or other remuneration.

      Although the SEC Pay-to-Play Rule does not include a similar "disgorgement" requirement, FINRA believes that such a requirement is appropriate for a violation of its pay-to-play rule and as a means to further discourage pay-to-play practices. In addition, FINRA notes that this disgorgement requirement would be in addition to any other sanctions that may be imposed for a violation of its pay-to-play rule.
      C. Prohibition on Soliciting and Coordinating Contributions

      Proposed Rule 2390(c) would prohibit a covered member or covered associate from coordinating or soliciting37 any person or PAC to make any: (1) contribution to an official of a government entity in respect of which the covered member is engaging in, or seeking to engage in, distribution or solicitation activities on behalf of an investment adviser; or (2) payment38 to a political party of a state or locality of a government entity with which the covered member is engaging in, or seeking to engage in, distribution or solicitation activities on behalf of an investment adviser. This provision is modeled on a similar provision in the SEC Pay-to-Play Rule39 and is intended to prevent covered members or covered associates from circumventing the proposed rule's prohibition on direct contributions to certain elected officials such as by "bundling" a large number of small employee contributions to influence an election, or making contributions (or payments) indirectly through a state or local political party.40
      D . Direct or Indirect Contributions or Solicitations

      Proposed Rule 2390(f) further provides that it shall be a violation of Rule 2390 for any covered member or any of its covered associates to do anything that, if done directly, would result in a violation of the rule. This provision is consistent with a similar provision in the SEC Pay-to-Play Rule41 and would prevent a covered member or its covered associates from funneling payments through third parties, including, for example, consultants, attorneys, family members, friends or companies affiliated with the covered member as a means to circumvent the proposed rule.42
      E. Covered Investment Pools

      Proposed Rule 2390(e) provides that a covered member that engages in distribution or solicitation activities with a government entity on behalf of an investment adviser to a covered investment pool43 in which a government entity invests or is solicited to invest shall be treated as though the covered member was engaging in or seeking to engage in distribution or solicitation activities with the government entity on behalf of the investment adviser directly.44 This provision is modeled on a similar prohibition in the SEC Pay-to-Play Rule45 and would apply the prohibitions of the proposed rule to an investment adviser that manages assets of a government entity through a hedge fund or other type of pooled investment vehicle. Thus, the provision would extend the protection of the proposed rule to public pension plans that access the services of investment advisers through hedge funds and other types of pooled investment vehicles sponsored or advised by investment advisers as a funding vehicle or investment option in a government-sponsored plan, such as a "529 plan."46
      F. Exceptions and Exemptions

      As discussed in more detail below, the proposed rule contains exceptions that are modeled on similar exceptions in the SEC Pay-to-Play Rule for de minimis contributions, new covered associates and returned contributions.47

      In addition, proposed Rule 2390(g) includes an exemptive provision for covered members that is modeled on the exemptive provision in the SEC Pay-to-Play Rule48 that would allow covered members to apply to FINRA for an exemption from the proposed rule's two-year time out. Under this provision, FINRA would be able to exempt covered members from the proposed rule's time out requirement where the covered member discovers contributions that would trigger the compensation ban after they have been made, and when imposition of the prohibition would be unnecessary to achieve the rule's intended purpose. This provision would provide covered members with an additional avenue by which to seek to cure the consequences of an inadvertent violation by the covered member or its covered associates that falls outside the limits of one of the proposed rule's exceptions. In determining whether to grant an exemption, FINRA would take into account the varying facts and circumstances that each application presents.
      1. De Minimis Contributions

      Proposed Rule 2390(d)(1) would except from the rule's restrictions contributions made by a covered associate to government entity officials for whom the covered associate was entitled to vote49 at the time of the contributions, provided the contributions do not exceed $350 in the aggregate to any one official per election. If the covered associate was not entitled to vote for the official at the time of the contribution, the contribution must not exceed $150 in the aggregate per election. Consistent with the SEC Pay-to-Play Rule, under both exceptions, primary and general elections would be considered separate elections.50 These exceptions are based on the theory that such contributions are typically made without the intent or ability to influence the selection process.
      2. New Covered Associates

      Proposed Rule 2390(d)(2) would provide an exception from the proposed rule's restrictions for covered members if a natural person made a contribution more than six months prior to becoming a covered associate of the covered member unless the covered associate engages in, or seeks to engage in, distribution or solicitation activities with a government entity on behalf of the covered member. This provision is consistent with a similar provision in the SEC Pay-to-Play Rule.51 As stated in the SEC Pay-to-Play Rule Adopting Release, the potential link between obtaining advisory business and contributions made by an individual prior to his or her becoming a covered associate who is uninvolved in distribution or solicitation activities is likely more attenuated than for a covered associate who engages in distribution or solicitation activities and, therefore, should be subject to a shorter look-back period.52 This exception is also intended to balance the need for covered members to be able to make hiring decisions with the need to protect against individuals marketing to prospective employers their connections to, or influence over, government entities the employer might be seeking as clients.53
      3. Certain Returned Contributions

      Proposed Rule 2390(d)(3) would provide an exception from the proposed rule's restrictions for covered members if the restriction is due to a contribution made by a covered associate and: (1) the covered member discovered the contribution within four months of it being made; (2) the contribution was less than $350; and (3) the contribution is returned within 60 days of the discovery of the contribution by the covered member.

      Consistent with the SEC Pay-to-Play Rule, this exception would allow a covered member to cure the consequences of an inadvertent political contribution to an official for whom the covered associate is not entitled to vote. As the SEC stated in the SEC Pay-to-Play Rule Adopting Release, the exception is limited to the types of contributions that are less likely to raise pay-to-play concerns.54 The prompt return of the contribution provides an indication that the contribution would not affect a government entity official's decision to award business. The 60-day limit is designed to give contributors sufficient time to seek its return, but still require that they do so in a timely manner. In addition, the relatively small amount of the contribution, in conjunction with the other conditions of the exception, suggests that the contribution was unlikely to have been made for the purpose of influencing the selection process. Repeated triggering contributions suggest otherwise. Thus, the proposed rule would provide that covered members with 150 or fewer registered representatives would be able to rely on this exception no more than two times per calendar year. All other covered members would be permitted to rely on this exception no more than three times per calendar year. In addition, a covered member would not be able to rely on an exception more than once with respect to contributions by the same covered associate regardless of the time period. These limitations are consistent with similar provisions in the SEC Pay-to-Play Rule.55

      Proposed Disclosure Requirements

      Proposed Rule 2271 would require a covered member engaging in distribution or solicitation activities for compensation with a government entity on behalf of one or more investment advisers to make specified disclosures to the government entity regarding each investment adviser. The disclosures must be in writing (which may be electronic) and provided at the time of the initial distribution or solicitation. In addition, the disclosures must include the following information:

      •  the fact that the covered member is engaging in distribution or solicitation activities on behalf of the investment adviser;
      •  the name of the investment adviser on whose behalf the covered member is engaging in distribution or solicitation activities;
      •  the nature of the relationship, including any affiliation, between the covered member and the investment adviser;
      •  a statement that the covered member will be compensated by the investment adviser for its distribution or solicitation activities and the terms of such compensation arrangement, including a description of the compensation paid or to be paid to the covered member;
      •  any incremental charges or fees that may be imposed on the government entity as a result of the distribution or solicitation engaged in by the covered member;
      •  the existence and details of any pecuniary, employment, business or other relationships between the covered member or any covered associate and any person affiliated with the government entity that has influence in the decision-making process in choosing an investment adviser; and
      •  the existence of the covered member's internal policies with respect to political contributions by covered associates and other associated persons.

      Proposed Rule 2271 also would require covered members to update in writing any material changes to the information provided in these disclosures within 10 calendar days of the date of such changes.56

      Proposed Recordkeeping Requirements

      Proposed Rule 4580 would require covered members that engage in distribution or solicitation activities with a government entity on behalf of any investment adviser that provides or is seeking to provide investment advisory services to such government entity to maintain books and records that would allow FINRA to examine for compliance with proposed Rules 2271 and 2390. This provision is consistent with similar recordkeeping requirements imposed on investment advisers in connection with the SEC Pay-to-Play Rule.57 The proposed rule would require covered members to maintain a list or other record of:

      •  the names, titles and business and residence addresses of all covered associates;
      •  the name and business address of each investment adviser on behalf of which the covered member has engaged in distribution or solicitation activities with a government entity within the past five years (but not prior to the rule's effective date);
      •  the name and business address of all government entities with which the covered member has engaged in distribution or solicitation activities on behalf of an investment adviser within the past five years (but not prior to the rule's effective date); and
      •  all direct or indirect contributions made by the covered member or any of its covered associates to an official of a government entity, or direct or indirect payments to a political party of a state or political subdivision thereof, or to a PAC.

      The proposed rule would require that the direct and indirect contributions or payments made by the covered member or any of its covered associates be listed in chronological order and indicate the name and title of each contributor and each recipient of the contribution or payment, as well as the amount and date of each contribution or payment, and whether the contribution was the subject of the exception for returned contributions in proposed Rule 2390.

      Economic Impact Analysis

      A. Need for the Rule

      The SEC Pay-to-Play Rule prohibits an investment adviser and its covered associates from providing or agreeing to provide, directly or indirectly, payment to any person to solicit a government entity for investment advisory services on behalf of the investment adviser unless the person is a "regulated person." A "regulated person" includes a member firm, provided that: (a) FINRA rules prohibit member firms from engaging in distribution or solicitation activities if political contributions have been made; and (b) the SEC finds that such rules impose substantially equivalent or more stringent restrictions on member firms than the SEC Pay-to-Play Rule imposes on investment advisers and that such rules are consistent with the objectives of the SEC Pay-to-Play Rule. Thus, FINRA must propose its own pay-to-play rule to enable member firms to continue to engage in distribution and solicitation activities for compensation with government entities on behalf of investment advisers.
      B. Regulatory Objective

      The proposed rules would establish a comprehensive regime to regulate the activities of member firms that engage in distribution or solicitation activities with government entities on behalf of investment advisers. FINRA aims to enable member firms to continue to engage in such activities for compensation while at the same time deterring member firms from engaging in pay-to-play practices.
      C. Economic Baseline

      The baseline used to evaluate the impact of the proposed rules is the regulatory framework under the SEC Pay-to-Play Rule and the MSRB pay-to-play rules. In the absence of the proposed rules, some member firms currently engaging in distribution or solicitation activities with government entities on behalf of investment advisers would not be able to receive payments from investment advisers after the SEC's ban on third-party solicitors becomes effective. Since a "regulated person" also includes SEC-registered investment advisers and SEC-registered municipal advisors subject to MSRB pay-to-play rules, member firms dually registered with the SEC as investment advisers or municipal advisors may continue to engage in distribution or solicitation activities for compensation with government entities on behalf of investment advisers.

      The member firms that would have to cease their distribution or solicitation activities for compensation with government entities on behalf of investment advisers may bear direct losses as a result of the loss of this business. In addition, the third-party solicitor ban may impact investment advisers and public pension plans.

      Specifically, a decrease in the number of third-party solicitors may reduce the competition in the market for solicitation services. Some investment advisers may need to search for and hire new solicitors as a result of the ban to continue their solicitation activities. Due to limited capacity of third-party solicitors, investment advisers may encounter difficulties in retaining solicitors or delays in solicitation services. These changes would likely increase the costs to investment advisers that rely on third-party solicitors to obtain government clients.

      To the extent that higher costs may reduce the number of investment advisers competing for government business, public pension plans may face limited investment opportunities. Allocative efficiency in the market for advisory services may be adversely affected.
      D. Economic Impacts
      1. Benefits

      The proposed rules would enable member firms to continue to engage in distribution or solicitation activities for compensation with government entities on behalf of investment advisers within the regulatory boundaries of the proposed rules. By preventing a potentially harmful disruption in the member firms' solicitation business, the proposed rules may help member firms avoid some of the likely losses associated with the SEC's third-party solicitor ban. The proposed rules may also help promote competition and efficiency by allowing more third-party solicitors to participate in the market for solicitation services, which may in turn reduce costs to investment advisers and improve competition for advisory services.

      The proposed rules are intended to establish a comprehensive regime to allow member firms to continue to engage in distribution or solicitation activities with government entities on behalf of investment advisers while deterring member firms from engaging in pay-to-play practices. FINRA believes the proposed rules would curb fraudulent conduct resulting from pay-to-play practices and, therefore, help promote fair competition in the advisory market and protect public pension funds and investors.
      2. Costs

      FINRA recognizes that covered members that engage in distribution or solicitation activities with government entities on behalf of investment advisers would incur costs to comply with the proposed rules on an initial and ongoing basis. Member firms would need to establish and maintain policies and procedures to monitor contributions the firm and its covered associates make and to ensure compliance with the proposed requirements. FINRA is interested in the prevalence of member firms' distribution or solicitation activities with government entities on behalf of investment advisers and requests comment on the number of member firms that would be affected by the proposed rules.

      The compliance costs would likely vary across member firms based on a number of factors such as the number of covered associates, business models of members firms and the extent to which their compliance procedures are automated, whether the covered member is (or is affiliated with) a registered investment adviser subject to the SEC Pay-to-Play Rule, and whether the covered member is a registered municipal securities dealer and thus subject to MSRB pay-to-play rules. A small covered member with fewer covered associates may expend fewer resources to comply with the proposed rules than a large covered member. Covered members subject to (or affiliated with entities subject to) the SEC Pay-to-Play Rule or MSRB pay-to-play rules may be able to borrow from or build upon compliance procedures already in place. For example, FINRA estimates that approximately 400 member firms are currently subject to the MSRB pay-to-play rules. FINRA requests comment on the number of member firms that are subject to (or are affiliated with entities subject to) the SEC Pay-to-Play Rule or MSRB pay-to-play rules and the estimated compliance costs for these member firms.

      The potential burden arising from compliance costs associated with the proposed rules can be initially gauged from the SEC's cost estimates for the SEC Pay-to-Play Rule. The SEC has estimated that investment advisers would spend between 8 and 250 hours to establish policies and procedures to comply with the SEC Pay-to-Play Rule.58 The SEC further estimated that ongoing compliance would require between 10 and 1,000 hours annually.59 The SEC estimated compliance costs for firms of different sizes. The SEC assumed that a "smaller firm" would have fewer than five covered associates that would be subject to the SEC Pay-to-Play Rule, a "medium firm" would have between five and 15 covered associates, and a "larger firm" would have more than 15 covered associates.60 The SEC estimated that the initial compliance costs associated with the SEC Pay-to-Play Rule would be approximately $2,352 per smaller firm, $29,407 per medium firm, and $58,813 per larger firm.61 It also estimated that the annual, ongoing compliance expenses would be approximately $2,940 per smaller firm, $117,625 per medium firm, and $235,250 per larger firm.62 FINRA encourages comment on whether the affected members are similar to investment advisers in size, number of covered associates and other characteristics related to compliance. FINRA also requests comment on whether the proposed rules would impose similar compliance costs to member firms as the SEC estimated for investment advisers.

      In addition, the SEC estimated the costs for investment advisers to engage outside legal services to assist in drafting policies and procedures. It estimated that 75 percent of larger advisory firms, 50 percent of medium firms, and 25 percent of smaller firms subject to the SEC Pay-to-Play Rule would engage such services.63 The estimated cost included fees for approximately 8 hours of outside legal review for a smaller firm, 16 hours for a medium firm and 40 hours for a larger firm, at a rate of $400 per hour.64 FINRA requests comment on the number of member firms that would engage similar legal services and the magnitude of the associated costs. FINRA also requests comment on whether some of the other costs estimated by the SEC, such as the cost to retain legal counsel to determine with certainty who could be a covered government official and the cost to apply for an exemption, would apply to member firms.

      The SEC estimated that the recordkeeping requirements of the SEC Pay-to-Play Rule would increase an investment adviser's burden by approximately 2 hours per year,65 which would cost the adviser $118 per year based on the SEC's assumption of a compliance clerk's hourly rate of $59.66 In addition, the SEC estimated that some small and medium firms would incur one-time start-up costs, on average, of $10,000, and larger firms would incur, on average, $100,000 to establish or enhance current systems to assist in their compliance with the recordkeeping requirements.67 FINRA preliminarily believes that the proposed recordkeeping requirements would impose an ongoing burden greater than 2 hours per year. Commenters are encouraged to provide cost estimates for compliance with the proposed recordkeeping requirements.

      FINRA also requests public comment on compliance costs associated with the proposed disclosure requirements. The costs may be lower than the costs imposed by MSRB Rule G-37, which requires quarterly reports.

      Since member firms that are dually registered as investment advisers (and thus subject to the SEC Pay-to-Play Rule) or municipal securities dealers or municipal advisors (and thus subject to the MSRB pay-to-play rules) should already have pay-to-play compliance policies and procedures in place, FINRA expects these member firms to provide useful information on compliance cost estimates through the public comment process. FINRA staff will estimate the compliance costs associated with the proposed rules to member firms based on information obtained through the process.

      The proposed rules would also impose costs on FINRA. FINRA would need to develop policies and procedures to regulate the activities of member firms that engage in distribution and solicitation activities with government entities on behalf of investment advisers. FINRA needs to establish a regulatory infrastructure to manage regulatory processes, including regulatory support to members and potential challenges to its decisions. It would also need to train its staff about the pay-to-play practices in order to conduct effective regulatory reviews.

      FINRA preliminarily estimates that it would spend approximately 150 hours to develop and train staff on policies and procedures to implement the proposed rules. FINRA expects to examine a member firm periodically on a one-, two-, three- or four-year cycle based upon, among other factors, FINRA's risk assessment of the member firm. The average frequency of an examination is estimated to be 3.29 years. Based on its experience with MSRB Rule G-37, FINRA estimates that an examiner would spend between 16 to 24 hours and up to 100 hours to examine a member firm's compliance with the proposed rules. In addition, FINRA is estimated to spend approximately one hour per examination to provide consultation on the proposed rules to member firms.
      3. Competitive Effects

      The proposed rules do not cover member firms that are SEC-registered municipal advisors subject to MSRB pay-to-play rules. On August 18, 2014, the MSRB issued a Regulatory Notice requesting comment on proposed MSRB pay-to-play rules applicable to municipal advisors. FINRA recognizes that both its and the MSRB's proposed rules are undergoing the public comment process and subject to modifications, but welcomes comment on any potential competitive impacts to member firms that might arise on the basis of any differences in the application of these rules.

      Investment advisers may engage in distribution and solicitation activities with government entities on behalf of other investment advisers. Investment advisers that are FINRA members may be subject to either the proposed rules or the SEC Pay-to-Play Rule depending on the services they are performing. FINRA invites comment on whether any differences between the proposed rules and the SEC Pay-to-Play Rule would have any impact on competition in the market for solicitation services by member firms.
      E. Regulatory Alternatives

      Since the SEC requires that FINRA imposes "substantially equivalent or more stringent restrictions" on member firms than the SEC Pay-to-Play Rule imposes on investment advisers, FINRA believes it is appropriate to model the proposed rules on the SEC Pay-to-Play Rule.

      Request for Comment

      FINRA requests comment on all aspects of the proposed rules, including any potential costs and burdens of the proposed rules. FINRA requests that commenters provide empirical data or other factual support for their comments wherever possible. FINRA particularly requests comment on the following questions:

      1. The proposed pay-to-play rule is modeled on the SEC Pay-to-Play Rule. Is this approach appropriate or are there alternative models that FINRA should consider that would be as or more effective in deterring pay-to-play practices and also meet the requirement in the SEC Pay-to-Play Rule that FINRA's rules impose substantially equivalent or more stringent restrictions on member firms than the SEC Pay-to-Play Rule imposes on investment advisers?
      2. The proposed pay-to-play rule applies to covered members that engage in distribution or solicitation activities for compensation with a government entity on behalf of an investment adviser that provides or is seeking to provide investment advisory services to such government entity. Could member firms engage in activities with government entities that are not covered by this rule that should be covered? If so, what are those activities and how should FINRA design a pay-to-play rule to cover such activities?
      3. FINRA is proposing to interpret and apply the terms in its proposed pay-to-play rule consistent with how the SEC has interpreted the terms in the SEC Pay-to-Play Rule. Is this approach appropriate? Are there terms that require additional clarification or that should be interpreted or applied differently? Are there differences between broker-dealers and investment advisers that would warrant a different interpretation or application of terms in the proposed rule?
      4. How prevalent are pay-to-play practices by member firms? What are the effects of such pay-to-play practices on the ability to obtain business from government entities?
      5. How prevalent are pay-to-play practices in connection with member firms engaging in distribution or solicitation activities with government entities on behalf of investment advisers that provide or are seeking to provide investment advisory services to the government entity? Would the proposed rules be effective at deterring such practices?
      6. Are the proposed recordkeeping requirements appropriately tailored to obtain information that would be relevant for purposes of monitoring for compliance with the proposed rule?
      7. Are the proposed disclosure requirements appropriately tailored to provide government entities with the information necessary for the government entity to determine if there are potential conflicts of interest that could influence the selection process by the government entity?
      8. What would be the likely effects on competition, efficiency and capital formation of the proposed pay-to-play rule?
      9. How many member firms are expected to be impacted by the proposed pay-to-play rule? What is the estimated number of covered associates per member firm?
      10. What are the sources and estimates of benefits associated with the proposed pay-to-play rule, proposed disclosure requirements and proposed recordkeeping requirements?
      11. What are the sources and estimates of compliance costs associated with the proposed pay-to-play rule, proposed disclosure requirements and proposed recordkeeping requirements? Would the proposed rules impose different costs based on the size or the business model of the member firm?
      12. How many member firms would engage outside legal services to assist in drafting policies and procedures to comply with the proposed rules? What are the estimated costs?
      13. How many member firms that would be impacted by the proposed pay-to-play rule are subject to (or are affiliated with entities subject to) the SEC Pay-to-Play Rule or MSRB pay-to-play rules? Would the compliance costs associated with the proposed rule be lower for these member firms? What are the estimates of compliance costs?
      14. The proposed pay-to-play rule does not cover member firms that are SEC-registered municipal advisors subject to MSRB pay-to-play rules. FINRA recognizes that both its and the MSRB's proposed rules are still undergoing the public comment process and subject to modifications. Would the applicability of the two sets of rules on member firms create any competitive imbalances? What are they? How substantial are they?
      15. Would the proposed pay-to-play rule create any competitive imbalances among member firms because some dually registered investment advisers would be subject to the SEC Pay-to-Play Rule while others would be subject to the proposed rule?
      16. Are there any other expected economic impacts associated with the proposed rules? What are they, what entities would be impacted, and what are the estimates of those impacts?

      1 "Pay-to-play" practices typically involve a person making cash or in-kind political contributions (or soliciting or coordinating others to make such contributions) to help finance the election campaigns of state or local officials or bond ballot initiatives as a quid pro quo for the receipt of government contracts.

      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) (Online Availability of Comments) for more information.

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

      4 See Advisers Act Release No. 3043 (July 1, 2010), 75 FR 41018 (July 14, 2010) (Political Contributions by Certain Investment Advisers) ("SEC Pay-to-Play Rule Adopting Release"). See also Advisers Act Release No. 3221 (June 22, 2011), 76 FR 42950 (July 19, 2011) (Rules Implementing Amendments to the Investment Advisers Act of 1940); Advisers Act Release No. 3418 (June 8, 2012), 77 FR 35263 (June 13, 2012) (Political Contributions by Certain Investment Advisers; Ban on Third Party Solicitation; Extension of Compliance Date).

      5 See SEC Pay-to-Play Rule 206(4)-5(f)(9). A "regulated person" also includes SEC registered investment advisers and SEC-registered municipal advisors, subject to specified conditions.

      6 See Advisers Act Release No. 3418 (June 8, 2012), 77 FR 35263 (June 13, 2012).

      7 See Exchange Act Release No. 70462 (September 20, 2013), 78 FR 67468 (November 12, 2013) (Registration of Municipal Advisors).

      8 In connection with the adoption of the SEC Pay-to-Play Rule, the SEC also adopted recordkeeping requirements related to political contributions by investment advisers and their covered associates. See Advisers Act Rule 204-2(a)(18) and (h)(1).

      9 "Solicitors" typically locate investment advisory clients on behalf of an investment adviser. See Advisers Act Release No. 2910 (August 3, 2009), 74 FR 39840, 39853 n.137 (August 7, 2009) (Political Contributions by Certain Investment Advisers).

      10 "Placement agents" typically specialize in finding investors (often institutional investors or high net worth investors) that are willing and able to invest in a private offering of securities on behalf of the issuer of such privately offered securities. See id.

      11 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41037 (discussing the reasons for proposing a ban on using third parties to solicit government business).

      12 See id.

      13 See id.

      14 In response to a request from SEC staff, FINRA previously indicated its intent to prepare rules for consideration by the SEC that would prohibit its member firms from soliciting advisory business from a government entity on behalf of an adviser unless the member firms comply with requirements prohibiting pay-to-play practices. See letter from Andrew J. Donohue, Director, Division of Investment Management, SEC, to Richard G. Ketchurn, Chairman & CEO, FINRA, dated December 18, 2009 (requesting whether FINRA would consider adopting a rule preventing pay-to-play activities by registered broker-dealers acting as legitimate placement agents on behalf of investment advisers). See also letter from Richard G. Ketchum, Chairman & CEO, FINRA, to Andrew J. Donohue, Director, Division of Investment Management, SEC, dated March 15, 2010 (stating "[w]e believe that a regulatory scheme targeting improper pay to play practices by broker-dealers acting on behalf of investment advisers is... a viable solution to a ban on certain private placement agents serving a legitimate function").

      15 Consistent with the SEC Pay-to-Play Rule, proposed Rule 2390(h)(10) defines the term "solicit" to mean "(A) With respect to investment advisory services, to communicate, directly or indirectly, for the purpose of obtaining or retaining a client for, or referring a client to, an investment adviser; and (B) With respect to a contribution or payment, to communicate, directly or indirectly, for the purpose of obtaining or arranging a contribution or payment." The determination of whether a particular communication would be a solicitation would depend on the facts and circumstances relating to such communication. As a general proposition, any communication made under circumstances reasonably calculated to obtain or retain an advisory client would be considered a solicitation unless the circumstances otherwise indicate that the communication does not have the purpose of obtaining or retaining an advisory client. See also infra note 37.

      16 See SEC Pay-to-Play Rule 206(4)-5(a)(1).

      17 See supra note 5.

      18 See SEC Pay-to-Play Rule 206(4)-5(a)(2)(i)(A) and 206(4)-5(f)(9).

      19 See Exchange Act Section 15B(e)(9) and Rule 15Ba1-1(n) thereunder (defining "solicitation of a municipal entity" to mean "a direct or indirect communication with a municipal entity or obligated person made by a person, for direct or indirect compensation, on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser... that does not control, is not controlled by, or is not under common control with the person undertaking such solicitation forthe purpose of obtaining or retaining an engagement by a municipa entity or obligated person of a broker, dealer, municipal securities dealer, or municipal advisor for or in connection with municipal financial products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of a municipal entity.")

      20 On August 18, 2014, the MSRB issued a Regulatory Notice requesting comment on draft amendments to MSRB Rule G-37, on political contributions made by brokers, dealers and municipal securities dealers and prohibitions on municipal securities business, to extend the rule to cover municipal advisors. See MSRB Regulatory Notice 2014-15 (August 2014).

      21 FINRA notes that a person that is registered under the SEA as a broker-dealer and municipa advisor, and under the Advisers Act as an investment adviser could potentially be a "regulated person" for purposes of the SEC Pay-to-Play Rule. Such a regulated person should follow the rules that apply to the services it is performing.

      22 See proposed Rule 2390(h)(6).

      23 See SEC Pay-to-Play Rule 206(4)-5(a)(1).

      24 Consistent with the SEC Pay-to-Play Rule, proposed Rule 2390(h)(7) defines an "official" to mean: "any person (including any election committee for the person) who was, at the time of the contribution, an incumbent, candidate or successful candidate for elective office of a government entity, if the office: (A) Is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity; or (B) Has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity."

      25 A 403(b) plan is a tax-deferred employee benefit retirement plan established under Section 403(b) of the Internal Revenue Code of 1986 (26 U.S.C. 403(b)).

      26 A 457 plan is a tax-deferred employee benefit retirement plan established under Section 457 of the Internal Revenue Code of 1986 (26 U.S.C. 457).

      27 A 529 plan is a "qualified tuition plan" established under Section 529 of the Internal Revenue Code of 1986 (26 U.S.C. 529). Consistent with the SEC Pay-to-Play Rule, proposed Rule 2390(h)(5) defines a "government entity" to mean "any state or political subdivision of a state, including: (A) Any agency, authority or instrumentality of the state or politica subdivision; (B) A pool of assets sponsored or established by the state or political subdivision or any agency, authority or instrumentality thereof, including but not limited to a "defined benefit plan" as defined in Section 414(j) of the Internal Revenue Code, or a state general fund; (C) A plan or program of a government entity; and (D) Officers, agents or employees of the state or political subdivision or any agency, authority or instrumentality thereof, acting in their official capacity."

      28 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41029 (discussing the terms "official" and "government entity").

      29 Consistent with the SEC Pay-to-Play Rule, proposed Rule 2390(h)(1) defines a "contribution" to mean "any gift, subscription, loan, advance, or deposit of money or anything of value made for: (A) The purpose of influencing any election for federal, state or local office; (B) Payment of debt incurred in connection with any such election; or (C) Transition or inaugural expenses of the successful candidate for state or local office."

      30 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41030. The SEC also noted that a covered associate's donation of his or her time generally would not be viewed as a contribution if such volunteering were to occur during non-work hours, if the covered associate were using vacation time, or if the adviser is not otherwise paying the employee's salary (e.g., an unpaid eave of absence). See id. at 41030 n. 157. FINRA would take a similar position in interpreting the proposed rule.

      31 Section 501(c)(3) of the Internal Revenue Code (26 U.S.C. 501(c)(3)) contains a list of charitable organizations that are exempt from Federal income tax.

      32 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018,41030 (discussing the scope of the term "contribution" under the SEC Pay-to-Play Rule). But see proposed Rule 2390(f) providing that it shall be a violation of Rule 2390 for any covered member or any of its covered associates to do anything that, if done directly, would result in a violation of the rule.

      33 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41031.

      34 Consistent with the SEC Pay-to-Play Rule, proposed Rule 2390(h)(2) defines a "covered associate" as: "(A) Any general partner, managing member or executive officer of a covered member, or other individual with a similar status or function; (B) Any associated person of a covered member who engages in distribution or solicitation activities with a government entity for such covered member; (C) Any associated person of a covered member who supervises, directly or indirectly, the government entity distribution or solicitation activities of a person in subparagraph (B) above; and (D) Any politica action committee controlled by a covered member or a covered associate."

      35 See id.

      36 Similarly, consistent with the SEC Pay-to-Play Rule, to prevent covered members from channeling contributions through departing employees, covered members must "look forward" with respect to covered associates who cease to qualify as covered associates or leave the firm. The covered associate's employer at the time of the contribution would be subject to the proposed rule's prohibition forthe entire two-year period, regardless of whether the covered associate remains a covered associate or remains employed by the covered member. Thus, dismissing a covered associate would not relieve the covered member from the two-year time out. See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41033 (discussingthe "look back" in that rule).

      37 Proposed Rule 2390(h)(10)(B) defines the term "solicit" with respect to a contribution or payment as "to communicate directly or indirectly, forthe purpose of obtaining or arranging a contribution or payment." This provision is consistent with a similar provision in the SEC Pay-to-Play Rule. See SEC Pay-to-Play Rule 206(4)-5(f)(10)(ii). Consistent with the SEC Pay-to-Play Rule, whether a particular activity involves a solicitation or coordination of a contribution or payment for purposes of the proposed rule would depend on the facts and circumstances.

      38 Consistent with the SEC Pay-to-Play Rule, proposed Rule 2390(h)(8) defines the term "payment" to mean "any gift, subscription, loan, advance or deposit of money or anything of value." This definition is similar to the definition of "contribution," but is broader, in the sense that it does not include limitations on the purposes for which such money is given (e.g., it does not have to be made for the purpose of influencing an election). Consistent with the SEC Pay-to-Play Rule, FINRA is including the broader term "payments," as opposed to "contributions," to deter a covered memberfrom circumventing the proposed rule's prohibitions by coordinating indirect contributions to government officials by making payments to political parties. See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41043, n. 331 and accompanying text (discussing a similar approach with respect to restrictions on soliciting and coordinating contributions and payments).

      39 See SEC Pay-to-Play Rule 206(4)-5(a)(2).

      40 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41043 (discussing restrictions on soliciting and coordinating contributions and payments).

      41 See SEC Pay-to-Play Rule 206(4)-5(d).

      42 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41044 (discussing direct and indirect contributions or solicitations).

      43 Consistent with the SEC Pay-to-Play Rule, proposed Rule 2390(h)(3) defines a "covered investment pool" to mean: "(A) Any investment company registered under the Investment Company Act of 1940 that is an investment option of a plan or program of a government entity, or (B) Any company that would be an investment company under Section 3(a) of the Investment Company Act but for the exclusion provided from that definition by either Section 3(c)(1), 3(c)(7) or 3(c)(11) of that Act." Thus, the definition includes such unregistered pooled investment vehicles as hedge funds, private equity funds, venture capital funds, and collective investment trusts. It also includes registered pooled investment vehicles, such as mutual funds, but only if those registered pools are an investment option of a participant-directed plan or program of a government entity.

      44 Consistent with the SEC Pay-to-Play Rule, under the proposed rule, if a government entity is an investor in a covered investment pool at the time a contribution triggering a two-year time out is made, the covered member must forgo any compensation related to the assets invested or committed by the government entity in the covered investment pool.

      45 See SEC Pay-to-Play Rule 206(4)-5(c).

      46 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41044 (discussing the applicability of the SEC Pay-to-Play Rule to covered investment pools).

      47 See SEC Pay-to-Play Rule 206(4)-5(b).

      48 See SEC Pay-to-Play Rule 206(4)-5(e).

      49 Consistent with the SEC Pay-to-Play Rule, for purposes of proposed Rule 2390(d)(1), a person would be "entitled to vote" for an official if the person's principal residence is in the locality in which the official seeks election. For example, if a government official is a state governor running for re-election, any covered associate who resides in that state may make a de minimis contribution to the official without causing a ban on the covered member being compensated for engaging in distribution or solicitation activities with that government entity on behalf of an investment adviser. If the government official is runningfor president, any covered associate in the country would be able to contribute the de minimis amount to the official's presidential campaign. See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41034 (discussingthe applicability in the SEC Pay-to-Play Rule of the exception for de minimis contributions).

      50 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41034.

      51 See SEC Pay-to-Play Rule 206(4)-5(b)(2).

      52 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41034 (discussing the applicability of the "look back" in the SEC Pay-to-Play Rule).

      53 See id.

      54 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41035.

      55 See SEC Pay-to-Play Rule 206(4)-5(b)(3). The SEC Pay-to-Play Rule includes different allowances for larger and smaller investment advisers based on the number of employees they report on Form ADV.

      56 The SEC imposes similar disclosure requirements on solicitors in connection with cash payments by investment advisers to solicitors with respect to solicitation activities. See Advisers Act Rule 206(4)-3.

      57 See Advisers Act Rule 204-2(a)(18) and (h)(i).

      58 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41056.

      59 See id.

      60 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41055.

      61 See supra note 58.

      62 See id.

      63 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41057.

      64 See id.

      65 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41063.

      66 See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41061.

      67 See supra note 65.

    • 14-49 SEC Approves Amendments to the Codes of Arbitration Procedure to Increase Arbitrator Honoraria by Increasing Arbitration Filing Fees, Member Surcharges and Process Fees and Hearing Session Fees; Effective Date: December 15, 2014

      View PDF

      Increases to Arbitrator Honoraria and Certain Arbitration Fees

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Operations
      Registered Representatives
      Senior Management
      Key Topics

      Arbitration
      Arbitrators
      Fees
      Honoraria
      Referenced Rules & Notices

      FINRA Rule 12214
      FINRA Rule 12800
      FINRA Rule 12900
      FINRA Rule 12901
      FINRA Rule 12902
      FINRA Rule 12903
      FINRA Rule 13214
      FINRA Rule 13800
      FINRA Rule 13900
      FINRA Rule 13901
      FINRA Rule 13902
      FINRA Rule 13903

      Executive Summary

      The Code of Arbitration Procedure for Customer Disputes (Customer Code) and the Code of Arbitration Procedure for Industry Disputes (Industry Code) (together, codes) govern the payments that FINRA makes to its arbitrators for the services they provide to FINRA's dispute resolution forum, as well as the fees assessed to the parties for arbitration proceedings. Honoraria payments to arbitrators have not been increased in fifteen years. The amendments increase the honoraria arbitrators receive for participating in hearing sessions, serving as a chairperson, deciding contested subpoena motions, and deciding simplified arbitration cases. To fund the increase in the payments to arbitrators, the SEC approved amendments to the codes to increase certain arbitration fees, such as the arbitration filing fees, member surcharges and process fees, and hearing session fees.1

      The amendments are effective for arbitration cases filed on or after December 15, 2014. The arbitrator honoraria and fee increases will not apply to arbitration cases filed prior to the effective date.

      The text of the amendments is available at www.finra.org/notices/14-49.

      Questions concerning this Notice should be directed to:

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

      Background & Discussion

      FINRA has amended the codes to increase arbitrator honoraria, which are payments that FINRA makes to its arbitrators for the services they provide to FINRA's dispute resolution forum. It will be the first increase in fifteen years. The increases are needed to help the arbitration forum retain a roster of high-quality arbitrators and attract qualified individuals who possess the skills necessary to manage arbitration cases and consider thoroughly all arbitration issues presented, which are essential elements for FINRA to meet its regulatory objective of protecting the investing public.

      To fund the honoraria increases, FINRA has amended the codes to increase the member surcharges and process fees for claims larger than $250,000 and the filing fees and hearing session fees for claims of more than $500,000. In addition, the amendments increase surcharges, process fees, filing fees and hearing session fees for non-monetary or unspecified claims.

      Increases to Arbitrator Honoraria

      Hearing Session Payments

      Under amended Rules 12214(a) and 13214(a), arbitrators will receive $300 for each hearing session2 in which the arbitrator participates. A typical day during an arbitration has two hearing sessions. Thus, under the amendments, arbitrators would receive $600 per day, if they participate in two hearing sessions in a day, an increase of 50 percent per day.

      Additional Chairperson Honoraria

      Chairpersons are often the arbitrators on FINRA's rosters with the most experience. In recognition of their increased experience and extra responsibilities during a hearing, FINRA pays chairpersons additional honoraria per hearing day. FINRA has amended Rules 12214(a) and 13214(a) to increase the chairperson honoraria to $125, an increase of 67 percent per day. The chairperson receives the additional honoraria for each day the person serves as chair, regardless of the number of hearing sessions scheduled per day.

      Contested Subpoena Motions

      Arbitrators receive honoraria when they decide contested motions for the issuance of a subpoena without a hearing (contested subpoena motions).3 A contested subpoena motion includes a motion requesting the issuance of a subpoena, the draft subpoena, a written objection from the party opposing the issuance of the subpoena and any other documents supporting a party's position.4 Under amended Rules 12214(d) and 13214(d), FINRA will assess a $250 fee to the parties to be paid to each arbitrator who participates in deciding the contested subpoena motion to cover the cost of the honoraria, which is a 25 percent increase. The honoraria will be paid on a per case basis, regardless of the number of contested subpoena motions decided by an arbitrator or panel during the case. Thus, the maximum amount that the parties could pay for any one case will be $750.

      Simplified Cases

      When a claimant5 files an arbitration claim in which the amount in dispute, excluding interest and expenses (claim amount) is $50,000 or less, one arbitrator decides the case based solely on the documents provided by the parties. No hearings take place unless the customer requests a hearing.6 In the forum, these cases are referred to as simplified arbitration cases. Under amended Rules 12800(f) and 13800(f), the arbitrator who decides simplified cases based solely on the documents provided by the parties will receive $350 per case, an increase of 180 percent per simplified case.

      Application

      FINRA noted in its rule filing that it was increasing arbitration filing fees, member surcharge and process fees, and hearing session fees for the primary purpose of increasing arbitrator honoraria.7 Thus, the increase in arbitration fees is intended to fund the increase in arbitrator honoraria. If FINRA were to extend the honoraria increases to pending arbitration cases, the honoraria payments would not be properly funded, as the fees from the pending cases would be based on the old fee structure. Therefore, FINRA will apply the new honoraria rates to arbitration cases filed on or after the effective date, so that they are linked to the new fee structure discussed below.

      Increases to Certain Fees in Arbitration

      Member Surcharge

      The codes provide that a surcharge will be assessed against each member that: (1) files a claim, counterclaim, cross claim or third party claim under the codes; (2) is named as a respondent in a claim, counterclaim, cross claim, or third party claim filed and served under the codes; or (3) employed, at the time the dispute arose, an associated person who is named as a respondent in a claim, counterclaim, cross claim, or third party claim filed and served under the codes.8 Each member is assessed a member surcharge, based on the aggregate claim amount, when it is brought into the case, whether through a claim, counterclaim, cross claim or third party claim.

      FINRA has amended Rules 12901 and 13901 to increase the member surcharges for claim amounts larger than $250,000, as indicated in the amended rule language. The surcharge is a member fee only, which means that arbitrators cannot allocate it to an investor party.

      Member Process Fee

      Currently, each member that is a party to an arbitration in which the claim amount is more than $25,000 must pay process fees, which are assessed at specific milestones in each case. Specifically, FINRA assesses a non-refundable prehearing process fee of $750 at the time the parties are sent arbitrator lists and a non-refundable hearing process fee, based on the claim amount, when the parties are notified of the date and location of the hearing on the merits.9 When the parties receive the arbitrator lists or notification of the hearing, FINRA assesses each member party the applicable process fee, whether the member is a claimant or respondent10 in the case.

      Under amended Rules 12903 and 13903, the member process fees will increase for claim amounts larger than $250,000. Further, FINRA will combine the two process fees, the nonrefundable prehearing process fee and non-refundable hearing process fee, into one fee, which would be due at the time the parties are sent the arbitrator lists. Like the surcharge, the process fee is a member fee only and, thus, cannot be allocated to an investor party.

      Filing Fees

      Under the codes, a customer, associated person, member or other non-member who files a claim, counterclaim, cross claim or third party claim must pay a filing fee to initiate an arbitration.11 The filing fee consists of two parts—a non-refundable fee, which FINRA keeps when a claim is filed, and a refundable deposit, which FINRA may return in whole or in part to the party that filed the claim in certain circumstances.12 FINRA has amended Rules 12900 and 13900 to increase the filing fees for investors, associated persons, members or other non-members who file claims of more than $500,000.13 Most of the filing fee increases have been added to the refundable portion of the filing fee.

      Hearing Session Fees

      A hearing session is a meeting of the parties and arbitrators.14 Hearing session fees are assessed for each hearing, pre-hearing and injunctive hearing conducted.15 A hearing session may be conducted by one or three arbitrators, depending on the claim amount.16 FINRA has amended Rules 12902 and 13902 to increase the hearing session fees for claims of more than $500,000. Under the amended rules, the fees for a hearing session with one arbitrator will not change. However, for hearing sessions with three arbitrators, the hearing session fees will increase for claim amounts starting at $500,000.01. Arbitrators allocate the hearing session fees among the parties in an arbitration.

      Non-Monetary or Unspecified Damages

      If a party files a claim that does not request or specify money damages, that claim is considered an unspecified claim. Each of the fee categories (discussed above) contains a fee amount for unspecified claims.17 This amendment increases surcharges, process fees, filing fees, and hearing session fees for non-monetary or unspecified claims.

      Effective Date

      The amendments are effective for arbitration cases filed on or after December 15, 2014. The new honoraria and fee increases will not apply to arbitration cases filed prior to the effective date.


      1 See Securities Exchange Act Release No. 73245 (Sept. 29, 2014), 79 FR 59876 (Oct. 3, 2014) (Order Approving File No. SR-FINRA-2014-026).

      2 The term "hearing session" means any meeting between the parties and arbitrator(s) of four hours or less, including a hearing or a prehearing conference. Rules 12100(n) and 13100(n).

      3 See Rules 12214(d) and 13214(d).

      4 See Rules 12214(d)(2) and 13214(d)(2).

      5 A "claimant" is a party that files the statement of claim that initiates an arbitration. Rules 12100(e) and 13100(e).

      6 See Rules 12800 and 13800.

      7 See Securities Exchange Act Rel. No. 72479 (June 26, 2014), 79 FR 37786 (July 2, 2014) at 37786.

      8 See Rules 12901 and 13901.

      9 If a claim amount is less than $25,000, the member would not be assessed any process fees. If a claim amount is between $25,000 and $50,000, FINRA would assess a nonrefundable prehearing process fee, but not the non-refundable hearing process fee. See Rules 12903(a) and 13903(a).

      10 A "respondent" is a party against whom a statement of claim or third party claim has been filed. A claimant against whom a counterclaim has been filed is not a respondent for purposes of the Code. Rule 12100(v) and Rule 13100(w).

      11 See Rules 12900(a) and 13900(a).

      12 The refundable portion correlates to the hearing session fees for the relevant claim size. A claimant may be entitled to a partial refund under the circumstances described in Rules 12900(c) and 13900(c). FINRA has also amended the refund amounts that correspond to the filing fee increases.

      13 If an investor demonstrates financial hardship, FINRA will waive the filing fees. See FINRA's Fee Waivers Web page.

      14 See note 2, supra.

      15 See Rules 12902(a) and 13902(a).

      16 See Rules 12401 and 13401.

      17 See Rules 12900(b)(2), 12901(a)(2), 12902(a) (2), and 12903(a). See also Rules 13900(b)(2), 13901(a), 13902(a)(2) and 13903(a).

    • 14-48 FINRA Requests Comment on a Proposal to Publish OTC Equity Volume Executed Outside Alternative Trading Systems; Comment Period Expires: Friday, January 9, 2015*

      * The comment period has been extended to February 20, 2015.

      View PDF

      Equity Trading Initiatives: OTC Equity Trading Volume

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Systems
      Trading
      Key Topics

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

      FINRA Rule 4552
      FINRA Rule 4553
      FINRA Rule 6282
      FINRA Rule 6380A
      FINRA Rule 6380B
      FINRA Rule 6622

      Executive Summary

      FINRA requests comment on a proposal to expand FINRA's alternative trading system (ATS) transparency initiative to publish the remaining equity volume executed over-the-counter (OTC), including non-ATS electronic trading systems and internalized trades. FINRA believes that the public will be able to better understand a firm's trading of equities off exchanges by reviewing the firm's new OTC equity trading volume information together with its existing ATS volume reports.

      The proposed rule text is set forth in Attachment A.

      Questions concerning this Notice should be directed to:

      •    Dave Chapman, Director, Market Regulation, at (240) 386-4995;
      •    Brendan Loonam, Director, Business Services, at (212) 858-4203; or
      •    Lisa Horrigan, Associate General Counsel, Office of General Counsel, at (202) 728-8190.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by Friday, January 9, 2015.

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

      Before becoming effective, the proposed rule change must be filed with the Securities and Exchange Commission (SEC) pursuant to Section 19(b) of the SEA.2

      Background & Discussion

      The proposal set forth in this Notice is one of seven FINRA initiatives relating to equity market structure and automated trading activities including high frequency trading (HFT).3 These initiatives are designed to increase the scope of trading information FINRA receives, provide more transparency into trading activities to market participants and investors and require firms engaged in electronic trading and their employees to be trained, educated and accountable for their role in equity trading.

      Under FINRA rules, each ATS is required to report its weekly volume, by security, to FINRA, and as of February 2, 2015, each ATS must use a unique market participant identifier (MPID) for reporting order and trade information to FINRA. As part of these requirements, FINRA makes the reported volume and trade count information for equity securities publicly available on its website.4 Pursuant to the proposal, FINRA is considering expanding this transparency initiative by publishing the remaining equity trading volume executed OTC by each firm on a security-by-security basis. The proposal would provide additional transparency into a significant portion of the OTC market5 by enabling market participants and investors to get a better understanding of each firm's OTC trading.

      FINRA would derive a firm's non-ATS volume information directly from OTC trades reported to FINRA's equity trade reporting facilities (i.e., the Alternative Display Facility, a Trade Reporting Facility or the OTC Reporting Facility). As such, firms would not have any new or additional reporting requirements as a result of the proposal. A firm's non-ATS volume would be based on trades reported for dissemination purposes—or "tape reports"—on which the firm is identified as the member firm with the trade reporting obligation—or "Executing Party."6 A firm's published trading volume information would not include trades for which the firm is the reported contra party,7 nor would it include trades that are reported for regulatory or clearing purposes only—or "non-tape reports." Volume information for each equity security would be published on the FINRA website on a twoweek or four-week delayed basis in accordance with the time frames specified for ATS volume publication.8

      As noted above, FINRA would publish non-ATS trading volume information at the firm level and not on an MPID-by-MPID basis. FINRA believes that this is appropriate because, outside of the ATS context, not all firms have a separate MPID for each unique trading center at the firm, and as such, publishing volume information at the MPID level may not provide meaningful or consistent information to the marketplace. For firms that use more than one MPID for their non-ATS trading,9 FINRA would aggregate and publish the non-ATS trading volume for all non-ATS MPIDs belonging to the firm under a single "parent" identifier or firm name.10

      FINRA does not believe that publishing volume information for each firm that executed only a small number of trades or shares in any given period would provide meaningful information to the marketplace. Accordingly, FINRA would combine volume from all firms that do not meet a specified minimum threshold and publish such de minimis volume information for those firms on an aggregated basis. For example, if five firms each execute 10 trades in the reporting period in a security, their 50 trades would be aggregated and published as a single line item; the firms and their volume information would not be identified separately. For a firm with more than one non-ATS MPID, the total volume across all of its non-ATS MPIDs would be combined for purposes of determining whether the de minimis threshold has been met. FINRA notes that all of the OTC volume would be published, but for firms that meet the de minimis threshold, their volume would not be attributed by name.

      FINRA is proposing to establish a threshold of fewer than on average 200 non-ATS transactions per day executed by the firm in the security during the one-week reporting period. This proposed threshold is based on the level of trading activity used by the SEC to identify "small market makers" for purposes of exemptive relief from the rule requiring market centers that trade NMS securities to make publicly available electronic reports that include uniform statistical measures of execution quality (SEC Rule 605 of Regulation NMS).11 FINRA reviewed volume statistics for firms across all securities for a one-week period (June 23–29, 2014). This review indicates that without applying any threshold, approximately 300 individual firms would have volume attributed by name. Looking at market participants with on average 200 or more trades per day across all securities, approximately 60 firms—which account for over 98 percent of all trading volume—would have volume attributed by name.

      Thus, under the proposal, if a firm averages below 200 (non-ATS) transactions per day across all securities during the reporting period, FINRA would aggregate the firm's volume with that of similarly situated firms. Additionally, because the published volume data would be broken down by security, if a firm averages below 200 (non-ATS) transactions per day in a given security during the reporting period, FINRA would aggregate the firm's volume in that security with that of similarly situated firms, even if the firm averages more than 200 (non-ATS) transactions per day across all securities during the reporting period. For example, if, during the reporting period, Firm 1 averages 10,000 trades per day across all securities, but averages only 50 trades per day in ABCD security, Firm 1's volume in ABCD security would be aggregated with other firms' volume in ABCD for that period.

      FINRA seeks comment on the appropriate de minimis threshold, and to help inform comments, presents volume statistics at alternative thresholds for the one-week period cited above:

      Threshold Approximate number of market participants that would be identified by name Percentage of all trading volume attributed to these market participants
      On average 300 or more trades per day across all securities 54 98.78%
      On average 200 or more trades per day across all securities 62 98.99%
      On average 100 or more trades per day across all securities 77 99.30%
      On average 50 or more trades per day across all securities 93 99.51%

      FINRA considered whether dividing published volume information into more granular categories, such as by trading capacity (i.e., principal versus agency or riskless principal) or by participant type (e.g., market maker), would be feasible or provide additional meaningful or reliable information to market participants. However, FINRA believes that publishing non-ATS trading volume information at more granular levels may increase the potential impact on firms and may raise concerns about potential information leakage, such as the possibility that a firm's trading activity or strategy could be discerned from the data. Further segregating the data, e.g., by trading desk, would entail potentially significant development work by firms to sufficiently identify the activity for FINRA (e.g., volume attributable to a market making desk) and may not be consistent across firms, while also leading to some of the same concerns about information leakage. Thus, FINRA currently is not proposing to publish the non-ATS volume data at more granular levels than by firm and security. FINRA believes that this approach, coupled with the delayed publication of data, should address any concerns a firm may have regarding potential information leakage.

      Economic Impacts

      Anticipated Benefits

      As discussed above, the proposal would expand the benefits of FINRA's ATS transparency program by providing additional transparency on the remaining equity volume executed OTC. The increased transparency would enable market participants and investors to better understand a firm's trading of equities off exchanges, thereby enhancing their understanding of executing firms' trading volume and market shares in the equity market.

      Anticipated Costs

      The proposal would not impose any additional reporting requirements on firms, and as a result, would have minimal impact on firms from a systems development perspective. FINRA, however, will incur costs for standardizing and compiling the data, development, testing, quality control, business support, and storage and maintenance of the data. While FINRA currently publishes ATS volume data on its website, the proposal would impose additional costs for Web page development and software changes to present the information as proposed, e.g., for purposes of the de minimis threshold and aggregation of volume executed by a single market participant's multiple MPIDs.

      For fee purposes, this data may be combined with the ATS data that is currently available and for which subscribers are charged under Rule 4553.

      Request for Comment

      FINRA seeks comments on the proposal outlined above. In addition to general comments, FINRA specifically requests comment on the following questions:

      •    Would the proposal provide valuable information to the marketplace?
      •    How might firms and other market participants use the published non-ATS OTC volume data?
      •    Is your firm likely to use this data?
      •    What (if any) concerns do firms have about publication of their non-ATS OTC volume data?
      •    Are there potential competitive disadvantages to attributing non-ATS volume information by firm name?
      •    Does limiting the granularity of information and publishing it on a two-week or four-week delayed basis mitigate any concerns firms might have about publication of their volume information? Are there other alternative steps FINRA could take to mitigate those concerns, while still disseminating meaningful information to the marketplace?
      •    Does the proposal to publish data on a two-week or four-week delayed basis lessen or otherwise change the value of the information?
      •    Would data published on a real-time or next-day basis be more useful or provide additional value, and if so, in what way?
      •    As discussed above, FINRA is proposing to publish non-ATS volume information on the same delayed basis on which ATS volume data is currently published. Should FINRA consider a different schedule? If so, what alternative schedule do commenters suggest and why?
      •    Do commenters agree with FINRA's proposal to publish non-ATS volume information at the firm level rather than at the MPID level?
      •    If commenters recommend publishing at the MPID level, what additional value would that provide? Would there be ways to increase the consistency and reliability of information at the MPID level?
      •    Should FINRA consider publishing volume information for non-ATS trading at more granular levels, and if so, what levels (e.g., by capacity)? What would be the costs and benefits of such an approach?
      •    Do commenters agree with the proposal to aggregate volume information for firms with a de minimis amount of trading in any given period?
      •    Is the proposed threshold for purposes of publishing aggregated non-ATS trading volume information (i.e., on average 200 trades per day) appropriate? If not, what alternative threshold should FINRA consider and why?
      •    Should FINRA consider a separate threshold for less frequently traded securities (e.g., a lower threshold for securities that are not in Tier 1 of the NMS Plan to Address Extraordinary Market Volatility)? If so, what separate threshold do commenters suggest and why?
      •    Would a threshold based on share or dollar volume rather than number of trades be more appropriate? Are there other alternative metrics that FINRA should consider in setting the threshold?
      •    What other economic impacts, including costs and benefits, might be associated with this proposal? Who might be affected and how?

      FINRA requests that commenters provide empirical data or other factual support for their comments wherever 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 NTM 03-73 (November 2003) (NASD Announces Online Availability of Comments) for more information.

      2 See Section 19 of the Securities Exchange Act of 1934 (SEA) 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 FINRA September 19, 2014, News Release "FINRA Board Approves Series of Equity Trading and Fixed Income Rulemaking Items".

      4 ATS volume information regarding fixed income securities currently is not being disseminated.

      5 For example, for the period from May 12 through June 23, 2014, approximately 57 percent of the share volume of OTC trades in NMS stocks was executed outside an ATS.

      FINRA notes that its purview extends only to OTC data, and as such, this proposal does not apply to publication of data relating to trades executed on an exchange.

      6 Under FINRA rules, in a trade between a member and non-member or customer, the member has the obligation to report the trade, and in a trade between two members, the "Executing Party," defined as the member that receives an order for handling or execution or is presented an order against its quote, does not subsequently re-route the order, and executes the transaction, has the obligation to report the trade. See Rules 6282, 6380A, 6380B and 6622.

      7 FINRA is proposing to include only volume from the executing party perspective because otherwise, published OTC volume would be inflated (i.e., publishing volume from both the executing party and contra party perspectives would double count the executed volume).

      8 Under Rule 4552, ATS volume information is published on a two-week delayed basis for NMS stocks in Tier 1 under the NMS Plan to Address Extraordinary Market Volatility (also referred to as the Limit Up/Limit Down Plan) and a four-week delayed basis for all other NMS stocks and OTC equity securities.

      9 For example, a firm may use separate MPIDs for its proprietary and agency desks.

      10 FINRA reiterates that a firm's ATS volume will continue to be published separately under the unique MPID(s) for each ATS operated by the firm.

      11 Specifically, the SEC exempted any market center that reported fewer than 200 transactions per trading day on average over the preceding six month period in securities that are covered by the rule. See letter from Annette L. Nazareth, Director, Division, to Richard Romano, Chair, and Carl P. Sherr, Vice-Chair, NASD Small Firms Advisory Board, dated June 22, 2001.


      Attachment A

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

      6000. QUOTATION AND TRANSACTION REPORTING FACILITIES

      6100. QUOTING AND TRADING IN NMS STOCKS

      6110. Trading Otherwise than on an Exchange

      (a) Members are required to report transactions in NMS stocks, as defined in Rule 600(b)(47) of SEC Regulation NMS, effected otherwise than on or through a national securities exchange to FINRA. For purposes of the Rule 6100 Series, "otherwise than on an exchange" means a trade effected by a FINRA member otherwise than on or through a national securities exchange. The determination of what constitutes a trade "on or through" a particular national securities exchange shall be determined by that exchange in accordance with all applicable statutes, rules and regulations, and with any necessary SEC approval.
      (b) Trading Information for OTC Transactions Executed Outside of Alternative Trading Systems
      (1) FINRA will publish on its public web site the Trading Information for NMS stocks for each member with the trade reporting obligation under Rules 6282(b), 6380A(b) and 6380B(b) on the following timeframes:
      (A) no earlier than two weeks following the end of the Trading Information week, Trading Information regarding NMS stocks in Tier 1 of the NMS Plan to Address Extraordinary Market Volatility; and
      (B) no earlier than four weeks following the end of the Trading Information week, Trading Information regarding NMS stocks that are subject to FINRA trade reporting requirements and are not in Tier 1 of the NMS Plan to Address Extraordinary Market Volatility.
      (2) Published Trading Information will be presented on FINRA's web site as follows:
      (A) Trading Information will be aggregated for all Market Participant Identifiers (MPIDs) used by a single member (excluding, if applicable, any MPIDs used by the member for reporting trades executed in its alternative trading system).
      (B) Trading Information shall be aggregated for members that have executed on average fewer than 200 transactions per day in the NMS stock during the Trading Information week.
      (3) "Trading Information" includes:
      (A) the number of shares of each NMS stock executed by the member with the trade reporting obligation under Rules 6282(b), 6380A(b) and 6380B(b) and reported to FINRA; and
      (B) the number of trades in a security executed by the member with the trade reporting obligation under Rules 6282(b), 6380A(b) and 6380B(b) and reported to FINRA.

      "Trading Information" for purposes of this Rule shall not include any transactions executed within an alternative trading system, which information is published under Rule 4552.

      *   *   *   *   *

      6600. OTC REPORTING FACILITY

      6610. General

      (a) Members are required to report transactions (other than transactions executed on or through an exchange) in OTC Equity Securities, including secondary market transactions in non-exchange-listed Direct Participation Program securities, and Restricted Equity Securities to the OTC Reporting Facility in compliance with the Rule 6600 and 7300 Series, as well as all other applicable rules and regulations.
      (b) Trading Information for OTC Transactions Executed Outside of Alternative Trading Systems
      (1) FINRA will publish on its public web site the Trading Information for OTC Equity Securities for each member with the trade reporting obligation under Rule 6622(b) no earlier than four weeks following the end of the Trading Information week.
      (2) Published Trading Information will be presented on FINRA's web site as follows:
      (A) Trading Information will be aggregated for all Market Participant Identifiers (MPIDs) used by a single member (excluding, if applicable, any MPIDs used by the member for reporting trades executed in its alternative trading system).
      (B) Trading Information shall be aggregated for members that have executed on average fewer than 200 transactions per day in the OTC Equity Security during the Trading Information week.
      (3) "Trading Information" includes:
      (A) the number of shares of each OTC Equity Security executed by the member with the trade reporting obligation under Rule 6622(b) and reported to FINRA; and
      (B) the number of trades in a security executed by the member with the trade reporting obligation under Rule 6622(b) and reported to FINRA.

      "Trading Information" for purposes of this Rule shall not include any transactions executed within an alternative trading system, which information is published under Rule 4552.

      *   *   *   *   *

    • 14-47 FINRA Requests Comment on a Proposal to Tighten Business Clock Synchronization Requirements; Comment Period Expires: Friday, January 9, 2015*

      * The comment period has been extended to February 20, 2015.

      View PDF

      Equity Trading Initiatives: Synchronization of Business Clocks

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Trade Reporting
      Legal
      Operations
      Systems
      Trading
      Training
      Key Topics

      Books, Records and Reports
      Business Clocks
      Clock Drift
      OATS Reporting
      Recording of Order, Quotation, and Trade Information
      Time Stamping
      Trade Reporting
      Referenced Rules & Notices

      FINRA Rule 7430
      SEC Rule 613

      Executive Summary

      FINRA is soliciting comment on a proposal to reduce the synchronization tolerance for computer clocks. The current clock synchronization requirements allow for a tolerance of one second from the National Institute of Standards and Technology (NIST) atomic clock. Under the proposal, the tolerance for computer clocks would be reduced to 50 milliseconds. The tolerance for mechanical time stamping devices would remain at one second.

      The proposed rule text is set forth in Attachment A.

      Questions regarding this Notice should be directed to:

      •    Shelly Bohlin, Vice President, Quality of Markets, at (240) 386-5029;
      •    Lisa Horrigan, Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8190; or
      •    Alex Ellenberg, Assistant General Counsel, OGC, at (202) 728-8152.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by Friday, January 9, 2015.

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

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

      Before becoming effective, the proposed rule change must be filed with the Securities and Exchange Commission (SEC) pursuant to Section 19(b) of the SEA.2

      Background and Discussion

      The proposal set forth in this Notice is one of seven FINRA initiatives relating to equity market structure and automated trading activities, including high frequency trading (HFT).3 These initiatives are designed to increase the scope of trading information FINRA receives, provide more transparency into trading activities to market participants and investors and require firms engaged in electronic trading and their employees to be trained, educated and accountable for their role in equity trading.

      Current FINRA rules require that firms synchronize their business clocks in conformity with procedures prescribed by FINRA. Specifically, FINRA Rule 7430 requires that firms synchronize their business clocks that are used for purposes of recording the date and time of any event that must be recorded pursuant to the FINRA By-Laws or other FINRA rules (e.g., the time a trade was executed or the time an order was received or routed), with reference to a time source as designated by FINRA. As specified in the current OATS technical specifications, all computer system clocks and mechanical time stamping devices must be synchronized to within one second of the NIST atomic clock.4 To maintain clock synchronization, clocks should be checked against the NIST atomic clock and re-synchronized, if necessary, at pre-determined intervals throughout the day.5 FINRA understands that some firms synchronize their clocks continuously throughout the day, while others do so at various times during the day and still others do so only once a day.6

      Given the increasing speed of trading in today's automated markets, FINRA believes the current one second tolerance is no longer appropriate for computer system clocks recording time under FINRA rules. Automated systems have evolved to the point where order placement and trading decisions are made on a millisecond, or finer, basis. In such an environment, the one second tolerance is insufficient for audit trail and surveillance purposes, particularly since firms are reporting to OATS in milliseconds and will begin trade reporting in milliseconds in the near future.7

      As the SEC has recognized, it is critical for regulators to have the capability to accurately determine the sequence in which all reportable events occur.8 Timestamp accuracy at the millisecond level is essential for the accurate sequencing of order, quote and trade events across market participants and market centers. FINRA's surveillance programs rely on the timestamps firms report, among other things, to monitor for intentional manipulative trading practices such as spoofing or layering (i.e., bidding or offering with the intent to cancel the bid or offer before execution) and to evaluate best execution and compliance with SEC Regulation NMS.

      Accordingly, FINRA is proposing to tighten the synchronization requirement for computer system clocks. The allowable drift tolerance for mechanical time-stamping devices (e.g., used for time-stamping an order ticket for a manual trade) would remain at one second. FINRA believes that a drift tolerance of 50 milliseconds for computer system clocks is the best option to facilitate surveillance of high frequency and algorithmic trading. In addition, FINRA and the exchanges have publicly stated their current belief that 50 milliseconds is the appropriate synchronization standard for purposes of the Consolidated Audit Trail (CAT) under SEC Rule 613.9 However, FINRA recognizes that it may be more burdensome for firms to comply with a 50 millisecond tolerance than a 100 or 200 millisecond tolerance and requests comments specifically on the costs and benefits of complying with the different synchronization requirements.10 In this regard, FINRA notes that the range across market participants could in fact be twice as large as the allowable drift. For example, if one firm's clock is 50 milliseconds behind and another firm's clock is 50 milliseconds ahead, the variance between events reported by these firms could be 100 milliseconds. Accordingly, FINRA believes it is important to set the shortest allowable drift that is reasonable and can be achieved by the majority of firms.

      As part of the proposal, FINRA also would codify the existing OATS technical specifications cited above, along with the reduced drift tolerance for electronic business clocks, in the Rule 4500 Series (Books, Records and Reports). Thus, the clock synchronization rule would be moved from the OATS rule series to make clear that these requirements apply to the recording of the date and time of any event that must be recorded under FINRA By-Laws or rules, not just OATS requirements.

      Economic Impacts

      Anticipated Benefits

      As discussed above, the proposal would allow FINRA to more accurately determine the sequence of order, quote and trade events across market participants and market centers, thereby improving FINRA's surveillance program and enhancing investor protection. In particular, the proposal would enhance FINRA's ability to monitor for manipulative trading practices, such as spoofing or layering, and to evaluate best execution and compliance with SEC Regulation NMS.

      Anticipated Costs

      Firms that receive or route orders or execute trades directly would likely incur costs associated with updating their systems and procedures to comply with a reduction in the allowable drift for computer system clocks. These costs may include costs to develop and maintain software programs that allow synchronization within 50 milliseconds. FINRA notes that there are third party software products that could help firms maintain synchronization within 50 or 100 milliseconds. Firms may find these software products to be more cost effective than developing and maintaining their own programs. Some firms may also need to update their technology hardware and servers to achieve the 50 millisecond drift standard.

      These costs will likely vary across firms depending on their current technology systems and procedures, their business models and the frequency with which they synchronize their clocks, as well as their current drift standards. FINRA understands that some firms already synchronize their computer clocks within 50 milliseconds, and as a result, they will not incur any material costs associated with this proposal.

      Request for Comment

      FINRA requests comment on all aspects of the proposed requirement, including the incremental costs of complying with a synchronization standard of 50 milliseconds versus a standard of 100 or 200 milliseconds for computer system clocks. FINRA requests specific comment on the following questions:

      •    Does your firm currently synchronize its computer clocks to within less than a second of the NIST (e.g., to within 50 or 100 milliseconds), and if so, what are the costs associated with maintaining that standard?
      •    What, if any, systems changes would firms need to make for purposes of complying with a reduction in the allowable drift tolerance for computer system clocks? What are the anticipated costs associated with these system changes?
      •    FINRA understands that there may be off-the-shelf software products generally available that could help firms achieve a 100 millisecond, and possibly a 50 millisecond, drift standard. What would the costs be, including systems and labor costs, of using such software? What are the benefits and drawbacks of using these types of products?
      •    Would the necessary systems changes and the associated costs vary depending on whether the synchronization standard is 50 milliseconds versus either 100 or 200 milliseconds?
      •    Would the proposed adoption of a 50 milliseconds standard cause any residual or other "downstream" impacts on a firm's systems? If so, would those impacts be mitigated if FINRA adopted a 100 or 200 millisecond standard instead?
      •    How much time would firms need to make any necessary systems changes to comply with a 50 millisecond standard?
      •    Would the implementation timeframe change materially under a higher (e.g., 100 or 200 millisecond) standard?
      •    If FINRA adopts a 50 millisecond standard, should a separate more permissive standard apply to firms with a de minimis amount of order and trading activity that are not engaged in algorithmic or high frequency trading, and if so, what should that standard be? How should FINRA define the universe of firms to which such a separate standard would apply?
      •    What would be the impact of a 50 millisecond standard on smaller firms? Would the impact change materially under a 100 or 200 millisecond standard?
      •    If smaller firms had a longer implementation period, would this lessen the impact on these firms of complying with a 50 millisecond standard? How should FINRA define the universe of firms to which such a separate standard would apply?
      •    What would be the impact of a 50 millisecond standard on firms that use their clearing firm's system for order routing and execution and regulatory reporting?
      •    As noted above, the synchronization standard for the CAT may be 50 milliseconds. Do firms have concerns about making systems changes in the near-term to comply with a higher drift tolerance under FINRA rules, e.g., 100 milliseconds, given that they may have to comply with a 50 millisecond standard under CAT in the longer term?
      •    Should the one second requirement for manual clocks remain? If not, what is an appropriate standard for manual clocks?
      •    What other economic impacts might be associated with this proposed rule? Who might be affected and how?

      FINRA requests that commenters provide empirical data or other factual support for their comments wherever 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 NTM 03-73 (November 2003) (Online Availability of Comments) for more information.

      2 See Section 19 of the Securities Exchange Act of 1934 (SEA) 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 FINRA September 19, 2014, News Release "FINRA Board Approves Series of Equity Trading and Fixed Income Rulemaking Items."

      4 Any time provider may be used for synchronization, however, all clocks and time stamping devices must remain accurate within a one-second tolerance of the NIST clock. This tolerance includes (1) the difference between the NIST standard and a time provider's clock, (2) transmission delay from the source and (3) the amount of drift of the member firm's clock. The OATS technical specifications further specify that computer system and mechanical clocks must be synchronized every business day before market open to ensure that recorded order event timestamps are accurate.

      5 The OATS technical specifications also provide that compliance examinations include a review for the existence of adequate procedures and checks to fulfill this obligation, as well as a test of the degree of accuracy of clocks that are used for providing audit trail information against the NIST standard. To facilitate examinations, member firms must document and maintain their clock synchronization procedures. In addition, member firms should keep a log of the times when they synchronize their clocks and the results of the synchronization process. This log should include notice of any time the clock drifts more than one second.

      6 FINRA generally believes that the firms that synchronize once daily are firms that accept manual orders.

      7 Earlier this year, the SEC approved a proposed rule change to amend FINRA's equity trade reporting and OATS rules to require firms to report time in trade reports and OATS reports in milliseconds, if their systems capture milliseconds. See Regulatory Notice 14-21 (May 2014). For OATS, the rule change codified long-standing guidance and was implemented on April 7, 2014. The millisecond reporting requirement was implemented on November 10, 2014, for the ADF and TRFs, and will be implemented on November 17, 2014, for the ORF. As technology advances, FINRA expects to see an increasing percentage of firms both capturing milliseconds and making submissions to the FINRA trade reporting facilities and OATS reflecting time in milliseconds.

      8 In its release adopting Rule 613 (Consolidated Audit Trail or "CAT"), the SEC noted that time drift is an issue that must be addressed to prevent a deterioration of the accuracy of the data in the consolidated audit trail. See Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722, 45774 (August 1, 2012)

      9 FINRA notes that the implementation of CAT is likely several years away and believes there are clear and important benefits to reducing the drift tolerance for computer system clocks in the near-term.

      10 FINRA notes that NIST itself uses a 50 millisecond advance to account for network delays, see NIST Internet Time Service, and, as a result, FINRA does not believe a tolerance of less than 50 milliseconds currently is necessary or appropriate.


      Attachment A

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

      4000. FINANCIAL AND OPERATIONAL RULES

      *   *   *   *   *

      4500. BOOKS, RECORDS AND REPORTS

      *   *   *   *   *

      [7430]4580. Synchronization of Member Business Clocks

      (a) Each member shall synchronize its business clocks, including computer system clocks and mechanical time stamping devices, that are used for purposes of recording the date and time of any event that must be recorded pursuant to the FINRA By-Laws or other FINRA rules, with reference to a time source as designated by FINRA, and shall maintain the synchronization of such business clocks in conformity with such procedures as are prescribed by FINRA.
      (b) All computer system clocks and mechanical time stamping devices must be synchronized to the National Institute of Standards and Technology (NIST) atomic clock. Any time provider may be used for synchronization, however, all computer system clocks must remain accurate within a 50-millisecond tolerance of the NIST clock and mechanical time stamping devices must remain accurate within a one-second tolerance of the NIST clock. This tolerance includes all of the following:
      (1) The difference between the NIST standard and a time provider's clock;
      (2) Transmission delay from the source; and
      (3) The amount of drift of the member's clock.
      (c) Computer system and mechanical clocks must be synchronized every business day before market open to ensure that recorded event timestamps are accurate. To maintain clock synchronization, clocks must be checked against the standard clock and re-synchronized, as necessary, throughout the day.

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

      .01 Compliance examinations include a review for the existence of adequate procedures and checks to fulfill the obligation under this Rule, as well as a test of the degree of accuracy of clocks that are used for providing audit trail information against the NIST standard. To facilitate examinations, members must document and maintain their clock synchronization procedures. In addition, members should keep a log of the times when they synchronize their clocks and the results of the synchronization process. This log should include notice of any time the clock drifts more than the tolerance specified in paragraph (b) of this Rule. This log should be maintained for the period of time and accessibility specified in SEC Rule 17a-4(b), and it should be maintained and preserved for the required time period in paper format or in a format permitted under SEC Rule 17a-4(f).
      *   *   *   *   *

    • 14-46 FINRA Requests Comment on a Proposal to Identify OTC Equity Trades Reported More Than Two Seconds After Execution as "Out of Sequence" and Not Last Sale Eligible; Comment Period Expires: Friday, January 9, 2015*

      * The comment period has been extended to February 20, 2015.

      View PDF

      Equity Trading Initiatives: OTC Trade Sequencing

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Systems
      Trading
      Key Topics

      Alternative Display Facility
      Dissemination
      Last Sale Eligible Trades
      NMS Stocks
      OTC Equity Securities
      OTC Reporting Facility
      Securities Information Processors (SIPs)
      Tape Reports
      Trade Reporting
      Trade Reporting Facilities
      Referenced Rules & Notices

      FINRA Rule 6282
      FINRA Rule 6380A
      FINRA Rule 6380B
      FINRA Rule 6622

      Executive Summary

      FINRA requests comment on a proposal to identify over-the-counter (OTC) trades in NMS stocks reported more than two seconds following trade execution as "out of sequence" and not last sale eligible for public dissemination purposes.

      The proposed rule text is set forth in Attachment A.

      Questions concerning this Notice should be directed to:

      •    Dave Chapman, Director, Market Regulation, at (240) 386-4995;
      •    Brendan Loonam, Director, Business Services, at (212) 858-4203; or
      •    Lisa Horrigan, Associate General Counsel, Office of General Counsel, at (202) 728-8190.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by Friday, January 9, 2015.

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

      Before becoming effective, the proposed rule change must be filed with the Securities and Exchange Commission (SEC) pursuant to Section 19(b) of the SEA.2

      Background & Discussion

      The proposal set forth in this Notice is one of seven FINRA initiatives relating to equity market structure and automated trading activities including high frequency trading (HFT).3 These initiatives are designed to increase the scope of trading information FINRA receives, provide more transparency into trading activities to market participants and investors and require firms engaged in electronic trading and their employees to be trained, educated and accountable for their role in equity trading.

      Under FINRA trade reporting rules, OTC trades in NMS stocks—as well as OTC equity securities (i.e., non-NMS stocks such as OTC Markets and foreign securities)—that are executed during the hours that a FINRA facility is open, must be reported as soon as practicable, but no later than 10 seconds, following trade execution.4 Trades reported more than 10 seconds following execution are late for purposes of compliance with FINRA rules and public dissemination. As such, these trades are not "last sale" eligible, i.e., they do not update the last sale price disseminated by the securities information processors (SIPs).5

      Given the increasing speed of trading in today's automated markets, particularly with respect to HFT algorithms, FINRA believes that a period of 10 seconds for last sale eligibility is too long to ensure proper sequencing of trades, especially given that trades electronically executed on an exchange, which are disseminated through the same SIPs as OTC trades in NMS stocks that are reported to FINRA, generally are reported electronically within sub-seconds. Trades are disseminated in the order in which they are reported, and the consolidated market data that is publicly disseminated by the SIPs does not distinguish between a trade reported one second after execution and a trade reported 10 seconds after execution, as both are considered timely. Thus, given how quickly the market and price for a security can change, even though the vast majority of trades are reported within one or two seconds today, the marketplace is unable to discern which trades reflect the immediate current market.

      For example, Firm 1 executes an OTC trade in ABCD security at 10:00:00 a.m. at a price of $20.00 per share and reports the trade at 10:00:10; this trade is timely under FINRA rules and currently eligible to update the last sale price. Firm 2 executes a trade in the same security at 10:00:05 a.m. at a price of $21.00 per share and reports the trade at 10:00:06. Firm 2's trade, because it was reported first, will be disseminated prior to Firm 1's trade. A market participant viewing the consolidated market data at 10:00:10 could misconstrue the current market for ABCD security to be $20.00 rather than $21.00.

      In addition, because trades executed 10 seconds prior may no longer reflect the current market for actively traded stocks, they may improperly impact the calculation of reference prices under the NMS Plan to Address Extraordinary Market Volatility (also referred to as the Limit Up/Limit Down Plan) or, at an extreme, trigger a trading halt. Delayed reports also could appear to other market participants as a violation of the Regulation NMS Order Protection Rule (i.e., trading at a price worse than the best displayed bid or offer, commonly referred to as a "trade-through").6

      Accordingly, FINRA is proposing to identify OTC trades in NMS stocks reported more than two seconds following trade execution as "out of sequence" for public dissemination purposes and therefore not last sale eligible.7 The FINRA trade reporting facilities, i.e., the Alternative Display Facility (ADF) and the Trade Reporting Facilities (TRFs),8 will append an indicator to "out of sequence" trades before sending them to the SIPs for dissemination. Thus, in the example above, Firm 1's trade in ABCD security would be identified as "out of sequence" and would not update the last sale price, and a market participant viewing the consolidated market data at 10:00:10 would see the current market for ABCD security reflected as $21.00.

      The current trade reporting timeframe under FINRA rules will remain unchanged. Thus, firms will continue to be required to report OTC trades as soon as practicable, and only trades reported more than 10 seconds following execution will continue to be considered late for purposes of compliance with FINRA rules. As such, FINRA believes that the proposal will minimize the impact on firms. For example, if the trade reporting timeframe under FINRA rules were reduced to two seconds, some firms would be required to undertake systems development work to comply with the new requirement.

      FINRA believes that the proposal will reduce the likelihood that out of sequence trades will be misconstrued and will increase the reliability of the transaction reporting stream, which will improve the ability of investors to understand the market conditions prevailing at the time of execution of their orders. FINRA further believes that two seconds strikes the appropriate balance of retaining most trades in the last sale calculation while excluding those that may not accurately reflect the current market. For example, during the period of June 23 through June 27, 2014, 97.330 percent of OTC trades in NMS stocks were reported within two seconds of execution.9 By way of comparison, during this period, 91.276 percent of OTC trades in NMS stocks were reported within one second of execution and 98.729 percent were reported within three seconds of execution.

      FINRA considered whether a separate standard should apply to thinly traded securities, e.g., whether trades in thinly traded securities reported within 10 seconds of execution should continue to be eligible to update the last sale price. However, FINRA is concerned that it may be difficult to define the universe of "thinly traded securities" and to apply such definition in a consistent and meaningful way. Additionally, FINRA is concerned that separate standards could be difficult to administer from a systems perspective and confusing for market participants (i.e., the tape would not identify trades subject to a two-second versus a 10-second standard, without additional systems development work, and thus market participants would need to refer to a list of securities that qualify as "thinly traded," which would change over time). Under the proposal, trades reported more than two seconds following execution will continue to be included in trade information disseminated by the SIPs, which is available to investors and other market participants, and will continue to be eligible to update the high and low sale prices for the day. Accordingly, FINRA believes that the proposal should apply to all NMS stocks uniformly. Nonetheless, FINRA specifically seeks comment on this issue.

      Much of the discussion relating to HFT has focused on the NMS stock markets. The OTC equity securities market is not as fully automated as the NMS stock markets and more manual trading and reporting occur in OTC equity securities. Proper sequencing of trades and the reliability of the transaction reporting stream also are important in the OTC equity securities market. However, given the more manual nature of this market, the fact that the market for an OTC equity security may not change as quickly as for actively traded NMS stocks, and the absence of some of the concerns underlying the proposal (e.g., the need for proper sequencing of trades for Limit Up/Limit Down and Regulation NMS purposes), at this time FINRA is not proposing that trades in OTC equity securities reported more than two seconds following execution be identified as "out of sequence" for purposes of public dissemination. (Trades in OTC equity securities are not commingled with transactions in NMS stocks, but are disseminated separately via FINRA's Trade Data Dissemination Service (TDDS) feed.) However, FINRA specifically seeks comment on this issue.

      FINRA also is proposing to amend the current Supplementary Material that provides guidance on the "as soon as practicable" requirement under the trade reporting rules. Specifically, consistent with the SEC's application of Rule 603 of Regulation NMS,10 FINRA interprets the "as soon as practicable" requirement to also require that firms not disseminate executed trade information sooner than the trade is reported to FINRA. Thus, for example, an ATS cannot commence the process of disseminating trade information to its subscribers any faster than it commences the process of reporting the trade to FINRA for dissemination purposes. This also would prohibit an ATS from reporting back execution information to the subscriber on whose behalf the trade was executed sooner than it reports the information to FINRA.

      Economic Impacts

      Anticipated Benefits

      As discussed above, FINRA believes that the proposal would enhance the trade information disseminated on the tapes, thereby enabling investors and other market participants to better understand the market conditions prevailing at the time of execution of their orders. The proposal would also reduce the likelihood that out of sequence trades are misinterpreted or, for example, improperly impact the calculation of reference prices under the Limit Up/Limit Down Plan.

      The economic impacts of the proposal may vary across securities depending upon the frequency at which the underlying securities trade. The anticipated benefits would be most pronounced with respect to more actively traded securities. For securities that are very thinly traded, FINRA considered whether the proposal would result in a loss of information, since some trades may be excluded from the last sale price calculation. FINRA notes that this may be an issue today, i.e., for very thinly traded securities where there is usually more than 10 seconds between trades, potentially the only trade that would update the last sale price is already omitted from the last sale calculation, if it is not reported within 10 seconds. However, FINRA does not believe that the proposal would result in a material loss of information because the trades would still be included in the data that is publicly disseminated and would continue to update the high and low sale prices. Nonetheless, FINRA specifically solicits comment on this issue.11

      In addition, the proposal to amend the Supplementary Material relating to the "as soon as practicable" requirement would clarify the need for consistency in the timeliness of reporting of information to ATS subscribers and other market participants via FINRA. As noted above, the proposed amendments would clarify that, consistent with the SEC's application of Rule 603 of Regulation NMS, a firm must not disseminate trade information to subscribers prior to meeting its reporting requirements to FINRA.

      Anticipated Costs

      The proposal would not change a firm's reporting obligations under FINRA rules and, as a result, would impose no material direct costs to member firms. In addition, the costs to FINRA would be minimal to update the TRFs and the ADF to identify "out of sequence" trades before sending them to the SIPs for dissemination.

      Request for Comment

      FINRA seeks comments on the proposal outlined above. In addition to general comments, FINRA specifically requests comments on the following questions:

      •    Would the proposal enhance the trade information disseminated on the tapes?
      •    Is the proposed two-second threshold for last sale eligibility for OTC trades in NMS stocks appropriate? If not, what alternative would commenters propose and why?
      •    As noted above, trades that are marked "out of sequence" and not last sale eligible will still be available to investors and other market participants. Nonetheless, are there concerns that the proposal could mischaracterize some trades, for example, those involving thinly traded stocks?
      •    Should FINRA consider a separate threshold for thinly traded securities, and if so, how should the universe of "thinly traded" securities be defined?
      •    Would such an approach provide more meaningful information to the marketplace? Is there a risk that separate thresholds could cause confusion to market participants?
      •    Because the ADF and TRFs would append the indicator before sending transaction reports to the SIPs, FINRA believes that the proposal would have minimal impact on firms. Do firms agree?
      •    Are there any direct or indirect costs that firms may incur as a result of the proposal, and if so, what are they?
      •    Do firms anticipate having to make any systems changes as a result of the proposal? If so, what are the costs associated with these system changes?
      •    The proposal would apply only to NMS stocks. Do commenters believe that it should be expanded to also apply to trades in OTC equity securities reported to the OTC Reporting Facility? If so, why, and what are the associated economic impacts?

      FINRA requests that commenters provide empirical data or other factual support for their comments wherever 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 NTM 03-73 (November 2003) (NASD Announces Online Availability of Comments) for more information.

      2 See Section 19 of the Securities Exchange Act of 1934 (SEA) 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 FINRA September 19, 2014, News Release "FINRA Board Approves Series of Equity Trading and Fixed Income Rulemaking Items."

      4 Firms must have policies and procedures reasonably designed to comply with the "as soon as practicable" requirement and must implement systems that commence the trade reporting process without delay upon execution. Where a firm has such reasonably designed policies, procedures and systems in place, the firm will 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.

      5 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 Consolidated Tape Association Plan (CTA Plan) and Tape C is governed by the Nasdaq Unlisted Trading Privileges Plan (UTP Plan). The consolidated tapes disseminate information for trades in NMS stocks executed OTC, as well as trades executed on exchanges.

      6 For example, if a trade is not disseminated until 10 seconds after execution, the best displayed market could have changed dramatically between the time of execution and ultimate dissemination of the trade, giving the appearance of a trade-through of the then-current market.

      7 Of course, for inactive stocks with gaps between trades of more than 10 seconds, these trades may in fact be in sequence. Generally, this would be apparent in the trade data.

      8 FINRA has two TRFs: the FINRA/NASDAQ TRF and the FINRA/NYSE TRF.

      9 As noted above, market participants have no way to identify which trades on the tape were reported within two seconds of execution and which trades were reported within 10 seconds of execution, and the price could have changed dramatically within that period. Thus, although the vast majority of trades are reported within two seconds today, FINRA is concerned that out of sequence trades nonetheless may be misconstrued.

      10 Rule 603 provides that any national securities exchange, national securities association, broker, or dealer that distributes information with respect to quotations for or transactions in an NMS stock to a securities information processor, broker, dealer, or other persons shall do so on terms that are not unreasonably discriminatory.

      11 FINRA also considered whether a firm might alter its reporting patterns by, for example, selectively reporting some trades in more than two seconds so as not to update the last sale price, while reporting its remaining trades within two seconds. Such behavior would be a violation of the trade reporting rules, and as such, FINRA believes that any such concerns are mitigated.


      Attachment A

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

      Note: The text of the proposed amendments to FINRA Rule 6380A relating to the FINRA/NASDAQ TRF is shown below. Similar changes will be made to the rule series relating to the ADF and FINRA/NYSE TRF.

      6000. QUOTATION AND TRANSACTION REPORTING FACILITIES

      *   *   *   *   *

      6300. TRADE REPORTING FACILITIES

      6300A. FINRA/NASDAQ TRADE REPORTING FACILITY

      *   *   *   *   *

      6380A. Transaction Reporting

      (a) through (h) No Change.

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

      .01. No Change.
      .02 Trade Reporting Time Frame
      (a) With respect to the requirement under paragraphs (a) and (g) of this Rule that members report trades and trade cancellations "as soon as practicable," a member with the trade reporting obligation under paragraph (b) of this Rule 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 member has such reasonably designed policies, procedures and systems in place, the member generally will not be viewed as violating the "as soon as practicable" requirement because of delays in trade reporting that are due to extrinsic factors that are not reasonably predictable and where the member does not purposely intend to delay the reporting of the trade. In no event may a member purposely withhold trade reports, e.g., by programming its systems to delay reporting until the last permissible second. FINRA also interprets "as soon as practicable" to require members to disseminate trade information to other market participants no sooner than executed trade information is reported to FINRA for dissemination purposes.
      (b) No Change.
      (c) For purposes of public dissemination, trades reported more than two seconds following execution will be submitted to the Securities Information Processors as "out of sequence" and will not be eligible to update the last sale price. Notwithstanding this designation, such trades will not be considered "late" if they are reported within the timeframe specified in paragraph (a) of this Rule.
      .03 through .04 No Change.
      *   *   *   *   *

    • 14-45 SEC Approves Amendments to FINRA Rules 9231 and 9232 to Add a Category of Persons Eligible to Serve as Panelists in Disciplinary Proceedings; Effective Date: September 26, 2014

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      Composition of Hearing Panels and Extended Hearing Panels

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Key Topics

      Disciplinary Proceedings
      Referenced Rules & Notices

      FINRA Rule 9120(i)
      FINRA Rule 9211
      FINRA Rules 9213(b)
      FINRA Rule 9231
      FINRA Rule 9232
      FINRA Rule 9311
      FINRA Rule 9550 Series

      Executive Summary

      FINRA has amended FINRA Rule 9231 (Appointment by the Chief Hearing Officer of Hearing Panel or Extended Hearing Panel or Replacement Hearing Officer) to establish an additional category of persons eligible to serve as panelists on a Hearing Panel or an Extended Hearing Panel in a disciplinary proceeding to include persons currently serving, or having served previously, on a committee appointed or approved by the FINRA Board.1 The rule change also makes a conforming amendment to Rule 9232 (Criteria for Selection of Panelists and Replacement Panelists), which establishes criteria for the appointment of eligible panelists to Hearing Panels and Extended Hearing Panels. The rule change will provide FINRA with a larger pool of individuals with experience and expertise who could serve as panelists.

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

      Questions concerning this Notice should be directed to Gary Dernelle, Associate General Counsel, Office of General Counsel, at (202) 728-8255.

      Discussion

      FINRA's disciplinary process begins with the Department of Enforcement or Department of Market Regulation filing a complaint with the Office of Hearing Officers that alleges a firm or person associated with a firm is violating or has violated any rule, regulation or statutory provision, including the federal securities laws and related regulations.2 Thereafter, the chief hearing officer assigns a hearing officer to preside over the disciplinary proceeding, and appoints panelists to a Hearing Panel or, if applicable, an Extended Hearing Panel to conduct the disciplinary proceeding.3 Trial-level hearings take place before a Hearing Panel or an Extended Hearing Panel, which listens to the presentation of evidence and issues a written decision setting forth findings as to whether a respondent engaged in the alleged misconduct and describing the sanctions, if any, imposed. A Hearing Panel or an Extended Hearing Panel decision is generally appealable to, and subject to discretionary review by, the National Adjudicatory Council (NAC).4

      Under FINRA Rule 9231, a Hearing Officer and two industry panelists, who are either currently associated with FINRA member firms or retired therefrom, compose a Hearing Panel or an Extended Hearing Panel. Prior to the approved rule change, the chief hearing officer appointed panelists from a pool of eligible persons that included persons who (1) currently serve or previously served on a District Committee; (2) previously served on the NAC; (3) previously served on a disciplinary subcommittee of the NAC or its predecessor; (4) previously served as a director or governor, but do not currently serve in any of these positions; or (5) in limited cases, currently serve or previously served on the Market Regulation Committee.

      Amended FINRA Rules 9231 and 9232 add one category of persons eligible to serve on a Hearing Panel or an Extended Hearing Panel for a disciplinary proceeding.5 This additional category includes a person who currently serves or previously served on a committee appointed or approved by the FINRA Board who is not currently a member of the NAC or a director or governor. In effect, the rule change enlarges the number of FINRA committees from which experienced and expert panelists can be drawn to encompass industry members who serve, or have served, on the FINRA Advisory Committees, including, for example, the Compliance Advisory Committee, Corporate Financing Committee, Financial Responsibility Committee, Fixed Income Committee, Investment Dealer/Insurance Affiliate Committee, and Membership Committee.6 Although the amended rules make a conforming amendment to FINRA Rule 9232 to reflect the additional category of eligible panelists under proposed FINRA Rule 9231, they do not alter the criteria currently contained within FINRA Rule 9232 for the selection of panelists.


      1 See Securities Exchange Act Release No. 73230 (September 26, 2014); 79 FR 59534 (October 2, 2014) (Order Approving SR-FINRA-2014-036).

      2 See FINRA Rule 9211.

      3 FINRA Rules 9213(b), 9231(a). The Chief Hearing Officer appoints an Extended Hearing Panel if, upon consideration of the complexity of the issues involved, the probable length of the hearing, or other factors, the Chief Hearing Officer determines that a matter shall be an "Extended Hearing." See FINRA Rules 9120(i), 9231(c).

      4 See FINRA Rule 9311.

      5 By extension, the rule change also expands the pool of persons eligible to serve as panelists on Hearing Panels for some expedited proceedings under the FINRA Rule 9550 Series. See FINRA Rule 9559(d)(2) (referencing FINRA Rules 9231 and 9232 for panelists' qualifications for serving on certain expedited proceedings).

      6 A complete list of the FINRA Advisory Committees, and a description of their roles and the advice they provide to FINRA, is provided on FINRA's website.

    • 14-44 Broker-Dealer, Investment Adviser Firm, Agent and Investment Adviser Representative, and Branch Renewals for 2015; Payment Deadline: December 12, 2014

      View PDF

      BD and IA Renewals for 2015

      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 2015 Renewal Program begins on November 10, 2014, 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:

      October 27, 2014 Firms may begin submitting post-dated Form U5 and BR Closing/Withdrawal filings via Web CRD/IARD.
      November 1, 2014 Firms may begin submitting post-dated Form BDW and ADV-W filings via Web CRD/IARD.

      Please Note: Post-dated filings submitted by 11 p.m., Eastern Time (ET), November 7, 2014, do not appear on the firm's Preliminary Renewal Statement. The only allowed date for post-dated termination filings is December 31, 2014.
      November 10, 2014 Preliminary Renewal Statements are available on Web CRD/IARD.
      December 12, 2014 Full payment of Preliminary Renewal Statements is due.
      January 2, 2015 Final Renewal Statements are available on Web CRD/IARD.
      January 16, 2015 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 12, 2014, may cause the firm to become ineligible to do business in the jurisdictions where it is registered, effective January 1, 2015. 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, 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, 2015.

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

      Background & Discussion

      Preliminary Renewal Statements

      Beginning November 10, 2014, 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;
      •   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 (ISE GEMINI), Miami International Stock Exchange, LLC (MIAX), NASDAQ Stock Exchange (NQX), New York Stock Exchange (NYSE), NYSE Arca, Inc. (ARCA), NYSE MKT LLC (NYSE-MKT), and NASDAQ OMX PHLX, Inc. (PHLX) maintenance fees, if applicable;
      •   state broker-dealer firm, branch, and agent (AG) renewal fees, if applicable;
      •   state investment adviser firm, branch and investment adviser representative (RA) renewal fees, if applicable;
      •   FINRA annual statutory disqualification fees for registered individuals.

      FINRA must receive full payment of the Preliminary Renewal Statement fees no later than December 12, 2014.

      If payment is not received by December 12, 2014, 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 list of AGs 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 RAs 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 list of AGs 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 ARCA, BATS-YX, BATS-ZX, BOX, BX, C2, CBOE, CHX, EDGA, EDGX, GEMINI, ISE, MIAX, NQX, NYSE, NYSE-MKT, 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 FINRA has received payment and that the firm's Renewal Statement balance is paid in full. Firms have four payment methods available to pay renewal fees:

      1. Electronic payment via E-Bill
      2. ACH/Wire Transfer
      3. Automatic FINRA Flex-Funding Account-to-Renewal Account Transfer
      4. Check

      Electronic Payment via E-Bill

      Firms may submit electronic payments to fund their renewal accounts through FINRA's E-Bill system. 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.

      Please Note: Starting November 3, 2014, users having the E-Bill Renewal entitlement will be able to subscribe to receive email alert notifications related to the annual Renewal Program, such as when the Preliminary Statement or Final Statement is due or when payments are made. For further details, please refer to the E-Bill User Guide.

      ACH/Wire Transfer

      All ACH or wire transfer payments sent to FINRA are deposited into firms' Flex-Funding Accounts. If you submit an ACH or wire transfer to pay your firm's renewal fees, it will not be applied to your Renewal Account until December 15, 2014, when FINRA begins the automatic Flex-Funding Account-to-Renewal Account transfer. 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 15, 2014, then you must pay using E-Bill directly to your Renewal Account.

      Firms may transfer funds via ACH or wire into their Flex-Funding Accounts. Firms should provide their banks with the following information:

      •   Transfer funds to: Bank of America
      •   Wire ABA Number: 026009593
      •   ACH ABA Number: 054001204
      •   Beneficiary: FINRA
      •   FINRA Account Number: 226005684771
      •   Reference Number: Firm CRD number

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

      •   Inform the bank to credit funds to the FINRA bank account.
      •   Provide the firm's CRD number 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 15, 2014, and through December 27, 2014, 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. 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 January 20, 2015, 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 15, 2014, 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 15, 2014, then you must pay using E-Bill directly to your Renewal Account.

      The check must be drawn on the FINRA-registered firm's account and include the firm's CRD number 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 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 418911
      Boston, MA 02241-8911

      Note: This box will not accept courier
      or overnight deliveries.
      Bank of America Lockbox Services
      FINRA 418911
      MA5-527-02-07
      2 Morrissey Blvd.
      Dorchester, MA 02125

      Telephone: (800) 376-2703

      Renewal Reports

      Beginning November 10, 2014, 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 — lists individuals included in the Renewal Program and includes billing codes (if the firm has provided them).
      •   Branches Renewal 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 — contains all individuals who are not registered with FINRA, but are registered with one or more jurisdictions. Firms should request this report as soon as possible to determine if it needs to request any FINRA registrations or terminate jurisdiction registrations.

      Post-Dated Form Filings

      Firms can begin filing post-dated Form U5 and BR Closing/Withdrawal termination filings via Web CRD/IARD on October 27, 2014, and Form BDW and ADV-W filings via Web CRD/ IARD on November 1, 2014. Post-dated filings are filings that have a termination date of December 31, 2014. If a post-dated Form U5, BDW, BR Closing/Withdrawal or ADV-W filing is submitted, the affected individual, firm, and/or branch may continue doing business in that jurisdiction until the end of the calendar year without being assessed renewal fees. December 31, 2014, is the only date allowed for a post-dated form filing.

      Firms that submit post-dated termination filings by 11 p.m., ET, on November 7, 2014, 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 10, 2014, will not be assessed renewal fees for the terminated jurisdictions on their Final Renewal Statements in January 2015. 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 27, 2014.

      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, 2015, 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 27, 2014.

      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 7, 2014, 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 27, 2014.

      Removing Open Registrations

      Throughout the year, firms have access to the "Approved AG Reg Without FINRA Approval Report" via Web CRD. This report identifies AGs 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 7, 2014, to avoid renewal charges for those individuals on their Preliminary Renewal Statements. This report also advises the firm if there are no AGs at the firm within this category.

      Final Renewal Statements

      On January 2, 2015, FINRA makes available all Final Renewal Statements on Web CRD/ IARD. These statements reflect the status of broker-dealer, AG, investment adviser firm and RA registrations, exempt reporting, or notice filings as of December 31, 2014. 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, 2015. Firms that have a credit balance in their FINRA Flex-Funding Accounts may submit a refund request to FINRA.

      On or after January 2, 2015, firms should access the Web CRD reports functionality for the Firm Renewal Report, which will list all individuals renewed with FINRA, ARCA, BATS-YX, BATS-ZX, BOX, BX, C2, CBOE, CHX, EDGA, EDGX, GEMINI, ISE, MIAX, NQX, NYSE, NYSE-MKT, PHLX and each jurisdiction. AGs 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 16, 2015, 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 2015 Regulatory Notice.

    • 14-43 SEC Approves Supplemental Inventory Schedule; Implementation Date: on or before January 30, 2015

      View PDF

      Supplemental FOCUS Information

      Regulatory Notice
      Notice Type

      New Supplemental Schedule
      Suggested Routing

      Compliance
      Legal
      Operations
      Regulatory Reporting
      Senior Management
      Key Topics

      FOCUS Reporting
      Referenced Rules & Notices

      FINRA Rule 4524

      Executive Summary

      The SEC has approved the adoption of the Supplemental Inventory Schedule (SIS),1 a supplemental schedule that must be filed by a firm that is required to file FOCUS Report Part II, FOCUS Report Part IIA or FOGS Report Part I, and has inventory positions as of the end of the FOCUS or FOGS reporting period, unless the firm has (1) a minimum dollar net capital or liquid capital requirement of less than $100,000 or (2) inventory positions consisting only of money market mutual funds.2 The initial SIS disclosing inventory positions as of December 31, 2014, must be filed with FINRA on or before January 30, 2015.3

      The SIS can be found at www.finra.org/notices/14-43.

      Questions concerning this Notice should be directed to:

      •   Kris Dailey, Vice President, Risk Oversight & Operational Regulation, at (646) 315-8434 or kris.dailey@finra.org; or
      •   Matthew E. Vitek, Associate General Counsel, Office of General Counsel, at (202) 728-8156 or matthew.vitek@finra.org.

      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 SIS, a supplemental schedule to the FOCUS Report Part II, FOCUS Report Part IIA and the FOGS Report Part I that would provide more detailed information about the inventory positions held by firms.4 The SIS must be filed by a firm that is required to file FOCUS Report Part II, FOCUS Report Part IIA or FOGS Report Part I, with inventory positions as of the end of the FOCUS or FOGS reporting period unless the firm has (1) a minimum dollar net capital or liquid capital requirement of less than $100,000; or (2) inventory positions consisting only of money market mutual funds. A firm with inventory positions consisting only of money market mutual funds will need to affirmatively indicate through functionality on the eFOCUS system that no SIS filing is required for the reporting period.

      The SIS will provide a more detailed categorization of a firm's long and short inventory positions than what is required by the FOCUS Report Part II, FOCUS Report Part IIA and FOGS Report Part I. For example, FOCUS Report Part II, FOCUS Report Part IIA and FOGS Report Part I require total inventory of securities sold short to be reported in aggregate (Item 1620), and do not provide any information on the types of securities sold short by firms. Similarly, FOGS Report Part I requires that all long inventory be reported in aggregate (Item 850). Further, on FOCUS Report Part II and IIA, long inventory is reported in categories that aggregate securities with different market risk profiles (e.g., the Corporate Obligations category on the FOCUS Report Part II (Item 400) and Debt Securities category on the FOCUS Report Part IIA (Item 419) include single name corporate bonds, private-label mortgage-backed securities and foreign issues debt obligations). The SIS will enhance FINRA's ongoing surveillance monitoring of firms' financial condition by providing greater transparency into the market risk posed by a firm's inventory positions and the potential impact to a firm's net capital or liquid capital, as well as related funding and liquidity requirements. In addition, the information provided by the SIS will enable FINRA staff to perform more targeted examinations of firms' market risk exposure.

      The SIS includes instructions that provide definitions and guidance with respect to the information required to be reported. The SIS is due within 20 business days of the end of a firm's FOCUS or FOGS reporting period and must be filed 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).5

      The initial SIS disclosing inventory positions as of December 31, 2014, must be filed with FINRA on or before January 30, 2015.


      1 See Securities Exchange Act Release No. 73192 (September 23, 2014), 79 FR 58390 (September 29, 2014) (Order Approving Proposed Rule Change; File No. SR-FINRA-2014-025).

      2 Firms that are government securities brokerdealers registered under Section 15C of the Securities Exchange Act are required to file a FOGS Report (Report on Finances and Operations of Government Securities Brokers and Dealers) in lieu of a FOCUS Report.

      3 See Securities Exchange Act Release No. 73392 (October 21, 2014) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Revise the Implementation Date of the SIS; File No. SR-FINRA-2014-044).

      4 For purposes of the SIS, the term "inventory positions" means securities or commodities positions (long, short or both) which are required to be reported on the balance sheet pursuant to GAAP.

      5 For more information about system entitlement and SAA, please visit FINRA's Entitlement Program page [http://www.finra.org/industry/compliance/entitlement/].

    • 14-42 SEC Approves Amendments to the Arbitration Codes to Expand Arbitrators' Authority to Make Referrals During an Arbitration Proceeding; Effective Date: October 27, 2014

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      Mid-case Referrals in Arbitration

      Regulatory Notice
      Notice Type

      Amendment
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topics

      Arbitration
      Arbitrators
      Referrals
      Referenced Rules & Notices

      FINRA Rule 12104
      FINRA Rule 13104

      Executive Summary

      The Customer and Industry Codes (Codes) permit arbitrators to refer to FINRA for disciplinary investigation any matter that has come to the arbitrator's attention during and in connection with the arbitration at the conclusion of the proceedings. The SEC approved amendments to the Codes to permit arbitrators to make a referral, during an arbitration, of any matter or conduct that has come to the arbitrator's attention during a hearing, which the arbitrator has reason to believe poses a serious threat, whether ongoing or imminent, that is likely to harm investors unless immediate action is taken.1 The amendments are effective on October 27, 2014, for any arbitration case which has scheduled hearings remaining.

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

      Questions concerning this Notice should be directed to:

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

      Discussion

      FINRA has amended Rules 12104 and 13104 to permit arbitrators to make a referral, during an arbitration, of any matter or conduct that has come to the arbitrator's attention during a hearing,2 which the arbitrator has reason to believe poses a serious threat, whether ongoing or imminent, that is likely to harm investors unless immediate action is taken. Prior to these amendments, the rules limited the arbitrators' ability to make referrals until the conclusion of an arbitration case.

      Making a Mid-case Referral

      Under Rules 12104(b) and 13104(b), an arbitrator may make a mid-case referral if the arbitrator learns of a matter or conduct from evidence presented by the parties during a hearing. The rules further provide that arbitrators should not make referrals during the pendency of an arbitration based solely on allegations in the statement of claim, counterclaim, cross claim or third party claim. The matter or conduct must pose a serious threat that is imminent or ongoing, and is likely to harm investors unless immediate action is taken. Examples of such a threat would include evidence of a Ponzi scheme or money-laundering.3

      Finally, if the arbitrator believes that such a threat exists but the case is about to conclude, then the rule instructs the arbitrator to wait until the case concludes and make a post-case referral, under Rules 12104(e) or 13104(e), if the arbitrator believes that the delay will not materially compromise investor protection. An arbitrator may have the opportunity to exercise such judgment if, for example, during the third of four consecutively scheduled hearing days, the arbitrator learns of a serious threat that meets the criteria of the rule. If the arbitrator anticipates that the remaining tasks will be completed shortly after the last hearing session is conducted on the fourth day, the arbitrator could defer making the mid-case referral until the case concludes, so that there would not be a significant delay to the conclusion of the case. In deciding whether to delay making a mid-case referral, however, the arbitrator should weigh the potential harm a mid-case referral could have on the individual claimant against the possible harm to other investors that a brief delay could cause.4

      Disclosure of Mid-case Referral to Parties and Time Limit to Request Recusal

      If any arbitrator refers a matter or conduct for investigation as discussed above, Rules 12104(c) and 13104(c) provide that the director will disclose the referral to the parties. Under these rules, any party asking that the referring arbitrator(s) recuse themselves must make the request no later than three days after the director notifies the parties of the referral. Further, if a party does not make the recusal request within the prescribed timeframe, the party forfeits the right to request recusal of the referring arbitrator(s).

      FINRA notes that the rule does not create a right to make a recusal request; this right exists in any arbitration case. Rules 12406 and 13409 of the Codes state that an arbitrator who is the subject of a recusal request has the discretion to decide whether to withdraw from the case. FINRA rules do not currently dictate the grounds for granting recusal requests and do not require specific decisions by arbitrators in response to such requests. Therefore, an arbitrator would not be required to grant a party's recusal request that results from the arbitrator's mid-case referral. Consistent with any other recusal request, an arbitrator challenged because of a mid-case referral would be required to make that decision in accordance with the Codes,5 and Code of Ethics for Arbitrators in Commercial Disputes.6

      Further, if an arbitrator denies a party's recusal request, FINRA does not believe that the denial would provide the subject of the referral with valid grounds to challenge an award. The Federal Arbitration Act establishes four grounds for vacating an arbitration award.7 Some individuals who commented on the proposed rule change have predicted that a possible challenge that might be triggered by a mid-case referral would be evident partiality. However, arbitrator evident partiality encompasses both an arbitrator's explicit bias toward one party and an arbitrator's inferred bias when an arbitrator fails to disclose relevant information to the parties.8 "The party alleging evident partiality must establish specific facts which indicate improper motives" on the part of the arbitrators.9 Further, courts have stated that neither the appearance of impropriety, standing alone,10 nor the arbitrators' decision are sufficient to constitute a showing of evident partiality.11

      In addition, courts have found that a situation in which an arbitrator forms an opinion using evidence presented during a hearing and then acts on that evidence does not rise to the level of evident partiality.12 Courts expect that after an arbitrator has heard considerable testimony, the arbitrator will have some view of the case.13 As long as that view is one that arises from the evidence and the conduct of the parties, it cannot be fairly claimed that some expression of that view amounts to bias.14 Based on case law, FINRA believes that, as arbitrators are expected to form opinions based on evidence presented to them after they are appointed, a prevailing investor's award would not likely be vacated because arbitrators acted on their views, in the form of a mid-case referral, prior to the conclusion of the proceedings.15

      Moreover, filing a motion to vacate an award on the basis of an arbitrator making a midcase referral could expose the attorney and the moving party to fees and sanctions. Courts have imposed sanctions to discourage parties from "defeating the purpose of arbitration by bringing such [motions] based on nothing more than dissatisfaction with the tribunal's conclusions."16 "Where parties agree to arbitration as an efficient and lower-cost alternative to litigation, both the parties and the system itself have a strong interest in the finality of those arbitration awards."17 Thus, courts have found that sanctions were appropriate when the motion "serves only to cause the parties to incur unnecessary expense and delay the implementation of the award."18

      President or Director Evaluates Mid-case Referral

      Under the amendments, Rules 12104(d) and 13104(d) provide that the president of FINRA Dispute Resolution or the director will evaluate the arbitrator referral to determine whether to transmit it to other FINRA divisions. Further, only the president or the director will have the authority to forward the referral under these rules.

      Making a Post-case Referral

      Rules 12104(e) and 13104(e) continue to permit an arbitrator to make referrals at the conclusion of an arbitration case. Specifically, the rules state that at the conclusion of an arbitration, any arbitrator may refer to FINRA for investigation any matter or conduct that has come to the arbitrator's attention during and in connection with the arbitration, either from the record of the proceeding or from material or communications related to the arbitration, which the arbitrator has reason to believe may constitute a violation of the rules of FINRA, the federal securities laws, or other applicable rules or laws.

      Effective Date

      The amendments are effective on October 27, 2014, for any arbitration case which has scheduled hearings remaining.


      1 See Securities Exchange Act Release No. 73319 (October 8, 2014), 79 FR 61915 (October 15, 2014) (Order Approving File No. SR-FINRA-2014-005).

      2 The term "hearing" means a hearing on the merits of an arbitration under Rule 12600. See Rules 12100(m) and 13100(m).

      3 FINRA notes that these examples are illustrative, not exhaustive.

      4 FINRA contemplates that the mid-case referral rule would typically be used in those circumstances where hearings are scheduled for many days, or even weeks, and, in particular, when the hearing days are not scheduled consecutively.

      5 Any party may ask an arbitrator to recuse himself or herself from the panel for good cause. Requests for arbitrator recusal are decided by the arbitrator who is the subject of the request. Rules 12406 and 13409.

      6 See The Code of Ethics for Arbitrators in Commercial Disputes, Canon I(E) (stating, in relevant part, that "[w]hen an arbitrator's authority is derived from the agreement of the parties, an arbitrator should neither exceed that authority nor do less than is required to exercise that authority completely. Where the agreement of the parties sets forth procedures to be followed in conducting the arbitration or refers to rules to be followed, it is the obligation of the arbitrator to comply with such procedures or rules.").

      7 An award may be vacated upon the application of any party to the arbitration—

      (1) where the award was procured by corruption, fraud, or undue means;
      (2) where there was evident partiality or corruption in the arbitrators, or either of them;
      (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or
      (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

      See 9 U.S.C. §10(a).

      8 Windsor, Kathryn A. (2012) "Defining Arbitrator Evident Partiality: The Catch-22 Of Commercial Litigation Disputes," Seton Hall Circuit Review: Vol. 6: Iss. 1, Article 7, p. 192.

      9 Sheet Metal Workers International Association Local Union 420 v. Kinney Air Conditioning Co., 756 F.2d 742, 746 (9th Cir. 1985).

      10 Kinney, 756 F.2d at 746 (citing International Produce, Inc. v. Rosshavet, 638 F.2d 548, 551 (2d Cir.), cert. denied, 451 U.S. 1017 (1981)).

      11 Stanley J. Mical, et al. v. Phillip J. Glick, et al., No. 13 C 6508 (N.D. Ill. filed Jan 28, 2014).

      12 Ballantine Books Inc., 302 F.2d at 21. See also Bell Aerospace Co. v. Local 516, UAW, 500 F.2d 921, 923 (2nd Cir. 1974).

      13 Ballantine, 302 F.2d at 21.

      14 Id. See also Health Services Management Corp. v. Hughes, 975 F.2d 1253, 1267 (7th Cir. 1992).

      15 Health Services Management Corp., 975 F.2d at 1267.

      16 DigiTelCom, Ltd. v. Tele2 Sverige AB, 2012 U.S. Dist. LEXIS 105896, 18–19 (S.D.N.Y. July 25, 2012).

      17 Id. at 18.

      18 Id. at 19–20. See also B.L. Harbert Int'l v. Hercules Steel Co., 441 F.3d 905, 913 (11th Cir. Ala. 2006) (suggesting that courts cannot prevent parties from trying to convert arbitration losses into court victories, but it may be that we can and should insist that if a party on the short end of an arbitration award attacks that award in court without any real legal basis for doing so, that party should pay sanctions).

    • 14-41 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 2014 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/media/237443/FEASemi- Annual-Update.pdf[cecouncil.com].

      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.

    • 14-40 Confidentiality Provisions in Settlement Agreements and the Arbitration Discovery Process

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      Confidentiality Provisions

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Senior Management
      Key Topics

      Arbitration
      Confidentiality Provisions
      Discovery
      Dispute Resolution
      FINRA Rule 2010
      Settlement Agreements
      Referenced Rules & Notices

      NTM 86-36
      NTM 95-87
      NTM 04-44
      FINRA Rule 2010
      SEA Rule 21F-17

      Executive Summary

      FINRA reminds firms that it is a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) to include confidentiality provisions in settlement agreements or any other documents, including confidentiality stipulations made during a FINRA arbitration proceeding, that prohibit or restrict a customer or any other person from communicating with the Securities and Exchange Commission (SEC), FINRA, or any federal or state regulatory authority regarding a possible securities law violation.

      Questions concerning this Notice should be directed to:

      •   Victoria L. Crane, Associate General Counsel, Office of General Counsel, at (202) 728-8104 or victoria.crane@finra.org; or
      •   Margo A. Hassan, Assistant Chief Counsel, Dispute Resolution, at (212) 858-4481 or margo.hassan@finra.org.

      Background & Discussion

      A. Settlement Agreements

      FINRA has previously cautioned firms about the use of provisions in settlement agreements with customers or other persons that impede, or have the potential to impede, FINRA investigations and the prosecution of FINRA enforcement actions. For example, in Notice to Members 04-44, FINRA cautioned firms regarding the use of confidentiality provisions in settlement agreements that prohibit or restrict the customer or other person from disclosing to FINRA or other securities regulators the settlement terms and the underlying facts of the dispute upon inquiry.1 FINRA noted that such provisions violate FINRA Rule 2010, which requires firms to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business.

      This Notice supplements FINRA's prior guidance by reminding firms that confidentiality provisions also cannot be used to prohibit or restrict an individual from initiating communications directly with FINRA or other securities regulators regarding the settlement terms or underlying facts of a dispute, regardless of whether the individual has received an inquiry from such regulatory authority regarding the dispute. For example, notwithstanding a confidentiality provision in a settlement agreement, the customer or any other person may, at any time, alert FINRA to potentially fraudulent or suspicious activities by a firm or its associated persons through FINRA's Investor Complaint Center,2 or communicate directly with SEC staff regarding a possible securities law violation.3

      Confidentiality provisions in settlement agreements should be written to expressly authorize, without restriction or condition, a customer or other person to initiate direct communications with, or respond to any inquiry from, FINRA or other regulatory authorities. As FINRA has stated in prior guidance regarding confidentiality provisions in settlement agreements, it is not FINRA's intent to preclude firms from entering into settlement agreements that include acceptable confidentiality provisions. The following is an example of an acceptable confidentiality provision in a settlement agreement:
      Any non-disclosure provision in this agreement does not prohibit or restrict you (or your attorney) from initiating communications directly with, or responding to any inquiry from, or providing testimony before, the SEC, FINRA, any other self-regulatory organization or any other state or federal regulatory authority, regarding this settlement or its underlying facts or circumstances.
      FINRA reminds firms that the use of confidentiality provisions in settlement agreements that prohibit or restrict a customer's or other person's ability to communicate directly with or in response to an inquiry from a regulatory authority, constitutes conduct that is inconsistent with just and equitable principles of trade that may result in FINRA disciplinary proceedings for violation of FINRA Rule 2010.
      B. Arbitration Discovery Process

      The discovery process allows the parties to an arbitration to obtain facts and information from other parties to the arbitration to support their case and prepare for the hearing. FINRA's Code of Arbitration Procedure for Customer Disputes (Customer Code) requires parties to cooperate with each other to the fullest extent practicable in the voluntary exchange of documents and information to expedite the arbitration process. The code contains rules that govern the discovery process, including making discovery requests, responding to such requests, objecting to discovery requests, and arbitrator authority to issue sanctions against parties for discovery abuses.

      FINRA's Discovery Guide supplements the Customer Code. The introductory language describes the discovery process generally and explains how arbitrators should apply the discovery guidelines in arbitration proceedings. The introduction is followed by document production lists that specify the documents that parties should exchange with each other in customer cases. In discussing confidentiality in the discovery process, the guide provides: "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."

      FINRA notes that any stipulations between the parties or confidentiality orders issued by an arbitrator as part of the discovery process regarding the non-disclosure of the documents in question outside the arbitration of the particular case, do not restrict or prohibit the disclosure of the documents to the SEC, FINRA, any other self-regulatory organization, or any other state or federal regulatory authority. Thus, confidentiality provisions relating to document production in the discovery process do not apply to the sharing of the documents with regulatory authorities.

      FINRA cautions firms that the use of confidentiality provisions in discovery stipulations that prohibit or restrict a customer's or other person's ability to communicate directly with or in response to an inquiry from a regulatory authority, constitutes conduct that is inconsistent with just and equitable principles of trade that may result in FINRA disciplinary proceedings for violation of FINRA Rule 2010.

      1 See NTM 04-44 (June 2004). See also NTM 95-87 (October 1995), NTM 86-36 (May 1986), and NASD Regulatory and Compliance Alerts (June 1994 and July 1995).

      2 FINRA maintains an Investor Complaint Center on its website. Individuals with evidence of, or material information about, potentially illegal or unethical activity may also contact FINRA's Office of the Whistleblower.

      3 See Rule 21F-17 of the Securities Exchange Act of 1934 that provides, in part: "No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement... with respect to such communications."

    • 14-39 New Template Available on FINRA Firm Gateway for Compliance With SEA Rule 17a-5(f)(2) (Statement Regarding Independent Public Accountant)

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      Electronic Filing

      Regulatory Notice
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Key Topics

      Electronic Filing Requirements
      Frequently Asked Questions
      SEA Rule 17a-5(f)(2) (Statement Regarding Independent Public Accountant)
      Referenced Rules & Notices

      NASD Rule 3170
      NTM 06-61
      Regulatory Notice 08-11
      SEA Rule 17a-5
       

      Executive Summary

      In 2013, the SEC amended paragraph (f)(2) of SEA Rule 17a-5 to revise the statement regarding identification of a broker-dealer's independent public accountant that broker-dealers must file with the SEC and FINRA, as specified in the rule.1 The new requirement became effective on June 1, 2014. This Notice is to announce that FINRA is making available, through the Firm Gateway, a new template (referred to as the Rule 17a-5(f)(2) Statement) for members to file electronically with FINRA pursuant to the rule. Pursuant to NASD Rule 3170, all such statements must be filed with FINRA electronically, using the new template.2

      Based on discussions with staff of the SEC Division of Trading and Markets, this Notice is also providing a set of Frequently Asked Questions for members' guidance.

      Questions concerning this Notice may be directed to the member's Regulatory Coordinator.

      The Rule 17a-5(f)(2) Statement is attached to this Notice as Attachment A.

      Background & Discussion

      Effective June 1, 2014, new requirements went into effect with respect to the statement regarding identification of a broker-dealer's independent public accountant that must be filed with the SEC and FINRA pursuant to SEA Rule 17a-5(f)(2). FINRA is making available a new template—the Rule 17a-5(f)(2) Statement—for members to file such statements with FINRA electronically. The template will be available on FINRA's Firm Gateway as of November 24, 2014. As of that date, FINRA will only accept Rule 17a-5(f)(2) Statements filed in electronic form.

      Frequently Asked Questions

      Q1. When must members file the Rule 17a-5(f)(2) Statement?

      A1. Because the related section of the amended Rule 17a-5 went into effect on June 1, 2014, there are distinct filing requirements for members with respect to their 2014 fiscal year end, and for members with respect to fiscal years ending in 2015 or later. The filing requirements are available in Question and Answer 4 of the SEC Division of Trading and Markets Frequently Asked Questions Concerning the July 30, 2013 Amendments to the Broker-Dealer Financial Reporting Rule:

      Question 4.

      Paragraph (f)(2) of Rule 17a-5 requires a broker-dealer to file a statement regarding its independent public accountant no later than December 10 of each year. As a result of the amendments to Rule 17a-5, a broker-dealer that is required by Rule 17a-5 to engage an independent public accountant must file a new statement that contains the information and representations required under amended paragraph (f)(2) of Rule 17a-5 (even if the broker-dealer is not changing accountants).

      Since the amendments to paragraph (f)(2) of Rule 17a-5 do not become effective until June 1, 2014, when must a broker-dealer file a new statement regarding its independent public accountant pursuant to paragraph (f)(2) of Rule 17a-5? What audit period should the new statement cover?

      Answer 4:

      A broker-dealer need not file a new statement regarding its independent public accountant under paragraph (f)(2) until after the amendments to this paragraph become effective on June 1, 2014. For a broker-dealer with a 2014 fiscal year end between June and December 2014, the new statement must be filed on or before the 10th day of the month in which the broker-dealer's fiscal year ends because the representations in the statement need to address the work that the accountant will perform with respect to the broker-dealer's annual reports for its fiscal year ending in 2014.

      Broker-dealers that file their new statement between June and December 2014 for their 2014 fiscal year annual audit do not need to file a second new statement for their 2015 fiscal year by December 10, 2014 if the contractual commitment between the broker-dealer and independent public accountant is of a continuing nature. If the contractual commitment between the brokerdealer and independent public accountant is not of a continuing nature, then the broker-dealer must file a new statement under paragraph (f)(2) for the annual audit to be conducted the following calendar year no later than December 10, 2014.

      Q2. If our firm files a Rule 17a-5(f)(2) Statement indicating that our engagement letter with our independent public accountant is of a continuing nature, providing for successive engagements, does our firm have any further Rule 17a-5(f)(2) Statement filing requirement?

      A2. Under the SEC's rule, if the engagement of an independent public accountant is of a continuing nature, providing for successive engagements, no further filing is required. If the engagement is for a single year, or if the most recent engagement has been terminated or amended, a new statement must be filed by the required date.

      Q3. Our firm recently replaced our independent public accountant. Pursuant to SEA Rule 17a-5(f)(3) we filed the Replacement of Accountant notification with FINRA electronically, and with the SEC in hard copy, as required. Do we also have to file the Rule 17a-5(f)(2) Statement?

      A3. Yes. These are separate requirements under SEA Rule 17a-5. While the related templates will have certain identical information, the information also varies given the purpose of each notification. As such, the Replacement of Accountant under the SEA Rule 17a-5(f)(3) filing notification does not serve as a substitute for filing the Rule 17a-5(f)(2) Statement.

      Q4. If our firm files the Rule 17a-5(f)(2) Statement with FINRA using the template provided, will we also have to file with the SEC?

      A4. Yes. Pursuant to SEA Rule 17a-5(f)(1), the Rule 17a-5(f)(2) Statement must be filed with the SEC's principal office in Washington, DC, and the regional office of the SEC for the region in which the broker-dealer's principal place of business is located.

      Q5. Our firm has a fiscal year end of June 30, 2014. We filed the Rule 17a-5(f)(2) Statement with FINRA in hard copy on June 10, 2014. Our engagement letter with our independent public accountant was signed in May 2014. Does our firm have to re-file the Rule 17a-5(f)(2) Statement electronically?

      A5. No, your firm is not required to re-file the Rule 17a-5(f)(2) Statement electronically. However, your firm may elect to do so. To evidence such submission, members may print a copy of any financial notification filed with FINRA.3

      Q6. There were unavoidable circumstances that caused our firm to be unable to file the Rule 17a-5(f)(2) Statement on time. Should we still file electronically?

      A6. Yes. A member's obligation to file is not eliminated just because unavoidable circumstances caused the member to file after the due date. Members should note that failing to obtain an engagement letter with an accountant by the due date (i.e., December 1 of the preceding calendar year unless the firm is a new member or is filing the Rule 17a-5(f)(2) Statement between June 1, 2014, and December 31, 2014) does not constitute unavoidable circumstances. Members should work with their accountant to obtain an engagement letter by the required due date. See Q1 and A1 above.

      Q7. What are the qualifications of independent public accountants?

      A7. As of June 1, 2014, SEA Rule 17a-5(f)(1) as amended provides:

      "Qualifications of independent public accountants. The independent public accountant must be qualified and independent in accordance with § 210.2-01 [under Regulation S-X] and the independent public accountant must be registered with the Public Company Accounting Oversight Board if required by the Sarbanes-Oxley Act of 2002."

      1 See Securities Exchange Act Release No. 70073 (July 30, 2013), 78 FR 51910 (August 21, 2013) (Final Rule: Broker-Dealer Reports).

      2 For more background regarding electronic filing requirements pursuant to NASD Rule 3170, see Notice to Members 06-61 (Electronic Filing Requirements) (November 2006) and Regulatory Notice 08-11 (Electronic Filing) (March 2008).

      3 See Question and Answer 5 in Regulatory Notice 08-11.


      Attachment A: STATEMENT REGARDING INDEPENDENT PUBLIC ACCOUNTANT UNDER SEA RULE 17a-5(f)(2)

      FINRA is making this template available for members to comply with SEA Rule 17a-5(f)(2), as amended, which went into effect on June 1, 2014 and sets forth new requirements as to the statement members must file to identify their independent public accountant. Members must file the statement electronically with FINRA. The statement must also be filed with the SEC's Washington, DC office and the SEC's regional office in which the member's principal place of business is located.

      (A) Member Information

      a. Name:
      b. Registration Number
      i. FINRA CRD Number:
      ii. SEC Registration Number:
      c. Address:
      d. Telephone:
      e. E-mail Contact:

      (B) Independent Public Accountant Information1

      a. Name:
      b. Address:
      c. Telephone:
      d. Contact Name:

      (C) Fiscal Year End Information

      a. The date of the fiscal year end of the annual reports of the firm covered by the engagement:

      MM/DD/YY

      (D) Engagement of Independent Public Accountant Information

      a. Engagement Date: MM/DD/YY
      b. The engagement (check one):
      i. ( ) is for a single year.
      ii. ( ) is of a continuing nature.

      (E) Representation Regarding Independent Public Accountant

      a. A representation that the independent public accountant engaged by the firm has undertaken the items enumerated in SEA Rule 17a-5(g)(1)2 and (g)(2) with respect to the preparation of the reports required under SEA Rule 17a-5(d)(1)(i)(C).
      i. ( ) Financial Report as described in SEA Rule 17a-5(d)(1)(i)(A); and
      ii. Check one:
      1. ( ) Compliance Report as described in SEA Rule 17a-5(d)(1)(i)(B)(1); or
      2. ( ) Exemption Report as described in SEA Rule 17a-5(d)(1)(i)(B)(2)

      (F) Does the firm clear transactions or carry customer accounts? Yes ( ) No ( )

      a. If Yes is selected, the firm must make the following representation as required by SEA Rule 17a-5(f)(2)(ii)(F):
      i. ( ) By filing this representation, and checking the box herein, the firm agrees to allow representatives of the SEC or FINRA, if requested in writing for purposes of an examination of the firm, to review the audit documentation associated with the reports of the independent public accountant filed under SEA Rule 17a- 5(d)(1)(i)(C).
      b. If Yes is selected, the firm must make the following representation as required by SEA Rule 17a-5(f)(2)(ii)(G):
      i. ( ) By filing this representation, and checking the box herein, the firm agrees to allow the independent public accountant to discuss with representatives of the SEC and FINRA, if requested in writing for purposes of an examination of the firm, the findings associated with the reports of the independent public account filed under SEA Rule 17a-5(d)(1)(i)(C).

      1 Pursuant to SEA Rule 17a-5(f)(2)(iv) any broker or dealer that is not required to file reports prepared by an independent public accountant must file a statement required under SEA Rule 17a-5(f)(2)(i) indicating the date as of which the unaudited reports will be prepared.

      2 SEA Rule 17a-5(g) (Engagement of independent public accountant) provides as follows:

      "The independent public accountant engaged by the broker or dealer to provide the reports required under paragraph (d)(1)(i)(C) of this section must, as part of the engagement, undertake the following, as applicable:

      "(1) To prepare an independent public accountant's report based on an examination of the financial report required to be filed by the broker or dealer under paragraph (d)(1)(i)(A) of this section in accordance with standards of the Public Company Accounting Oversight Board; and
      "(2)(i) To prepare an independent public accountant's report based on an examination of the statements required under paragraphs (d)(3)(i)(A)(2) through (5) of this section in the compliance report required to be filed by the broker or dealer under paragraph (d)(1)(i)(B)(1) of this section in accordance with standards of the Public Company Accounting Oversight Board; or (ii) To prepare an independent public accountant's report based on a review of the statements required under paragraphs (d)(4)(i) through (iii) of this section in the exemption report required to be filed by the broker or dealer under paragraph (d)(1)(i)(B)(2) of this section in accordance with standards of the Public Company Accounting Oversight Board."

    • 14-38 FINRA Announces Updates of the Interpretations of Financial and Operational Rules

      View PDF

      SEC Financial Responsibility Rules

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Finance
      Legal
      Operations
      Regulatory Reporting
      Senior Management
      Key Topics

      Books and Records
      Customer Protection
      Net Capital
      Referenced Rules & Notices

      Regulatory Notice 08-56
      Regulatory Notice 13-44
      Regulatory Notice 14-06
      Regulatory Notice 14-12
      Regulatory Notice 14-25
      SEA Rule 15c3-1
      SEA Rule 15c3-1a
      SEA Rule 15c3-1e
      SEA Rule 15c3-1f
      SEA Rule 15c3-1g
      SEA Rule 15c3-3a
      SEA Rule 17a-4

      Executive Summary

      FINRA is updating the imbedded text of Securities Exchange Act (SEA) financial responsibility rules for broker-dealers in the Interpretations of Financial and Operational Rules to reflect the effectiveness of amendments the SEC adopted.1 The updated imbedded text relates to SEA Rules 15c3-1, 15c3-1a, 15c3-1e, 15c3-1f, 15c3-1g, 15c3-3a and 17a-4. FINRA is also making available related updates of the Interpretations of Financial and Operational Rules that have been communicated to FINRA by the staff of the SEC's Division of Trading and Markets (SEC staff). The updated interpretations relate to SEA Rule 15c3-1.

      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

      In December 2013, the SEC adopted rule amendments that became effective on July 7, 2014.2 FINRA is updating the imbedded SEC rule text in the Interpretations of Financial and Operational Rules to reflect the amendments that relate to SEA Rules 15c3-1, 15c3-1a, 15c3-1e, 15c3-1f, 15c3-1g, 15c3-3a and 17a-4. The interpretation updates resulting from the SEC's December 2013 amendments to SEA Rule 15c3-1 are set forth below. Page references are to the hardcopy version. These interpretations are being updated with specific additions, revisions and rescissions.

      The following interpretations have been revised:

      •   SEA Rule 15c3-1(c)(2)(vi)(E)/03 (Federally Chartered Savings and Loan Association Short-Term Promissory Notes) on page 462.
      •   SEA Rule 15c3-1(c)(2)(vi)(F)/01 (Zero Coupon Bonds-Application) on page 473.
      •   SEA Rule 15c3-1(c)(2)(vi)(F)/09 (Corporate Put Bond Haircuts) on page 475.
      •   SEA Rule 15c3-1(c)(2)(vi)(F)/11 (Government Stripped Bonds and Coupons) on page 475.
      •   SEA Rule 15c3-1(c)(2)(vi)(F)/12 (Nonconvertible Debt Securities with Variable Interest Rate) on page 476.
      •   SEA Rule 15c3-1(c)(2)(vi)(H)/02 (Municipal Auction Rate Cumulative Preferred Stock) on page 492.

      The following interpretations have been rescinded:

      •   SEA Rule 15c3-1(c)(2)(vi)/041 (Nationally Recognized Statistical Rating Organizations ("NRSROs")) on page 404.
      •   SEA Rule 15c3-1(c)(2)(vi)(E)/01 (Commercial Paper Rating) on page 461.

      These rule text and interpretation updates are available in portable digital format (PDF) on FINRA's Interpretations of Financial and Operational Rules page.

      Further, SEC staff continues to communicate and issue written and oral interpretations of the financial responsibility and reporting rules including the newly amended sections of such rules. FINRA has previously updated the Interpretations of Financial and Operational Rules on its website in Regulatory Notices 08-56, 13-44, 14-06, 14-12 and 14-25.

      FINRA member firms and others that maintain the hardcopy version of the Interpretations of Financial and Operational Rules may refer to the accompanying updated pages, containing the aforementioned rule text updates, which are being made available to enable the replacement of existing pages in the hardcopy version of the Interpretations of Financial and Operational Rules. The filing instructions for the new pages are as follows:

      SEA Rule Remove Old Pages Add New Pages
      15c3-1 404 404
      15c3-1 461–462 461–462
      15c3-1 471 471
      15c3-1 473 473
      15c3-1 475–476 475–476
      15c3-1 492 492
      15c3-1a 1001–1034 1001–1033
      15c3-1e 1433–1434 1433–1434
      15c3-1f 1501–1534 1501–1533
      15c3-1g 1606 1606
      15c3-3a 2608 2608
      17a-4 3101–3132 3101–3132

      1 See Securities Exchange Act Release No. 71194 (December 27, 2013), 79 FR 1522 (January 8, 2014) (Final Rule: Removal of Certain References to Credit Ratings Under the Securities Exchange Act of 1934).

      2 See note 1.

    • 14-37 FINRA Requests Comment on a Rule Proposal to Implement the Comprehensive Automated Risk Data System; Comment Period Expires: December 1, 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 4311
      Regulatory Notice 13-42
      SEA Rule 15c3-3
      SEA Rule 17a-3
      SEA Rule 17a-4

      Executive Summary

      FINRA is requesting comment on a proposed rule to implement the Comprehensive Automated Risk Data System (CARDS). FINRA initially released CARDS as a concept proposal in Regulatory Notice 13-42. This rule proposal reflects the comments received on the concept proposal.

      The rule proposal would be implemented in phases and would exclude the collection of personally identifiable information (PII) for customers, including account name, account address and tax identification number. The first phase would require approximately 200 carrying or clearing firms (i.e., firms that carry customer or non-customer accounts or clear transactions) to periodically submit in an automated, standardized format specific information that is part of the firms' books and records relating to their securities accounts and the securities accounts for which they clear. The information to be submitted would include data relating to securities and account transactions, holdings, account profile information (excluding PII), and securities reference data. A carrying or clearing firm would not, however, be required to submit specified account profile information primarily related to suitability, for the securities accounts it carries or clears on a fully-disclosed or omnibus basis for others. For all other securities accounts, carrying or clearing firms would be required to submit these account profile-related data elements as part of the first phase of CARDS. The second phase of CARDS would require fully-disclosed introducing firms to submit the specified account profile-related data elements either directly to FINRA or through a third party.

      The text of the proposed rule can be found at www.finra.org/notices/14-37.

      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 December 1, 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

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

      Background and Discussion

      CARDS is an initiative that would allow FINRA to enhance investor protection and help restore and maintain investor confidence by collecting information in a standardized format across all firms subject to CARDS on a regular basis. The information that FINRA would collect through CARDS is substantially consistent with the information it already collects when it conducts an individual examination. The transition to a standardized and regular data collection method is vital to FINRA's goal to transform its regulatory surveillance program and implement a more comprehensive examination program.

      CARDS is intended as the next step in the evolution of FINRA's risk-based surveillance and examination programs. Through the CARDS initiative, FINRA recognizes that technological advancements can be leveraged to obtain, store, manage and access large quantities of data to identify and quickly respond to potentially fraudulent and abusive behavior that it might not see through its current surveillance or examination programs. Today, FINRA has a robust examination program through which firms are inspected on-site every one to four years. These examinations are based on a combination of sampling methodologies, reviews of customer and firm activities, focused reviews in priority areas of concern, and interactions with firm staff to understand the specific circumstances surrounding areas highlighted through data analysis. In contrast, CARDS would require the submission of data on a regular, automated basis from all firms subject to CARDS. The receipt of more up-to-date and complete data would allow FINRA to identify and quickly respond to high-risk areas and suspicious activities. CARDS would enable FINRA to enhance its ability to, for example:

      •   understand the business profile of a firm and incorporate that understanding into FINRA's examination, surveillance, cycle planning and risk assessment functions;
      •   track product mix across firms and in branches of each firm, including changes to that mix;
      •   understand, on an ongoing basis, where firms consistently sell products that present higher risk to customers and, when compared to risk tolerance profiles, appear to be unsuitable for those clients;
      •   identify patterns of transactions that indicate bad behavior on the part of a particular broker-dealer, branch office or registered representative, and monitor more effectively for problem areas such as pump and dump schemes, suitability, churning, mutual fund switching and concentrations of high-risk securities;
      •   understand the overall risk profile of a firm, including where a firm is taking on too much market risk in its proprietary trading or other risk-taking activities; and
      •   identify potentially suspicious activity in accounts that may call into question the adequacy of a firm's anti-money laundering program.

      CARDS would also enable firms to better manage compliance through shared information provided to firms based on FINRA's analyses. The feedback and report card approach has worked well in FINRA's market surveillance program and would be a valuable enhancement to FINRA's member regulation programs as well. Further, FINRA would plan to provide firms access to their own data in a way that would facilitate the firms' use of the data as part of their compliance efforts. FINRA would work with firms to determine the extent and nature of any tools that FINRA would provide as part of this effort. FINRA believes that this could strengthen compliance efforts at many firms, particularly those smaller firms that cannot afford to create compliance tools themselves.

      FINRA believes that after accounting for the initial investment to implement CARDS, CARDS would serve to reduce burdens on firms and lower costs due to, among other things, eliminating intermittent, and sometimes frequent and extensive, information requests from FINRA for the information CARDS covers. In addition, FINRA would analyze CARDS information before launching firm-wide sweeps or examining firms on-site, thereby potentially eliminating some sweeps, more effectively targeting the firms included in other sweeps, reducing the burdens associated with targeted, multi-firm initiatives, and streamlining reviews conducted as part of on-site visits to firms that pose low risks of harm to investors.

      As discussed in more detail below, FINRA is conducting an analysis of the economic impacts associated with CARDS. FINRA asked a series of questions in the concept proposal, has met with firms and other stakeholders to better understand the concerns raised in response to the concept proposal, and developed a set of questions to elicit feedback from a group of firms—including self-clearing, correspondent clearing and introducing firms—regarding the economic impact of the rule proposal to firms. In addition, FINRA requests comment in this Notice on the economic impact of the rule proposal, including the costs and benefits of the proposal, and requests submission of data and quantified comments, where possible.

      Concept Proposal

      As stated in the concept proposal, FINRA envisioned that under CARDS, clearing and carrying 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. The concept proposal stated that such information would include, at a minimum, account information, account activity information and security identification information. To minimize the impact on small and mid-size firms, the concept proposal further stated that introducing firms would not be required to transmit the specified information directly to FINRA, but would provide their clearing firms with the information in their possession that is necessary for the clearing firms to comply with CARDS' information submission requirements. In addition, the concept proposal stated that firms would submit the required information to FINRA on a regular schedule (such as on a daily or weekly basis) in a standardized format that would permit FINRA to run analytics for a particular day during the period being reported and that a firm submitting information would be permitted to enter into an agreement with a third party to fulfill the firm's reporting obligations.

      FINRA received approximately 800 comment letters in response to the concept proposal, including 140 unique comment letters. In addition to reviewing the comment letters, FINRA has been actively meeting with firms—collectively, individually and via FINRA's advisory committees—to obtain additional feedback on the concept proposal and to inform FINRA's development of the rule proposal. FINRA has worked intensively with a group of six "pilot" firms to further refine and develop the CARDS data specifications and rule proposal and has received valuable feedback. FINRA also has sought feedback on the CARDS data specifications from a "sounding board" of 11 firms that includes self-clearing, correspondent clearing and introducing firms. Because investor protection is the driver for CARDS, FINRA conferred with investor and consumer protection groups to obtain feedback on the concept proposal and in developing the rule proposal. FINRA now requests comment on the rule proposal. The key provisions of the rule proposal are set forth below; however, interested persons should carefully read the rule text for a complete understanding of the proposal.

      Rule Proposal

      The rule proposal would be implemented in phases and would exclude the collection of PII. The rule proposal includes the first two phases of CARDS. Any later phases would be subject to additional rulemaking and attendant public comment.

      A. Collection of PII

      A primary concern raised early in the comment process related to the collection of PII. Although the concept proposal noted that in developing CARDS, FINRA was interested in considering ways in which to gather account identifying information without disclosing account names or other PII, it became evident early on that firms remained concerned about FINRA's intent relative to collecting PII. Accordingly, on March 4, 2014, FINRA issued a statement that CARDS would not require the submission of information that would identify to FINRA the individual account owner, including, account name, account address or tax identification number. This clarification served the dual purpose of confirming that PII would not be collected while also addressing certain concerns associated with data security. Despite the March 4 statement, some commenters continued to express concerns that FINRA would be able to link customers' identities across firms and that identities could be discerned by any potential hackers of the CARDS database. In the absence of PII, FINRA believes that CARDS would not contain information that would enable accounts to be linked across firms or that would reasonably enable a potential hacker to determine the identity of an account's owner.

      Moreover, all data sent to FINRA would be encrypted in transmission and after receipt in a way that would not permit anyone to read or interpret the data without the proprietary encryption keys. FINRA would also limit access to the raw data to a few select full-time technical employees, whose access to the data would be carefully tracked and actively monitored.

      Given that (i) FINRA will not be collecting PII as part of the CARDS information, (ii) unlike financial firm account databases, access to the CARDS database would provide no ability for potential hackers to access or cause movements of either cash or securities, and (iii) as discussed in more detail below, the security disciplines FINRA would employ, the likelihood of anyone exploiting what would be anonymous data would be small.
      B. Data Security

      FINRA's security protocols for handling confidential data became a focal point after the CARDS concept was announced. Commenters expressed concerns about CARDS information being held in a single database and the potential security concerns that could present. As noted above, FINRA believes that such a security risk would be low. FINRA has been maintaining high security standards and safely hosting highly confidential broker data for decades. Moreover, FINRA believes that the investor protection benefits that would come from CARDS, and FINRA's increased ability to reduce fraudulent and abusive behavior, significantly outweigh the remote risk of a security breach.

      Nevertheless, FINRA is committed to the highest level of security when it comes to CARDS and the information that would be collected. FINRA would apply to CARDS the many security controls and protocols it already has in place. In particular, FINRA operates a comprehensive security program to mitigate cyber and physical information security and privacy threats, and to ensure compliance with applicable data privacy regulations and laws. FINRA's program is based upon industry best practices, is guided by relevant federal and international standards, and is compliant with relevant data security and privacy laws and regulations.

      In addition, as it does today, FINRA would continually look for ways to enhance its security measures that would be applicable to CARDS as well as FINRA's many other systems and programs relating to regulatory data collection, including through detailed discussions of security protocols with firms. To that end, FINRA is committed to assessing its security and privacy controls and practices against appropriate compliance standards, including by obtaining Service Organization Controls (SOC) 2 and 3 reports, to further demonstrate the integrity of its controls relating to security, availability, processing integrity, confidentiality and privacy. FINRA intends to undertake these assessments prior to the implementation date for CARDS.
      C. Data Categories

      The rule proposal would require the submission, in accordance with the phased approach discussed in this Notice, to FINRA of prescribed data relating to the following categories of information for all the firm's securities accounts3 to the extent the data is part of a firm's books and records:4
      •   Securities Transactions
      •   Purchases and Sales: A chronological listing of the member firm's cleared securities transactions reported on a trade date basis.
      •   Dividend Reinvestments: Information on the value of cash dividends used to purchase additional shares of the underlying security.
      •   Account Transactions
      •   ACATS5 Transfer Summary: Information on security account transfers between member firms that are also NSCC members and that are carried out through the ACATS system.
      •   ACATS Transfer Detail: Information, by security, on transferred securities positions for transferred securities accounts through the ACATS system.
      •   Non-ACATS6 and Internal Securities Transfer Summary: Information on security transfers between securities accounts at member firms outside of the ACATS system, as well as internal transfers (e.g., journal entries) between securities accounts at the same member firm.
      •   Non-ACATS and Internal Securities Transfer Detail: Information, by security, on each security transferred between securities accounts at member firms outside of the ACATS system, as well as internal transfers (e.g., journal entries) between securities accounts at the same member firm.
      •   Account Additions and Withdrawals: Information on the addition or withdrawal of funds to or from a securities account.
      •   Margin Calls: Information on the making and satisfaction of margin calls.
      •   Holdings
      •   Stock Record: A record, for each security, of all long or short positions carried by the member firm for all securities accounts, including stock record information as specified in SEA Rule 17a-3(a)(5).7
      •   Stock Record Summary by Security: An aggregate position for each security on the member firm's stock record.
      •   Allocation Pair-Off Detail: A record of how each security on the member firm's stock record is allocated using the firm's Allocation Pair-Off Hierarchy (as described below).
      •   Allocation Pair-Off Summary: An aggregate of the Allocation Pair-Off Details. This data reflects the aggregate quantities and values for each allocation pair-off sequence (i.e., the aggregate results of the pairing of long versus short allocation codes for each specific allocation sequence).
      •   Allocation Category Summary: An aggregate of long and short stock record positions for each SEA Rule 15c3-3 allocation category (e.g., customer long, securities borrowed and fails to deliver).
      •   Securities Account Balance: An aggregate value of the holdings, including the balances and equity in the securities accounts at the member firm.
      •   Account Profiles
      •   Securities Account: Information regarding all securities accounts on the books and records of the member firm, such as account classification and registration, and whether the account can transact on margin.
      •   Securities Account Participant: Information about the type of persons (i.e., whether a natural person, corporation, partnership, trust or otherwise) associated with a securities account.
      •   Securities Account Servicing Representative: Information about account servicing representatives.
      •   Securities Account Suitability: Information regarding each securities account at the member firm related to know-your-customer and suitability obligations (excluding PII).
      •   Securities Reference Data
      •   Security Reference: Information on the securities listed in all applicable CARDS data segments (e.g., purchases and sales, stock record, ACATS and Non-ACATS).
      •   Allocation Category: A list of the member firm's allocation categories used in the preparation of the SEA Rule 15c3-3 reserve formula allocation, along with the member firm's corresponding descriptions.
      •   Allocation Pair-Off Hierarchy: The priority order used by the member firm to pair-off security positions within the stock record in accordance with the provisions of SEA Rule 15c3-3a (Exhibit A).
      FINRA would publish on its website the data categories as part of the CARDS data specifications. The data specifications would contain a data dictionary that would describe all of the data categories in CARDS files and a list of reporting formats, including field names, data types and permissible values. In addition, the data specifications would provide firms with the operational and technical requirements for submitting CARDS information to FINRA. The data specifications would cover system access requirements for submitting CARDS information, purchase and sales scenarios that describe responsibilities for submitting CARDS information, details regarding the required layout of CARDS files, and procedures for providing corrections to CARDS information and receiving feedback from FINRA.
      D. Phased Approach

      In the concept proposal, FINRA stated that CARDS would require carrying and clearing firms (on behalf of introducing firms) and self-clearing firms to submit in an automated, standardized format specific information relating to their customers' accounts and the customer accounts of each firm for which they clear. This was intended to reduce costs and make the data delivery process simpler for firms and FINRA. Since issuing the concept proposal, it has become evident that clearing firms were reluctant to handle data that they do not require for clearing purposes. Moreover, introducing firms prefer to decide whether to have a third party submit the information on their behalf or provide the submission themselves. In light of these comments, FINRA has modified the approach of CARDS such that it would be implemented in phases that permit these options.

      Phase 1

      The first phase of CARDS would limit the collection of information to only that data that resides at carrying or clearing firms (i.e., firms that carry customer or non-customer accounts or clear transactions). Carrying or clearing firms would be required to submit the data set forth in the CARDS data specifications that the firms have as part of their books and records relating to their securities accounts and securities accounts for which they clear. This would include information relating to securities and account transactions, holdings, account profile information (excluding PII) and securities reference data for all securities accounts.

      Phase 1 would not include submission by a carrying or clearing firm of the following 15 data elements relating to account profile information (the Select Account Profile Data Elements) for securities accounts it carries or clears on a fully-disclosed or omnibus basis for others:
      (1) investment time horizon;
      (2) investment objective;
      (3) risk tolerance;
      (4) net worth;
      (5) servicing representative(s) compensation allocation;
      (6) servicing representative(s) identifier;
      (7) serviced-by representative group flag;
      (8) branch CRD number;
      (9) registered representative CRD number;
      (10) self-directed account flag;
      (11) birth year;
      (12) account participant related to employee flag;
      (13) control person for public company flag;
      (14) account participant politically exposed person flag;8 and
      (15) account participant related to employee of another broker-dealer flag.
      FINRA has determined to propose this approach because, following feedback from firms in developing the rule proposal, FINRA understands that these Select Account Profile Data Elements are not always part of a firm's books and records for the accounts that the firm carries or clears for others on a fully-disclosed or omnibus basis. The proposed rule would require a carrying or clearing firm to submit the Select Account Profile Data Elements for all other securities accounts that it carries or clears and that it has as part of its books and records. For example, a self-clearing firm would be required to submit all the prescribed account profile data for the accounts that it self-clears.

      Carrying or clearing firms would also have the option of providing the required information to FINRA pursuant to an agreement with a third party. Notwithstanding the existence of such an agreement, each carrying or clearing firm would be responsible for complying with the CARDS reporting requirements applicable to it.

      Because the information to be submitted as part of phase 1 would be limited to information that is part of a carrying or clearing firm's books and records, the rule proposal would not amend existing requirements relating to firms' maintenance and preservation of their books and records.9

      Phase 2

      The second phase of CARDS would add the collection of the Select Account Profile Data Elements (described above), as set forth in the CARDS data specifications, from fully-disclosed introducing firms for all the firms' introduced securities accounts. Fully-disclosed introducing firms would have the option of providing the information to FINRA directly or by entering into an agreement with a third party pursuant to which the third party agrees to fulfill the introducing firm's obligations for submitting the CARDS information to FINRA. Thus, fully-disclosed introducing firms would have flexibility in determining how to submit the information to FINRA.

      Fully-disclosed introducing firms would be required to ensure that FINRA receives the Select Account Profile Data Elements as part of phase 2 from only one source, whether that is from the introducing firm directly or a third party. Fully-disclosed introducing firms would be required to identify to FINRA, as part of the CARDS registration process, from which source they would be providing the Select Account Profile Data Elements.

      Several commenters requested that FINRA clearly define where supervisory and reporting responsibilities lie between introducing firms and their clearing firms. The allocation of responsibilities between an introducing firm and its clearing firm is governed by FINRA Rule 431110 and that rule is not changing. Firms may choose to re-negotiate their carrying agreements to comply with the CARDS reporting requirements. FINRA notes, however, that to the extent an introducing firm determines, under phase 2 of CARDS, to submit the Select Account Profile Data Elements to FINRA pursuant to an agreement with a third party, such as a clearing firm, the introducing firm would retain responsibility for ensuring the accuracy and completeness of the submitted information. If the submitted information is inaccurate or incomplete, the introducing firm would be responsible for providing the corrected or missing information to FINRA via the third party. The introducing firm would also be responsible for ensuring that FINRA receives the information within the time frame required for reporting CARDS information to FINRA. Moreover, if the third party is simply passing on the information to CARDS, and does not otherwise use the information for its customer reviews, that third party would not be held to any new supervisory or compliance obligations relating to the information.

      To the extent that a third party agrees to submit information to FINRA on behalf of a member firm, the member firm must require, as part of the agreement, that the third party maintain and preserve a copy of the data transmitted to FINRA in accordance with the time period required for the member firm to maintain and preserve such data under the proposed rule, i.e., three months.11
      E. Exclusions

      Several commenters on the concept proposal stated that account, activity and security identification information is not collected and maintained for all types of products and that firms would have to incur significant costs to obtain this information for such products. To reduce the costs of CARDS to firms, the rule proposal's reporting requirements relating to the transmission of purchases and sales securities transaction information would not apply to products that are not held, or custodied at, or executed through, a clearing firm, such as variable annuities, private placements, direct participation programs (DPPs), private investments in public equity (PIPEs), non-traded real estate investment trusts, unregistered securities, precious metals and direct mutual funds, other than NSCC Network Level 3 mutual funds.12 FINRA expects that the collection of this information may be part of a later phase of CARDS, which would be subject to additional rulemaking.
      F. Frequency of Submissions

      For both phases 1 and 2, the proposed rule would require the submission of information on a calendar month basis. Firms would be required to submit information to FINRA by the 10th business day of the following calendar month. For securities and account transaction information, however, firms would be permitted to submit the data more frequently if it better aligns with their business processes. In addition, for securities and account transaction information, firms would be required to submit information with daily granularity. With respect to holdings and account profile information (including the Select Account Profile Data Elements), firms would be required to submit a single monthly snapshot as of the last business day of the calendar month. Firms would be required to submit reference data relating to all of the securities referenced in the transmission for the prior month, although firms would have the option to transmit the reference data more frequently than monthly. Firms would be required to maintain and preserve a copy of the data transmitted by the member firm to FINRA for a period of not less than three months.13 FINRA would perform automated validations on submitted data and provide results to member firms. Some validations could result in errors, which member firms would need to correct within seven business days after receipt of the validation results from FINRA. The CARDS data specifications would provide additional detail regarding FINRA's validation approach, file rejections and repairs, as well as firm-initiated corrections and deletions of submitted CARDS information.

      In seeking input from firms on the CARDS data specifications and in developing the rule proposal, several firms commented on the length of time following calendar month-end that FINRA would provide for firms to transmit the prescribed data to FINRA and on the amount of time that firms would receive to correct errors and repair file rejections. FINRA understands that firms need to have sufficient time to collect, clean, transmit, correct and repair the data, and is requesting additional feedback in this Notice to help further inform it regarding whether the proposed time periods would be appropriate.
      G. Data Standards

      Several commenters raised concerns regarding the difficulty of establishing common data content standards, particularly with respect to suitability information. Although the rule proposal would include the provision of a standardized file specification for transmitting data, it would also provide firms with the ability to report specified data elements in free format text fields, including suitability information and product and security descriptions. This would allow firms to continue to have the flexibility to develop and implement records relating to these data elements in their own formats.

      In addition, some commenters noted that introducing firms, particularly smaller firms, use varying degrees of automation in recording suitability information. Accordingly, as part of phase 2, the rule proposal would provide fully-disclosed introducing firms with the option to provide the CARDS information directly to FINRA. Based on feedback from firms, FINRA understands that providing introducing firms with the option to submit the CARDS information directly to FINRA would lessen the costs to those firms that currently do not automate all or part of their recording of suitability information. FINRA would provide to introducing firms a Web interface, data upload and machine-to-machine capabilities.
      H. Onboarding and Testing

      CARDS would provide an independent environment for testing. Firms would be required to successfully transmit information to the CARDS test environment before they begin reporting data to the CARDS production environment. Before testing with the CARDS application could begin, member firms would need to register with CARDS business operations via a registration process. This registration process would, for example, establish firm contacts, provide user account numbers, and specify whether firm submissions would be directly from the firm or a third party. CARDS would process all data submissions it receives in the test environment in the same way as in the production environment. For example, after submitting data to the CARDS test environment, firms would be able to obtain or view feedback on the status of that data submission.
      I. Implementation Date and Historical Information

      FINRA is proposing that a reasonable period of time within which carrying or clearing firms would be required to start submitting CARDS information to FINRA under phase 1 would be approximately nine months following SEC approval of CARDS requirements. FINRA anticipates that fully-disclosed introducing firms would begin submitting CARDS information to FINRA within 15 months of SEC approval of CARDS. FINRA would publish the schedule for phases 1 and 2 of CARDS as soon as it has been established following SEC approval of CARDS requirements.

      In addition, carrying or clearing firms would be required to submit historical purchase and sales transaction information for the time period between the date of SEC approval of CARDS and the date on which the firms begin submitting CARDS information to FINRA. Several firms have expressed cost concerns relating to FINRA's proposed collection of historical purchase and sales transaction information. Because the collection of this information would allow FINRA to run analytics on the information as soon as CARDS is implemented, thereby making it a valuable analytical tool from the outset, FINRA has determined to include in the proposed rule the collection of this historical information and requests additional comment in this Notice regarding the requirement.

      Other Concerns

      As discussed above, FINRA has modified its approach to CARDS in response to the comment letters and additional feedback it has received from meeting with firms individually and collectively regarding the concept proposal and the development of the rule proposal. In addition, commenters raised concerns relating to the purpose and scope of CARDS, which are addressed below.

      A. Compliance and Supervisory Functions

      In response to the concept proposal, some firms commented that CARDS would supplant the legal, compliance and supervisory programs firms administer. CARDS is not intended to, nor will it, duplicate these functions. FINRA will not establish a transaction-by-transaction based exception program. Granular oversight to ensure compliance or prevent and detect problems with individual customers and transactions remains the central role of a firm's compliance and supervisory programs. Thus, a firm's compliance and supervisory programs would remain responsible for oversight to prevent and detect problems based on the full information the firm holds.

      CARDS may permit FINRA to provide valuable information to firms that compliance and supervisory staffs can use to enhance their operations. FINRA seeks comment from firms regarding what information would be valuable for purposes of their compliance and supervisory programs. Based on comments from firms, there is a significant interest in obtaining access to their own submitted data. FINRA would provide this access in a form that would facilitate and improve a firm compliance department's capabilities. FINRA would also consider making this data available to a firm's service provider if the firm authorized such access.
      B. Duplicative Information

      Many commenters questioned why FINRA is moving forward with CARDS at the same time that the Consolidated Audit Trail (CAT) is being developed. Fundamentally, CAT and CARDS collect different information. Unlike CARDS, CAT will not contain information regarding customer risk tolerance, investment objectives, money movements, margin requirements and position data that FINRA uses to conduct its reviews. This distinction is a core feature of CARDS and emphasizes FINRA's investor protection mission. In addition, an analysis by FINRA staff of any potential overlap between the data fields proposed to be collected by CARDS and CAT indicated that there was limited overlap. Any transaction information proposed to be collected by CARDS that would also have to be collected by CAT would require significant additional information such as commissions and fees and final settled moneys that CAT would not collect.

      In addition, FINRA has performed an extensive analysis of current firm reporting to FINRA to determine to what extent CARDS information is already being collected through existing reporting systems. FINRA has determined that, other than as discussed below, its existing reporting systems do not collect the same type or granularity of information that FINRA would collect under CARDS.

      One area of duplication that FINRA has identified relates to INSITE,14 which FINRA intends to retire as firms start submitting CARDS information to FINRA under phase 1. Another area of duplication that FINRA has identified is the stock record data collected from firms as part of FINRA's Automated Exam Program (AEP). CARDS would collect the information currently reported by firms under FINRA's AEP. FINRA is proposing the collection of the information reported by firms under FINRA's AEP such that it would be collected on a monthly basis, rather than the current annual basis, because of its value in surveilling for firms' compliance with customer protection obligations, as well as various other risks, such as market and credit risk.

      During the time period between SEC approval of CARDS and the implementation date for CARDS, FINRA expects firms to continue providing AEP information to FINRA under their existing processes. FINRA intends to retire the current processes for collecting AEP information as firms start submitting the information as part of CARDS.

      To the extent any other CARDS-related information is obtained through other reporting obligations, FINRA is committed to eliminating any duplicate reporting requirements.

      Interim Economic Impact Assessment

      In the concept proposal, FINRA provided a high-level description of the key economic impacts it identified as associated with CARDS. Benefits identified in the concept proposal included: (1) increased investor protection through greater effectiveness of FINRA's surveillance and examination programs; (2) reduced regulatory costs and burdens on firms associated with providing information on an ad hoc basis in support of FINRA examinations; and (3) elimination of duplicative systems that provide information CARDS would cover. The anticipated costs identified in the concept proposal included costs associated with: (1) building and maintaining an infrastructure to submit the required data; (2) transmission and reconciliation of data to FINRA by clearing firms; and (3) production and provision of additional CARDS data by introducing firms to clearing firms. The concept proposal also noted that there may be other costs to firms depending on the specific obligations in the rule.

      The rule proposal refines the CARDS concept proposal. It would, among other refinements discussed herein, exclude the collection of PII and provide greater flexibility to introducing firms and carrying or clearing firms in meeting the proposed reporting obligations. The rule proposal reflects FINRA's understanding that it can provide greater flexibility to firms while maintaining its objective of increased investor protection. Increased flexibility would be provided through the exclusion of PII, the format in which suitability information would be collected, the regularity of data provision and the channels available to firms to provide the required CARDS information.

      In phase 1, CARDS would impose new obligations on approximately 200 carrying or clearing firms. These firms would be required to provide to FINRA a regular data submission that includes specified data, some with specified values, and in a specified file format. The information submitted in phase 1 would cover securities accounts of these firms along with those of approximately 1,850 fully-disclosed introducing firms. As part of phase 1, CARDS would also collect information currently reported by firms under FINRA's AEP. This collection of information would create an additional reporting obligation for firms that do not currently report under FINRA's AEP, which FINRA estimates to be approximately 100 firms among the carrying or clearing firms identified above. Fully-disclosed introducing firms would not have any additional reporting obligations in phase 1 for the accounts they clear through other firms. In phase 2, fully-disclosed introducing firms would be required to submit the Select Account Profile Data Elements directly to FINRA or through a third party.

      FINRA staff is continuing to collect and assess information about the costs, benefits and other economic impacts of CARDS from a variety of sources, including the six pilot and 11 sounding board firms, commenters and FINRA internal sources. An interim assessment of the associated economic impacts based on information gathered to date is provided below. FINRA requests comment on the anticipated costs, benefits and other economic impacts to firms, investors and the public associated with the rule proposal.

      A. Anticipated Benefits

      CARDS would be designed to enhance investor protection and ensure market integrity by allowing FINRA to identify and quickly respond to high-risk areas and suspicious activities that it might not identify through its current surveillance and examination programs. FINRA's current examination program involves the collection of information, on a firm by firm basis, which can vary in content, scope and time period across examinations. CARDS would enable FINRA to automate its data collection and run regular and ad hoc analytics against more up-to-date and complete data, thereby enhancing FINRA's ability to more quickly uncover potentially fraudulent and abusive behavior. CARDS would provide a comprehensive view of firm and industry activity that would allow FINRA to, among other things, analyze customer dealing activities within individual firms, at particular branch offices, and with specific registered representatives, as well as compare one firm's customer activities against those of its peers. Access to comprehensive information would enable FINRA to promptly identify emerging risks and problematic patterns and incorporate the information in developing surveillance and examination strategies and priorities.

      FINRA would use the information collected through CARDS to enhance its supervision of firms in several ways. CARDS would enable FINRA to review firm data ahead of individual examinations, thereby leading to more focused examinations. Collection of data on a more regular basis from firms would permit FINRA to react more quickly and effectively to unexpected and rapidly developing events that could threaten investor protection or market integrity. The use of CARDS in these ways would lead to a more effective allocation of regulatory resources and enhanced investor protection.

      FINRA believes that the regular collection of information as described in this Notice would lead to greater investor protection, in part, because of its recent experience in employing analytics against a large amount of customer account information collected for a limited number of firms in an examination context. FINRA's experience with its Risk Discovery and Analytics Tool (RDAT) pilot program provides direct experience in applying automated analytics on data, albeit for a limited number of firms and for a limited time period. Specifically, FINRA staff has noted that this platform has allowed it to save days to weeks usually committed to standardizing and conforming data for analysis during an examination. Further, the regular provision of data in anticipation of an examination replaces a process of request and response for information that can typically take weeks.

      Most importantly, the RDAT analytics helped FINRA identify firms involved in potentially problematic practices and uncover issues such as suspicious trading activity, excessive commissions, concentration of high-risk products in customer accounts and inadequate sales practice supervisory procedures. For example, the RDAT analytics helped FINRA identify a firm that was selling a new, high-risk product—a business in which the firm was not historically engaged and its financial reporting did not disclose. For another firm, RDAT reports allowed FINRA staff to filter through millions of trades to quickly identify potential areas of risk related to penny stocks liquidations and suspicious trading activity. In addition, FINRA used the data collected to conduct analyses on Puerto Rican debt during the period when a potential default was of heightened concern. FINRA used the data collected to determine which firms had exposure to Puerto Rican debt and quickly target for resolution investor protection concerns, such as which investor accounts had high concentrations of Puerto Rican debt and conflicts of interest based on a firm's proprietary accounts or employees selling their own holdings of Puerto Rican debt while their customers were buying these securities. In addition, the analytics enhanced FINRA's understanding of the firms' business models, operations and sales activity, and improved the quality of business conduct reviews through comprehensive, automated analysis of brokerage activity.

      The collection of more complete information, over a longer period, would enhance FINRA's ability to identify appropriate concerns in a more timely manner and further enhance investor protection. For example, more complete information would provide FINRA with the ability to eliminate certain sweep initiatives where the sought after information is already within FINRA's possession, and better and more quickly identify the appropriate set of firms when a sweep remains appropriate. As a result, firms without significant exposures would not be asked to commit resources to respond to a sweep request, while investors who are most at risk would benefit from quicker and more targeted action. Access to more comprehensive information would also further enhance FINRA's risk reviews that are core to its mission of investor protection. For example, CARDS would provide a more holistic view of customer accounts, thereby allowing FINRA to better pinpoint where suitability risks might exist by identifying groups of customers holding high-risk products, branch offices with concentrations of such products and registered representatives selling those products. Similarly, CARDS would allow FINRA to run analytics on a more complete and comparable set of transactions to identify accounts where excessive commissions may have been charged. CARDS would enable FINRA to better assess the business lines and activities in which firms are engaged, the risks associated with those business lines, and the factors that aggravate or mitigate those risks, and incorporate this assessment in surveillance activities, planning examination cycles and developing its focus for individual examinations.

      CARDS would also replace existing reporting systems that already collect related information. Several commenters noted that FINRA should identify and retire systems that collect CARDS-related information to minimize duplication and overall compliance costs. FINRA is committed to eliminating any systems with duplicate reporting requirements. As noted above, one such reporting system is INSITE, which FINRA intends to retire after firms start submitting information to FINRA as part of the first phase of CARDS. FINRA also intends to retire the current systems and processes for collecting AEP information, and instead require firms to submit such information as part of CARDS. The replacement of AEP processes by CARDS would streamline data reporting and eliminate duplication for AEP firms.

      Following FINRA's analyses of the information firms provide, FINRA intends to share relevant data and analyses, including firms' own data and performance benchmarks, with firms. Several commenters stated that receiving performance benchmarks would be beneficial and could support their in-house compliance programs. FINRA believes that this information sharing could help firms with their compliance and supervisory programs that would continue to have the obligation to conduct oversight. Further, FINRA believes that the opportunity to share standardized data and metrics would particularly benefit smaller firms because of the relatively higher costs associated with capturing, standardizing and maintaining data.
      B. Anticipated Costs

      FINRA anticipates that carrying or clearing firms submitting information under phase 1 would incur costs to develop and maintain infrastructure to submit the required data. Costs to these firms would include the cost of compiling, standardizing and formatting data, possibly across multiple systems. These firms would also incur costs associated with quality control, reconciliation and transmission, as well as archiving and storing the CARDS data transmitted, as regulatory records. Some of these costs may be related to the timing of reporting, reconciling and repairing data submitted. In addition, as noted above, phase 1 would require carrying or clearing firms to submit information currently collected under FINRA's AEP. Firms that do not currently submit information under FINRA's AEP would incur costs to develop and maintain infrastructure to submit the information as part of CARDS. Firms that currently submit information under FINRA's AEP would need to retire their existing AEP systems and increase the frequency of the information provided from annual to monthly. CARDS would provide carrying or clearing firms the option of transmitting the required information directly to FINRA or through a third party, thereby allowing these firms to choose the least costly option.

      Fully-disclosed introducing firms would not have any additional reporting obligations in phase 1, for the accounts they clear through other firms and, as a result, would not incur direct costs associated with those accounts. Fully-disclosed introducing firms may incur indirect costs if carrying or clearing firms pass on CARDS costs to their introducing firms. However, the extent to which carrying or clearing firms can pass on these costs depends on the degree of competition in the market for carrying or clearing services. The more competitive the market for these services, the more difficult it would be for carrying or clearing firms to pass on all their costs to introducing firms.

      In phase 2, fully-disclosed introducing firms would submit the Select Account Profile Data Elements directly to FINRA or through a third party. Introducing firms would, therefore, have flexibility in determining how to submit the information to FINRA, which is intended to reduce costs for these firms by allowing them to choose the most cost effective option. Firms that choose to provide the information to FINRA directly would incur costs associated with developing and maintaining systems and procedures to compile, standardize and transmit the data to FINRA. These firms would also incur costs associated with quality control, archiving and storing the data submissions as regulatory records. Firms that choose to provide the CARDS information to FINRA through a third party may pay a third party for agreeing to fulfill their reporting obligations. These firms may also incur costs associated with compiling and transmitting any required information to the third party, reconciling the information and quality control, to ensure the accuracy and completeness of the submitted information.

      Carrying or clearing firms may agree to transmit the Select Account Profile Data Elements in phase 2 to FINRA on behalf of their introducing firms. As a result, carrying or clearing firms may incur costs associated with collecting any required data from their introducing firms, as well as compiling, standardizing, and transmitting it to FINRA. If these carrying or clearing firms transmit the data for some but not all of their introducing firms, they may incur additional costs, such as costs associated with keeping track of whether they have been identified by their introducing firms to be the source of the phase 2 data elements.

      Similar to introducing firms in phase 1, investors may face indirect costs if firms covered by this proposal attempt to pass their costs on to the public. But here too, the extent to which broker-dealers can pass on these costs depends on the degree of competition in the market for brokerage services.

      FINRA is collecting information about anticipated costs to firms, and other economic impacts associated with CARDS, from a group of clearing, self-clearing and introducing firms. Based on the information collected to date from a limited number of clearing and self-clearing firms, the preliminary estimates of cost to develop CARDS systems and procedures range from approximately $390,000 to $8.33 million and the annual cost to maintain these systems ranges from approximately $76,000 to $2.44 million. The median estimates of cost to develop and annual cost to maintain CARDS systems and procedures are approximately $1.68 million and $400,000, respectively. These cost estimates represent firms with different sizes, clearing arrangements and business models, and are influenced by, among other factors, the complexity of their business and their technology infrastructure. FINRA is continuing to review the estimates provided to date and collect cost estimates from additional firms.

      FINRA's costs to implement phases 1 and 2 of CARDS would include costs to develop and maintain the technology infrastructure to collect, compile, standardize, reconcile, store and archive the CARDS data. Additional phase 2 costs would be incurred to develop and maintain a portal for introducing firms to submit phase 2 data directly to FINRA. There would also be costs associated with developing and sharing performance benchmarks and other information with firms. Based on the proposed rule requirements, FINRA's preliminary estimate of the cost to develop CARDS technology systems and processes ranges from $8 million to $12 million over a three-year period. There would be no direct impact to member firms associated with this investment. FINRA continues to assess the additional technology costs to maintain these systems, as well as costs to support an analytics program to run against the CARDS data.

      Request for Comments

      FINRA seeks comments on the rule proposal. In addition to generally requesting comments, FINRA specifically requests comments on the questions below. FINRA requests data and quantified comments where possible.

      1. In proposing the rule to implement CARDS, FINRA has sought to incorporate the feedback received since issuing the concept proposal, discuss the details of its examination and surveillance objectives, and explain how the CARDS initiative and rule proposal strive to obtain data to achieve those objectives in a direct and efficient manner. FINRA welcomes comments on other approaches to achieve the CARDS objectives that would be similarly or more effective.
      2. In addition to the economic impacts identified in the Interim Economic Impact Assessment, are there other significant sources of economic impacts associated with CARDS, including anticipated costs and benefits, to carrying or clearing firms, or introducing firms? What are these economic impacts and what factors or firm characteristics contribute to these impacts? What would be the magnitude of costs associated with developing, implementing and maintaining the systems and procedures to submit CARDS information under the proposed rule? What factors or business attributes contribute to the costs associated with the proposal, such as size of the firm or differences in business model?
      3. To what extent do fully-disclosed introducing firms anticipate using a third party to report the Select Account Profile Data Elements under phase 2? What would be the sources and magnitude of costs to introducing firms associated with providing these data elements to FINRA through a third party? What would be the costs associated with providing these data elements directly to FINRA? Do introducing firms currently store these data elements in standardized electronic form in their systems? If not, how costly would it be for introducing firms to standardize the required data in order to transmit it to FINRA directly or through a third party?
      4. To what extent do carrying or clearing firms anticipate using a third party to report CARDS information under phase 1? What would be the sources and magnitude of costs to these carrying or clearing firms associated with providing the required information to FINRA through a third party? To what extent do clearing firms anticipate transmitting the Select Account Profile Data Elements on behalf of their introducing firms in phase 2? What would be the sources and magnitude of costs to clearing firms associated with transmitting these data elements on behalf of introducing firms?
      5. What are the costs incurred by firms today in responding to FINRA sweeps and other initiatives designed to address emerging risks to investors? What are the sources of these costs? What factors or business attributes contribute to the costs?
      6. What economic impact, including costs and benefits would accrue to the investing public by this proposal? How do investors evaluate enhanced investor protection? What would be the magnitude and primary sources of costs associated with the proposed rule to investors? What factors or attributes would contribute to the costs borne by different segments of the public associated with the proposal?
      7. The rule proposal would require the submission to FINRA of customer and non-customer account numbers. Should FINRA allow firms to submit unique identifiers rather than account numbers? What would be the costs and benefits of allowing firms to submit unique identifiers rather than account numbers?
      8. Should FINRA consider an exception to the reporting requirements for firms that do not engage in any retail activity? Should FINRA consider an exception to the reporting requirements for firms that engage in limited retail activity? If so, what threshold should FINRA consider for limited retail activity and what is the basis for such threshold? What are the costs and benefits for any proposed threshold associated with limited retail activity?
      9. The rule proposal would require the transmission of information regarding money movements. What would be the costs and benefits of requiring firms to regularly transmit information relating to money movements?
      10. FINRA intends to retire INSITE and AEP as firms start submitting the information as part of CARDS. What would be the costs to firms associated with retiring their existing AEP and INSITE systems? What would be the magnitude of annual cost savings and the factors that contribute to these cost savings? Are there other collections of data that FINRA should consider retiring upon successful implementation of CARDS? What are those systems, and what would be the anticipated costs savings associated with retiring those systems?
      11. FINRA plans to provide feedback to firms based on FINRA's analyses of CARDS information. Further, FINRA plans to provide firms with access to their own data in a way that would facilitate their use as part of their compliance efforts. What information would be most beneficial to firms in meeting their compliance and supervisory obligations? What benefits might arise from sharing relevant data and analyses with firms?
      12. Some commenters have asserted that carrying or clearing firms would pass all costs associated with the proposal onto introducing firms. Other commenters have asserted that all the costs would ultimately be borne by investors. Is there sufficient competition among carrying or clearing firms to limit their ability to pass on costs? Is there sufficient competition among introducing firms to limit their ability to pass on costs? What evidence supports these comments?
      13. FINRA contemplates that the collection of information to be required by this proposal would enhance efficiency in other programs. In what other ways could FINRA use the information contemplated in this proposal to better protect investors and enhance market integrity? What would be the value of using the information collected in those ways?
      14. Do carrying or clearing firms believe that nine months following SEC approval of CARDS requirements would be a reasonable time period within which to start submitting CARDS information to FINRA under phase 1? Do fully-disclosed introducing firms believe that within 15 months of SEC approval of CARDS requirements would be a reasonable time period within which to start submitting CARDS information to FINRA under phase 2?

      1 FINRA will not edit personal identifying information, such as names or email addresses, from comments. Persons should submit only information that they wish to make publicly available. See Notice to Members 03-73 (November 2003) (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 The proposed rule defines "securities account" to mean an account as defined in SEA Rule 15c3-3(a)(14). SEA Rule 15c3-3(a)(14) provides that "[t]he term securities account shall mean an account that is maintained in accordance with the requirements of Section 15(c)(3) of the Exchange Act and §240.1Bc3-3." Thus, a securities account would include all retail and institutional customer accounts, as well as non-customer, proprietary, depository, custodial, clearance, items in transfer and similar accounts.

      4 As noted above, interested persons should read the rule text for a complete understanding of the proposal, including a description of the categories of information to be submitted to FINRA.

      5 ACATS, or Automated Customer Accounts Transfer Service, is a system administered by the National Securities Clearing Corporation (NSCC) through which transfers of customer accounts from one member firm to another are affected.

      6 A non-ACATS transfer is a transfer of partial assets from a financial organization, or a transfer of assets from a non-NSCC member firm (for instance, a bank, credit union, or mutual fund company).

      7 SEA Rule 17a-3(a)(5) provides that: "Every member of a national securities exchange who transacts a business in securities directly with others than members of a national securities exchange, and every broker or dealer who transacts a business in securities through the medium of any such member, and every broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, as amended, shall make and keep current the following books and records relating to its business:... A securities record or ledger reflecting separately for each security as of the clearance dates all "long" or "short" positions (including securities in safekeeping and securities that are the subjects of repurchase or reverse repurchase agreements) carried by such member, broker or dealer for its account or for the account of its customers or partners or others and showing the location of all securities long and the offsetting position to all securities short, including long security count differences and short security count differences classified by the date of the physical count and verification in which they were discovered, and in all cases the name or designation of the account in which each position is carried."

      8 The Financial Action Task Force (FATF) defines politically exposed persons (PEPs) as individuals who are or have been entrusted with prominent public functions domestically or by a foreign country, for example, heads of state or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations and important political party officials. FATF states that the definition of PEPs is not intended to cover middle ranking or more junior individuals. See International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, FATF Recommendations (February 2012).

      9 See, e.g., SEA Rule 17a-4 (Records to be Preserved By Certain Exchange Members, Brokers and Dealers). See also infra note 13, and accompanying text.

      10 See FINRA Rule 4311 (Carrying Agreements).

      11 See Section F (Frequency of Submissions) of this Notice for a discussion regarding firm record retention requirements relating to the data transmissions.

      12 NSCC Network Level 3 refers to broker-dealer and other distribution firms that maintain full customer account control, handling orders, customer statements and reporting. The underlying customers do not have any direct privileges with the mutual fund company.

      13 Based on discussions with SEC staff, to the extent the record retention requirements of SEA Rule 17a-4 would apply to the data transmissions, the rule's requirements would be satisfied by FINRA's retention of the data transmissions under SEA Rule 17a-1.

      14 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 (seethe INSITE web page).

    • 14-36 FINRA Announces Elimination of OTC Bulletin Board Historical Research Reports; Fees for ORF Trade Reporting and Data; Effective Dates: September 30, 2014 (Elimination of OTCBB Historical Research Reports); November 17, 2014 (ORF Fees)

      View PDF

      OTC Reporting Facility

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Finance
      Legal
      Operations
      Senior Management
      Systems
      Trading
      Key Topics

      FINRA Automated Data Delivery Service (FINRA ADDS) Fees
      Historical Research Reports
      OTC Bulletin Board (OTCBB)
      OTC Equity Securities
      OTC Reporting Facility (ORF)
      Restricted Equity Securities
      Trade Reporting
      Trade Reporting Fees
      Web Browser Access Fees
      Referenced Rules & Notices

      FINRA Rule 6420
      FINRA Rule 7710
      FINRA Rule 7740
      NTM 00-79

      Executive Summary

      Effective September 30, 2014, FINRA will no longer provide historical research reports for OTC Bulletin Board (OTCBB) securities, and FINRA Rule 7740, pursuant to which FINRA charges fees for such reports, is deleted as of that date. In addition, FINRA is announcing amendments to FINRA Rule 7710 relating to fees for OTC Reporting Facility (ORF) trade reporting and data, upon migration of the ORF to FINRA's Multi-Product Platform (MPP) on November 17, 2014.

      The text of the amendments is available in Attachment A.

      Questions regarding this Notice may be directed to:

      •   FINRA Market Operations at (866) 776-0800;
      •   FINRA Product Management at (866) 899-2107; or
      •   for legal or interpretive questions, Lisa Horrigan, Associate General Counsel, Office of General Counsel, at (202) 728-8190.

      Background and Discussion

      The ORF is the FINRA facility firms use to report transactions in OTC equity securities, i.e., equity securities that are not NMS stocks, including OTCBB securities, and transactions in restricted equity securities effected pursuant to Securities Act Rule 144A.1 Currently, the ORF uses technology provided by The NASDAQ OMX Group, Inc. (NASDAQ) that is based on NASDAQ's proprietary Automated Confirmation Transaction (ACT) platform. The ORF will migrate to the MPP on November 17, 2014, and as of that date, will no longer operate on the ACT platform.2

      Pursuant to a proposed rule change filed with the SEC,3 FINRA deleted Rule 7740 relating to historical research reports for OTCBB securities, and amended Rule 7710 relating to fees for ORF trade reporting and data upon migration to the MPP. Specifically, FINRA (1) adopted fees for Web browser access to the ORF and for real-time "time and sales" ORF data through the Web browser; (2) adopted fees for ORF data through FINRA's Automated Data Delivery Service (FINRA ADDS); and (3) clarified the application of existing transaction reporting fees, without modifying the fee amounts specified in the rule.

      Elimination of Historical Research Reports

      As of September 30, 2014, FINRA will no longer provide historical research reports regarding OTCBB securities through the OTCBB website.4 As the quotation activity through the OTCBB has declined significantly in recent years, the value of these reports has diminished, and users have found alternative ways to obtain this data. Accordingly, FINRA Rule 7740 (Historical Research and Administrative Reports), pursuant to which fees for such reports are charged, is deleted in its entirety, effective September 30, 2014.5

      ORF Web Browser Access Fees

      Following migration of the ORF to the MPP, FINRA will offer Web browser access to the ORF on the MPP; firms will no longer use the ACT Workstation.6 FINRA currently offers Web browser access to FINRA's Trade Reporting and Comparison Engine (TRACE) and Alternative Display Facility (ADF) on the MPP.7

      FINRA is offering two levels of Web browser access to the ORF: Level I (Trade Report or Clearing Firm View Only) access and Level II (Full Service) access. Level I access permits a member firm to report transactions to the ORF via the Web browser and provides access to trade management functions, such as trade reconciliation, cancel and correct. In addition, firms can access their trade data for the current trading day plus three prior days, as well as reference data, such as the Security Daily List, through the Web browser.

      Clearing firms can subscribe to Level I Web browser access to view data regarding their correspondents' trades reported to the ORF associated with the subscribing clearing firm's Clearing Number. Through the Web browser, clearing firms can access on a "view only" basis their correspondents' trade data for the current trading day plus three prior days. A clearing firm can view its correspondent's data—including, e.g., trades on which the correspondent is the reporting party or contra party, open trades and declined trades—and also reference data, but cannot take advantage of other Trade Management functions unless it executes, with its correspondent, a FINRA Uniform Services Agreement (USA) and submits the executed agreement to FINRA Market Operations. Once the clearing firm has a valid agreement in place with its correspondent, it may accept or decline submissions on its correspondent's behalf. In such circumstances, the correspondent, as the party to the trade, will be assessed any applicable transaction reporting fees under Rule 7710(a).

      Level II (Full Service) Web browser access permits the reporting of transactions to the ORF and related trade management functionality, as well as access to real-time "time and sales" ORF data for a given security through the Web browser. Specifically, firms can query—by security symbol and trade date—for the following real-time ORF data: (1) trade details for disseminated trades in a given time period, which data will include the 52-week high and low prices and the dates such prices were attained; (2) the daily high price, low price, last sale price, most recent trade price and volume in a given time period; and (3) the weekly high price, low price and volume in a given time period, including the dates the high and low prices were attained.8

      The charge for Level I (Trade Report or Clearing Firm View Only) Web browser access to the ORF is $20 per month per user ID, and the charge for Level II Web browser access to the ORF is $25 per month per user ID.9

      Fees for ORF Data Through FINRA ADDS

      FINRA ADDS is a secure website that provides member firms, by market participant identifier (MPID), access to trade journal files containing key information regarding the firm's trades reported to FINRA. Currently, FINRA ADDS makes recent ADF and TRACE trade journals available for free through the FINRA ADDS website and offers subscribers the option of receiving historical data as well as retrieving data automatically via Secure File Transfer Protocol (SFTP) for a fee. FINRA has enhanced FINRA ADDS to include ORF data, to be delivered in the same format and via the same two methods currently used for TRACE and ADF data.10

      FINRA ADDS—Firm Subscribers

      FINRA ADDS provides firms with their own trade data. The ORF trade journals provided through FINRA ADDS replace the equity trade journals for ORF previously provided by NASDAQ. Through the FINRA ADDS website, a firm has access to ORF trade data associated with its MPID for the three prior business days free of charge without having to subscribe to the additional optional data services discussed below.11 In addition, firms can access their trade data for dates older than the most recent three business days by subscribing to ORF Data Delivery Plus through FINRA ADDS for a fee. The fee will be charged per month to each MPID that is a subscriber for ORF Data Delivery Plus reports (Plus Reports), which will be provided in response to requests by the MPID.12 The fees are based on (1) the average number of transactions reported to the ORF 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 four tiers,13 and (2) the number of Plus Reports the subscriber receives in a month.14

      The fee schedule for ORF Data Delivery Plus through FINRA ADDS is as follows:15

      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: 50,000 + $60 $80 $100
      Tier 2: 10,000–49,999 $40 $55 $70
      Tier 3: 1,000–9,999 $20 $30 $40
      Tier 4: < 1,000 $10 $15 $20

      Firms also have the option of subscribing to the ORF Data Delivery SFTP service, which will enable them to automate the process of retrieving their ORF trade journal files. Files will be made available on a daily basis, and subscribers can connect to FINRA ADDS via SFTP to download their data.

      The fees for ORF data via SFTP are (1) a one-time set up fee of $250 and (2) a monthly fee of $200 for each MPID that subscribes to the service.16

      FINRA ADDS—Clearing Firm Subscribers

      Clearing firms can subscribe to FINRA ADDS for access to data regarding their correspondents' clearing eligible trades reported to the ORF associated with the subscribing clearing firm's Clearing Number. This data replaces the clearing firm trade journal files for ORF previously provided by NASDAQ. ORF data for clearing firms is available through the FINRA ADDS website and via SFTP. Through the FINRA ADDS website, a clearing firm has access to its correspondents' ORF trade data associated with its Clearing Number for the three prior business days free of charge without having to subscribe to the additional optional data services. Clearing firms can access their correspondents' data for dates older than the most recent three business days for a monthly fee.

      The charge for Clearing Data Delivery Plus service through FINRA ADDS is a flat fee of $150 per Clearing Number17 per month, irrespective of the number of reports received.18 The charge for the Clearing Data Delivery SFTP service is a one-time start-up fee of $250 and $300 per month for each Clearing Number that subscribes to the service.19

      ORF Transaction Reporting Fees

      FINRA amended Rule 7710 to clarify the rule's application, without modifying the transaction reporting fee amounts specified in the rule, as follows.

      •   First, where the same market participant is on both sides of a trade report (e.g., a cross transaction, which can be reported with the executing party's MPID on both sides of the trade), applicable fees assessed on a "per side" basis are assessed once, rather than twice, and the market participant is assessed the fee as the executing party side only. This is consistent with the manner in which trades reported to the ORF currently are billed.
      •   Second, trades reported for regulatory purposes only (i.e., trades that are submitted neither for public dissemination nor clearing through the ORF, also referred to as "non-tape, non-clearing reports") are not assessed a fee. This codifies FINRA's current billing methodology as set forth in Notice to Members 00-79 (November 2000).
      •   Third, the "Late Report—T+N" fee of $0.288 is charged only to the executing party for a late trade report submitted one or more days after trade date (T+N).20 Prior to the amendments, this fee was charged to both sides.
      •   Fourth, the "Query" charge has been deleted, because it relates to functionality that is specific to ACT and does not apply on the MPP. Upon migration of the ORF to the MPP, firms can still search for their trades, but there is no charge for such functionality. In addition, the Corrective Transaction Charge applies to "Cancel/Correct" transactions only; the ORF no longer supports "Error, Inhibit, Kill, or No/Was" transactions, which are ACT-specific.
      •   Finally, transactions that are not subject to comparison21 through the ORF are charged a fee of $0.029 per side. In the course of a recent review of ORF billing methodology, FINRA determined that for "tape only" transactions between two FINRA member firms (i.e., transactions that are reported for public dissemination purposes and are not cleared through the ORF or locked-in via AGU or QSR), only the reporting party was charged.

      Upon migration of the ORF to the MPP, in accordance with the existing rule, both sides will be charged for all transactions reported to the ORF that are not subject to comparison, including all "tape only" trades that are not cleared through the ORF, as well as trades that are cleared through the ORF and locked-in via AGU or QSR agreements.22 Although the rule language remains unchanged, some firms that are identified as the contra party on trade reports submitted to the ORF will be impacted, i.e., some firms will see an increase in their fees and other firms will start receiving ORF invoices for the first time.23

      FINRA notes that historically, if a firm's total ORF fees over a six-month period fell below the threshold amount of $20.00, FINRA would not invoice the firm and would write off the fees for that period. FINRA is discontinuing this threshold billing policy, and all parties will receive a bill irrespective of the total amount due.

      The amendments to Rule 7710 are effective on November 17, 2014.


      1 "OTC equity security" and "restricted equity security" are defined under Rule 6420.

      2 Firms can obtain additional information relating to ORF migration on the FINRA OTC Reporting Facility (ORF) Migration page.

      3 See Securities Exchange Act Release No. 72595 (July 11, 2014), 79 FR 41711 (July 17, 2014) (Notice of Filing and Immediate Effectiveness; SR-FINRA-2014-032).

      4 The last date on which to order a report is September 29, 2014.

      5 FINRA intends to file a proposed rule change with the SEC to revise the operative date for the deletion of Rule 7740. As proposed in SR-FINRA-2014-032, the operative date would have been the date of migration of the ORF to the MPP, which originally was scheduled for September 15, 2014.

      6 In addition to Web browser access, firms can report trades to the ORF via computerto- computer interface (CTCI), a Financial Information eXchange (FIX) line or indirectly via third party intermediaries (e.g., service bureaus). Following migration to the MPP, firms will continue to be able to connect to the ORF using any of these three methods. Firms that report to the ORF via CTCI or FIX—either directly or indirectly through third party intermediaries—will continue to pay NASDAQ, as FINRA's technology service provider for the MPP, charges associated with FIX and CTCI ports to connect to the ORF data center.

      7 A firm that utilizes the TRACE Web browser, the ADF Web browser and the ORF Web browser would pay three separate fees under Rules 7730(a)(1), 7510(c)(1) and 7710(b).

      8 While a Level II Web browser subscriber will see all ORF trades at the time of the query in a specific security, the subscriber will not see the continuous real-time ORF transaction feed (or TDDS), and the Web browser will not include quote data from the real-time OTCBB quote feed (or BBDS).

      9 See Rule 7710(b).

      10 FINRA notes that a firm that subscribes to FINRA ADDS for TRACE, ADF and ORF data would pay three separate fees under Rules 7730(g), 7510(d) and 7710(c).

      11 As noted above, firms that have Web browser access can download up to three days' worth of their prior day ORF trade data through the Trade Management functionality on the MPP at no additional charge (once the firm has paid any applicable fees, e.g., for ORF Web browser access); however, the data is not in the same format as available through FINRA ADDS. Specifically, the Trade Management data through the Web browser is "living" for three days after trade date (T+3), whereas FINRA ADDS files are produced at the end of the trading day and will not change (e.g., to reflect trades that were subsequently canceled or corrected). For example, on Wednesday, a firm cancels a trade that it executed on Monday. Through FINRA ADDS, the firm will see the trade from Monday, with no indication that the trade was subsequently canceled. Through Trade Management, the status of the trade will be updated from "New" to "Canceled."

      12 To access trade information for multiple MPIDs, a firm must obtain a subscription for each MPID.

      13 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 November 2014 will be assigned to a tier based upon the ORF transactions reported in 2013 in which the MPID was a party, and will remain in that tier until December 31, 2014. In 2015, the MPID will be re-evaluated and assigned to a tier for 2015 fee purposes, based upon the MPID's ORF trades in 2014. Where there is no historical data associated with an MPID (e.g., the MPID is new), the lowest tier applies.

      14 A subscriber's fee will be assessed each month and accordingly may vary during a calendar year, depending on the number of reports FINRA makes available to the subscriber in response to the subscriber's requests. The ORF Data Delivery Plus fee is based upon the number of reports provided to avoid charging for data requests that FINRA may be unable to provide (e.g., a request for data that pre-dates migration of the ORF to the MPP).

      15 See Rule 7710(c)(1).

      16 See Rule 7710(c)(1).

      17 To access trade information for multiple Clearing Numbers, a firm must obtain a subscription for each Clearing Number.

      18 See Rule 7710(c)(2).

      19 See Rule 7710(c)(2).

      20 Under FINRA rules, trades that are executed between 8:00 p.m. and midnight and trades that are executed on non-business days (pursuant to amendments approved under SR-FINRA- 2013-050 and also effective for the ORF on November 17, 2014) must be reported by 8:15 a.m. the next business day following execution. Such T+N trades are timely and are not assessed the late fee under Rule 7710. All other T+N trades are late under FINRA rules and as such are subject to this fee.

      21 Transactions that are not subject to comparison include trades that are not cleared through the ORF and trades that are locked-in for clearing at the time of submission via an automatic give-up agreement (AGU) or a National Securities Clearing Corporation's qualified special representative (QSR) agreement.

      22 As noted above, neither side is charged a fee for trades that are submitted for regulatory purposes only, i.e., non-tape, non-clearing reports.

      23 While FINRA believes that the overall impact on firms is relatively modest, FINRA is contacting the firms that will be most affected by the change in billing methodology to make them aware of the potential increase in their invoices as of the November 17, 2014, effective date. FINRA will not retroactively bill affected contra parties in accordance with the existing rule.


      Attachment A

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

      * * * * *

      7700. CHARGES FOR OTC REPORTING FACILITY, OTC BULLETIN BOARD AND TRADE REPORTING AND COMPLIANCE ENGINE SERVICES

      7710. OTC Reporting Facility

      (a) Transaction Related Charges

      The following charges shall be paid by the participant for trade reporting to the OTC Reporting Facility[:]. In the case of trades where the same market participant is on both sides of a trade report, applicable fees assessed on a “per side” basis will be assessed once, rather than twice, and the market participant will be assessed applicable charges for reporting transactions not subject to comparison as the Executing Party side only.

      Transaction Related Charges:
      Reporting of transactions not subject to comparison through the OTC Reporting Facility $0.029/side
      Submission of non-tape, non-clearing (regulatory) reports No fee
      Clearing report to transfer a transaction fee charged by one member to another member pursuant to Rule 7330(i) $0.03/side
      Comparison $0.0144/side per 100 shares (minimum 400 shares; maximum 7,500 shares)
      Late Report—T+N $0.288/[side]trade (charged to the Executing Party)
      [Query] [$0.50/query]
      Corrective Transaction Charge $0.25/Cancel, Correct [Error, Inhibit, Kill, or 'No' portion of No/Was] transaction, paid by reporting side; $0.25/Break, Decline transaction, paid by each party

      (b) Web Browser Access

      A member that elects to report transactions to the OTC Reporting Facility pursuant to the Rule 6600 and 7300 Series via an OTC Reporting Facility web browser or a Clearing Firm that elects to view correspondent transaction data associated with its Clearing Number via the OTC Reporting Facility web browser shall be charged:
      (1) For Level I (Trade Report or Clearing Firm View Only) web browser access, $20 per month per user ID; or
      (2) For Level II (Full Service) web browser access, which includes "time and sales" query access to real-time ORF data, $25 per month per user ID.
      (c) FINRA ADDS Fees

      The FINRA Automated Data Delivery System ("FINRA ADDS") provides (1) a member access to OTC Reporting Facility trade journal files associated with its own market participant identifier ("MPID") and (2) a clearing firm access to OTC Reporting Facility trade journal files associated with the clearing firm's correspondent(s).
      (1) Member Firm Data Per MPID

      The following fees are for two optional FINRA ADDS services: OTC Reporting Facility Data Delivery Plus and OTC Reporting Facility Data Delivery Secure File Transfer Protocol.
      (A) OTC Reporting Facility Data Delivery Plus Fee

      The OTC Reporting Facility Data Delivery Plus fee is charged per month to an MPID that is a subscriber for OTC Reporting Facility Data Delivery Plus reports ("Plus reports") provided in response to requests by the MPID. (Plus reports do not include a report in response to a request for an OTC Reporting Facility trade journal file for a specified date, if the specified date is within three (3) business days of the date of the request; such reports 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: 50,000 + $60 $80 $100
      Tier 2: 10,000–49,999 $40 $55 $70
      Tier 3: 1,000–9,999 $20 $30 $40
      Tier 4: < 1,000 $10 $15 $20

      Where there is no historical data associated with an MPID (e.g., the MPID is new), the lowest tier applies.
      (B) OTC Reporting Facility Data Delivery Secure File Transfer Protocol Fee

      The OTC Reporting Facility Data Delivery Secure File Transfer Protocol ("OTC Reporting Facility Data Delivery SFTP") fees are charged to an MPID that is a subscriber and are:
      (i) Set-Up Fee—a one-time fee of $250 per MPID.
      (ii) Monthly Fee—a monthly fee of $200 per MPID.
      (2) Clearing Data Per Clearing Number

      The following fees are for two optional FINRA ADDS services: OTC Reporting Facility Clearing Data Delivery Plus and OTC Reporting Facility Clearing Data Delivery Secure File Transfer Protocol.
      (A) OTC Reporting Facility Clearing Data Delivery Plus Fee

      The OTC Reporting Facility Clearing Data Delivery Plus fee is $150 per month per Clearing Number that is a subscriber for OTC Reporting Facility Clearing Data Delivery Plus reports ("Clearing Plus reports") provided in response to requests by the Clearing Number. (Clearing Plus reports do not include a report in response to a request for an OTC Reporting Facility Clearing trade journal file for a specified date, if the specified date is within three (3) business days of the date of the request; such reports are provided to a Clearing Number at no charge.)
      (B) OTC Reporting Facility Clearing Data Delivery Secure File Transfer Protocol Fee

      The OTC Reporting Facility Clearing Data Delivery Secure File Transfer Protocol ("OTC Reporting Facility Clearing Data Delivery SFTP") fees are charged to a Clearing Number that is a subscriber and are:
      (i) Set-Up Fee—a one-time fee of $250 per Clearing Number.
      (ii) Monthly Fee—a monthly fee of $300 per Clearing Number.

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

      .01 "Executing Party" shall be defined as the party with the trade reporting obligation under Rule 6622.

      * * * * *

      [7740. Historical Research and Administrative Reports]

      [(a) The charge to be paid by the purchaser of an Historical Research Report regarding OTC Bulletin Board security or other OTC security through the web site shall be determined in accordance with the following schedule:]

        [Number of fields of information in the report]
      [1–10] [11–15] [16 or more]
      [A. Issues Summary Statistics]
      [For a security for a day] [$10] [$15] [$20]
      [For a security for a month, quarter, or year] [$20] [$30] [$40]
      [For all issues for a day] [$50] [$75] [$100]
      [For all issues for a month, quarter, or year] [$100] [$150] [$200]
      [B. Intra-Day Quote and Intra-Day Time and Sales Data]
      [For a security and/or a market participant for a day] [$15] [$25] [$35]
      [For all market participants for a day or for all securities for a day] [$30] [$40] [$50]
      [(For purposes of this report, market participants are those entities qualified to participate in the OTC Bulletin Board Service pursuant to Rule 6540(a) and (b)).]      
      [C. FINRA may, in its discretion, choose to make a report that purchasers wish to obtain every trading day available on a subscription discount basis. In such cases, the price for a subscription to receive a report every trading day in a month shall be the applicable rate to receive the report for a day times 20; the price for a subscription to receive the report for every trading day in a quarter shall be the applicable rate to receive the report every day times 60; and the price for a subscription to receive a report every trading day in a year shall be the applicable rate to receive the report for a day times 240.]      
      [D. All OTCBB Issuers Directory]   [$250]  

      [(b) Administrative Reports—$25 per user, per month.]
      * * * * *

    • 14-35 FINRA Requests Comment on a Revised Proposal to Adopt Consolidated FINRA Rule 2231 (Customer Account Statements); Comment Period Expires: October 31, 2014

      View PDF

      Customer Account Statements

      Regulatory Notice
      Notice Type

      Request for Comment
      Consolidated Rulebook
      Suggested Routing

      Compliance
      Legal
      Operations
      Risk
      Senior Management
      Key Topics

      Customer Account Statements
      Referenced Rules & Notices

      FINRA Rule 3150
      FINRA Rule 4311
      NASD Rule 2340
      NASD Rule 3050
      NYSE Rule 409 and its Interpretations
      NYSE Rule 407
      SEA Rule 10b-10

      Executive Summary

      FINRA seeks comment on a revised proposal to transfer, largely unchanged, current NASD Rule 2340 (Customer Account Statements) and Incorporated NYSE Rule 409 (Statements of Accounts of Customers)1 into the consolidated FINRA rulebook as FINRA Rule 2231 (Customer Account Statements). The revised proposal includes changes made in response to comments on the prior proposal that was subsequently withdrawn. The key changes in the revised proposal from the prior proposal are to (1) maintain the quarterly delivery requirement in the current rule; and (2) allow customers to direct the transmission of customer account statements and other documents to third parties, provided the firm sends duplicates of such account statements and other documents directly to the customer.

      The proposed rule is available as Attachment A at www.finra.org/ notices/14-35.

      Questions regarding this Notice should be directed to:

      •   Kris Dailey, Vice President, Risk Oversight & Operational Regulation (ROOR), at (646) 315-8434; or
      •   Kosha Dalal, Associate Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-6903.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by October 31, 2014.

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

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

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

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

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

      Current NASD Rule 2340 (Customer Account Statements) generally requires each general securities member (as that term is defined in the rule)4 and NYSE Rule 409 (Statements of Account of Customers) generally requires each member organization to send account statements to customers at least quarterly showing security and money positions during the preceding quarter.

      A. Initial Filing

      In April 2009, FINRA filed with the SEC a proposed rule change to adopt consolidated FINRA Rule 2231 (Customer Account Statements) that would have transferred NASD Rule 2340 and NYSE Rule 409 with significant changes into the FINRA Rulebook (the initial filing).5 Among other changes, in the initial filing, FINRA proposed to replace the existing quarterly customer account statement delivery requirement with a requirement to send account statements at least once every calendar month to each customer whose account had activity during the period. The initial filing also proposed to incorporate existing supplementary material to NYSE Rule 409, including provisions allowing a firm to send customer account statements and other documents to third parties based on written instructions from the customer.

      The SEC received 12 comment letters.6 All commenters objected to the proposed monthly delivery requirement, generally stating that current industry practice continued to be providing customer account statements on a quarterly basis. Among other concerns, the commenters noted that the proposed monthly delivery requirement would result in significant compliance costs for the industry without meaningful benefits for customers, and could create conflicts with firms' obligations under SEA Rule 10b-10 (Confirmation of Transactions), as well as quarterly reporting standards in the retirement plan industry. SEC staff also expressed concern regarding the proposed provision allowing firms to transmit customer account statements and other documents to third parties based on written instructions from the customer.

      In response to the comments, FINRA filed Amendment No. 1 to the proposed rule change in July 2011.7 Among other changes, in Amendment No. 1, FINRA proposed to permit firms to send quarterly account statements in a range of circumstances.8 FINRA also revised the proposal regarding transmission of customer account statements to third parties to require firms to continue to deliver duplicate copies of customer account statements to customers even when directed by customers in writing to send the statements to third parties.

      The SEC published Amendment No. 1 for comment in August 2011 and received eight comment letters.9 Commenters continued to raise concerns regarding the monthly delivery requirement, asserting that quarterly delivery of account statements should not be limited to select circumstances. In addition, commenters objected to the proposed requirement to deliver duplicate copies of account statements to customers even when directed by customers in writing to send the statements to third parties. Some commenters believed that there should be circumstances under which members should not be required to deliver duplicate statements to customers, particularly where there is a power of attorney or incapacity. In July 2012, FINRA withdrew the initial filing to further consider the comments.10
      B. Revised Proposal

      In light of the concerns with the initial filing, FINRA requests comment on a revised proposal that would largely transfer unchanged current NASD Rule 2340 (Customer Account Statements) and NYSE Rule 409 (Statements of Accounts of Customers) into the consolidated FINRA rulebook as FINRA Rule 2231 (Customer Account Statements).11 The revised proposal would require each general securities member firm to send account statements at least once each calendar quarter to each customer whose account had activity during the period since the last statement was sent to the customer. The key changes in the revised proposal from the initial filing are to (1) maintain the quarterly delivery requirement in the current rule; and (2) allow customers to direct the transmission of customer account statements and other documents to third parties, provided the firm sends duplicates of such account statements and other documents directly to the customer.

      1. Provisions Transferring Largely Unchanged

      Proposed FINRA Rule 2231 would transfer, largely unchanged, the following requirements of NASD Rule 2340 and NYSE Rule 409:

      •   Quarterly Delivery Requirement. Proposed FINRA Rule 2231(a) would require each general securities member firm to send account statements to customers at least once each calendar quarter containing a description of any securities position, money balances or account activity in the accounts since the prior account statements were sent. The term "general securities member," would be transferred with minor technical changes from NASD Rule 2340(d).12
      •   Requirement to Provide SIPA Disclosure. Proposed FINRA Rule 2231(a) also would require customer account statements to include a statement advising customers to report promptly any inaccuracy or discrepancy in their account and to re-confirm any oral communications in writing to further protect the customer's rights under the Securities Investor Protection Act (SIPA).
      •   Disclosure of Free Credit Balances. Proposed FINRA Rule 2231(a) also would provide that the rule does not qualify or condition the obligations of firms to comply with SEA Rule 15c3-3(j)(1) related to free credit balances carried for the account of customers.
      •   DVP/RVP Requirements. Proposed FINRA Rule 2231(b) would provide that quarterly statements do not need to be sent to customer accounts carried solely for execution on a Delivery versus Payment/Receive versus Payment (DVP/RVP) basis, subject to specified conditions.
      •   DPP/REIT Securities Requirements, Subject Pending Rule Filing. Proposed FINRA Rule 2231(c) would address the inclusion of per share estimated values for DPP or REIT securities held in customer accounts or included on customer account statements, subject to a currently pending rule filing relating to the valuation of unlisted DPP and REIT securities.13
      •   Definitions. Proposed FINRA Rule 2231(d) would include the current definitions of "general securities member" and "account activity," among others.
      •   Exemptive Authority. Proposed FINRA Rule 2231(e) would allow FINRA to exempt firms from the provisions of the rule pursuant to the Rule 9600 Series.
      2. New Supplementary Material .02—Transmission of Customer Account Statements to Other Persons

      Proposed Supplementary Material .02 would provide that, except as required to comply with NASD Rule 3050 (Transactions for or by Associated Persons) and NYSE Rule 407 (Transactions—Employees of Members, Member Organizations and the Exchange), a firm may not address or send account statements or other communications relating to a customer's account to other persons or entities or in care of a person holding power of attorney over the customer's account unless (a) the customer has provided written instructions to the firm to send such statements or other communications to such person or entity or in care of a person holding power of attorney over the customer's account; and (b) the firm sends duplicates of such statements or other communications in accordance with this rule directly to the customer either in paper format or electronically as provided in proposed Supplementary Material .03.

      Proposed Supplementary Material .02 would limit the customer's ability to decline to receive customer account statements beyond what was permitted in NYSE Rule 409(b) or NASD Rule 2340. NYSE Rule 409(b) prohibits, without NYSE's consent, the delivery of statements, confirmations or other communications to customers (1) in care of a person holding power of attorney over the customer's account unless either (A) the customer has provided written instructions to the member to send such confirmations, statements or communications to such person, or (B) duplicate copies are sent to the customer at some other address designated in writing by the customer; or (2) at the address of any member or in care of a partner, stockholder who is actively engaged in the member's business or employee of the member. NASD Rule 2340 does not contain a similar provision.14
      3. Proposed Supplementary Material

      Proposed FINRA Rule 2231 would transfer with minor changes several related interpretations under NYSE Rule 409. As such, the requirements would become applicable to all FINRA member firms. Specifically, the revised proposal would include:
      •   Supplementary Material .05—Information to be Disclosed on Statement. The provision would require that customer account statements clearly and prominently disclose on the front of the statement the identity of the introducing firm and clearing firm (if different) and their respective contact information for customer service. The identity of the clearing firm and its contact information for customer service may appear on the back of the statement provided the information is in "bold" or "highlighted" letters; and that the clearing firm is a member of SIPC.
      •   Supplementary Material .06—Assets Externally Held and Included on Statements Solely as a Service to Customers. The provision would require clear and prominent separation on the statement when a customer account statement includes assets that the firm does not hold on behalf of the customer and that are not included on the firm's books and records, and sets forth other required disclosures.
      •   Supplementary Material .07—Use of Logos, Trademarks, etc. The provision would require that firms not use the logo, trademark or other similar identification of a person (other than the introducing firm or clearing firm) on a customer account statement in a manner that is misleading or causes customer confusion.
      •   Supplementary Material .08—Use of Summary Statements. The provision would set forth requirements when a firm seeks to jointly formulate or distribute customer account statements together with a statement summarizing or combining assets held in different accounts (summary statement).
      In addition, proposed FINRA Rule 2231 would add the following as new supplementary material:
      •   Supplementary Material .01—Compliance with FINRA Rule 4311 (Carrying Agreements). The provision would remind firms that Rule 4311(c)(2) generally requires each carrying agreement, in which accounts are carried on a fully disclosed basis, to expressly allocate to the carrying firm the responsibility for the safeguarding of funds and securities for the purposes of SEA Rule 15c3-3 and for preparing and transmitting statements of account to customers.
      •   Supplementary Material .03—Use of Electronic Media to Satisfy Delivery Obligations. The provision would allow firms to satisfy their delivery obligations under the proposed rule by using electronic media, subject to compliance with standards established by the SEC on the use of electronic media for delivery purposes.
      •   Supplementary Material .04—Compliance with FINRA Rule 3150 (Holding of Customer Mail). The provision would permit firms to hold customer mail, including customer account statements or other communications relating to a customer's account, subject to the requirements of Rule 3150.15
      C. Request for Comment

      FINRA requests comment on all aspects of the revised proposal, including any potential costs and burdens that the revised proposal could impose on firms. FINRA particularly requests comment concerning the following areas:
      1. Does the revised proposal to retain the quarterly delivery requirement address the operational and cost concerns commenters raised about the proposed monthly delivery requirement in the initial filing?
      2. From time to time, firms have raised questions regarding the scope of the term "general securities member" as defined in NASD Rule 2340(d). The definition excludes firms that do not carry customer accounts and do not hold customer funds or securities.16 Should the definition of "general securities member"17 be amended or clarified to better align with the obligations of clearing or carrying members? Should FINRA revise the proposed definition of "general securities member" to mean any firm that carries customer accounts, clears customer transactions or otherwise holds customer funds or securities? It is FINRA's intent to require firms conducting a DVP/RVP business to comply with the requirements of the rule; should the definition be clarified to include firms conducting DVP/RVP business?18 Separately, should the definition be clarified with respect to its application to firms that operate commission rebate or recapture programs (some acting as aggregators of such balances) and that hold such balances for customers?
      3. What impact will proposed Supplementary Material .02 (Transmission of Customer Account Statements to Other Persons) have on existing practices with respect to the transmission of account statements and other documents to third parties? Commenters are encouraged to provide cost projections where practicable.
      4. What is the current industry practice with respect to sending account statements to customers, for example, where the customer is disabled or incapacitated, resides in a nursing home, has a trusted person to review statements, or there is a valid power of attorney or guardianship established? Have firms implemented any safeguards or best practices to address these situations?
      5. Should the proposed rule include specific exemptions that would allow firms not to send account statements to customers under identified situations? If so, what situations and why?
      FINRA also specifically requests comments on the economic impact and expected beneficial results of the proposed rule:
      1. What direct and indirect costs will result from proposed Supplementary Material .02?
      2. Are the costs imposed by proposed Supplementary Material .02 warranted by the potential protection to customers from receiving duplicate account statements?
      3. What benefits or burdens would result for customers from proposed Supplementary Material .02?
      4. What impact, if any, would proposed Supplementary Material .02 have on business practices and competition in the financial industry?
      FINRA requests that commenters provide empirical data or other factual support for their comments, whenever possible.

      1 For convenience, Incorporated NYSE Rules are referred to as 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) (Online Availability of Comments) for more information.

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

      4 The term "general securities member," is defined in NASD Rule 2340(d) to mean "any member that conducts a general securities business and is required to calculate its net capital pursuant to the provisions of SEA Rule 15c3-1(a). Notwithstanding the foregoing definition, a member that does not carry customer accounts and does not hold customer funds or securities is exempt from the provisions of this section."

      5 See Securities Exchange Act Release No. 59921 (May 14, 2009), 74 FR 23912 (May 21, 2009) (Notice of Filing File No. SR-FINRA-2009-028).

      6 See the SEC's website for a list of commenters to the initial filing.

      7 See Securities Exchange Act Release No. 64969 (July 26, 2011), 76 FR 46340 (August 2, 2011) (Notice of Filing of Amendment No. 1 to File No. SR-FINRA-2009-028) (Amendment No. 1 to the initial filing).

      8 For example, a firm could send quarterly statements to customers if the firm relies on an appropriate rule, regulation, release, interpretation, "no-action" position or exemption issued by the SEC or its staff that (1) specifically applies to the fact situation of the activity; (2) provides relief from the immediate transaction confirmation delivery requirements of SEA Rule 10b-10; and (3) permits quarterly delivery of customer account statements. Similarly, a firm could send quarterly statements to customers for various passive activities, such as the receipt of funds in accounts that are not directly from a purchase or sale transaction, including the receipt of interest and dividends. A firm otherwise eligible to send quarterly account statements by meeting such requirements would have been required to provide customers access to current information on their accounts via the Internet and by telephone.

      9 See the SEC's website for a list of commenters to Amendment No. 1 to the initial filing.

      10 See Securities Exchange Act Release No. 67588 (August 2, 2012), 77 FR 47470 (August 8, 2012) (Notice of Withdrawal of File No. SR-FINRA-2009-028).

      11 In addition, the revised proposal would not include several supplementary materials from NYSE Rule 409. Specifically, the proposal would not adopt: (1) NYSE Rule Interpretation 409(a)/01 (Applicability), but would add Supplementary Material .01 (Compliance with FINRA Rule 4311 (Carrying Agreements)) to remind firms of their obligations under Rule 4311(c)(2); and (2) NYSE Rule Interpretation 409(b)/01 (Standards For Holding Mail For Foreign Customers), but would add Supplementary Material .04 (Compliance with FINRA Rule 3150 (Holding of Customer Mail)) to permit firms to hold customer account statements consistent with the requirements of Rule 3150.

      12 See supra note 4.

      13 See Securities Exchange Act Release No. 71545 (February 12, 2014), 79 FR 9535 (February 19, 2014) (Notice of Filing File No. SR-FINRA-2014-006). See Securities Exchange Act Release No. 72193 (May 20, 2014), 79 FR 30217 (May 27, 2014) (Order Instituting Proceeding to Determine Whether To Approve or Disapprove File No. SR-FINRA-2014-006). See also Amendment No. 1 to SR-FINRA-2014-006 and Response to Comments (July 11, 2014).

      14 NYSE Rule 409(g) also provides that firms carrying margin accounts for customers should send duplicate copies of monthly statements of guaranteed accounts to the respective guarantors unless such guarantors have specifically provided in writing that they do not want such statements sent to them. FINRA recommends eliminating NYSE Rule 409(g) because its provisions advising members to send duplicate account statements to guarantors is better addressed by the general requirement described above to obtain written instructions from the customer to send customer statements to third parties.

      15 The SEC approved FINRA's proposed rule change to adopt rules regarding supervision in the consolidated FINRA rulebook, including specifically FINRA Rule 3150 (Holding of Customer Mail). See Securities Exchange Act Release No. 71179 (December 23, 2013); 78 FR 79542 (December 30, 2013) (Order Granting Approval of a Proposed Rule Change to Adopt Rules Regarding Supervision in the Consolidated FINRA Rulebook, as Modified by Amendment No. 1) (File No. SR-FINRA-2013-025). The consolidated supervision rules become effective on December 1, 2014. See Regulatory Notice 14-10.

      16 See Securities Exchange Act Release No. 31319 (October 14, 1992); (Order Approving Proposed Rule Change Relating to Periodic Account Statements) (File No. SR-NASD-92-29).

      17 See supra note 4.

      18 The proposal would retain the current provisions of NASD Rule 2340(b) that permit firms not to send quarterly customer account statements to DVP/RVP customers if certain conditions are satisfied.

    • 14-34 SEC Approves Amendments to Disseminate Additional Asset-Backed Securities Transactions and to Reduce the Reporting Time for Such Transactions; Effective Date: April 27, 2015*

      * The effective date has been extended to June 1, 2015.

      View PDF

      Trade Reporting and Compliance Engine (TRACE)

      Regulatory Notice
      Rule Amendment

      Guidance
      Suggested Routing

      Compliance
      Fixed Income
      Legal
      Operations
      Systems
      Trading
      Training
      Key Topics

      Asset-Backed Securities
      Dissemination
      List or Fixed Offering Price
      Rule 144A Transactions
      Securitized Products
      Takedown Transactions
      Transaction Reporting
      Referenced Rules & Notices

      FINRA Rule 6710
      FINRA Rule 6730
      FINRA Rule 6750
      FINRA Rule 7730
      Securities Act Rule 144A

      Executive Summary

      The SEC approved amendments to the Trade Reporting and Compliance Engine (TRACE) rules and dissemination protocols to provide for dissemination of transactions in an additional group of asset-backed securities1 and to reduce the time frame for reporting such transactions, other than Fixed or List Price and Takedown Transactions.2 Transactions in asset-backed securities effected pursuant to Securities Act Rule 144A (Rule 144A transactions) also will be disseminated. The amendments will become effective on April 27, 2015.

      The amended rule text is available at www.finra.org/notices/14-34.

      Questions regarding this Notice should be directed to:

      •   Ola Persson, Vice President, Transparency Services, at (212) 858-4796; or
      •   Racquel Russell, Associate General Counsel, Office of General Counsel, at (202) 728-8363.

      Note: On March 3, 2015, FINRA extended the effective date from April 27, 2015, to June 1, 2015.

      Background & Discussion

      The SEC approved amendments to the Rule 6700 Series, Rule 7730 and the TRACE dissemination protocols to disseminate additional transactions in asset-backed securities (e.g., asset-backed securities collateralized by pools of credit card receivables, student loans, auto loans), while excepting specific types of these transactions from dissemination and changing the time periods for reporting.

      Definitions and Dissemination

      The amendments to Rule 6710(m) add new defined terms and revise existing terms to identify the class of securities that will now also be subject to dissemination. Specifically, the current term "asset-backed security" has been re-named as "securitized products" and the new definition of "asset-backed security" more narrowly describes the specific class of securitized products to be disseminated under the amendment. This new definition of "asset backed security" specifically excludes: (i) securitized products backed by residential or commercial mortgage loans, mortgage-backed securities, or other financial assets derivative of mortgage-backed securities; (ii) an SBA-Backed asset-backed security traded to be announced (TBA) or in a specified pool transaction;3 and (iii) collateralized debt, loan and bond obligations.4 Beginning on the effective date, FINRA will commence dissemination of this newly defined category of asset-backed securities. Dissemination of transactions in the newly defined category of asset-backed security will include Rule 144A transactions in such securities immediately upon receipt of a transaction report. There will be a $10 million dissemination cap for asset-backed security transactions.5

      The amendments also revise the definitions of "list or fixed offering price transaction" and "takedown transaction" in Rules 6710(q) and (r), respectively, to include asset-backed security transactions. Accordingly, firms that effect primary market asset-backed security transactions that meet all the requirements of a "list or fixed offering price transaction" or a "takedown transaction" will be afforded the treatment of such transactions. As set forth in Rule 6730(a)(2), firms may report such transactions as late as T+1 during TRACE system hours. As set forth in Rule 6750(b)(3), transactions are not disseminated and per Rule 7730(b)(1)(C), firms would not be charged a reporting fee.6

      Reporting Time Periods

      The amendments also address the time periods by which firms must report asset-backed security transactions to TRACE. Specifically, Rule 6730(a)(3)(B)(i) provides that, for a pilot program that will expire on October 23, 2015, asset-backed security transactions must be reported no later than 45 minutes from the time of execution, subject to minor exceptions for transactions executed shortly before the TRACE system closes and when the TRACE system is closed.7 After October 23, 2015, asset-backed security transactions must be reported no later than 15 minutes from the time of execution, subject again to exceptions to the reporting time frames for transactions executed shortly before the TRACE system closes and when the TRACE system is closed.8

      Data Availability

      The transaction information from disseminated asset-backed security transactions will be included in the securitized products data set (SP Data Set) under Rule 7730(c) (previously titled the ABS Data Set) and the Historic Securitized Products Data Set under Rule 7730(d) (previously titled the Historic ABS Data Set).9 The transaction information from disseminated asset-backed securities that are Rule 144A transactions will be included in the Rule 144A Data Set and the Historic Rule 144A Data Set.10 There is no change to the fees for either data set.


      1 The term "asset-backed security" is defined in Rule 6710(cc).

      2 See Securities Exchange Act Release No. 71607 (February 24, 2014), 79 FR 11481 (February 28, 2014) (SEC Order Approving File No. SR-FINRA-2013-046).

      3 The terms "SBA-Backed ABS," "TBA," and "specified pool transaction" are defined in Rule 6710(bb), Rule 6710(u) and Rule 6710(x), respectively.

      4 FINRA also adopted Supplementary Material .01 to provide additional guidance regarding the scope of the term "asset-backed security."

      5 To mitigate concerns regarding the confidentiality of dealer and customer trading strategies, identities and positions in assetbacked securities, FINRA will not disseminate the contra-party indicator, which identifies whether the trade is with a dealer, a buy from a customer, or a sell to a customer.

      6 All primary market transactions in other classes of securitized products will continue to be excluded from the definition of "list or fixed offering price" and "takedown transaction."

      7 See Rule 6730(a)(3)(B)(i).

      8 See Rule 6730(a)(3)(B)(ii), which incorporates by reference Rule 6730(a)(1)(A) through (D).

      9 A transaction in a disseminated TRACE-eligible security becomes available as part of historic TRACE data no earlier than 18 months after the specific transaction is reported to TRACE.

      10 FINRA launched a new Rule 144A data set and the provision of historic Rule 144A data on June 30, 2014 in connection with FINRA's dissemination of transactions effected as Rule 144A transactions. See Securities Exchange Act Release No. 70345 (September 6, 2013), 78 FR 56251 (September 12, 2013) (Order Approving 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); Securities Exchange Act Release No. 70691 (October 16, 2013), 78 FR 62788 (October 22, 2013) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to TRACE Fees for Securities Act Rule 144A Transaction Data; File No. SR-FINRA-2013-043); and Regulatory Notice 13-35 (October 30, 2013) (announcing June 30, 2014, as the effective date for SR-FINRA-2013-029 and SR-FINRA-2013-043).

    • 14-33 FINRA Revises the Series 24 and 23 Examination Programs; Implementation Date: October 13, 2014

      View PDF

      Qualification Examinations

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Legal
      Operations
      Registration
      Training
      Key Topics

      General Securities Principal
      General Securities Principal Sales
      Supervisor Module
      Series 23
      Series 24
      Qualification Examinations
      Referenced Rules & Notices

      FINRA Rule 2090
      FINRA Rule 2111
      FINRA Rule 3230
      FINRA Rule 4510
      NASD Rule 1021(b)
      NASD Rule 1022(a)
      NASD Rule 2212
      NASD Rule 2310
      NASD Rule 2510
      NASD Rule 3110
      Regulatory Notice 09-41
      SEA Rule 15c1-7
      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 the examinations cover. Based on this review process, FINRA has revised the General Securities Principal (Series 24) and General Securities Principal Sales Supervisor Module (Series 23) examination programs.1

      The changes are reflected in the Series 24 and 23 content outlines on FINRA's website and will appear in Series 24 and 23 examinations administered on or after October 13, 2014.

      Questions regarding this Notice should be directed to:

      •   Bridget Fox, Qualifications Analyst, Testing and Continuing Education Department, at (240) 386-6472; or
      •   Alexandra Toton, Manager, Testing and Continuing Education Department, at (240) 386-4677.

      Background & Discussion

      Section 15A(g)(3) of the Securities Exchange Act of 1934 (SEA) 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.

      NASD Rule 1022(a) (General Securities Principal) requires that a "principal" qualify and register as a General Securities Principal,2 unless the person's activities are so limited as to qualify such person for one or more of the limited categories of principal registration, such as a Financial and Operations Principal, an Introducing Broker-Dealer Financial and Operations Principal, a Registered Options Principal, an Investment Company and Variable Contracts Products Principal, a Direct Participation Programs Principal, a General Securities Sales Supervisor or a Government Securities Principal. The rule does not preclude individuals whose activities are so limited from qualifying and registering as General Securities Principals.

      NASD Rule 1022(a) also requires that a firm's chief compliance officer (CCO) designated on Schedule A of the firm's Form BD (Uniform Application for Broker-Dealer Registration) be qualified and registered as a General Securities Principal. If a firm's activities are limited to investment company and variable contracts products, direct participation programs or government securities, the firm's CCO may instead be qualified and registered as an Investment Company and Variable Contracts Principal, Direct Participation Programs Principal or Government Securities Principal, respectively. In addition, for purposes of the CCO requirement for firms that are also members of the NYSE, FINRA recognizes the NYSE Compliance Official (Series 14) examination as an acceptable alternative to the principal examination requirements for General Securities Principal, Investment Company and Variable Contracts Principal or Direct Participation Programs Principal, as applicable.

      Pursuant to NASD Rule 1022(a), a General Securities Principal is not qualified to function as a Financial and Operations Principal, an Introducing Broker-Dealer Financial and Operations Principal, a Registered Options Principal, a General Securities Sales Supervisor, a Municipal Securities Principal or a Municipal Fund Securities Limited Principal, unless the General Securities Principal is also qualified and registered in these other categories.

      Further, a General Securities Principal is not qualified to supervise the conduct of a Research Analyst or Supervisory Analyst engaged in equity research, unless the General Securities Principal has passed the Regulatory Administration and Best Practices (Series 87) portion of the Research Analyst examination or the Supervisory Analyst (Series 16) examination and is registered as a Research Principal.

      A person seeking to register as a General Securities Principal must satisfy the General Securities Representative prerequisite registration or another acceptable prerequisite registration.3 While registration as a Corporate Securities Representative, Private Securities Offerings Representative or Investment Banking Representative satisfies the prerequisite registration requirement for a General Securities Principal, such a principal will only have limited supervisory authority consistent with his or her representative category. In addition, NASD Rule 1022(a) requires that a General Securities Principal with responsibility over specific investment banking activities satisfy the Investment Banking Representative registration requirements, regardless of any other prerequisite registration.

      A person registering as a General Securities Principal must also pass the Series 24 qualification examination or an alternative examination. The Series 23 examination, in combination with qualification and registration as a General Securities Sales Supervisor (Series 9/10),4 is an acceptable qualification alternative to the Series 24 examination for associated persons who are required to qualify and register as General Securities Principals with FINRA. The Series 23 examination tests material from the Series 24 examination not otherwise tested on the Series 9/10 examination.

      In consultation with a committee of industry representatives, FINRA recently undertook a review of the Series 24 and 23 examination programs. As a result of this review, FINRA has revised the content outlines for the examinations to reflect changes to the laws, rules and regulations covered by the examinations and to incorporate the functions and associated tasks currently performed by a General Securities Principal. FINRA also has revised the format of the content outlines.

      Revisions

      FINRA has divided the Series 24 and 23 content outlines into the following five major job functions that are performed by a General Securities Principal and included specific tasks for each function:

      Function 1: Supervision of Registration of the Broker-Dealer and Personnel Management Activities;

      Function 2: Supervision of General Broker-Dealer Activities;

      Function 3: Supervision of Retail and Institutional Customer-Related Activities;

      Function 4: Supervision of Trading and Market Making Activities; and

      Function 5: Supervision of Investment Banking and Research.

      FINRA also has adjusted the number of questions assigned to each major job function to ensure that the examinations better reflect the key tasks performed by a General Securities Principal. The questions on the revised Series 24 and 23 examinations will place greater emphasis on key tasks such as supervision of registered persons, sales practices and compliance.

      The following are the number of questions assigned to each of the functions on the Series 24:

      Function 1: 9 questions;

      Function 2: 45 questions;

      Function 3: 32 questions;

      Function 4: 32 questions; and

      Function 5: 32 questions.

      The following are the number of questions assigned to each of the functions on the Series 23:

      Function 1: 6 questions;

      Function 2: 26 questions;

      Function 3: 12 questions;

      Function 4: 28 questions; and

      Function 5: 28 questions.

      Each function also includes specific tasks describing activities associated with performing that function. There are two tasks (1.1–1.2) associated with Function 1; seven tasks (2.1–2.7) associated with Function 2; three tasks (3.1–3.3) associated with Function 3; three tasks (4.1–4.3) associated with Function 4; and three tasks (5.1–5.3) associated with Function 5.5 For example, one such task (Task 2.1) is to develop, implement and update firm's policies, written supervisory procedures (WSP) and controls for applicable rules and regulations; and implement appropriate monitoring and testing.6 Further, the outlines list the knowledge required to perform each function and associated tasks (e.g., business and regulatory requirements for firm's systems and technologies).7 In addition, where applicable, the outlines list 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 2090), NASD Rules (e.g., NASD Rule 2510) and SEC rules (e.g., SEA Rule 15c1-7).8

      FINRA conducted a job analysis study of General Securities Principals, which included the use of a survey, in developing each function and associated tasks and updating the required knowledge set forth in the revised outlines. The functions and associated tasks, which appear in the revised outlines for the first time, reflect the day-to-day activities of a General Securities Principal. FINRA also has revised the content of the Series 24 and 23 outlines to reflect changes to the laws, rules and regulations covered by the examinations. Among other revisions, FINRA has revised the content outlines to reflect the adoption of rules in the consolidated FINRA rulebook (e.g., NASD Rule 2310 (Recommendations to Customers (Suitability)), NASD Rule 2212 (Telemarketing) and NASD Rule 3110 (Books and Records) were adopted as FINRA Rule 2111 (Suitability), FINRA Rule 3230 (Telemarketing) and FINRA Rule 4510 Series (Books and Records Requirements), respectively)).9

      In conjunction with the changes to the content outlines, FINRA has made changes to the weighting of questions on the topics on the content outlines and to the question banks for the Series 24 and 23 examinations.

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

      The number of questions on the Series 24 examination will remain at 150 multiple-choice questions,10 and candidates will continue to have 3 hours and 45 minutes to complete the examination. A score of 70 percent is required to pass the revised Series 24 examination, which is the same as the current passing score. The number of questions on the Series 23 examination will remain at 100 multiple-choice questions, and candidates will continue to have 2 hours and 30 minutes to complete the examination. A score of 70 percent is required to pass the revised Series 23 examination, which is the same as the current passing score.

      Availability of Content Outlines

      The revised Series 24 and 23 content outlines are available on FINRA's website.


      1 See Securities Exchange Act Release No. 72765 (August 5, 2014), 79 FR 46898 (August 11, 2014) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2014-034); Securities Exchange Act Release No. 72766 (August 5, 2014), 79 FR 46887 (August 11, 2014) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2014-035).

      2 The term "principal" is defined in NASD Rule 1021(b) (Definition of Principal).

      3 The other acceptable prerequisite representative registrations are: United Kingdom Securities Representative; Canada Securities Representative; Investment Banking Representative; Corporate Securities Representative; or Private Securities Offerings Representative. See NASD Rule 1022(a)(1) (A); Regulatory Notice 09-41 (July 2009); and Securities Exchange Act Release No. 57073 (December 31, 2007), 73 FR 1382 (January 8, 2008) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2007-028).

      4 FINRA also recognizes the historical equivalents to the Series 9/10 registration category, the Series 8 and 12 registration categories.

      5 See Series 24 and 23 Outlines Pages 6-29.

      6 See Series 24 and 23 Outlines Page 9.

      7 See Series 24 and 23 Outlines Page 9.

      8 See Series 24 and 23 Outlines Page 19.

      9 See Rule Conversion Chart.

      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 Series 24 examination includes 10 additional, unidentified pre-test questions that do not contribute towards the candidate's score. Therefore, the examination actually consists of 160 questions, 150 of which are scored. The 10 pre-test questions are randomly distributed throughout the examination.

    • 14-32 FINRA Amends FINRA Rule 9120 and the Definition of "Hearing Officer"; Implementation Date: August 12, 2014

      View PDF

      Definition of "Hearing Officer"

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Key Topics

      Disciplinary Proceedings
      Hearing Officers
      Referenced Rules & Notices

      FINRA Rule 9120

      Executive Summary

      FINRA has amended the definition of "Hearing Officer" to include a former FINRA employee who previously acted as a Hearing Officer and who is a licensed attorney. Based on the amended definition, the Chief Hearing Officer may appoint a former employee of FINRA who previously acted as a Hearing Officer to act in an adjudicative role and fulfill the various adjudicative responsibilities and duties of a Hearing Officer described in the Code of Procedure.1 The implementation date of the amended definition is August 12, 2014.

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

      Questions concerning this Notice should be directed to Megan Rauch, Counsel, Office of General Counsel, at (202) 728-8863.

      Discussion

      FINRA has amended FINRA Rule 9120 to modify the definition of "Hearing Officer" to include a former FINRA Hearing Officer who is a licensed attorney and who is appointed by the Chief Hearing Officer. The previous rule limited the definition of Hearing Officer to current FINRA employees.

      The amended definition of "Hearing Officer" will be implemented on August 12, 2014. As of that date, the Chief Hearing Officer may appoint, on a case by case basis, a former FINRA employee who previously acted as a Hearing Officer to fulfill the various adjudicative responsibilities and duties of a Hearing Officer described in the Code of Procedure. The former employees appointed by the Chief Hearing Officer would be experienced, licensed attorneys who previously acted in the same adjudicative role and fulfilled the same adjudicative responsibilities and duties for FINRA. As a former employee acting and defined as a Hearing Officer, he or she would be subject to the same FINRA rules that address the impartiality of Hearing Officers and the fairness of disciplinary and expedited proceedings as a current Hearing Officer.


      1 See Securities Exchange Act Release No. 72543 (July 3, 2014), 79 FR 39440 (July 10, 2014); File No. SR-FINRA-2014-031, which was filed for immediate effectiveness on July 2, 2014.

    • 14-31 SEC Approves FINRA Rule 2081 Regarding Prohibited Conditions Relating to Expungement of Customer Dispute Information; Effective Date: July 30, 2014

      View PDF

      Expungement of Customer Dispute Information

      Regulatory Notice
      Notice Type

      New Rule
      Suggested Routing

      Compliance
      Legal
      Operations
      Registered Representatives
      Senior Management
      Key Topics

      Arbitration
      BrokerCheck
      CRD
      Customer Dispute Information
      Expungement
      Referenced Rules & Notices

      FINRA Rule 2080
      FINRA Rule 2081
      NTM 04-16

      Executive Summary

      The SEC has approved FINRA Rule 2081 (Prohibited Conditions Relating to Expungement of Customer Dispute Information) to prohibit member firms and associated persons from conditioning or seeking to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer's agreement to consent to, or not to oppose, the firm's or associated person's request to expunge such customer dispute information from the Central Registration Depository (CRD®).1 The rule is effective immediately.

      The text of Rule 2081 is set forth in Attachment A.

      Questions concerning this Notice should be directed to:

      •   Victoria L. Crane, Associate General Counsel, Office of General Counsel, at (202) 728-8104; or
      •   Mignon McLemore, Assistant Chief Counsel, Dispute Resolution, at (202) 728-8151.

      Background & Discussion

      The CRD system is the central licensing and registration system for the U.S. securities industry and its regulators. In general, the information in the CRD system is submitted by registered securities firms and regulatory authorities in response to questions on the uniform registration forms. These forms collect administrative and disciplinary information about registered personnel, including customer complaints, arbitration claims and court filings made by customers, and the arbitration awards or court judgments that may result from those claims or filings (i.e., "customer dispute information").2 FINRA, state and other regulators use this information in connection with their licensing and regulatory activities. Firms also use the information when making hiring decisions. In addition, the information that FINRA releases to the public through BrokerCheck® is derived from the CRD system. BrokerCheck helps investors make more informed decisions about member firms and associated persons with which they conduct business. Hence, it is critical to investor protection that the underlying records in the CRD system include accurate and complete customer dispute information.

      Brokers who wish to have customer dispute information removed from the CRD system (and thereby, from BrokerCheck) because, for example, they believe that the allegations made against them are unfounded or that they have been incorrectly identified, must seek expungement pursuant to FINRA Rule 2080.3 FINRA has long had concerns about the practice of firms and associated persons conditioning settlement agreements for the purpose of obtaining expungement relief and, thereby, potentially removing from the CRD system information that helps protect investors. Over the years, FINRA has taken numerous steps towards addressing these concerns. Despite these previous steps, FINRA continues to have concerns regarding such conduct.

      Accordingly, new FINRA Rule 2081 prohibits expressly such conduct by providing that no member firm or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer's agreement to consent to, or not to oppose, the member firm's or associated person's request to expunge such customer dispute information from the CRD system. The prohibition applies to both written and oral agreements and to agreements entered into during the course of settlement negotiations, as well as to any agreements entered into separate from such negotiations. The rule also precludes such agreements even if the customer offers not to oppose expungement as part of negotiating a settlement agreement and applies to any settlements involving customer disputes, not only to those related to arbitration claims.

      Once information is expunged from the CRD system, it is permanently deleted and, therefore, no longer available to the investing public or regulators. By removing the ability of the parties to a customer dispute to "bargain-for" expungement relief as part of a settlement agreement, or otherwise, Rule 2081 will help ensure that information is expunged from the CRD system only when there is an independent judicial or arbitral decision that expungement is appropriate.


      1 See Securities Exchange Act Release No. 72649 (July 22, 2014), 79 FR 43809 (July 28, 2014) (Order Approving File No. SR-FINRA-2014-020).

      2 See Notice to Members 04-16 (March 2004).

      3 FINRA Rule 2080 provides that member firms and associated persons seeking expungement of customer dispute information from the CRD system must obtain a court order that either directs expungement or confirms an arbitration award containing expungement relief. The rule requires that member firms and associated persons seeking such a court order or confirmation name FINRA as a party. Upon request, FINRA may waive the obligation to name it as a party if FINRA determines that the expungement relief is based on an affirmative judicial or arbitral finding that: (1) the claim, allegation or information is factually impossible or clearly erroneous; (2) the registered person was not involved in the alleged investmentrelated sales practice violation, forgery, theft, misappropriation or conversion of funds; or (3) the claim, allegation or information is false.


      Attachment A

      2081. Prohibited Conditions Relating to Expungement of Customer Dispute Information

      No member or associated person shall condition or seek to condition settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer's agreement to consent to, or not to oppose, the member's or associated person's request to expunge such customer dispute information from the CRD system.

    • 14-30 SEC Approves Amendments to FINRA Rule 2210 to Exclude Research Reports on Exchange-Listed Securities From Filing Requirements and Clarify the Standards Applicable to Free Writing Prospectuses; Effective Date: July 11, 2014

      View PDF

      Communications With the Public

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Advertising
      Compliance
      Legal
      Registered Representatives
      Research
      Senior Management
      Key Topics

      Advertising
      Communications With the Public
      Free Writing Prospectuses
      Investment Analysis Tools
      Research Reports
      Referenced Rules & Notices

      FINRA Rule 2210
      FINRA Rule 2214
      FINRA Rule 2310
      Investment Company Act Rule 24b-3
      NASD Rule 2711
      Regulatory Notice 10-52
      Securities Act Rule 433
      Securities Act Rule 482

      Executive Summary

      The SEC has approved amendments to FINRA Rule 2210 (Communications with the Public) that: (i) exclude from Rule 2210's filing requirements research reports concerning only securities listed on a national securities exchange, other than research reports which must be filed pursuant to Section 24(b) of the Investment Company Act of 1940 and (ii) clarify that free writing prospectuses that are exempt from filing with the SEC are not subject to Rule 2210's filing or content standards.1 The amendments are effective immediately.

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

      Questions concerning this Notice should be directed to:

      •   Joseph P. Savage, Vice President and Counsel, Regulatory Policy, at (240) 386-4534 or joe.savage@finra.org; or
      •   Philip Shaikun, Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-8451 or philip.shaikun@finra.org.

      Background & Discussion

      Filing Exclusion for Research Reports

      FINRA Rule 2210 requires firms to file certain communications with FINRA's Advertising Regulation Department. Among other things, within 10 business days of first use or publication, firms must file retail communications concerning:

      •   registered investment companies (including mutual funds, exchange-traded funds, variable insurance products, closed-end funds and unit investment trusts);
      •   public direct participation programs (as defined in FINRA Rule 2310); and
      •   any security that is registered under the Securities Act of 1933 and that is derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance or a foreign currency.2

      In addition, FINRA Rule 2210 requires new firms to file most broadly disseminated retail communications with FINRA at least 10 business days prior to first use for a one-year period beginning on the date reflected in the Central Registration Depository (CRD®) system as the date that FINRA membership became effective.3

      Accordingly, the Rule 2210 filing requirements apply to research reports4 to the extent that they constitute retail communication about a product category that requires filing pursuant to Rule 2210 (including the provisions of the rule referenced above), or to the extent that they are covered by the new member filing requirements. The filing requirements cover research reports concerning certain exchange-listed securities, such as exchange-listed master limited partnerships (MLPs) and registered closed-end funds, as well as research reports produced by a firm that is subject to the new member filing requirements.

      On June 26, 2014, the SEC approved amendments to FINRA Rule 2210 that exclude research reports concerning only exchange-listed securities from the filing requirements, other than research reports that must be filed pursuant to Section 24(b) of the 1940 Act. Section 24(b) requires any registered open-end investment company, any registered unit investment trust, or any registered face-amount certificate company, and any underwriter5 for such companies, to file all advertisements, pamphlets, circulars, form letters and other sales literature addressed to or intended for distribution to prospective investors with the SEC within 10 days of distribution of such material.6

      Accordingly, firms no longer are required to file with FINRA any research reports concerning only securities listed on a national securities exchange, such as reports concerning an exchange-listed closed-end fund or master limited partnership, other than research reports that must be filed pursuant to Section 24(b) of the 1940 Act. In addition, firms that are subject to the new member filing requirement will no longer be required to file any research reports concerning only securities listed on a national securities exchange, other than research reports that must be filed pursuant to Section 24(b).

      Clarification Regarding Free Writing Prospectuses Exempt From SEC Filing

      The filing requirements and content standards of FINRA Rule 2210 do not apply to prospectuses and similar documents that have been filed with the SEC, other than investment company advertisements prepared pursuant to Securities Act Rule 482, and free writing prospectuses that are used or referred to by a broker-dealer and distributed by or on behalf of the broker-dealer in a manner reasonably designed to lead to its broad unrestricted dissemination.

      FINRA Rule 2210(c)(7)(F) excludes from the rule's filing requirements "[p]rospectuses, preliminary prospectuses, fund profiles, offering circulars and similar documents that have been filed with the SEC or any state, or that is exempt from such registration, except that an investment company prospectus published pursuant to Securities Act Rule 482 and a free writing prospectus that has been filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii) will not be considered a prospectus for purposes of this exclusion."

      Similarly, FINRA Rule 2210(d)(8) excludes from the rule's content standards "[p]rospectuses, preliminary prospectuses, fund profiles and similar documents that have been filed with the SEC," but provides that the content standards do apply to "an investment company prospectus published pursuant to Securities Act Rule 482 and a free writing prospectus that has been filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii)."

      Firms have raised questions as to whether these exclusions cover a free writing prospectus that is exempt from filing with the SEC pursuant to Securities Act Rule 433. FINRA intended these exclusions to cover prospectuses filed with the SEC as well as free writing prospectuses that are exempt from filing, other than so-called "omitting prospectuses" of registered investment companies governed by Securities Act Rule 482, and free writing prospectuses required to be filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii).7 To clarify this intent, FINRA has amended FINRA Rule 2210(c)(7)(F) and FINRA Rule 2210(d) (8) specifically to exclude from the filing and content standards free writing prospectuses that are exempt from filing with the SEC and to clarify that the filing and content requirements apply to free writing prospectuses required to be filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii).


      1 See Securities Exchange Act Release No. 72480 (June 26, 2014), 79 FR 37796 (July 2, 2014) (File No. SR-FINRA-2014-012). The amendments also correct a cross-reference in FINRA Rule 2214 (Requirements for the Use of Investment Analysis Tools).

      2 See FINRA Rule 2210(c)(3)(A), (B) and (E).

      3 See FINRA Rule 2210(c)(1)(A). This filing requirement covers any retail communication that is published or used in any electronic or other public media, including any generally accessible website, newspaper, magazine or other periodical, radio, television, telephone or audio recording, video display, signs or billboards, motion pictures or telephone directories (other than routine listings). To the extent any retail communication that is subject to this filing requirement is a free writing prospectus that has been filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii), the firm may file such retail communication within 10 business days of first use rather than at least 10 business days prior to first use.

      4 NASD Rule 2711(a)(9) defines "research report" as "any written (including electronic) communication that includes an analysis of equity securities of individual companies or industries, and that provides information reasonably sufficient upon which to base an investment decision." The definition specifically excludes certain types of communications, such as discussions of broad-based indices or commentaries on economic, political or market conditions.

      5 The 1940 Act defines "underwriter" to include "any person who has purchased from an issuer with a view to, or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking." The term excludes "a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributor's or seller's commission." See 1940 Act Section 2(a)(40).

      6 Pursuant to Rule 24b-3 under the 1940 Act, any sales material shall be deemed filed with the SEC for purposes of Section 24(b) upon filing with FINRA.

      7 See Regulatory Notice 10-52 (Free Writing Prospectuses) (October 2010) (FINRA communication rules "apply to free writing prospectuses distributed by a broker-dealer in a manner reasonably designed to lead to broad unrestricted dissemination"). FINRA Rule 2210's filing and content standards are intended to apply to free writing prospectuses that are subject to filing with the SEC pursuant to Securities Act Rule 433(d)(1)(ii), but not to other types of free writing prospectuses.


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

      2000. DUTIES AND CONFLICTS

      2200. COMMUNICATIONS AND DISCLOSURES

      2210. Communications with the Public

      (a) through (b) No change.
      (c) Filing Requirements and Review Procedures
      (1) through (6) No change.
      (7) Exclusions from Filing Requirements
      The following communications are excluded from the filing requirements of paragraphs (c)(1) through (c)(4):
      (A) through (E) No change.
      (F) Prospectuses, preliminary prospectuses, fund profiles, offering circulars and similar documents that have been filed with the SEC or any state, or that is exempt from such registration, and free writing prospectuses that are exempt from filing with the SEC, except that an investment company prospectus published pursuant to Securities Act Rule 482 and a free writing prospectus that [has been]is required to be filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii) will not be considered a prospectus for purposes of this exclusion.
      (G) through (N) No change.
      (O) Research reports as defined in NASD Rule 2711 that concern only securities that are listed on a national securities exchange, other than research reports required to be filed with the Commission pursuant to Section 24(b) of the Investment Company Act of 1940.
      (8) through (9) No change.
      (d) Content Standards
      (1) through (7) No change.
      (8) Prospectuses Filed with the SEC
      Prospectuses, preliminary prospectuses, fund profiles and similar documents that have been filed with the SEC and free writing prospectuses that are exempt from filing with the SEC are not subject to the standards of this paragraph (d); provided, however, that the standards of this paragraph (d) shall apply to an investment company prospectus published pursuant to Securities Act Rule 482 and a free writing prospectus that [has been]is required to be filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii).
      (e) through (g) No change.

      2214. Requirements for the Use of Investment Analysis Tools

      (a) General Considerations

      This Rule provides a limited exception to Rule 2210(d)(1)(F). No member may imply that FINRA endorses or approves the use of any investment analysis tool or any recommendation based on such a tool. A member that offers or intends to offer an investment analysis tool under this Rule (whether customers use the member's tool independently or with assistance from the member) must, within 10 business days of first use, (1) provide FINRA's Advertising Regulation Department ("Department") access to the investment analysis tool and, (2) pursuant to Rule [2210(c)(3)(D)] 2210(c) (3)(C), file with the Department any template for written reports produced by, or retail communications concerning, the tool.
      (b) through (d) and Supplementary Material No change.

    • 14-29 FINRA Requests Comment on a Proposal to Establish a Publicly Accessible Online Repository of Form 211 Information; Comment Period Expires: September 2, 2014

      View PDF

      Form 211 Information Repository

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Legal
      Operations
      Systems
      Trading and Market Making
      Training
      Key Topics

      Form 211
      Market Making
      Rule 15c2-11 under the Securities
      Exchange Act of 1934 (SEA)
      Referenced Rules & Notices

      FINRA Rule 6432
      SEA Rule 15c2-11

      Executive Summary

      FINRA is soliciting comment on a proposal to make publicly available through FINRA's website a repository of Form 211 information. Firms are required to complete FINRA's Form 211 to demonstrate compliance with the specific information review requirements under SEA Rule 15c2-11 prior to initiating a quotation in a non-exchange-listed security.

      The proposed rule text is attached as Appendix A. A copy of the Form 211 is attached as Appendix B.

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

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by September 2, 2014.

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

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

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

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

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

      Before becoming effective, the proposed rule change must be filed with the Securities and Exchange Commission (SEC) pursuant to Section 19(b) of the SEA.2

      Background and Discussion

      SEA Rule 15c2-11 generally prohibits a firm from publishing a quotation for a non-exchange-listed security unless the firm has reviewed certain information about the issuer whose security is the subject of the quotation and believes this information to be accurate and obtained from a reliable source. The specific information requirements of SEA Rule 15c2-11 differ depending upon the characteristics of the issuer and the security being quoted. Under FINRA Rule 6432 (Compliance with the Information Requirements of SEA Rule 15c2-11), a firm must demonstrate compliance with SEA Rule 15c2-11 by completing and filing a Form 211 with FINRA at least three business days before the firm's quotation is published or displayed in the quotation medium.

      The information requirements of FINRA's Form 211 track the requirements of SEA Rule 15c2-11. Specifically, Form 211 is a five-part form. Part 1, Issuer and Security Information, requests basic information regarding the security and the issuer, such as the name and contact information for the issuer and the total number of shares outstanding. Part 1 also asks the filing firm to provide the initial price (if any) for the quotation sought to be entered, the basis upon which the price was determined and the factors considered in making this determination.

      Part 2, Required Issuer Information, requires firms to select which information requirements apply to the issuer and the security based upon paragraph (a) of SEA Rule 15c2-11. Thus, firms must select either subparagraph (a)(1) for recent offerings pursuant to Section 10(a) of the Securities Act of 1933; (a)(2) for recent Regulation A offerings; (a)(3) for reporting companies; (a)(4) for foreign private issuers; or (a)(5) for non-reporting (and all other) issuers.3 Depending upon the subparagraph selected, the Form 211 further requires firms to respond to specific questions and attach or reference additional materials (see Appendix B).

      Part 3, Supplemental Information, requests information surrounding the firm's submission of the Form 211, including the identity of any person(s) for whom the quotation is being submitted and any information provided to the firm by such person(s), asks whether there has been a recent trading suspension, and requires disclosure of any material information of which the firm is aware or possesses regarding the issuer, including adverse information. Part 4, Regulatory Filings, requests specified information relating to issuers that file financial reports with the SEC or another regulatory authority. Part 5, Certification, requires the responsible employee of the firm to, among other things, attest that there is a reasonable basis for believing that the information accompanying the Form 211 is accurate in all material respects and that the sources of information are reliable.

      FINRA cleared more than 800 Form 211s in 2013, resulting in the initiation or resumption of quotations in the subject non-exchange-listed securities.4 However, at present, there is no process by which investors, firms, issuers or other parties may request from FINRA copies of a cleared Form 211. Thus, FINRA proposes to establish a public website repository to provide access to information provided on the form by the filing firm. Importantly, the repository would include Form 211 information for those issuers that are not reporting companies for which there may be very little public information available to investors.5 FINRA believes that access to the information included on Form 211 will assist the public in understanding the range and sources of information that may be available for a particular issuer and serve as a useful supplementary research tool.

      SEA Rule 15c2-11 provides several exceptions that, if met, also relieve a quoting firm of its obligations under FINRA Rule 6432 to submit a Form 211 to FINRA.6 The exceptions include relief for instances in which a firm is quoting a security that represents unsolicited customer interest;7 has been the subject of regular and continuous quotations for the past 30 days;8 or is a municipal security.9 In addition, SEA Rule 15c2-11(h) provides the SEC with exemptive authority with respect to Rule 15c2-11.10 Thus, where a firm is able to rely upon an exception to or exemption from SEA Rule 15c2-11, a Form 211 filing with FINRA is not required. Due to the existence of these exceptions and exemptions, the website repository may not include recent (or any) information regarding a non-exchange-listed security currently being quoted over-the-counter. Therefore, as stated below, FINRA specifically requests comment regarding any concerns around the reliability and usefulness of information contained on Form 211.

      FINRA is working to update the Form 211 process to provide for electronic filing of Form 211, which currently is received from firms through mail and fax. FINRA believes that moving to electronic filing would facilitate the process of establishing and maintaining a Form 211 information repository.

      Request for Comment

      FINRA requests comment on all aspects of the proposed repository, including any impact on investors, issuers of non-exchange-listed securities or market makers. FINRA specifically requests comment concerning the following issues.

      •  Who or what entities would be interested in Form 211 information? What is the level of interest in Form 211 information?
      •  What are the benefits of making Form 211 information publicly available? FINRA welcomes estimates on the number of investors who are anticipated to access and use Form 211 information.
      •  What are the potential uses of Form 211 information to investors and other market participants? FINRA seeks comment on the format (e.g., Form 211 scans, downloadable data files) in which Form 211 information should be made accessible through the repository.
      •  Are there specific concerns by firms, issuers, investors or other parties regarding FINRA providing public access to Form 211 information?
      •  Should all Form 211 information be provided in the repository or certain parts omitted or redacted? If the latter, which parts should be omitted or redacted and why?
      •  Should any attachments (or links to the attachments, where available) that accompany a Form 211 also be made accessible through the repository?
      •  Should a firm's supplemental submissions in connection with a Form 211 filing be included as part of the Form 211 information repository? For example, a firm may submit additional documentation subsequent to its initial Form 211 filing in response to FINRA staff comments or to change its request for clearance to quote from an unpriced quotation to a priced quotation.11
      •  Are there risks associated with making non-current information available to investors through the repository? If so, should there be prominent disclosure to investors and other potential users of the website that the Form 211 information may be stale and, therefore, users should conduct further research on the issuer and security to assess whether additional and more current information is available?
      •  Should the Form 211 be removed from the repository after a certain period of time or flagged to highlight that the information contained may be stale (e.g., after six months from the date of clearance)?
      •  Should FINRA consider adopting a requirement that firms file periodic updates to Form 211 information? If so, at what intervals should updating be required? In addition, should all of the applicable original Form 211 items of information be subject to the updating requirement?
      •  If FINRA were to adopt an updating requirement, should the original filing firm be required to fulfill the requirement? If the original filing firm no longer quotes the security, who should be required to update the Form 211 information?
      •  Are there firm or customer privacy concerns regarding making public any of the items of information contained on Form 211?
      •  Are there firm liability concerns regarding making public any of the items of information contained on Form 211?
      •  Should FINRA include in the repository Form 211 relating to both reporting and non-reporting companies (based upon the issuer's status at the time of the filing of the Form 211)?
      •  How many years' worth of historic data should the repository cover initially (e.g., one year of historic Form 211 information)?
      •  Are there alternative methods for FINRA to achieve the objectives of the proposed rule? If so, what are these alternatives and why are they better suited than the proposed rule?

      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) (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 Due to the possibility that there is limited information publicly available on non-reporting companies, which are companies that do not file audited periodic financials with a regulatory body, SEA Rule 15c2-11(a)(5) (and Form 211) requires that, when seeking to initiate or resume quotations in the securities of non-reporting companies, firms must, among other things, provide to FINRA the issuer's most recent balance sheet, profit and loss and retained earnings statements, and equivalent financial information for the two prior fiscal years for the company (or any predecessor company). To facilitate the accessibility of this information to potential investors, SEA Rule 15c2-11 and Form 211 require that firms make the paragraph (a)(5) information reasonably available upon request to any person expressing an interest in a proposed transaction in the subject security.

      4 FINRA Rule 6432(e) provides that, for purposes of the rule, "non-exchange-listed security" means any equity security, other than a restricted equity security, that is not traded on any national securities exchange.

      5 As described in note 3, non-reporting companies are neither registered under Section 12 of the SEA, file reports under Section 15(d) of the SEA or satisfy certain other specified reporting requirements. FINRA received 990 Form 211 applications in 2013, of which 821 have been cleared. Of the cleared Form 211 applications, 59 were for non-reporting companies.

      6 FINRA Rule 6432 provides that the Form 211 requirements apply, except as provided for in SEA Rules 15c2-11(f)(1), (2), (3) and (5) and 15c2-11(h).

      7 See SEA Rule 15c2-11(f)(2).

      8 See SEA Rule 15c2-11(f)(3) (i.e., the "piggyback exception"). The piggyback exception of paragraph (f)(3) of SEA Rule 15c2-11 generally is available to a firm where the quoted security has been the subject of a quotation on the inter-dealer quotation system on each of at least 12 days within the previous 30 calendar days, with no more than 4 business days in succession without a quotation. Therefore, it is possible that the Form 211 filing relating to a security that is continuously quoted was submitted by a firm who no longer quotes the security months or years prior to current quotations.

      9 See SEA Rule 15c2-11(f)(4).

      10 SEA Rule 15c2-11(h) sets forth the SEC's exemptive authority with respect to the requirements of SEA Rule 15c2-11 and provides that SEA Rule 15c2-11 shall not prohibit any publication or submission of any quotation if the SEC, upon written request or upon its own motion, exempts such quotation either unconditionally or on specified terms and conditions, as not constituting a fraudulent, manipulative or deceptive practice comprehended within the purpose of the rule.

      11 FINRA Rule 6432(c) provides that, if a firm's initial or resumed quotation does not include a priced entry, the firm must supplement its prior filing before inserting a priced entry for the affected non-exchange-listed security in a quotation medium. The supplemental filing must specify the basis upon which the proposed priced entry was determined and the factors considered in making that determination. The supplemental filing must be received by FINRA at least three business days before the firm's priced entry first appears in a quotation medium.


      APPENDIX A

      Below is the text of the proposed rule change. Proposed new language is underlined. The proposed rule text may be revised in response to comments received on this Notice.

      * * * * *

      6000. QUOTATION AND TRANSACTION REPORTING FACILITIES

      * * * * *

      6400. QUOTING AND TRADING IN OTC EQUITY SECURITIES

      * * * * *

      6430. OTC Equity Quotation Requirements

      * * * * *

      6432. Compliance with the Information Requirements of SEA Rule 15c2-11

      * * * * *

      (a) through (e) No Change.

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

      01. No Change.
      02. Information filed with FINRA to demonstrate compliance with SEA Rule 15c2-11 pursuant to this Rule, including copies of the completed applicable FINRA form(s), accompanying documents, and subsequent submissions will be made publicly available by FINRA.

      * * * * *


      APPENDIX B

      This version of the Form 211 becomes effective on July 7, 2014.

      FORM 211

      General Instructions

      Complete this form to initiate or resume quotations in a quotation medium, as defined in Rule 15c2-11(e)(i) under the Securities Exchange Act of 1934 (1934 Act) including, but not limited to, the OTC Bulletin BoardTM or OTC Link® ATS. By completing this form, your firm is representing that it has satisfied all applicable requirements of Rule 15c2-11 and the filing and information requirements of FINRA Rule 6432. It is not necessary to file this application if a member qualifies for an exception or exemption provided by paragraphs (f)(1)-(5) or (h) of Rule 15c2-11.

      Send the completed form and a copy of the required Issuer information to FINRA, OTC Compliance Unit, 9509 Key West Avenue, Rockville, MD 20850-3329. If you have any questions, call the OTC Compliance Unit at (240) 386-5100.

      Check the applicable quotation medium(s):

      OTC Bulletin BoardTM

      OTC Link® ATS

      Other (name of quotation medium)

      Part 1 — Issuer and Security Information

      Provide the information requested below:

      1. Exact name of Issuer and predecessor (if any)
      _________________________________________________________________________
      2. Address of principal executive offices

      _________________________________________________________________________
      _________________________________________________________________________
      3. Telephone number of principal executive offices

      ________________________________________________________________________
      4. Type of security (check one) Domestic Security Foreign Security DPP
      Sponsored ADR Unsponsored ADR
      5. State of incorporation Country of incorporation
      ________________________________________________________________
      6. Complete title and class of security to be quoted
      _________________________________________________________________
      7. Symbol of security (if assigned) CUSIP
      _________________________________________________________________________
      8. Par or stated value of security
      _______________________________________________________________________
      9. Total securities outstanding at the end of the Issuer's most recent fiscal year
      _____________________________________________________________________
      _____________________________________________________________________
      10. Name and address of transfer agent
      _____________________________________________________________________
      _____________________________________________________________________
      11. List any restrictions on the transfer of the security
      ____________________________________________________________________
      _____________________________________________________________________
      12. Price of initial quotation entry Bid Ask
      No price at this time
      _____________________________________________________________________

      If you are requesting to enter a bid and/or ask price, you must also provide a clear statement of the following information:

      The basis upon which the priced entry was determined:__________________________________________

      The factors considered in making that determination:____________________________________________

      Part 2 — Required Issuer Information

      Check the applicable box (select only one) that corresponds to the category of Issuer information accompanying this application. To determine the applicable category, carefully review paragraphs (a)(1)-(5) of Rule 15c2-11 and paragraph (g), which defines "reasonably current" information for purposes of paragraph (a)(5).

      Provide one copy of all required information (except for EDGAR documents) along with this completed form.

      RECENT OFFERINGS

      (a)(1) Provide the prospectus that became effective less than 90 calendar days prior to filing this Form 211, as specified by Section 10(a) of the Securities Act of 1933 (1933 Act).

      ______________________________________________________________________________________
      SEC Effective Date: Date Security(ies) Issued:

      (a)(2) Provide the offering circular that became effective less than 40 calendar days prior to filing this Form 211, as provided for under Regulation A under the 1933 Act.

      _____________________________________________________________________________________
      SEC Effective Date: Date Security(ies) Issued:

      REPORTING COMPANIES

      (a)(3) Provide the Issuer's most recent annual report filed pursuant to Section 13 or 15(d) of the 1934 Act or the annual statement referred to in Section 12(g)(2)(G)(i) of the 1934 Act. Provide quarterly and other current reports filed after the Issuer's most recent annual report or statement. List below each report or statement and applicable amendments filed by the Issuer through EDGAR that your firm has in its possession that meets the requirements of this section.

      Name of Report or Statement Report or Statement Date EDGAR Filed Date
      ______________ ______________ ______________
      ______________ ______________ ______________
      ______________ ______________ ______________
      ______________ ______________ ______________

      FOREIGN PRIVATE ISSUERS

      (a)(4) Provide the following information regarding the Issuer's reliance upon Rule 12g3-2(b) of the 1934 Act.

      The foreign exchange(s) on which the subject class of securities is listed that, either singly or together with the trading of the same class of the Issuer's securities in another foreign jurisdiction, constitutes the primary trading market for those securities.
      ____________________________________________________________________________________________________
      The symbol(s) of the security(ies) that trade on the foreign exchange(s).
      ____________________________________________________________________________________________________
      The location of the Internet Web site or electronic information delivery system that the member firm would provide upon request to any person to direct them to the information that the Issuer published electronically pursuant to Rule 12g3-2(b).
      ____________________________________________________________________________________________________

      NON-REPORTING AND ALL OTHER COMPANIES

      (a)(5) The applicant must make the Issuer information filed in conjunction with section (a)(5) of this form available upon request to any person expressing an interest in a proposed transaction with the subject security filed. Provide the Issuer's most recent balance sheet, profit and loss and retained earnings statements, equivalent financial information for the two prior fiscal years for the Issuer or any predecessor company, and the documents that support the information provided in this form.

      a. Describe the Issuer's business.

      _____________________________________________________________________________________________________________
      ________________________________________________________________________________________________
      b. Describe the products or services offered by the Issuer.

      _____________________________________________________________________________________________________________
      ________________________________________________________________________________________________
      c. Describe the Issuer's facilities.

      _____________________________________________________________________________________________________________
      _________________________________________________________________________________________________
      d. List the name(s) of the current Chief Executive Officer(s) and members of the Board of Directors of the Issuer.

      _____________________________________________________________________________________________________________
      _________________________________________________________________________________________________
      e. Is the firm that is submitting this form, or any person associated with it, affiliated directly or indirectly with the Issuer?

      Yes No If yes, what is the affiliation?

      ______________________________________________________________________________________
      ______________________________________________________________________________________
      f. Is the quotation being published or submitted on behalf of any other broker-dealer?

      Yes No If yes, what is the name of the broker or dealer?

      ______________________________________________________________________________________
      ______________________________________________________________________________________
      g. Is the quotation being published or submitted directly or indirectly on behalf of the Issuer or any director, officer or any person who is directly or indirectly the beneficial owner of more than 10% of the outstanding units or shares of any equity security of the Issuer?

      Yes No If yes, what is the name of the person, and what is the basis for any exemption under the federal securities laws for any sales of such securities on behalf of this person?

      ______________________________________________________________________________________
      ______________________________________________________________________________________
      ______________________________________________________________________________________
      ______________________________________________________________________________________

      Part 3 — Supplemental Information

      Please review paragraphs (b)(1)-(3) of Rule 15c2-11 and provide the information requested below.

      (b)(1) Describe the circumstances surrounding the submission of this application. Include the identity of any person(s) for whom the quotation is being submitted and any information provided to your firm by such person(s).

      ______________________________________________________________________________________
      ______________________________________________________________________________________
      ______________________________________________________________________________________
      ______________________________________________________________________________________

      (b)(2) Has the Issuer or its predecessor (if any) been subject to a trading suspension order issued by the SEC during the past 12 months? If a trading suspension order has been issued, provide a copy of the order or of the SEC's public release announcing the trading suspension order.

      Check the appropriate box: Trading suspension order or release enclosed. Not applicable.

      ______________________________________________________________________________________
      ______________________________________________________________________________________
      ______________________________________________________________________________________
      ______________________________________________________________________________________

      (b)(3) Provide any material information, including adverse information regarding the Issuer, that your firm is aware of or has in its possession. (Do not list information already provided in Part 2.) If your firm does not possess such information, state "None" below.

      Identify any applicable information by name and date.

      ______________________________________________________________________________________
      ______________________________________________________________________________________
      ______________________________________________________________________________________
      ______________________________________________________________________________________

      Part 4 — Regulatory Filings

      Fiscal Year End Date (MM/DD)
      ________________________________________________________________________

      Date of Incorporation (MM/DD/YYYY)
      ________________________________________________________________________

      Standard Industrial Classification (SIC) Code
      _________________________________________________________________________

      (a) Complete if the Issuer files periodic reports through the SEC's EDGAR system.
      •  Provide the 10-digit Central Index Key (CIK) number. (The CIK is a unique identifier assigned by the SEC to all companies and people who file disclosure documents through EDGAR with the SEC.)

      ________________________________________________________________________
      (b) Complete if the non-EDGAR filing Issuer is an insurance company or files periodic reports with a federal banking agency or state supervisor.
      •  Name of regulatory authority where the Issuer files periodic financial reports:

      _______________________________________________________________________________________________
      •  Telephone number of the regulatory authority:
      _______________________________________________________________________________________________
      •  The Issuer's filing cycle. (Check one)
      Quarterly
      Semi-Annually
      Annually
      Other (Describe the filing cycle)______________________________________________________
      •   List the required reports filed by the Issuer for the current fiscal year.
      Name of Report or Statement Report or Statement Date Filed Date
           
           
           

      Part 5 — Certification

      The undersigned must have a reasonable basis for believing that the information accompanying this form is accurate in all material respects and that the source of the information is reliable.

      By signing this document:

      •  I acknowledge and certify that my firm has a reasonable basis for believing that the information accompanying this form (including required EDGAR filed documents not provided) is accurate in all material respects and that the sources of information are reliable ("affirmative review obligation") as required by Rule 15c2-11 and FINRA Rule 6432;
      •  I understand and acknowledge that this affirmative review obligation applies to all subsequent submissions made in connection with this Form 211 application;
      •  I certify that I have examined this form and, to the best of my knowledge and belief, it is true, correct, and complete;
      •  I certify that neither _________________________________ [member name] nor persons associated with ____________________________________________[member name] have accepted or will accept any payment or other consideration, directly or indirectly, from the Issuer of the security to be quoted, or any affiliate or promoter thereof, for publishing a quotation or acting as market maker in the security to be quoted, or submitting an application in connection therewith, including the submission of this Form 211; and
      •  I understand and acknowledge that copies of this form, accompanying documents, and subsequent submissions made in connection with this Form 211 application may be provided to the Securities and Exchange Commission, other regulatory agencies, or to the quotation medium(s) on which the security is or will be quoted.

      Name, title and signature of firm employee to contact regarding information contained in this Form 211 application.

      Name Title
      Signature Date
      Phone Fax

      Name, title, and signature of the registered principal of the firm responsible for this Form 211 application, and all subsequent submissions made in connection with this application.

      Name Title
      Signature Date
      Firm Name  

      (Firm must be an OTC Link subscriber if application is for the OTC Link.)

      Address
      City State Zip
      Firm CRD# Market Participant Identifier

    • 14-28 SEC Approves FINRA Rule Concerning Self-Trades; Effective Date: August 25, 2014

      View PDF

      Self-Trades

      Regulatory Notice
      Notice Type

      Guidance
      New Rule
      Suggested Routing

      Compliance
      Institutional
      Internal Audit
      Legal
      Operations
      Registered Representatives
      Risk
      Senior Management
      Systems
      Trading
      Key Topics

      Algorithmic Trading
      Information Barriers
      Self-Trades
      Referenced Rules & Notices

      FINRA Rule 2010
      FINRA Rule 5210
      FINRA Rule 6140
      NASD Rule 3010
      Regulatory Notice 14-10

      Executive Summary

      The SEC approved new supplementary material to FINRA Rule 5210 (Publication of Transactions and Quotations) to address transactions in a security resulting from the unintentional interaction of orders originating from the same firm that involve no change in the beneficial ownership of the security (self-trades). Effective August 25, 2014, firms must have policies and procedures in place that are reasonably designed to review trading activity for, and prevent, a pattern or practice of self-trades resulting from orders originating from a single algorithm or trading desk, or related algorithms or trading desks. This Notice describes the new rule, including firms' obligations regarding self-trades and under what circumstances algorithms or trading strategies are presumed to be “related” for purposes of the rule.

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

      Questions concerning this Notice should be directed to Brant Brown, Associate General Counsel, Office of General Counsel, at (202) 728-6927 or brant. brown@finra.org.

      Background & Discussion

      FINRA Rule 5210 provides that "no member shall publish or circulate, or cause to be published or circulated, any…communication of any kind which purports to report any transaction as a purchase or sale of any security unless such member believes that such transaction was a bona fide purchase or sale of such security." On May 1, 2014, the SEC approved new Supplementary Material .02 to Rule 5210.1 The new supplementary material becomes effective on August 25, 2014, and requires firms to adopt policies and procedures regarding "self-trades," which are defined as "transactions in a security resulting from the unintentional interaction of orders originating from the same firm that involve no change in the beneficial ownership of the security."2

      Under Rule 5210 and its supplementary material, self-trades resulting from orders that originate from unrelated algorithms or separate and distinct trading strategies within the same firm would generally be considered bona fide transactions. However, self-trades by a single algorithm or trading desk or related algorithms or trading desks raise heightened concerns that this type of trading may not reflect genuine trading interest, particularly if there is a pattern or practice of such trades. This type of trading becomes increasingly problematic when it accounts for a material percentage of the volume in a particular security.3 Consequently, under new Supplementary Material .02, firms must have policies and procedures in place that are reasonably designed to review their trading activity for, and prevent, a pattern or practice of self-trades resulting from orders originating from a single algorithm or trading desk, or related algorithms or trading desks. The supplementary material was adopted to address those instances where self-trades, even though unintentional, may not reflect genuine trading interest, especially where they account for a significant amount of volume in a security and potentially adversely affect the price discovery process.

      When developing their policies and procedures, firms should note that the supplementary material clarifies that algorithms or trading strategies within the most discrete unit of an effective system of internal controls at a firm are presumed to be "related" for purposes of the rule. As a general matter, FINRA believes that multiple algorithms or trading desks within a discrete unit would be permitted to communicate or would be under the supervision of the same people, and thus will be related; consequently, the supplementary material includes such a presumption. Although the rule establishes this presumption, FINRA recognizes that individual firms may organize their supervisory structure in different ways, and the rule allows for firms to attempt to rebut the presumption. For example, firms could show that effective information barriers exist between the algorithms or desks, that different personnel are responsible for managing or supervising the algorithms or desks, or that the algorithms or desks operate independently from one another in other ways.


      1 Securities Exchange Act Release No. 72067 (May 1, 2014), 79 FR 26293 (May 7, 2014) (Order Approving SR-FINRA-2013-036).

      2 Wash sales (i.e., trading involving no change in beneficial ownership that is intended to produce the false appearance of trading) continue to be strictly prohibited under both the federal securities laws and FINRA rules. See, e.g., 15 U.S.C. 78i(a)(1); FINRA Rule 6140(b). In addition, Supplementary Material .02 does not change firms' existing obligations under NASD Rule 3010 and FINRA Rule 2010. The SEC recently approved moving NASD Rule 3010 into the Consolidated FINRA Rulebook as FINRA Rule 3110 with significant changes. See Securities Exchange Act Release No. 71179 (December 23, 2013), 78 FR 79542 (December 30, 2013) (Order Approving SR-FINRA-2013-025); see also Regulatory Notice 14-10 (March 2014).

      3 The rule does not establish a specific threshold below which a firm could continue to engage in unlimited self-trading. As FINRA noted throughout the rulemaking process, it recognizes that isolated self-trades are generally bona fide transactions; however, self-trading over time, whether of material volume, regularity, or both, would indicate a pattern or practice that firms should review their trading activity for and prevent.

    • 14-27 SEC Approves Amendments to Codes of Arbitration Procedure to Require Redaction of Personal Confidential Information from Documents Filed With FINRA Dispute Resolution; Effective Date: July 28, 2014

      View PDF

      Protecting Personal Confidential Information in Arbitration Cases

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Key Topics

      Arbitration
      Codes of Arbitration Procedure
      Redacting Personal Confidential Information
      Referenced Rules & Notices

      FINRA Rule 12300
      FINRA Rule 12307
      FINRA Rule 13300
      FINRA Rule 13307
      FINRA Rule 12800
      FINRA Rule 13800

      Executive Summary

      The SEC approved amendments to the Customer and Industry Codes of Arbitration Procedure to provide that any document that a party files with FINRA that contains an individual's Social Security number, taxpayer identification number or financial account number must be redacted to include only the last four digits of any of these numbers.1 The amendments apply only to documents filed with FINRA. They do not apply to documents that parties exchange with each other or submit to the arbitrators at a hearing on the merits. In addition, the amendments do not apply to cases administered under the Simplified Arbitration rules.

      The amendments are effective on July 28, 2014, for all documents filed with FINRA 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

      During an arbitration proceeding, parties submit pleadings and supporting documents to FINRA Dispute Resolution (DR) that may contain an individual's Social Security number, taxpayer identification number, or financial account number (personal confidential information or PCI). For example, customers often file account opening documents and account statements, which show their account numbers. Since FINRA employees regularly handle and transmit party documents containing PCI, FINRA has procedures in place to guide staff and arbitrators on how to keep confidential information safe. These procedures have enhanced the security of party documents and information. In an effort to further protect parties from identity theft and accidental loss of PCI, FINRA amended the Code of Arbitration Procedure for Customer Disputes and the Code of Arbitration Procedure for Industry Disputes to require parties to redact specified PCI from documents they file with FINRA.

      Specifically, FINRA amended Rules 12300 and 13300 (Filing and Serving Documents) to provide that, in an electronic or paper filing with FINRA, any document that contains an individual's Social Security number, taxpayer identification number, or financial account number must be redacted to include only the last four digits of any of these numbers. The rules specify that a party must not include full numbers. If FINRA receives a claim,2 including supporting documents, with a full Social Security, taxpayer identification or financial account number, FINRA will deem the filing deficient under Rule 12307 or Rule 13307 (Deficient Claims), as applicable, and will request that the party refile the document without the PCI within 30 days from the time the party receives notice. If a party files a document with PCI that is not covered by Rules 12307 or 13307 (a document other than a claim, such as a motion), FINRA will deem the filing to be improper and will request that the party refile the document, with the required redaction, within 30 days from the time the party receives notice. If the party refiles the document in compliance with the rules, FINRA will consider the document to be filed on the date the party initially filed it with FINRA.

      There are two exceptions to the new redaction requirements. The amendments apply only to documents that parties file with FINRA (either in hard copy or electronically through, for example, the DR Portal). They do not apply to documents that parties exchange with each other, or submit to the arbitrators at a hearing on the merits. In addition, the amendments do not apply to cases administered under FINRA's Simplified Arbitration Rules 12800 and 13800.

      To further protect themselves from the risk of identity theft, parties can agree to additional measures to protect PCI in the documents they share. For example, parties can agree not to use, or to redact driver license numbers and birthdates. Additionally, parties can agree to redact the entire Social Security number, taxpayer identification number or financial account number, if that is their preference. Finally, parties can use secure shredding facilities to safely dispose of documents they use at hearings.

      Effective Date

      The amendments are effective on July 28, 2014, for all documents filed with FINRA on or after the effective date.


      1 See Securities Exchange Act Rel. No. 72269 (May 28, 2014), 79 Federal Register 32003 (June 3, 2014) (File No. SR-FINRA-2014-008).

      2 The term claim means an allegation or request for relief and includes counterclaims, cross claims and third party claims.


      Attachment A

      New language is underlined; Deletions are in brackets.

      Customer Code

      12300. Filing and Serving Documents

      (a)–(f) No change
      (g)
      (1) In an electronic or paper filing with FINRA, any document that contains an individual's Social Security number, taxpayer identification number or financial account number must be redacted to include only the last four digits of any of these numbers; a party shall not include the full numbers. If FINRA receives a claim, including supporting documents, with the full Social Security number, taxpayer identification number or financial account number, FINRA will deem the filing deficient under Rule 12307 and will request that the party refile the document in compliance with this paragraph. If a party files with FINRA any document not covered by Rule 12307, that contains full numbers as referenced above, FINRA will deem the filing improper and will request that the party refile the document within 30 days from the time the party receives notice. If a party refiles the document, the corrected documents will be considered filed on the date the party initially filed the documents with FINRA.
      (2) The requirements of paragraph (g)(1) above do not apply to electronic or paper documents that parties exchange with each other and do not file with FINRA or to documents parties submit to a panel at a hearing on the merits.
      (3) The requirements of paragraphs (g)(1) above do not apply to Simplified Arbitrations under Rule 12800.

      12307. Deficient Claims

      (a) The Director will not serve any claim that is deficient. The reasons a claim may be deficient include the following:
      •  A Submission Agreement was not filed by each claimant;
      •  The Submission Agreement was not properly signed and dated;
      •  The Submission Agreement does not name all parties named in the claim;
      •  The claimant did not file the correct number of copies of the Submission Agreement, statement of claim or supporting documents for service on respondents and for the arbitrators;
      •  The claim does not specify the customer's home address at the time of the events giving rise to the dispute;
      •  The claim does not specify the claimant's or the claimant's representative's current address; [or]
      •  The claimant did not pay all required filing fees, unless the Director deferred the fees; or
      •  The claim does not comply with the restrictions on filings with personal confidential information under Rule 12300(g).
      (b) The Director will notify the claimant in writing if the claim is deficient. If the deficiency is corrected within 30 days from the time the claimant receives notice, the claim will be considered filed on the date the initial statement of claim was filed with the Director under Rule 12300(a). If all deficiencies are not corrected within 30 days, the Director will close the case without serving the claim, and will refund part of the filing fee in the amount indicated in the schedule under Rule 12900(c).
      (c) The panel will not consider any counterclaim, cross claim or third party claim that is deficient. The reasons a counterclaim, cross claim or third party claim may be deficient include the reasons listed in paragraph (a). The Director will notify the party making the counterclaim, cross claim or third party claim of [the] any deficiencies in writing. If the deficiency is corrected within 30 days from the time the party receives notice, the counterclaim, cross claim or third party claim will be considered filed on the date the initial counterclaim, cross claim or third party claim was filed with the Director. If all deficiencies are not corrected within 30 days from the time the party making the counterclaim, cross claim or third party claim receives notice of the deficiency, the panel will proceed with the arbitration as though the deficient counterclaim, cross claim or third party claim had not been made.

      Industry Code

      13300. Filing and Serving Documents

      –(f) No change
      (g)
      (1) In an electronic or paper filing with FINRA, any document that contains an individual's Social Security number, taxpayer identification number or financial account number must be redacted to include only the last four digits of any of these numbers; a party shall not include the full numbers. If FINRA receives a claim, including supporting documents, with the full Social Security number, taxpayer identification number or financial account number, FINRA will deem the filing deficient under Rule 13307 and will request that the party refile the document in compliance with this paragraph. If a party files with FINRA any document not covered by Rule 13307, that contains full numbers as referenced above, FINRA will deem the filing improper and will request that the party refile the document within 30 days from the time the party receives notice. If a party refiles the document, the corrected documents will be considered filed on the date the party initially filed the documents with FINRA.
      (2) The requirements of paragraph (g)(1) above do not apply to electronic or paper documents that parties exchange with each other and do not file with FINRA or to documents parties submit to a panel at a hearing on the merits.
      (3) The requirements of paragraphs (g)(1) above do not apply to Simplified Arbitrations under Rule 13800.

      13307. Deficient Claims

      The Director will not serve any claim that is deficient. The reasons a claim may be deficient include the following:

      •  A Submission Agreement was not filed by each claimant;
      •  The Submission Agreement was not properly signed and dated;
      •  The Submission Agreement does not name all parties named in the claim;
      •  The claimant did not file the correct number of copies of the Submission Agreement, statement of claim or supporting documents for service on respondents and for the arbitrators;
      •  The claim does not specify the claimant's or the claimant's representative's current address; [or]
      •  The claimant did not pay all required filing fees, unless the Director deferred the fees; or
      •  The claim does not comply with the restrictions on filings with personal confidential information under Rule 13300(g).
      (b) The Director will notify the claimant in writing if the claim is deficient. If the deficiency is corrected within 30 days from the time the claimant receives notice, the claim will be considered filed on the date the initial statement of claim was filed with the Director under Rule 13300(a). If all deficiencies are not corrected within 30 days, the Director will close the case without serving the claim, and will refund part of the filing fee in the amount indicated in the schedule under Rule 13900(c).
      (c) The panel will not consider any counterclaim, cross claim or third party claim that is deficient. The reasons a counterclaim, cross claim or third party claim may be deficient include the reasons listed in paragraph (a). The Director will notify the party making the counterclaim, cross claim or third party claim of [the] any deficiencies in writing. If the deficiency is corrected within 30 days from the time the party receives notice, the counterclaim, cross claim or third party claim will be considered filed on the date the initial counterclaim, cross claim or third party claim was filed with the Director. If all deficiencies are not corrected within 30 days from the time the party making the counterclaim, cross claim or third party claim receives notice of the deficiency, the panel will proceed with the arbitration as though the deficient counterclaim, cross claim or third party claim had not been made.

    • 14-26 New Payments for Market Making Certification Requirement for FINRA Form 211; Effective Date: July 7, 2014

      View PDF

      Prohibition on Payments for Market Making

      Regulatory Notice
      Notice Type

      Guidance
      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Operations
      Systems
      Trading and Market Making
      Training
      Key Topics

      Form 211
      Market Making
      Payments for Market Making
      SEA Rule 15c2-11
      Referenced Rules & Notices

      FINRA Rule 2020
      FINRA Rule 5250
      FINRA Rule 6432
      NTM 75-16
      SEA Rule 15c2-11
      Securities Act Section 5

      Executive Summary

      FINRA is issuing this Regulatory Notice to remind firms and associated persons of the FINRA Rule 5250 (Payments for Market Making) prohibition on accepting payments for market making, which includes payments for filing a Form 211 pursuant to FINRA Rule 6432 (Compliance with the Information Requirements of SEA Rule 15c2-11). This Notice also announces the July 7, 2014, effective date of a new requirement under Rule 6432 that firms certify that neither the firm nor its associated persons have accepted or will accept any payment or other consideration prohibited by Rule 5250.1

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

      Background and Discussion

      Rule 5250 prohibits firms and their associated persons from accepting any payment or other consideration, directly or indirectly, from an issuer of a security, or any affiliate or promoter thereof, for publishing a quotation, acting as market maker in a security, or submitting an application in connection therewith. Rule 5250 is intended to, among other things, assure that a firm acts in an independent capacity when publishing a quotation or making a market in an issuer's securities. The Rule 5250 prohibition on receiving payments for market making includes within its scope the receipt of payments for submitting a Form 211 to FINRA pursuant to Rule 6432, which sets forth the standards applicable to firms for demonstrating compliance with SEA Rule 15c2-11 and must be complied with prior to initiating or resuming quotations in a quotation medium.

      Rule 6432 generally requires firms to review and attach specified information concerning the issuer whose security is being quoted in a quotation medium. This information includes, as applicable, a recent prospectus, the issuer's most recent annual and periodic reports or other financial information, the price at which the security will be quoted and the basis thereof.2 Form 211 also asks the firm to certify that the responsible principal has a reasonable basis for believing that the information accompanying the Form 211 is accurate in all material respects and obtained from a reliable source.

      FINRA is reminding firms that accepting monetary compensation or receiving shares of stock in connection with publishing a quotation, including, but not limited to, the filing of a Form 211 with FINRA, is expressly prohibited by Rule 5250, irrespective of whether such payments are solicited or unsolicited. Accepting such prohibited payments compromises the independence of a firm's decision regarding its quoting and market making activities and, among other things, harms investor confidence in the overall marketplace because investors are unable to ascertain which quotations are based on actual interest and which quotations are supported by issuers or promoters.3

      To further emphasize firms' obligations in this area, FINRA has adopted an additional certification under Rule 6432 that requires firms to certify to FINRA that neither the firm nor its associated persons have accepted or will accept any payment or other consideration, directly or indirectly, from the issuer of the security to be quoted, or any affiliate or promoter thereof, for publishing a quotation or acting as market maker in the security to be quoted, or submitting an application in connection therewith, including the submission of the Form 211.4

      The new certification will be included in the Form 211 beginning on July 7, 2014.5 Only firms submitting a form pursuant to Rule 6432 going forward will be required to submit the new certification, though FINRA notes that the prohibition on accepting payments for market making already is applicable to firms and associated persons.6


      1 See Securities Exchange Act Release No. 71720 (March 13, 2014), 79 FR 15363 (March 19, 2014) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2014-011).

      2 As stated in Notice to Members 75-16 (February 1975), payments for market making may be viewed as a conflict of interest since they may influence the firm's decision as to whether to quote or make a market in a security and, thereafter, the prices that the firm would quote.

      3 See Securities Exchange Act Release No. 38812 (July 3, 1997), 62 FR 37105 (July 10, 1997) ("Order Approving File No. SR-NASD-97-29"). The rule prohibits indirect payments by the issuers, affiliates, or promoters through other members. Therefore, firms may not accept payments from other firms that originate from an issuer, affiliate or promoter of the issuer. See Order Approving File No. SR-NASD-97-29.

      4 FINRA continues to believe a market maker should have considerable latitude and freedom to make or terminate market making activities in an issuer's securities. The decision by a firm to make a market in a given security and the question of price generally are dependent on a number of factors, including, among others, supply and demand, the firm's expectations toward the market, its current inventory position, and exposure to risk and competition. The decision, however, should not be influenced by payments to the firm by the issuer. FINRA's policy concerning payments for market making was first set forth in Notice to Members 75-16 and then codified as NASD Rule 2460 (now FINRA Rule 5250) in 1997. See Notice to Members 75-16 (February 1975), Notice to Members 97-46 (August 1997) and Order Approving File No. SR-NASD-97-29.

      5 The Exemption Request Form pursuant to Rule 6432 also will include the new certification.

      6 Firms should be mindful that charging an issuer a fee for making a market, or accepting an unsolicited payment from an issuer where the firm makes a market in the issuer's securities, could also subject the firm to violations of the anti-fraud provisions of federal securities laws and FINRA Rule 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices). See Order Approving File No. SR-NASD-97-29. FINRA Rule 2020 provides that no firm shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance. A payment by an issuer to a market maker to facilitate market making activities also could involve the firm in potential violations of the registration requirements of Section 5 of the Securities Act of 1933. See Order Approving File No. SR-NASD-97-29.

    • 14-25 FINRA Announces Updates of the Interpretations of Financial and Operational Rules

      View PDF

      SEC Broker-Dealer Reporting Rules

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Finance
      Legal
      Operations
      Regulatory Reporting
      Senior Management
      Key Topics

      Books and Records
      Notification Provisions
      Referenced Rules & Notices

      Regulatory Notice 08-56
      Regulatory Notice 13-44
      Regulatory Notice 14-06
      Regulatory Notice 14-12
      SEA Rule 17a-5
      SEA Rule 17a-11

      Executive Summary

      FINRA is updating the imbedded text of Securities Exchange Act (SEA) reporting rules for broker-dealers in the Interpretations of Financial and Operational Rules to reflect the effectiveness of amendments the SEC adopted.1 The updated imbedded text relates to SEA Rules 17a-5 and 17a-11. FINRA is also making available related updates of the Interpretations of Financial and Operational Rules that have been communicated to FINRA staff by the staff of the SEC's Division of Trading and Markets (SEC staff). The updated interpretations relate to SEA Rule 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

      In July 2013, the SEC adopted amendments to the reporting rules for brokerdealers. FINRA is updating the imbedded SEC rule text in the Interpretations of Financial and Operational Rules to reflect the amendments that became effective on June 1, 2014.2 The updated imbedded text relates to SEA Rules 17a-5 and 17a-11. The interpretation updates resulting from the SEC's July 2013 amendments to SEA Rule 17a-5 are set forth below. Page references are to the hardcopy version. These interpretations are being updated with specific additions, revisions and rescissions.

      The following interpretation has been revised:

      •   SEA Rule 17a-5(m)(1)/01 (Audit Extension Request) on page 3281.

      The following interpretation has been rescinded:

      •   SEA Rule 17a-5(c)(2)/01 (Additional Time on Sending Audited and Unaudited Statements to Customers) on page 3222.

      These rule text and interpretation updates are available in portable digital format (PDF) on FINRA's Interpretations of Financial and Operational Rules page.

      Further, SEC staff continues to communicate and issue written and oral interpretations of the financial responsibility and reporting rules including the newly amended sections of the rules. FINRA has previously updated the Interpretations of Financial and Operational Rules on its website in Regulatory Notices 08-56, 13-44, 14-06 and 14-12.

      FINRA member firms and others that maintain the hardcopy version of the Interpretations of Financial and Operational Rules may refer to the accompanying updated pages, containing the aforementioned rule text updates, which are being made available to enable the replacement of existing pages in the hardcopy version of the Interpretations of Financial and Operational Rules. The filing instructions for the new pages are as follows:

      SEA Rule Remove Old Pages Add New Pages
      17a-5 3201-3284 3201-3284
      17a-11 3301-3304 3301-3304

      1 See Securities Exchange Act Release No. 70073 (July 30, 2013), 78 FR 51910 (August 21, 2013) (Broker-Dealer Reports).

      2 See note 1.

    • 14-24 April 2014 Supplement to the Security Futures Risk Disclosure Statement; Implementation Date: June 23, 2014

      Security Futures

      View PDF

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Institutional
      Legal
      Senior Management
      Trading
      Key Topics

      Security Futures
      Security Futures Risk Disclosure Statement
      Referenced Rules & Notices

      FINRA Rule 2370
      NTM 98-3

      Executive Summary

      FINRA has released the April 2014 Supplement (Supplement) to the October 2002 Security Futures Risk Disclosure Statement (Statement).1 The Supplement adds new disclosure to accommodate proposed changes by OneChicago, LLC, to list a product with a physical delivery settlement cycle shorter than three business days. The implementation date of the Supplement is June 23, 2014.

      Questions concerning this Notice should be directed to Matthew E. Vitek, Assistant General Counsel, Office of General Counsel, at (202) 728-8156.

      Background & Discussion

      FINRA has released the Supplement to the Statement. The Statement contains general disclosures on the characteristics and risks of security futures. The Supplement accommodates proposed changes by OneChicago, LLC, to list a product with a physical delivery settlement cycle shorter than three business days. The Supplement discloses that settlement by physical delivery may be effected on a timeframe shorter than three business days based on the rules of the exchange and subject to the National Securities Clearing Corporation's Rules and Procedures. As with the previous supplement to the Statement, the Supplement should be read in conjunction with the Statement.

      FINRA Rule 2370(b)(11) requires a firm to deliver the current Statement to each customer at or prior to the time such customer's account is approved for trading security futures. Thereafter, the rule requires the firm to distribute each new or revised Statement to each customer having an account approved for such trading or, in the alternative, not later than the time a confirmation of a transaction is delivered to each customer that enters into a security futures transaction. Firms may separately distribute new supplements to such customers; firms are not required to redistribute the entire Statement or the earlier supplement.

      FINRA reminds firms that they may electronically transmit documents that they are required to furnish to customers under FINRA rules, including the Supplement, provided firms adhere to the standards contained in the SEC's May 1996 and October 1995 releases on electronic delivery,2 and as discussed in Notice to Members 98-3. Firms also may transmit the proposed supplement to customers through the use of a hyperlink, provided that customers have consented to electronic delivery.

      The implementation date of the Supplement is June 23, 2014.


      1 See Securities Exchange Act Release No. 71981 (April 21, 2014), 79 FR 23034 (April 25, 2014) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change; File No. SR-FINRA- 2014-019).

      2 See Securities Act Release No. 7288 (May 9, 1996), 61 FR 24644 (May 15, 1996) and Securities Act Release No. 7233 (October 6, 1995), 60 FR 53458 (October 13, 1995).

    • 14-23 FINRA Issues an Interpretation to Clarify the Classification and Trade Reporting of Certain "Hybrid" Securities to FINRA; Effective Date: June 16, 2014

      Trade Reporting

      View PDF

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Fixed Income
      Legal
      Operations
      Systems
      Trading
      Training
      Key Topics

      Capital Trust Security
      Depositary Shares
      Hybrid Security
      Over-the-Counter Reporting Facility
      Preferred Shares
      TRACE
      Transaction Reporting
      Trust Preferred Security
      Referenced Rules & Notices

      FINRA Rule 6420
      FINRA Rule 6622
      FINRA Rule 6700 Series
      FINRA Rule 6710
      Regulation NMS
      Regulation NMS Rule 600(b)(47)
      Regulatory Notice 08-72
      SEA Rule 144(a)(3)
      SEA Rule 144A
      SEA Section 31
      Section 3 of Schedule A to the FINRA By-Laws

      Executive Summary

      FINRA is publishing this Notice to provide additional information on how trades in certain securities that have both debt- and equity-like features (hybrid securities) must be reported to FINRA. Specifically, the SEC approved an interpretation regarding the appropriate trade reporting facility to which firms should report transactions in the following three types of hybrid securities: (1) unlisted depositary shares having a liquidation preference of $1,000 or more; (2) unlisted non-convertible, preferred securities having a liquidation preference of $1,000 or more; and (3) unlisted capital trust securities (also referred to as trust preferred securities) (together, "covered hybrid securities").1

      In accordance with this interpretation, on June 16, 2014, firms will be required to report transactions in covered hybrid securities to the Trade Reporting and Compliance Engine (TRACE). However, firms may request the set-up of a new hybrid security for trade reporting purposes in accordance with this interpretation prior to that date. A list of covered hybrid securities that will be moved from the OTC Reporting Facility (ORF) to TRACE on June 16, 2014, is attached as Appendix A.

      Questions regarding this Notice should be directed to:

      •   Ola Persson, Vice President, Transparency Services, at (212) 858-4796 or by email; or
      •   Racquel Russell, Associate General Counsel, Office of General Counsel, at (202) 728-8363 or by email.

      Background and Discussion

      FINRA trade reporting rules generally require that firms report over-the-counter (OTC) transactions in debt securities that are "TRACE-Eligible Securities"2 and equity securities to FINRA. FINRA Rule 6622 requires that firms report OTC transactions in "OTC Equity Securities"3 to ORF and the FINRA Rule 6700 series requires firms to report transactions in TRACE-Eligible Securities to TRACE.

      In consultation with the industry, FINRA has determined that the term "TRACE-Eligible Security" includes the following covered hybrid securities (and thus these securities should be reported to TRACE):4

      1. unlisted capital trust and trust preferred securities;5
      2. unlisted depositary shares having a liquidation preference of $1,000 or more (or a cash redemption price of $1,000 or more) that is a fractional interest in a non-convertible,6 preferred security ("hybrid $1,000 depositary share"); and
      3. unlisted non-convertible, preferred securities having a liquidation preference of $1,000 or more (or a cash redemption price of $1,000 or more) ("hybrid $1,000 preferred security"), such as a hybrid $1,000 preferred security that is offered directly to an investor or a preferred security underlying multiple hybrid $1,000 depositary shares.

      Any such security deemed a "TRACE-Eligible Security" would be excluded from the defined term "OTC Equity Security."7

      All other preferred securities and depositary shares representing fractional interests in these securities, except the covered hybrid securities identified above, will continue to be included in the defined term "OTC Equity Security," and firms must report transactions in such securities to ORF.8 For example, a non-convertible preferred security having a par value or liquidation preference of $25 that is not listed on an equity facility of a national securities exchange would be an "OTC Equity Security" under the interpretation and would be required to be reported to ORF.

      Thus, beginning on June 16, 2014, any firm reporting a trade in a hybrid security must report the transaction to the appropriate facility in compliance with this interpretation. However, prior to June 16, 2014, any firm requesting the set-up of a new hybrid security for trade reporting purposes may, but is not required to, do so in accordance with this interpretation.

      A list of covered hybrid securities that will be moved from ORF to TRACE on June 16, 2014, is attached as Appendix A.


      1 See Securities Exchange Act Release No. 71927 (April 10, 2014), 79 FR 21494 (April 16, 2014) (Order Approving Proposed Rule Change, as Modified by Amendment No. 1 of File No. SR-FINRA-2013-039).

      2 FINRA Rule 6710(a) defines "TRACE-Eligible Security" as a debt security that is United States ("U.S.") dollar-denominated and issued by a U.S. or foreign private issuer, and, if a "restricted security" as defined in Securities Act Rule 144(a) (3), sold pursuant to Securities Act Rule 144A; or is a debt security that is U.S. dollar-denominated and issued or guaranteed by an Agency as defined in paragraph (k) or a Government-Sponsored Enterprise as defined in paragraph (n). However, the term "TRACE-Eligible Security" does not include a debt security that is: issued by a foreign sovereign, a U.S. Treasury Security as defined in paragraph (p), or a money market instrument as defined in paragraph (o).

      3 FINRA Rule 6420(f) defines "OTC Equity Security" to include "any equity security that is not an 'NMS stock' as that term is defined in Rule 600(b) (47) of SEC Regulation NMS; provided, however, that the term 'OTC Equity Security' shall not include any Restricted Equity Security." FINRA Rule 6420(k) defines "Restricted Equity Security" to mean "any equity security that meets the definition of 'restricted security' as contained in Securities Act Rule 144(a)(3)."

      4 This interpretation applies solely to a hybrid security that is not listed on an equity facility of a national securities exchange. See e.g., FINRA Trade Reporting Notice–2/22/08, (FINRA applied TRACE reporting requirements, distinguishing between listed and unlisted securities, and required firms to report transactions in unlisted convertible debt and unlisted equity-linked notes to TRACE, and OTC transactions in convertible debt and equity-linked notes listed on an equity facility of a national securities exchange to an appropriate FINRA equity trade reporting facility for NMS Stocks (the Alternative Display Facility (ADF) or a trade reporting facility (TRF)). For purposes of this interpretation, the term "listed on an equityfacility of a national securities exchange" means a security that qualifies as an NMS stock (as defined in Rule 600(b)(47) of Regulation NMS under the Act) as distinguished from a security that is listed on a bond facility of a national securities exchange. See 17 CFR 242.600(b)(47).

      5 The term "TRACE-Eligible Security" includes capital trust securities and trust preferred securities (other than a capital trust security or a trust preferred security that is listed on an equity facility of a national securities exchange) and transactions in such securities must be reported to TRACE (and not to ORF) in compliance with the applicable reporting requirements. This interpretation would apply even if the capital trust security (or a trust preferred security) was previously listed on an equity facility of a national securities exchange and reported to a FINRA equity facility, but has since been delisted. Once delisted, the security must be reported to TRACE. Similarly, any other hybrid security that does not meet the definition of "covered hybrid security" solely because it is listed on a national securities exchange would be required to be reported to TRACE once delisted.

      6 Non-convertible means not convertible into or exchangeable for property or shares of any other series or class of the issuer's capital stock.

      7 This interpretation also applies to unlisted American Depository Receipts (ADRs) on hybrid securities in the same manner in which it applies to the underlying hybrid security. Thus, an unlisted ADR on a covered hybrid security would be excluded from the definition of "OTC Equity Security" under the interpretation and would be required to be reported to TRACE. Whereas, an unlisted ADR on a depositary share having a par value or liquidation preference of $25 would be an "OTC Equity Security" under the interpretation and would be required to be reported to ORF.

      8 Pursuant to Section 31 of the Act, FINRA and the national securities exchanges are required to pay transaction fees and assessments to the SEC that are designed to recover the costs related to the government's supervision and regulation of the securities markets and securities professionals. See 15 U.S.C. 78ee. FINRA obtains its Section 31 fees and assessments from its membership, in accordance with Section 3 of Schedule A to the FINRA By-Laws. The transactions that are assessable under Section 3 of Schedule A to the FINRA By-Laws are reported to FINRA through one of FINRA's equity trade reporting facilities: the ORF, the ADF, or a TRF. As expressly stated in the Act, sales of bonds, debentures, or other evidence of indebtedness (debt securities) are excluded from Section 31 of the Act. See 15 U.S.C. 78ee(b). Because of this exclusion under Section 31 of the Act, transactions reported to TRACE are not subject to the regulatory transaction fee under Section 3 of Schedule A to the FINRA By-Laws. To determine whether a non-exchange listed security is an equity security or a debt security for purposes of assessing the regulatory transaction fee, FINRA relies on the facility to which the transaction is reported. If the transaction is reported to the ORF, the transaction is treated as one involving an equity security and is subject to the regulatory transaction fee. If the transaction is reported to TRACE, the transaction is treated as one involving a debt security and thus is not subject to the regulatory transaction fee. See Regulatory Notice 08-72.


      Appendix A

      CUSIP/CINS Symbol Issuer Issue Description
      U0201H106 ALFI ALLY FINANCIAL 7% Perp Pfd Shs Series G—Reg S
      02005N605 GMSPZ ALLY FINANCIAL, INC. PERP PFD SER G 7%
      060505DT8 BACYL BANK OF AMERICA Depositary Shares Representing 1/25th Fixed to Floating (Non Cumulative Preferred Series M)
      060505ED2 BCXOL BANK OF AMERICA Depositary Share representing 1/25th Preferred Series U
      064058AB6 BKNML BANK OF NEW YORK Depositary Shares representing 1/100th Preferred Stock Series D
      06738C828 BCBAY BARCLAYS BK ADR ADR Series 1 Repstg Preferred Shares Series 1 (United Kingdom)
      05530RAB4 BBVZF BBVA INTERNATIONAL Guaranteed Preferred Securities (Spain)
      U13620AA7 CPDJP CA PFD FDG TR Noncum Tr Pfd Secs Without Fxd Mty 2003
      151327202 CRFDZ CENTAUR FDG CORP PREF SHS SER B 9.08% 144A
      151895406 CNTOP CENTERPOINT PFD D Flexible Preferred Series D
      172967GR6 CYGXL CITIGROUP INC. Depositary Shares representing 1/25th Preferred Series D
      190750607 CBKAP COBANK ACB/PFD SER E Perp Preferred CL E Fixed to FLTG
      239649205 DMRRP DAYTON & MICH RR CO Preferred Stock
      30767E307 FCBTP FARM CREDIT BANK Perp Non Cumulative Sub Ser 1 Pfd 10% Cl B
      316773CM0 FTBXL FIFTH THIRD BANCORP Depositary Share representing 1/25th Preferred Series H
      31984K209 FCCTP FIRST COMNTY CORP A Preferred Series A
      31984K308 FCCTO FIRST COMNTY CORP B Preferred Series B
      344437504 FONRP FONAR CORP PFD Preferred Stock
      369622SP1 GEAPP GENERAL ELECTRIC Perpetual Preferred Stock Series B Fixed to Floating Rate
      369622ST3 GEAPO GENERAL ELECTRIC CAP Perpetual Preferred Series C
      43787N207 HMTAP HOMETOWN BANKSHARES Non cumulative Perpetual Preferred
      48124BAC9 JPYYL JP MORGAN Depositary Shares Representing 1/10th Preferred Series Q
      46625HHA1 JFTTL JP MORGAN CHASE Depositary Shares Representing 1/10th Preferred Series I
      46625HJ04 JPJOL JP MORGAN CHASE Depositary Shares Representing 1/10th Preferred Series S Fixed to Floating
      46625HJW1 JPMOL JP MORGAN CHASE Depositary Shares Representing 1/10th interest fixed to floating preferred series U
      48126HAA8 JPPML JP MORGAN CHASE Dep Shs Repstg l/10th Pfd Ser R
      49455T202 KMRFZ KINDER MORGAN 144A Cumulative Pfd Ser A 144A
      539439AA7 LLYDZ LLOYDS BANKING ADR Repstg Pref Shs 144A (United Kingdom)
      539439AC3 LLYBZ LLOYDS BANKING ADR Repstg Pref Ser A 144A (United Kingdom)
      539439AE9 LLYKY LLOYDS BANKING Sponsored ADR Representing Preferenced Shares Fixed to Floating Reg S (United Kingdom)
      539439AF6 LLYKZ LLOYDS BANKING ADR Repstg Pref Shs Fxd Fltg 144A (United Kingdom)
      G5533WAB3 LLYZF LLOYDS BANKING Preferenced Shares American Depositary receipt Representing Preferenced 100 Shares Reg (-S Fixed to Floating) (United Kingdom)
      539439AB5 LYGZY LLOYDS BANKING GRP Ordinary Shares (ADR representing preferance shares Reg S) (United Kingdom)
      55261FAG9 MTBPP M&T BANK Perpetual Preferred Series E Fixed to Floating
      724481866 PBOWO PITNEY BOWES INC Preferred Series F 144a
      693475AK1 PNCXL PNC FINANCIAL Depositary Shares Representing 1/100th Perpetual Preferred Series O
      693475AM7 PNCYL PNC FINANCIAL Depositary Shares Representing 1/100th Perpetual Preferred Series R Fixed to Floating
      74316E202 PSNNP PROFESSIONAL SVC PFD Preferred Stock
      780097AU5 RLSPY ROYAL BANK SCOTLAND Sponsored ADR Ser U Repstg Pref U Shs (United Kingdom)
      780097AE1 RBSLY ROYAL BK SCOTLAND SE American Depositary Shares
      84129X206 SCSGP SOUTHCREST FINL GROU Preferred
      846425841 SBSAO SPAN BROAD SER B PFD Series B Preferred Stock
      900151507 TYABF TURKIYE IS BANKA REG Spons Reg S GDR
      949746PM7 WFCNO WELLS FARGO Perp Pfd Cl A Ser K Fixed/Fltg
      982356206 WRGFP WRIGHT G F STL & WIR Preferred Stock
      983890206 XCSTP XCELARATOR STUDI PFD Preferred Stock
      989701BD8 ZIONP ZIONS BANC Perpetual Preferred Series I
      989701BF3 ZIONO ZIONS BANCORPORATION Series J Fixed/Floating Rate Non-Cumulative Perpetual Preferred Stock

    • 14-22 SEC Approves Amendments to FINRA Rule 5110 to Permit Termination Fees and Rights of First Refusal; Provide an Exemption From the Filing Requirements for Certain Collective Investment Vehicles; and Clarify the Electronic Filing Requirement*

      * Effective Date: May 15, 2014

      View PDF

      Corporate Financing Rule

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Corporate Finance
      Legal
      Operations
      Senior Management
      Syndicate
      Underwriting
      Key Topics

      Electronic Filing
      Exchange-Traded Funds
      Investment Banking
      Rights of First Refusal
      Termination Fees
      Underwriting
      Referenced Rules & Notices

      FINRA Rule 2310
      FINRA Rule 5110
      FINRA Rule 5121

      Executive Summary

      The SEC approved amendments to FINRA Rule 5110 (Corporate Financing Rule—Underwriting Terms and Arrangements) to expand the circumstances in which termination fees and rights of first refusal are permissible; exempt from the filing requirements certain collective investment vehicles that are not registered as investment companies; and make clarifying, non-substantive changes regarding documents filed through FINRA's electronic filing system.1 The amendments become effective May 15, 2014.

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

      Questions regarding this Notice may be directed to:

      •   Paul Mathews, Vice President, Corporate Financing, at (240) 386-4623 or Paul.Mathews@finra.org;
      •   James S. Wrona, Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8270 or Jim.Wrona@finra.org;
      •    Kathryn M. Moore, Associate General Counsel, OGC, at (202) 728-8200 or Kathryn.Moore@finra.org.

      Background & Discussion

      FINRA Rule 5110, among other things, regulates underwriting compensation, requires the filing of specified information in connection with public offerings in which firms will participate, and prohibits unfair arrangements in connection with public offerings of securities. FINRA amended Rule 5110's provisions regarding unfair arrangements to (1) expand the circumstances under which firms and issuers may negotiate termination fees and rights of first refusal (ROFR), with specified conditions; (2) exempt from the filing requirements certain collective investment vehicles that are not registered as investment companies; and (3) clarify the electronic filing requirement.

      Termination Fees and Rights of First Refusal

      FINRA Rule 5110(f) (Unreasonable Terms and Arrangements) sets forth terms and arrangements that, when proposed in connection with a public offering of securities, are considered unfair and unreasonable. FINRA amended its requirements regarding termination fees and ROFR to provide firms with a greater degree of flexibility in negotiating the terms of their agreements for terminated offerings, while also providing protection for issuers if a firm fails materially to perform the underwriting services contemplated in the written agreement. FINRA amended Rule 5110(f)(2)(D) (Prohibited Arrangements) to permit, in the event the public offering is not completed, termination fees or a ROFR in a written agreement between the issuer and the participating member, provided that:

      1. the agreement specifies that the issuer has a right of "termination for cause," which shall include the participating member's material failure to provide the underwriting services contemplated in the written agreement;2
      2. the issuer's exercise of its right of "termination for cause" eliminates any obligations with respect to the payment of any termination fee or provision of any ROFR;3
      3. the amount of any specified termination fee must be reasonable in relation to the underwriting services contemplated in the agreement, and any fees arising from underwriting services provided under a ROFR must be customary for those types of services; and
      4. the issuer shall not be responsible for paying the termination fee unless an offering or other type of transaction (as set forth in the agreement) is consummated within two years of the date the engagement is terminated by the issuer.

      Rule 5110 would continue to provide that the duration of any ROFR may not be for more than three years from the date of commencement of sales of the public offering (in the case of a successful offering). In the case of a terminated offering, FINRA amended Rule 5110(f)(2)(E) to provide that the duration of an ROFR may not be for more than three years from the date the issuer terminates the engagement. In both cases, the agreement may not provide for more than one opportunity to waive or terminate the ROFR in consideration of any payment or fee.4

      Filing Requirements for Certain Exchange-Traded Funds

      Rule 5110(b)(8) (Exempt Offerings) generally provides an exemption for investment companies from the filing requirements of the rule.5 Due to this exemption, exchange-traded funds (ETF) that are structured as investment companies generally are exempt. However, this exemption does not include certain other ETF that are not investment companies. FINRA believes it is appropriate to add an exemption for these products even if they do not fall under the definition of an investment company. Accordingly, FINRA amended Rule 5110(b)(7) to exempt from the filing requirements of Rule 5110 offerings of securities issued by a pooled investment vehicle, whether formed as a trust, partnership, corporation, limited liability company or other collective investment vehicle, that is not registered as an investment company under the Investment Company Act and has a class of equity securities listed for trading on a national securities exchange, provided that such equity securities may be created or redeemed on any business day at their net asset value per share.

      Electronic Filing

      Rule 5110(b) (Filing Requirements) generally provides that no firm or person associated with a firm shall participate in any manner in a public offering of securities subject to FINRA Rules 2310, 5110 or 5121 unless the specified documents and information relating to the offering have been filed with and reviewed by FINRA. FINRA amended Rule 5110(b) (5) to make clarifying, non-substantive changes regarding documents filed through FINRA's electronic filing system.6


      1 See Securities Exchange Act Release No. 72114 (May 7, 2014), 79 FR 27355 (May 13, 2014) (Order Approving SR-FINRA-2014-004).

      2 The specific meaning of "termination for cause" would be dictated by the agreement. For purposes of the rule, a "termination for cause" would include a firm's material failure to perform the underwriting services contemplated in the written agreement.

      3 Firms would continue to be permitted to receive reimbursement of out-of-pocket, bona fide, accountable expenses actually incurred by the participating firm in connection with a terminated offering as provided in amended Rule 5110(f)(2)(D)(i).

      4 Rule 5110(f)(2)(G) is redesignated as Rule 5110(f) (2)(F), which prohibits any payment or fee to waive or terminate a ROFR regarding future public offerings, private placements or other financings that exceed specified values or that are not paid in cash.

      5 Rule 5110(b)(8)(C) exempts from the rule's filing requirements securities of "open-end" investment companies as defined in Section 5(a)(1) of the Investment Company Act of 1940 ("Investment Company Act") and securities of any "closed-end" investment company as defined in Section 5(a)(2) of the Investment Company Act that (1) makes periodic repurchase offers pursuant to Rule 23c-3(b) under the Investment Company Act and (2) offers its shares on a continuous basis pursuant to Rule 415(a)(l)(xi) of SEC Regulation C.

      6 The effective date of the electronic filing requirements under Rule 5110 was July 12, 2002. See Notice to Members 02-26.


      Attachment A

      New language is underlined; deletions are in brackets.

      * * * * *

      5000. SECURITIES OFFERING AND TRADING STANDARDS AND PRACTICES

      5100. SECURITIES OFFERINGS, UNDERWRITING AND COMPENSATION

      5110. Corporate Financing Rule–Underwriting Terms and Arrangements

      (a) No Change.
      (b) Filing Requirements
      (1) through (4) No Change.
      (5) Documents to be Filed
      (A) The following documents relating to all proposed public offerings of securities that are required to be filed under paragraph (b)(4) above shall be filed [with] through FINRA's electronic filing system for review:
      (i) [Three copies of the] The registration statement, offering circular, offering memorandum, notification of filing, notice of intention, application for conversion and/or any other document used to offer securities to the public;
      (ii) [Three copies of any] Any proposed underwriting agreement, agreement among underwriters, selected dealers agreement, agency agreement, purchase agreement, letter of intent, consulting agreement, partnership agreement, underwriter's warrant agreement, escrow agreement, and any other document that describes the underwriting or other arrangements in connection with or related to the distribution, and the terms and conditions relating thereto; and any other information or documents that may be material to or part of the said arrangements, terms and conditions and that may have a bearing on FINRA's review;
      (iii) [Three copies of each] Each pre- and post-effective amendment to the registration statement or other offering document, [one] with a copy marked to show changes; and [three (3) copies of] any other amended document previously filed pursuant to subparagraphs (i) and (ii) above, [one] with a copy marked to show changes; and
      (iv) [Three copies of the] The final registration statement declared effective by the SEC or equivalent final offering document and a list of the members of the underwriting syndicate, if not indicated therein, and one copy of the executed form of the final underwriting documents and any other document submitted to FINRA for review.
      (B) [All documents] Documents that are filed with the SEC through the SEC's Electronic Data Gathering, Analysis, and Retrieval ("EDGAR") System that are referenced in FINRA's electronic filing system shall be treated as filed with FINRA.
      (6) No Change.
      (7) Offerings Exempt from Filing

      Notwithstanding the provisions of subparagraph (1) above, documents and information related to the following public offerings need not be filed with FINRA for review, unless subject to the provisions of Rule 5121(a)(2). However, it shall be deemed a violation of this Rule or Rule 2310, for a member to participate in any way in such public offerings if the underwriting or other arrangements in connection with the offering are not in compliance with this Rule or Rule 2310, as applicable:
      (A) through (E) No Change.
      (F) exchange offers of securities where:
      (i) No Change.
      (ii) the company issuing securities qualifies to register securities with the SEC on registration statement Forms S-3, F-3, or F-10, pursuant to the standards for those Forms as set forth in subparagraphs (C)(i) and (ii) of this paragraph; [and]
      (G) offerings of securities by a church or other charitable institution that is exempt from SEC registration pursuant to Section 3(a)(4) of the Securities Act[.]; and
      (H) offerings of securities issued by a pooled investment vehicle, whether formed as a trust, partnership, corporation, limited liability company or other collective investment vehicle, that is not registered as an investment company under the Investment Company Act and has a class of equity securities listed for trading on a national securities exchange; provided that such equity securities may be created or redeemed on any business day at their net asset value per share.
      (8) through (9) No Change.
      (c) Underwriting Compensation and Arrangements
      (1) No Change.
      (2) Amount of Underwriting Compensation
      (A) No Change.
      (B) For purposes of determining the amount of underwriting compensation, all items of value received or to be received from any source by the underwriter and related persons which are deemed to be in connection with or related to the distribution of the public offering as determined pursuant to subparagraph[s] (3) [and (4)] below shall be included.
      (C) through (E) No Change.
      (3) No Change.
      (d) through (e) No Change.
      (f) Unreasonable Terms and Arrangements
      (1) No Change.
      (2) Prohibited Arrangements

      Without limiting the foregoing, the following terms and arrangements, when proposed in connection with a public offering of securities, shall be unfair and unreasonable.
      (A) through (C) No Change.
      (D) [The payment of any] Any compensation by an issuer to a member or person associated with a member in connection with an offering of securities that is not completed according to the terms of agreement between the issuer and underwriter, except: [those negotiated and paid in connection with a transaction that occurs in lieu of the proposed offering as a result of the efforts of the underwriter and related persons and provided, however, that]
      (i) the reimbursement of out-of-pocket accountable, bona fide expenses actually incurred by the member or person associated with a member [shall not be presumed to be unfair or unreasonable under normal circumstances.]; and
      (ii) a termination fee or a right of first refusal, as set forth in a written agreement between the issuer and the participating member, provided that:
      a. the agreement specifies that the issuer has a right of "termination for cause," which shall include the participating member's material failure to provide the underwriting services contemplated in the written agreement;
      b. an issuer's exercise of its right of "termination for cause" eliminates any obligations with respect to the payment of any termination fee or provision of any right of first refusal;
      c. the amount of any termination fee must be reasonable in relation to the underwriting services contemplated in the agreement and any fees arising from underwriting services provided under a right of first refusal must be customary for those types of services; and
      d. the issuer shall not be responsible for paying the termination fee unless an offering or other type of transaction (as set forth in the agreement) is consummated within two years of the date the engagement is terminated by the issuer.
      [(E) Any "tail fee" arrangement granted to the underwriter and related persons that has a duration of more than two years from the date the member's services are terminated, in the event that the offering is not completed in accordance with the agreement between the issuer and the underwriter and the issuer subsequently consummates a similar transaction, except that a member may demonstrate on the basis of information satisfactory to FINRA that an arrangement of more than two years is not unfair or unreasonable under the circumstances.]
      ([F])(E) Any right of first refusal provided to the underwriter or related persons to underwrite or participate in future public offerings, private placements or other financings that:
      (i) has a duration of more than three years from the date of [effectiveness or] commencement of sales of the public offering or the termination date of the engagement between the issuer and underwriter; or
      (ii) has more than one opportunity to waive or terminate the right of first refusal in consideration of any payment or fee.
      (G) through (I) redesignated as (F) through (H).
      [(J)](I) When proposed in connection with the distribution of a public offering of securities on a "firm commitment" basis, any over[ ]allotment option providing for the over[ ]allotment of more than 15% of the amount of securities being offered, computed excluding any securities offered pursuant to the over[ ] allotment option.
      (K) through (M) redesignated as (J) through (L).
      (g) Lock-Up Restriction on Securities
      (1) No Change.
      (2) Exceptions to Lock-Up Restriction

      Notwithstanding paragraph (g)(1) above, the following shall not be prohibited:
      (A) the transfer of any security:
      (i) through (ii) No Change.
      (iii) if the aggregate amount of securities of the issuer held by the underwriter [or] and related persons do not exceed 1% of the securities being offered;
      (iv) through (viii) No Change.
      (B) No Change.
      (h) Non-Cash Compensation
      (1) No Change.
      (2) Restrictions on Non-Cash Compensation

      In connection with the sale and distribution of a public offering of securities, no member or person associated with a member shall directly or indirectly accept or make payments or offers of payments of any non-cash compensation, except as provided in this provision. Non-cash compensation arrangements are limited to the following:
      (A) through (B) No Change.
      (C) Payment or reimbursement by offerors in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member, provided that:
      (i) associated persons obtain the member's prior approval to attend the meeting and attendance by a member's associated persons is not conditioned by the member on the achievement of a sales target or any other incentives pursuant to a non-cash compensation arrangement permitted by paragraph ([d]h)(2)(D);
      (ii) through (iii) No Change.
      (iv) the payment or reimbursement by the issuer or affiliate of the issuer is not conditioned by the issuer or an affiliate of the issuer on the achievement of a sales target or any other non-cash compensation arrangement permitted by paragraph ([d]h)(2)(D).
      (D) No Change.
      (E) Contributions by a non-member company or other member to a non-cash compensation arrangement between a member and its associated persons, provided that the arrangement meets the criteria in paragraph ([d]h)(2)(D).

      A member shall maintain records of all non-cash compensation received by the member or its associated persons in arrangements permitted by paragraphs ([d]h)(2)(C) through (E). The records shall include: the names of the offerors, non-members or other members making the non-cash compensation contributions; the names of the associated persons participating in the arrangements; the nature and value of non-cash compensation received; the location of training and education meetings; and any other information that proves compliance by the member and its associated persons with paragraphs ([d]h)(2)(C) through (E).
      (i) No Change.

      1 No Change.

      * * * * *

    • 14-21 SEC Approves Amendments to Equity Trade Reporting and OATS Rules; Effective Dates: OATS: April 7, 2014; ORF: September 15, 2014; ADF and TRFs: (millisecond reporting): September 29, 2014; ADF and TRFs (remaining amendments): First Quarter 2015

      The effective date for ORF has been extended to November 17, 2014.
      Original effective date: September 15, 2014.

      The effective date for ADF and TRFs (millisecond reporting) has been extended to November 10, 2014. Original effective date: September 29, 2014.

      The effective date for ADF and TRFs (remaining amendments) has been extended to April 20, 2015. Original effective date: First Quarter 2015.

      View PDF

      Equity Trade Reporting and OATS

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Systems
      Trading
      Key Topics

      Alternative Display Facility (ADF)
      Form T
      Intermarket Sweep Orders (outbound)
      NMS Stocks
      Non-Business Day Trades
      Order Audit Trail System (OATS)
      OTC Equity Securities
      OTC Reporting Facility (ORF)
      Prior Reference Price Transactions
      Step-Outs
      Stop Stock Transactions
      T+365 Trades
      Trade Reporting Trade Reporting Facilities (TRFs)
      Referenced Rules & Notices

      FINRA Rules 6282, 6380A, 6380B, 6420, 6622, 7130, 7140, 7230A, 7230B, 7240A, 7240B, 7330, 7340 and 7440
      Regulatory Notice 11-03
      SEC Regulation NMS

      Executive Summary

      The Securities and Exchange Commission (SEC) has approved amendments to FINRA rules governing the reporting of (i) over-the-counter (OTC) transactions in equity securities to the FINRA facilities;1 and (ii) orders in NMS stocks and OTC equity securities to the Order Audit Trail System (OATS). The OATS amendments were implemented April 7, 2014, and the ORF amendments will be implemented September 15, 2014. The implementation date for the requirement relating to reporting in milliseconds to the ADF and TRFs is September 29, 2014. The implementation date for the remainder of the ADF and TRF amendments will be announced separately and will be during the first quarter of 2015.

      The amended rule text is available in the online FINRA Manual.

      Questions regarding this Notice may be directed to:

      •   Market Regulation Legal Section at (240) 386-5126;
      •   FINRA Market Operations at (866) 776-0800;
      •    FINRA Product Management at (866) 899-2107;
      •   FINRA's OATS Helpdesk at (800) 321-6273; or
      •    for legal or interpretive questions, Lisa Horrigan, Associate General Counsel, Office of General Counsel, at (202) 728-8190.

      Background and Discussion

      The SEC approved2 amendments to FINRA rules relating to:

      •   reporting an additional time field for specified trades;
      •   expressing execution time in milliseconds when reporting to the FINRA facilities and OATS;
      •   linking reversal reports to the original trade;
      •   reporting trades executed on non-business days and trades that are more than one year old;
      •   using a new "step-in" indicator; and
      •   processing trades submitted to a FINRA facility for clearing.

      Reporting an Additional Time Field

      FINRA rules currently require that trade reports submitted to the FINRA facilities include the time of trade execution, except where another time is expressly required by rule. Because of enhancements to FINRA facilities to accommodate more than one time entry for a single transaction report, the amendments require firms to reflect two times in reports of stop stock transactions, as defined for purposes of the FINRA trade reporting rules,3 and transactions that reflect an execution price that is based on a prior reference point in time (PRP transactions). Specifically, firms must report (1) the time at which the parties agree to the stop stock price or the prior reference time (i.e., the time currently required by FINRA rules), and (2) the actual time of execution.4 Thus, for example, for stop stock transactions, if the parties agree to the stop stock price at 10:00 a.m. and the trade is executed at 11:00 a.m., the trade report would reflect times of 10:00 a.m. and 11:00 a.m. Similarly, for PRP transactions, if a firm executes a market-on-open order at 10:30 a.m., the trade report would reflect times of 9:30 a.m. (the time the market opened) and 10:30 a.m. Stop stock and PRP transactions that are reported more than 10 seconds following execution are marked late. Firms are reminded that if the trade is executed within 10 seconds of the time the parties agree to the stop stock price or within 10 seconds of the prior reference time, then firms should not use the designated modifier and report only the actual time of execution.

      In addition, the amendments require firms to include two times when reporting block transactions using the exception for Intermarket Sweep Orders (ISOs) (outbound) under SEC Rule 611 (Order Protection Rule) of Regulation NMS if the time the firm routed the ISOs is different from the execution time.5 Specifically, firms must report the time that all material terms of the transaction are known in the "execution time" field, as they do today. In the new time field (i.e., the reference or "ISO time" field), if different from the execution time, firms should report the time they used to determine the ISOs, if any, to route to any better-priced protected quotations (sometimes referred to as the time the firm takes a "snapshot" of the market).6 Firms are reminded that, to comply with SEC Rule 611(b)(6), SEC staff has stated that firms need to use an automated system that is capable of ascertaining current protected quotations and simultaneously routing the necessary ISOs.7 Thus, FINRA would expect the "snapshot" time and the time that ISOs are routed to be the same. To the extent that these times differ, or where multiple ISOs are routed and the route times differ, using the "snapshot" time in all instances will eliminate any confusion regarding which time to report.

      Expressing Time in Milliseconds (Trade Reporting and OATS)

      FINRA trade reporting rules require firms to report execution time to the FINRA facilities in terms of hours, minutes and seconds (i.e., HH:MM:SS).8 Similarly, the OATS rules require firms to record order event times in hours, minutes and seconds.9 Pursuant to the amendments, firms must express time in milliseconds (i.e., HH:MM:SS:mmm) when reporting trades to the FINRA facilities or order information to OATS, if the firm's system captures time in milliseconds.10 However, firms are not required to capture time in milliseconds and are permitted to continue to report time in seconds, if their systems do not capture milliseconds. FINRA notes that if a firm's system, such as an alternative trading system, captures time in milliseconds, then that system is expected to be capable of reporting in milliseconds. FINRA also notes that as technology advances, FINRA would expect to see over time an increasing percentage of firms both capturing milliseconds and making submissions to the FINRA facilities and OATS reflecting time in milliseconds.

      In addition, if a firm submits multiple reports for the same event (e.g., a trade report and an OATS Execution Report), FINRA would expect the time stamps to be both to the second or both to the millisecond, but not one to the second and one to the millisecond. For example, where the firm is reporting execution time in milliseconds, FINRA would match the execution time on the firm's OATS Execution Report and on its corresponding trade report at the millisecond (not second) level and the time stamps on the two reports must be identical.11 Thus, firms may need to update their systems for OATS reporting to reflect the fact that other systems in the firm use milliseconds so that the times those systems use (if in milliseconds) are accurately reflected in the firm's OATS reports. As noted above, the amendments do not require firms to use milliseconds or update existing systems to use milliseconds; however, to the extent a firm's system uses milliseconds, those timestamps should be to the millisecond when they are reported to OATS.

      FINRA further notes that the determination whether a trade has been reported late (i.e., outside the 10-second reporting window under FINRA rules) remains at the second level for firms that report execution time in seconds, and for firms that report time in milliseconds, the determination is made at the millisecond level. Thus, for example, a trade with an execution time of 10:01:00 must be reported no later than 10:01:10, and a trade with an execution time of 10:01:00:999 must be reported no later than 10:01:10:999.

      Linking Reversal Reports to the Original Trade

      FINRA rules require that if a trade that was previously reported to FINRA is cancelled or reversed, firms must report the cancellation or reversal to the same FINRA facility to which the trade was originally reported12 and must do so within the time frames set forth in the rules.13 The amendments require firms to identify the original trade in the reversal report by including the control number the FINRA facility generated and report date for the original trade report.14 In accordance with system requirements, the control number field is a required field for all reports of reversals and if it is not populated, then the report will be rejected. However, FINRA will validate the control number only where the original trade was executed after implementation of the amendments. Accordingly, when reversing trades executed prior to implementation, firms are not required to provide an actual control number and instead may insert a "dummy" number to populate the required field.

      Firms must maintain sufficient records to enable them to identify the control number and report date for any trades that they reverse, to the extent such information cannot be obtained from the data retained by the FINRA facility.15

      Reporting Non-business Day Trades and T+365 Trades

      Pursuant to the amendments, firms are required to report trades executed on non-business days (i.e., weekends and holidays) and trades reported more than 365 days after trade date (T+365) to a FINRA facility. (Today these trades are reported on Form T through FINRA's Firm Gateway.) Non-business day trades and T+365 trades are assessed regulatory fees under Section 3 of Schedule A to the FINRA By-Laws (Section 3)16 and are not submitted to clearing by the FINRA facility17 or disseminated.

      In addition, firms must report non-business day trades on an "as/of" basis by 8:15 a.m. the next business day following execution with the unique trade report modifier to denote their execution outside normal market hours; trades not reported by 8:15 a.m. are marked late.18 Thus, for example, a trade executed on Saturday must be reported by 8:15 a.m. the following Monday (since the FINRA facilities are not open on Saturday to accept the trade report), and if the trade is not reported by that time, it is marked late. All T+365 trades are reported on an "as/of" basis and are marked late.

      Using a New "Step-in" Indicator

      Today, firms can effectuate a "step-out"19 by submitting a clearing-only report to a FINRA facility, and FINRA rules prohibit firms from submitting to a FINRA facility any non-tape report (including but not limited to reports of step-outs) associated with a previously executed trade that was not reported to that FINRA facility.20 For every step-out, one firm is stepping out of (or transferring) the position and the other firm is stepping into (or receiving) the position. Pursuant to the amendments, where both sides are submitting a clearing-only report to effectuate a step-out, the firm transferring out of the position must report a step-out and the firm receiving the position must report a step-in. FINRA notes that the FINRA facilities that offer matching, such as the ORF, will match corresponding "step-out" and "step-in" submissions; the system will not match two "step-in" or two "step-out" submissions.21 Firms are reminded that they should not use the step-out and step-in indicators when reporting a riskless principal or agency "flip," both of which entail a change in beneficial ownership and must be reported to FINRA where specified by rule.

      Processing Trades Submitted for Clearing

      When firms use the trade acceptance and comparison functionality of a FINRA facility, the reporting party reports the trade and the contra party subsequently either accepts or declines the trade.22 The amendments clarify that rather than being purged from the system at the end of trade date processing, trades that have been declined by the contra party are carried over and remain available for cancellation or correction by the reporting party or subsequent acceptance by the contra party.23 Thus, for example, if Firm A, as the contra party, erroneously declines the trade report Firm B submits, Firm A could accept the previously declined trade up to T+1.24

      Declined trades that are carried over will not be available for the automatic lock-in process described in the rules and will not be sent to clearing unless the parties take action. Firms are reminded that the reporting firm must cancel a declined trade that was previously reported for dissemination purposes to have the trade removed from the tape, i.e., the system does not remove the trade automatically from the tape.25

      In addition, the amendments reorganized FINRA rules relating to locking in trades for clearing and clarified that trades that are T+22 or older that remain open are carried over, but are not subject to the automatic lock-in process.26 (Today such T+22 trades are purged from the system, although firms may subsequently resubmit them.)

      Implementation

      FINRA will implement the amendments as follows:

      •   OATS: As previously announced, the amendments to the OATS rules were implemented on Monday, April 7, 2014.27
      •   OTC Reporting Facility: The amendments to the ORF rules will be implemented upon migration of the ORF to the new technology platform on Monday, September 15, 2014. Firms should refer to the ORF Forms & Documentation page for updated ORF technical specifications.
      •   Alternative Display Facility, FINRA/Nasdaq TRF and FINRA/NYSE TRF: The implementation date for the requirement relating to reporting in milliseconds to the ADF and TRFs is Monday, September 29, 2014. The implementation date for the remainder of the ADF and TRF amendments has not been set and will be extended beyond the September 30, 2014, date, proposed in SR-FINRA-2013-050, to the first quarter of 2015. Separate notice will be provided once the ADF and TRF implementation date has been set.

      1 Specifically, the FINRA facilities are the Alternative Display Facility (ADF) and the Trade Reporting Facilities (TRFs), to which firms report OTC transactions in NMS stocks; and the OTC Reporting Facility (ORF), to which firms report transactions in OTC equity securities, as defined in FINRA Rule 6420 (i.e., equity securities that are not NMS stocks), as well as transactions in restricted equity securities, as defined in FINRA Rule 6420, effected pursuant to Securities Act Rule 144A.

      2 See Securities Exchange Act Release No. 71623 (February 27, 2014), 79 FR 12558 (March 5, 2014) (Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1; File No. SR-FINRA-2013-050).

      3 "Stop stock transaction" means a transaction resulting from an order in which a firm and another party agree that the order will be executed at a stop stock price or better, which price is based upon the prices at which the security is trading at the time the firm receives the order. See Rules 6220, 6320A, 6320B and 6420.

      4 See paragraphs (F) and (G) of Rules 6282(a)(4), 6380A(a)(5), 6380B(a)(5) and 6622(a)(5).

      5 FINRA notes that this requirement applies only when reporting OTC transactions in NMS securities to the ADF or a TRF and is not applicable to reporting to the ORF.

      6 As FINRA noted in NASD Member Alert: Guidance Relating to "Execution Time" for Purposes of Compliance with NASD Trade Reporting Rules (June 13, 2007), in surveilling for compliance with SEC Rule 611(b)(6) in this context, firms should compare routed ISOs with the protected quotations that were displayed at the time of routing.

      7 SEC staff has further indicated that it does not believe it would be possible for manual routing of an ISO to comply with the requirement in Rule 611(b)(6). See SEC Responses to Frequently Asked Questions Concerning Rule 611 and Rule 610 of Regulation NMS (April 4, 2008 update), FAQ 3.03: Executing and Reporting Block Trades Pursuant to ISO Exception.

      8 See, e.g., Rules 6282(c)(5), 6380A(c)(5), 6380B(c) (5) and 6622(c)(5).

      9 See Rule 7440(a)(2). Rule 7450 generally requires all applicable order information required to be recorded under Rule 7440 to be reported to OATS. Although Rule 7440(a)(2) requires order event times to be recorded to the second, FINRA published guidance in 2011 in connection with the expansion of OATS to all NMS stocks stating that firms that capture time in milliseconds should report time to OATS in milliseconds. See Regulatory Notice 11-03 (January 2011); see also OATS Reporting Technical Specifications, Cover Memo, at iv (May 3, 2011 ed.). The amendments codify this guidance into Rule 7440(a)(2).

      10 See Rules 6282.04, 6380A.04, 6380B.04, 6622.04, 7130.01, 7230A.01, 7230B.01, 7330.01 and 7440(a)(2).

      11 OATS uses fourfields, including the execution time stamp, to link an OATS Execution Report or OATS Combined Order/Execution Report to the corresponding trade report.

      12 See Rules 7130(g), 7230A(i), 7230B(h) and 7330(h).

      13 See, e.g., Rules 6282(g)(2), 6380A(g)(2), 6380B(f) (2), and 6622(f)(2) and (f)(3).

      14 See subparagraph (3) in Rules 6282(g), 6380A(g) and 6380B(f) and subparagraph (4) in Rule 6622(f).

      15 The FINRA facilities retain historic trade data and the amount of data retained varies among the facilities.

      16 Pursuant to Section 31 of the Exchange Act, FINRA and the national securities exchanges are required to pay transaction fees and assessments to the SEC that are designed to recover the costs related to the government's supervision and regulation of the securities markets and securities professionals. FINRA obtains its Section 31 fees and assessments from its membership in accordance with Section 3.

      17 See Rules 7140(b), 7240A(b), 7240B(b) and 7340(b).

      18 See Rules 6282(a)(2), 6380A(a)(2), 6380B(a)(2) and 6622(a)(2). Similarly, under Rule 6622(a) (3), any Securities Act Rule 144A transaction in a restricted equity security that is executed on a non-business day must be reported by the time the ORF closes the next business day.

      19 A step-out allows a member firm to allocate all or part of a client's position from a previously executed trade to the client's account at another firm. In other words, a step-out functions as a client's position transfer, rather than a trade; there is no exchange of shares and funds and no change in beneficial ownership. The step-out function was designed and implemented as a service to facilitate the clearing process for firms involved in these types of transfers. See Trade Reporting FAQ 301.1.

      Each firm is required to report its side to effectuate a step-out; however, if the two firms have the proper agreements in place (i.e., an Automatic Give-Up (AGU) or Qualified Special Representative (QSR) agreement), the step-out can be effectuated with only one submission. The amendments do not affect the process for effectuating a step-out with a single submission via AGU or QSR.

      20 See Rules 7130(g), 7230A(i), 7230B(h) and 7330(h). Thus, for example, a firm cannot use one TRF to step out of an OTC trade that was originally reported to another TRF.

      21 For purposes of reporting step-outs/step-ins to the FINRA facilities, the firm stepping out of (or transferring) the position is the "executing party" with the trade reporting obligation and the firm stepping into (or receiving) the position is the contra party.

      22 Alternatively, one firm may submit a locked-in trade on behalf of the other firm, if the firms have the requisite agreements in place (i.e., AGU or QSR). In that instance, the trade acceptance and comparison functionality would not be used.

      23 See Rules 7140(a)(2), 7240A(a)(2) and 7340(a)(2).

      24 FINRA notes that where trades are not locked-in pursuant to agreement, contra parties are required to accept or decline a trade within 20 minutes after execution, and FINRA generally expects contra parties to complete the process of accepting or declining a trade, including any subsequent updates, within that time frame. See Rules 7130(b), 7230A(b) and 7330(b).

      25 See Rules 7140(a)(2), 7240A(a)(2) and 7340(a)(2).

      26 See Rules 7140(a)(3), 7240A(a)(3) and 7340(a)(3).

      27 See the March 21, 2014, OATS Report, "Firms Capturing Time in Milliseconds Required to Report to OATS in Milliseconds Beginning April 7, 2014."

    • 14-20 FINRA Revises the Product and Problem Codes Used for Reporting Customer Complaints and Filing Required Documents Online; Implementation Date: October 1, 2014

      View PDF

      Reporting Requirements

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Systems
      Key Topics

      Customer Complaints
      Filing Requirements
      Online Filing
      Product and Problem Code Changes
      Reporting Requirements
      Referenced Rules & Notices

      FINRA Rule 2111
      FINRA Rule 4530
      NASD Rule 3070

      Executive Summary

      Starting on October 1, 2014, firms must select revised and new product and problem codes when: (1) reporting information regarding written customer complaints alleging theft or misappropriation of funds or securities, or forgery; (2) reporting quarterly statistical and summary information regarding written customer complaints; and (3) completing the online form to file copies of required documents.

      For purposes of reporting statistical and summary information regarding written customer complaints, the first quarterly report using the revised and new codes is due by January 15, 2015, which is the reporting deadline for customer complaints received during the fourth calendar quarter (October 1, 2014, through December 31, 2014).

      The revised and new product and problem codes are provided in Attachment A.

      Questions concerning this Notice should be directed to Anthony Cavallaro, Central Review Group, at (646) 315-7319.

      Background & Discussion

      FINRA Rule 4530 (Reporting Requirements) requires firms to report, among other events, written customer complaints alleging theft or misappropriation of funds or securities, or forgery.1 The rule also requires firms to report quarterly statistical and summary information regarding written customer complaints.2 All customer complaint information must be electronically reported to FINRA via an application on the FINRA Firm Gateway. In addition, the rule requires firms to file with FINRA copies of specified criminal and civil actions,3 which firms have the option of filing online via a form on the Firm Gateway.4

      Firms are required to select the appropriate product and problem code when reporting customer complaint information and when completing the online form to file copies of required documents. FINRA periodically reviews the product and problem codes to determine whether the codes need to be revised to provide more clarity and whether new categories need to be added. Based on this review, FINRA is revising the codes and adding new categories. FINRA is also making non-substantive technical and stylistic changes to the codes. The substantive changes are described below.

      Product Codes

      FINRA is amending Code 10—Money Markets, which was previously used for reporting allegations relating to money markets under NASD Rule 3070 (Reporting Requirements) (the predecessor to FINRA Rule 4530). As revised, firms must use Code 10—Certificate of Deposit (CD) (coupon and zero CDs) if the matter relates to a CD, and Code 38—Money Markets (e.g., commercial paper, Banker's Acceptance (BA), not money market funds) if the matter relates to money markets.

      In addition, FINRA is adding the following new product codes:

      Code 46 Viatical Settlement—The sale of a terminally ill policy owner's existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. Such a sale provides the policy owner with a lump sum. The third party becomes the new owner of the policy, pays the monthly premiums, and receives the full benefit of the policy when the insured dies.
      Code 47 Private Securities—Securities that are not registered; not listed on an exchange; and otherwise not publicly available for trade.
      Code 48 Non-Broker-Dealer Affiliate Product—Such as banking and insurance instruments or services related to non-broker-dealer affiliate activity and not otherwise characterized by another Product Code.
      Code 49 Exchange-Traded Notes (ETNs)—Senior, unsecured, unsubordinated debt security issued by an underwriting bank designed to provide investors access to the returns of various market benchmarks. ETNs do not actually own anything they are tracking. The note is backed by the credit of the underwriting bank that is promising to pay the amount reflected in the index, minus fees upon maturity.

      Problem Codes

      FINRA is revising the description of Code 04—Suitability to reflect the requirements of FINRA Rule 2111 (Suitability). In addition, FINRA is revising the title and description of Code 63 from "Poor Service—Where the customer alleges that service from the firm or any of its employees was inadequate and/or unsatisfactory (e.g. failure to return phone calls, rudeness, lack of administrative attention to the account, etc.)" to "Service Issues—Allegations concerning inadequate or unsatisfactory service from the firm or any of its employees."

      FINRA is also adding the following new problem codes:

      Code 13 Selling Away—Allegations concerning the RR engaging in a securities transaction outside the scope of his or her relationship with the firm and without the knowledge or approval of the firm.
      Code 14 Outside Business Activities—Allegations concerning the RR engaging in an undisclosed business activity (other than a securities transaction) outside the scope of his or her relationship with the firm (e.g., employment with another entity without the knowledge of the firm).
      Code 33 Non-Broker-Dealer Affiliate Activity—Non-Broker-Dealer Affiliate activity not otherwise characterized by another Problem Code.
      Code 68 Firm Policy—Allegations concerning a customer's dissatisfaction with the RR or the firm as a result of a firm policy or procedure (that is not otherwise better characterized by another Problem Code).

      Availability of the Revised and New Codes

      The revised and new product and problem codes are provided in Attachment A and are also available on FINRA's website.


      1 See FINRA Rule 4530(a)(1)(B).

      2 See FINRA Rule 4530(d). Firms must report this information by the 15th calendar day of the month following the end of each calendar quarter (e.g., by April 15 for the first quarter). The statistics that firms report provide FINRA with important regulatory information that assists with the timely identification of potential sales practice and operational issues.

      3 See FINRA Rule 4530(f).

      4 See FINRA Rule 4530(g). Firms also have the option of filing the documents required under FINRA Rule 4530(f) via mail or email.


      FINRA Rule 4530

      Product Codes

      Select the most prominent in the complaint from the following codes:

      00 Miscellaneous
      01 Equity-Listed (common and preferred stock)
      02 Debt-Corporate (not asset-backed, includes convertible, corporate and zeros)
      03 Debt-U.S. Government/U.S. Government Agency/U.S. Government Zeros and U.S. Zero Receipts (e.g., Treasury Investors Growth Receipt (TIGR), Certificate of Accrual on Treasury Securities (CATS)).
      04 Commodities/Futures (except commodity options and financial futures)
      05 Commodity Options
      06 Options (except index)
      07 Index Options
      08 Insurance (not annuities)
      09 Mutual Funds (open-ended, includes money market funds)
      10 Certificate of Deposit (CD) (coupon and zero CDs)
      11 Unit Investment Trusts (UITs) (corporate, government and municipal defined asset funds)
      12 Direct Investments (limited partnerships, etc.)
      13 Financial Futures
      14 Equity-OTC (common and preferred stock, new issue)
      15 Debt-Municipal (bonds, notes and zeros, not Municipal Investment Trusts (MITs))
      16 Debt-Asset Backed (Collateralized Mortgage Obligations (CMOs), credit card receivables, etc.)
      17 Managed/Wrap Accounts (in-house money manager)**
      18 No Product
      19 Managed/Wrap Accounts (outside money manager)**
      20 Variable Annuities—A variable annuity is an insurance company contract that allows the owner to elect to receive immediate or future periodic payments. A variable annuity is purchased, either with a lump sum or over time, with premiums allocated among various, separate account funds offered in the annuity contract. During the accumulation phase, the rate of return and the contract fund value on a variable annuity fluctuates with the performance of the underlying investments in the separate account funds, sometimes called investment portfolios or subaccounts.
      21 Warrants/Rights
      22 Real Estate Investment Trusts (REITS)
      23 Employee/Employer Stock Option Plan (not listed options)**
      24 Equity-Foreign
      25 Debt-Foreign
      26 Exchange-Traded Funds (ETFs)
      27 Single Stock Futures
      28 529 Plans**
      29 Hedge Funds
      30 Private Placements (e.g., Private Investments in Public Equity Securities (PIPES), etc.)
      31 Promissory Notes
      32 Mortgage (pledged assets, reverse mortgage)
      33 Closed-End Funds
      34 Cash Management Accounts (e.g., debit/credit card) **
      35 Self-Directed Fee-Based Accounts (non-managed) **
      36 Contractual Plans/Systematic Investment Plans
      37 Tenant in Common (e.g., 1031 Exchanges)
      38 Money Markets (e.g., commercial paper, Banker's Acceptance (BA), not money market funds)
      39 Auction Rate Securities—Municipal Debt
      40 Auction Rate Securities—Corporate Debt
      41 Auction Rate Securities—Closed-End Funds
      42 Structured Products—For the purpose of this reporting, structured products are investment instruments designed to facilitate a particular risk-return objective, the performance of which is based on one or more referenced asset, index, interest rate, or other market measure. Some structured products offer full protection of the principal invested, whereas others offer limited or no protection of the principal. Structured products may be listed on a securities exchange or traded in the over-the-counter market.
      43 Fixed Annuities—A fixed annuity is an insurance contract that is purchased either in a lump sum or over time. A fixed annuity is credited with a fixed or set interest rate and allows the owner to elect to receive immediate or future periodic payments. The insurance company guarantees both earnings and principal.
      44 Equity-Indexed Annuities—An equity-indexed annuity is an insurance company product purchased either in a lump sum or with a series of payments. The insurance company credits the holder with a return that is based on performance of an equity index, such as the S&P 500 Composite Stock Price Index. The insurance company may guarantee a minimum return. After the accumulation period, the insurance company makes periodic payments under the terms of the contract or in a lump sum.
      45 Life Settlements—A life settlement is a financial transaction in which a policy owner sells an existing life insurance policy to a third party for more than the policy's cash surrender value, but less than the net death benefit.
      46 Viatical Settlement—The sale of a terminally ill policy owner's existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. Such a sale provides the policy owner with a lump sum. The third party becomes the new owner of the policy, pays the monthly premiums, and receives the full benefit of the policy when the insured dies.
      47 Private Securities—Securities that are not registered; not listed on an exchange; and otherwise not publicly available for trade.
      48 Non-Broker-Dealer Affiliate Product—Such as banking and insurance instruments or services related to non-broker-dealer affiliate activity and not otherwise characterized by another Product Code.
      49 Exchange-Traded Notes (ETNs)—Senior, unsecured, unsubordinated debt security issued by an underwriting bank designed to provide investors access to the returns of various market benchmarks. ETNs do not actually own anything they are tracking. The note is backed by the credit of the underwriting bank that is promising to pay the amount reflected in the index, minus fees upon maturity.

      ** These account types are to be used when the allegations relate specifically to the type of account and not to an underlying security within the account.

      FINRA Rule 4530

      Problem Codes

      Select the most egregious allegation in the complaint from the following codes:

      00 Miscellaneous (Sales Practice Only)—"Sales Practice" only ("Non-Sales Practice" Miscellaneous code is "99").
      01 Misrepresentation—Allegations concerning false or misleading statements, claims, comparisons or omissions of material fact. Includes, but is not limited to, assurances and guarantees that are part of either oral or written communications or correspondence from the Registered Representative (RR) to a customer or prospect (not research/trading/investment banker/issuer/sponsor material).
      02 Unauthorized Trading—Allegations concerning one or more transactions that were effected without the customer's specific knowledge and approval. (Note: Not margin liquidation or dividend reinvestment type problems.)
      03 Excessive Trading—Allegations concerning trading that was controlled by the RR and was excessive given the size, frequency, and character of the account in which trading was done solely to generate commissions or other compensation with disregard to the customer's investment objectives.
      04 Suitability—Allegations concerning an unsuitable recommended transaction or investment strategy involving a security or securities, including possible violations of, among others, the following main suitability obligations: reasonable-basis suitability (must perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards, and determine whether the recommendation is suitable for at least some investors based on that understanding); customer-specific suitability (must have a reasonable basis to believe that a recommendation of a security or investment strategy involving a security or securities is suitable for the particular customer based on the customer's investment profile); and quantitative suitability (must have a reasonable basis to believe that a series of recommended securities transactions are not excessive where there is control over the account).
      05 Failure to Follow Instructions—Allegations concerning the RR's failure to follow specific instructions from the customer's proper power of attorney holder or authorized parties of corporate or other entity accounts.
      06 Documentation—Allegations concerning material inaccuracies, omissions, or failures to obtain or provide required documents.
      07 Solicitation—Allegations concerning improper solicitation of an account or a transaction.
      08 Misappropriation/Forgery—Allegations concerning theft or misappropriation of funds or securities or forgery. (Note: Not dividend reinvestment, customer checking/debit card activity or routine transfer instructions problems.)
      09 Communications with the Public—Allegations concerning false or misleading statements, claims, comparisons, or material omissions in communications or correspondence to a customer or prospect (including flyers, retail communications, sales materials and advertisements prepared by the RR).
      10 Disclosure of Fees—Allegations concerning the RR's failure to advise or the RR's incorrect advice of back-end fees associated with the product. (Includes Contingent Deferred Sales Charges (CDSC), surrender penalties, but not commissions or managed account fees.)
      11 Failure to Supervise—Allegations concerning a sales practice violation involving the customer's account or the RR and also a failure to supervise on the part of the named supervisor, such as the branch office manager, at the time the activity occurred.
      12 Poor Recommendation/Poor Advice—Allegations concerning a recommendation to purchase, sell or exchange a security that constituted poor advice.
      13 Selling Away—Allegations concerning the RR engaging in a securities transaction outside the scope of his or her relationship with the firm and without the knowledge or approval of the firm.
      14 Outside Business Activities—Allegations concerning the RR engaging in an undisclosed business activity (other than a securities transaction) outside the scope of his or her relationship with the firm (e.g., employment with another entity without the knowledge of the firm).
      20 Research—Allegations concerning a transaction(s) that was made based upon a firm's research opinion that allegedly contained a material misstatement(s) or the omission of a material fact(s) communicated to the RR/customer. (This will usually be coded as a "Firm" vs. "RR" problem.)
      21 Product Origination/Investment Banking—Allegations concerning a transaction(s) that was based on investment banking/issuer/sponsor disclosure(s) that allegedly lacked "due diligence" in that such disclosure(s) contained a material misstatement(s) or the omission of a material fact(s) communicated to the RR/customer. (This will usually be coded as a "Firm" vs. "RR" problem.)
      22 Trading—Allegations concerning a transaction(s) that was based on a Trading Department (or support staff) disclosure(s) that contained a material misstatement(s) or the omission of a material fact(s) relating to secondary market conditions or security feature communicated to the RR/customer. (This will usually be coded as a "Firm" vs. "RR" problem.)
      23 Poor Performance—Allegations concerning the poor performance of the customer's account, but does not allege any specific sale practice violations against the RR or attribute damages to a research analyst recommendation. (Not otherwise reportable under Sales Practice Codes 20, 21 or 22.)
      24 Managed Accounts—Allegations concerning the practice of an in-house or outside money manager. (Not to be used when the RR is the money manager and allegations are of a sales practice nature against the RR.)
      25 Marketing/Sales Literature—Allegations concerning false or misleading statements, claims, comparisons or material omissions found in retail communications, advertisements, sales literature and other written firm communications. (Not research trading/investment banking/issuer/sponsor materials.)
      26 Regulation B—Allegations concerning a denial of credit on the basis of race, color, religion, national origin, sex, marital status, age, receipt of income from public assistance programs or good faith exercise of any rights under the Consumer Credit Protection Act (CCPA) (Usually coded as a "firm vs. RR" problem.)
      27 Regulation E—Allegations concerning a failure by the firm to comply with Regulation E—the Electronic Transfer Act. (Usually coded as a "firm vs. RR" problem.)
      28 Regulation S-P—Allegations concerning a failure by the firm to comply with Regulation S-P, which was adopted to implement Title V of the Gramm-Leach-Bliley Act.

      Pursuant to Regulation S-P, a financial institution must:
      •   Disclose to customers— on an initial and annual basis—its policies for collecting and sharing a customer's non-public personal information with affiliated and nonaffiliated third parties;
      •   Provide the Firm's customers with the ability to "opt out" of certain disclosures of their non-public personal information to non-affiliated third parties, with certain exceptions; and
      •   State the financial institution's security standards to protect a customer's nonpublic personal information. (Usually coded as a "firm vs. RR" problem.)
      29 Third Party/Anonymous—Allegations received by an unauthorized third party or anonymous source. (Note: If the firm received authorization from the customer subsequent to the receipt of a third party/anonymous complaint, it is obligated to file an amendment via the Firm Gateway application within 45 days of receipt of the authorization to identify the true problem code.)
      30 Complaints Referred to Previous Employer—Allegations received by a firm against a current or previously employed RR regarding activities that occurred at the RR's former employer firm.
      31 Other Theft / Forgery—Allegations concerning theft or misappropriation of funds or securities or forgery against someone other than a RR of the firm.
      32 Identity Theft—Allegations concerning improper use of a customer's social security number or other non-public personal identity information by unauthorized individuals or entities.
      33 Non-Broker-Dealer Affiliate Activity—Non-Broker-Dealer Affiliate activity not otherwise characterized by another Problem Code.
      40 Miscellaneous—Firm related complaints only. Non sales practice miscellaneous code is 99. Sales practice miscellaneous code is 00.
      50 Transfer of Accounts—Allegations concerning full or partial transfer of a customer's account between broker-dealers. Includes both ACATS and manual transfers and internal transfers between branches.
      51 Receipt or Delivery of Securities—Allegations concerning receipt or delivery of any type of security from broker-dealer to a customer or vice versa. Includes lost certificates, delayed securities transfers, non-transferable securities or securities not in transfer because of a fail.
      52 Receipt or Disbursement of Funds—Allegations concerning funds received from or disbursed to a customer. Includes checks generated automatically, such as monthly dividend checks, IRS distribution, etc.
      53 Dividend and Interest Problems—Allegations concerning payments or charges of dividends or interest, including stock dividends. Does not include disbursement of automatic monthly dividend checks or margin interest dependencies.
      54 Margin Problems—Allegations concerning margin, including account liquidations, margin call notification and margin interest discrepancies.
      55 Reorganization/Redemption—Allegations concerning stock splits, tenders, mergers, bond/unit trust redemption and called bonds.
      56 Proxy/Prospectus—Allegations concerning the delay or non-receipt of a proxy, prospectus or shareholder mailing by a customer.
      57 Execution—Allegations concerning non-execution, price discrepancy, delay in entry or report and delay in mutual fund purchases and redemptions.
      58 Statements/Confirms—Allegations concerning physical characteristics and presentation of statements/confirms, failure to receive statement/confirms, and questions regarding the reported price, value of, or failure to, value a security.
      59 Tax Reporting—Allegations concerning tax reporting to, or on behalf of, a customer. Includes 1099, TEFRA withholding, K-1, W2-p, 5498 and Year-to-Date information appearing on monthly statements as well as any other tax reporting forms.
      60 Fees and Commissions—Allegations concerning customary fees (custodial, administrative), service charges (bounced checks, lost certificate, replacement, etc.) and commissions/markups (markdowns) and wrap fees.
      61 Account Administration and Processing—Allegations concerning daily activity in a customer's account (e.g., trade corrections, journal entries, un-invested credit balances, and erroneous or missing positions in account).
      62 On-Line Trading—Allegations concerning trading initiated by a customer on-line, (including non-execution, price discrepancy, delays in execution and delays in trade confirmation).
      63 Service Issues—Allegations concerning inadequate or unsatisfactory service from the firm or any of its employees.
      64 PATRIOT Act Liquidation—Allegations concerning the liquidation of an account due to the firm's inability to confirm the customer's identity per Section 326 of the PATRIOT Act or failure to obtain foreign bank certifications per Sections 313 and 319(b) of the PATRIOT Act.
      65 Account Administration and Processing—Account Opening—Allegations concerning problems establishing a new account (e.g., delays in opening account, and issues with account type and documentation).
      66 Account Administration and Processing—Account Maintenance—Allegations concerning non-transaction-related problems with existing accounts (e.g., address changes, investment objective changes, title changes and account closing issues).
      67 On-Line Issues—Allegations concerning access and functionality of a firm's online system (connectivity and navigation).
      68 Firm Policy—Allegations concerning a customer's dissatisfaction with the RR or the firm as a result of a firm policy or procedure (that is not otherwise better characterized by another Problem Code).
      99 Miscellaneous (Non-Sales Practice Only)—"Non-Sales Practice" only ("Sales Practice" Miscellaneous code is "00".)

    • 14-19 FINRA Requests Comment on a Revised Proposal to Require a Hyperlink to BrokerCheck in Online Retail Communications With the Public; Comment Period Expires: June 16, 2014

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      BrokerCheck

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

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

      BrokerCheck®
      Central Registration Depository (CRD®)
      Social Media
      Uniform Registration Forms
      Referenced Rules & Notices

      Regulatory Notice 10-06
      Regulatory Notice 11-39
      Regulatory Notice 12-10
      FINRA Rule 2210
      FINRA Rule 2267

      Executive Summary

      FINRA seeks comment on a revised proposal to require a hyperlink to BrokerCheck in firms' online retail communications with the public. The revised proposal includes changes made in response to comments on a prior proposal to amend FINRA Rule 2267 (Investor Education and Protection). The revised proposal would require a firm to include a readily apparent reference and hyperlink to BrokerCheck on each website of the firm that is available to retail investors. In addition, it would require a firm to include a readily apparent reference and hyperlink to BrokerCheck in online retail communications with the public that include a professional profile of, or contact information for, an associated person, subject to specified conditions and exceptions, including exceptions for electronic mail and text messages.

      The proposed rule is available as Attachment A at www.finra.org/notices/14-19.

      Questions regarding this Notice should be directed to:

      •   Joseph Savage, Vice President, Regulatory Policy, at (240) 386-4534;
      •   Richard E. Pullano, Vice President and Chief Counsel, Registration and Disclosure, at (240) 386-4821 (regarding BrokerCheck); or
      •   Erika Lazar, Assistant General Counsel, Office of General Counsel, at (202) 728-8013.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by June 16, 2014.

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

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

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

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

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

      In January 2013, FINRA filed with the SEC a proposed rule change to amend FINRA Rule 2267 (Investor Education and Protection)3 to require all firms to include a prominent description of and link to BrokerCheck on their websites, social media pages and any comparable Internet presence (the initial proposal).4 The requirement also applied to the websites, social media pages and any comparable Internet presence relating to a firm's investment banking or securities business maintained by or on behalf of any person associated with a firm. The proposed rule change was intended to increase investor awareness and use of BrokerCheck.5 The SEC received 24 comment letters in response to the proposed rule change, some of which raised operational issues. The most common concerns involved the challenges of implementing the proposed rule change with respect to social media pages and the use of a "deep" link to BrokerCheck summary reports specific to each member firm or associated person.6 FINRA withdrew the filing to assess and respond to commenters' concerns.

      B. Revised Proposal

      In light of the concerns with the initial proposal, FINRA requests comment on a revised proposal that incorporates the proposed BrokerCheck link requirement into FINRA's regulatory framework for communications with the public in FINRA Rule 2210 (Communications With the Public). Specifically, the revised proposal would adopt FINRA Rule 2210(d)(8)(A) to require a firm to include a readily apparent reference and hyperlink to BrokerCheck on each website of the firm that is available to retail investors.

      In addition, proposed FINRA Rule 2210(d)(8)(B) would require a firm to include a readily apparent reference and hyperlink to BrokerCheck in online retail communications that include a professional profile of, or contact information for, an associated person, subject to the following conditions:7

      •   If the retail communication appears on the firm's website or any site that it hosts, the hyperlink to BrokerCheck must appear in close proximity to the profile or contact information.
      •   If the retail communication appears on a third-party website that permits a hyperlink to another website, the firm must either (1) post a hyperlink to BrokerCheck in close proximity to the profile or contact information; or (2) post a hyperlink to the firm's website, which includes a readily apparent reference and hyperlink to BrokerCheck, in close proximity to the profile or contact information, and include in the thirdparty website communication disclosure that informs the reader that a hyperlink to BrokerCheck is available through the linked website.
      •   If the retail communication appears on a third-party website that does not permit a hyperlink to another website, the firm must provide the BrokerCheck web address (uniform resource locator (URL)) in close proximity to the profile or contact information and, to the extent feasible, disclose that information concerning the associated person is available through BrokerCheck.

      Proposed FINRA Rule 2210(d)(8)(C) would except from the proposed requirements:

      •   electronic mail or text messages;
      •   a retail communication that is posted on an online interactive electronic forum (such as a message board, Twitter feed or chat room);8
      •   a member firm that does not provide products or services to retail investors; or
      •   a directory or list of associated persons limited to names and contact information.9

      FINRA does not treat third-party communications as a firm's or its associated persons' communications under FINRA Rule 2210 unless the firm or its associated persons have adopted or become entangled with the communication.10 Accordingly, the disclosure requirements of proposed FINRA Rule 2210(d)(8) would not apply to independent thirdparty websites that provide contact or profile information about a firm or its associated persons if the firm and its associated persons have not adopted the website and have no involvement with its content.11

      FINRA believes the proposed amendments to FINRA Rule 2210 address many of the commenters' concerns on the original proposal. By incorporating the proposed rule change into the regulatory framework for communications with the public, the revised proposal clarifies the operation of the proposed requirements. In this regard, FINRA has issued guidance related to FINRA Rule 2210 that addresses the rule's application to social media pages, blogs and other online communications with the public.12 In addition, the revised proposal clarifies that a hyperlink to BrokerCheck be included only on websites of the firm that are available to retail investors, rather than on all of its social media pages and proprietary sites that limit access to institutional investors.

      As detailed above, the revised proposal provides flexibility with respect to online retail communications on third-party websites that are not controlled by the firm, such as social media sites, by providing firms with options to address the restrictions and limitations of such websites.13 In addition, the exceptions in the revised proposal provide clarity regarding the application of the proposed rule. The revised proposal eliminates the requirement for a deep link to a firm's or associated person's BrokerCheck report summary page.

      FINRA believes that the revised approach will increase investor awareness of BrokerCheck, while addressing the operational concerns the initial proposal raised.

      To assist firms in assessing the impact of the revised proposal, FINRA reviewed a selection of popular social media sites and conducted trials to determine how firms could implement the proposed requirements for third-party websites. Based on this review, FINRA determined that firms would be able to post a hyperlink to BrokerCheck or a hyperlink to the firm's website in close proximity to an associated person's profile or contact information on:14

      •   Facebook: in the "About" section of the Profile page;
      •   LinkedIn: in the "Background Summary" section (individuals);
      •   YouTube: in the "About" section of the Profile page; and
      •   Pinterest: in the "About" section of the Profile page.

      With respect to Twitter, FINRA understands that due to character limitations along with the inability to include hyperlinks in a user's profile, the inclusion of a hyperlink to BrokerCheck or a hyperlink to the firm's website is not feasible. For sites with such restrictions, firms would be required to provide the BrokerCheck URL in close proximity to an associated person's profile or contact information and, to the extent feasible, disclose that information concerning the associated person is available through BrokerCheck. On Twitter, the BrokerCheck web address would be required in the "About" section of an associated person's Profile page.

      FINRA requests comment on all aspects of the revised proposal, including any potential costs and burdens that the revised proposal could impose on firms. FINRA particularly requests comment concerning the following issues:

      •   Does the revised proposal address the operational concerns raised by the initial proposal, particularly with respect to the proposed requirements for third-party websites? Why or why not?
      •   Should FINRA retain the deep link requirement to provide investors with direct access to a firm's or associated person's BrokerCheck report summary?15
      •    Will the revised proposal increase investor use and awareness of BrokerCheck?
      •   What are the direct and indirect costs of the proposed rule to firms, including the cost associated with monitoring retail communications of associated persons across different channels? FINRA welcomes estimates of these costs to firms.
      •   Are there alternative approaches FINRA should consider to accomplish this goal? If so, what are those alternatives and why could they be better suited?

      FINRA requests that commenters provide empirical data or other factual support for their comments wherever 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 NTM 03-73 (November 2003) (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 Subject to limited exceptions, FINRA Rule 2267(a) requires member firms to provide annually in writing to each of their customers the BrokerCheck hotline number, the FINRA website address, and a notification of the availability of an investor brochure that describes BrokerCheck.

      4 See Securities Exchange Act Release No. 68700 (January 18, 2013), 78 FR 5542 (January 25, 2013) (Notice of Filing of SR-FINRA-2013-002).

      5 See also Regulatory Notice 12-10 (February 2012).

      6 A BrokerCheck report summary page displays the firm's or person's CRD number, SEC number (for firms), registration status and employing firm (for individuals).

      7 FINRA Rule 2210(a)(5) defines a "retail communication" as any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. Rule 2210(a)(6) defines a "retail investor" as any person other than an institutional investor (as defined in Rule 2210(a)(4)), regardless of whether the person has an account with a member.

      8 FINRA notes, however, that the proposed requirements would apply to static content on a site that hosts an online interactive forum (such as a profile page).

      9 This exception for directories that are limited to the names and contact information of associated persons is intended to apply both to directories that appear on a member's website, as well as third-party website directories in which the firm or associated person was involved with the website's content.

      10 See Regulatory Notice 11-39 (August 2011), Question 4.

      11 For example, a firm would not be required to ensure that an independent third-party website that provides ratings or customer reviews about broker-dealers includes a hyperlink to BrokerCheck if the firm and its associated persons have not adopted the website or become entangled with the creation of the website's content. Similarly, the requirements of proposed FINRA Rule 2210(d)(8) would not apply to online directories that aggregate and assemble service industry information based on publicly available data without any involvement of a firm or its associated persons.

      12 See Regulatory Notice 11-39 (August 2011) and Regulatory Notice 10-06 (January 2010).

      13 FINRA notes that, consistent with social media guidance published by FINRA in relation to FINRA Rule 2210, the revised proposal would not apply to personal social media sites or a biography on a website that is outside the scope of an associated person's relationship with a member firm.

      14 If the hyperlink is to the firm's website, the firm also must include disclosure that informs the reader that a hyperlink to BrokerCheck is available through the linked website.

      15 FINRA notes that a deep link can be created by adding a firm's or individual's CRD number to the end of the appropriate web address format (Designated URL). For example, the deep link for the individual with CRD number 1234 is www.brokercheck.finra.org/Individual/1234.

    • 14-18 FINRA Revises the Investment Company and Variable Contracts Products Principal (Series 26) Examination Program; Implementation Date: June 16, 2014

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      Qualification Examinations

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Legal
      Operations
      Registration
      Training
      Key Topics

      Series 26 Qualification Examination
      Referenced Rules & Notices

      FINRA Rule 2090
      FINRA Rule 2111
      FINRA Rule 3230
      FINRA Rule 4510
      Information Notice 3/12/08
      NASD Rule 1022(b)
      NASD Rule 2212
      NASD Rule 2310
      NASD Rule 2510
      NASD Rule 3110
      NYSE Rule 345.15(3)
      and its interpretation
      SEA Rule 15c1-7
      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 Principal (Series 26) examination program.1

      The changes are reflected in the Series 26 content outline on FINRA's website and will appear in Series 26 examinations administered on or after June 16, 2014.

      Questions regarding this Notice should be directed to:

      •   Amaka Omenka, Senior Qualifications Analyst, Testing and Continuing Education Department, at (240) 386-4678; or
      •   Bridget Fox, Qualifications Analyst, Testing and Continuing Education Department, at (240) 386-6472.

      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 1022(b)3 (Limited Principal—Investment Company and Variable Contracts Products), if a principal'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), and he or she is registered as either a General Securities Representative or a Limited Representative—Investment Company and Variable Contracts Products, the principal may register and qualify as an Investment Company and Variable Contracts Products Principal.4 The Series 26 examination qualifies an individual to function as an Investment Company and Variable Contracts Products Principal.

      In consultation with a committee of industry representatives, FINRA recently undertook a review of the Series 26 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 Principal currently performs. FINRA also has revised the format of the content outline.

      Revisions

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

      Function 1: Personnel Management Activities and Registration of the Broker-Dealer, 16 questions;

      Function 2: Supervises Associated Persons and Oversees Sales Practices, 49 questions; and

      Function 3: Oversees Compliance and Business Processes of the Broker-Dealer and its Offices, 45 questions.

      FINRA also adjusted the number of questions assigned to each major job function to ensure that the overall examination better reflects the key tasks performed by an Investment Company and Variable Contracts Products Principal. The questions on the revised Series 26 examination place greater emphasis on key tasks such as supervision of registered persons, sales practices and compliance.

      Each function also includes specific tasks describing activities associated with performing that function. There are two tasks (1.1–1.2) associated with Function 1; six tasks (2.1–2.6) associated with Function 2; and six tasks (3.1–3.6) associated with Function 3.5 For example, one task (Task 2.1) is monitors, supervises and documents the sales activities of associated persons to achieve compliance with securities industry rules and regulations and firm policies and provides feedback regarding product knowledge and performance.6 Further, the outline lists the knowledge required to perform each function and associated tasks (e.g., standards of conduct and prohibited activities).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 2090), NASD Rules (e.g., NASD Rule 2510) and SEC rules (e.g., SEA Rule 15c1-7).8

      FINRA conducted a job analysis study of Investment Company and Variable Contracts Products Principals, 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 Principal. 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 FINRA rules that replace NASD rules in the consolidated FINRA rulebook (e.g., FINRA Rules 2111 (Suitability), 3230 (Telemarketing) and 4510 Series (Books and Records Requirements), respectively).9 FINRA has adopted similar changes to the Series 26 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 26 examination will remain at 110 multiplechoice questions,10 and candidates will continue to have 165 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 26 content outline is available on FINRA's website.


      1 See Securities Exchange Act Release No. 71998 (April 23, 2014); 79 FR 24047 (April 29, 2014); File No. SR-FINRA-2014-015, which was filed with the SEC for immediate effectiveness on April 15, 2014.

      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 Ruleboo"). 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 Content Outline Pages 6–18.

      6 See Content Outline Page 9.

      7 See Content Outline Page 9.

      8 See Content Outline Page 11.

      9 See Rule Conversion Chart.

      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 10 additional, unidentified pre-test questions that do not contribute towards the candidate's score. Therefore, the examination actually consists of 120 questions, 110 of which are scored. The 10 pre-test questions are randomly distributed throughout the examination.

    • 14-17 2014 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 13-17
      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 $6,159,100 to adequately fund the GASB's annual budget by collecting $1,539,775 from its member firms each calendar quarter beginning in April 2014.

      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 members in the previous calendar quarter. To exclude firms with de minimis transactions in municipal securities in a given quarter from being assessed the fee, members 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 2014, GASB's annual budget expenses of $9,248,800 will be partially funded from $3,089,700 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 $6,159,100;3 therefore, FINRA will collect $1,539,775 from its members each quarter beginning in April 2014.4

      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 2013 and the 2014 GASB budget, FINRA estimates that the GASB Accounting Support Fee for 2014 will be between $0.0018 and $0.0022 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 13-17 (April 2013); Regulatory Notice 12-15 (February 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 2014 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 The invoice firms receive in January 2014 covers the fourth quarter of GASB's 2013 budget and is based on the amounts set forth in Regulatory Notice 13-17. 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)(1), (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).

    • 14-16 Securities Industry/Regulatory Council on Continuing Education Issues Firm Element Advisory Update

      View PDF

      Continuing Education

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Continuing Education
      Legal
      Registration
      Senior Management
      Key Topics

      Continuing Education
      Firm Element
      Referenced Rules & Notices

      The Securities Industry/Regulatory Council on Continuing Education (Council) has released its Spring 2014 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.

    • 14-15 FINRA Requests Comment on the Effectiveness and Efficiency of its Gifts and Gratuities and Non-Cash Compensation Rules; Comment Period Expires: May 8, 2014*

      * The comment period has been extended to May 23, 2014.

      View PDF

      Retrospective Rule Review

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Investment Companies
      Legal
      Registered Representatives
      Senior Management
      Variable Contracts
      Key Topics

      Business Entertainment
      Commercial Bribery
      Gifts
      Gratuities
      Non-Cash Compensation
      Referenced Rules & Notices

      FINRA Rule 3220
      FINRA Rule 2310(c)
      FINRA Rule 2320(g)(4)
      FINRA Rule 5110(h)
      NASD Rule 2830(I)(5)

      FINRA is conducting a retrospective review of the gifts and gratuities and non-cash compensation rules to assess their effectiveness and efficiency. This Notice outlines the general retrospective rule review process and seeks responses to several questions related to firms' experiences with these specific rules.

      Questions regarding this Notice should be directed to:

      •   Joseph Savage, Vice President and Counsel, Regulatory Policy, at (240) 386-4534;
      •   Victoria Crane, Associate General Counsel, Office of General Counsel, at (202) 728-8104; or
      •   Hammad Qureshi, Economist, Office of the Chief Economist, at (202) 728-8150.

      Action Requested

      FINRA encourages all interested parties to comment. Comments must be received by May 8, 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.

      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 & Discussion

      FINRA believes that it is appropriate, after a reasonable period of time, to look back at its significant rulemaking to determine whether a FINRA rule or rule set2 is meeting its intended investor-protection objectives by reasonably efficient means. FINRA further believes that a retrospective review should include a review not only of the substance and application of a rule or rule set, but also FINRA's processes to administer the rules. FINRA intends to select relevant rules and to conduct retrospective rule reviews on an ongoing basis to ensure that its rules remain relevant and appropriately designed to achieve their objectives, particularly in light of environmental, industry and market changes.

      FINRA will prioritize rules for review, taking into consideration a number of factors, including:

      •   feedback from FINRA's Member Relations and Education department as to rules most frequently identified by firms as raising questions or concerns;
      •   input from FINRA's advisory committees;
      •   observations and experience of FINRA's operating departments, including examination findings, enforcement actions, interpretive requests and general questions;
      •   how recently the rule(s) have been amended or subjected to industry feedback;
      •   the anticipated length of the review process based on the breadth and complexity of the rule or rule set; and
      •   federal laws, regulations, or rules that may preempt or otherwise limit FINRA's ability to amend rules.

      For a newly adopted rule, FINRA will consider it for retrospective review after a reasonable implementation period—allowing FINRA time to gain experience with the rule and to obtain meaningful data to conduct a thorough assessment of the rule's impact.

      The review process will consist of two phases: (1) findings and (2) action. During the findings phase, FINRA will assess the efficacy and efficiency of the rule or rule set as currently implemented, including FINRA's internal administrative processes. FINRA also intends to seek input from affected parties and experts, including its advisory committees, subject-matter experts inside and outside of the organization, and other stakeholders, including industry members, investors, interested groups and the public. FINRA staff will assess issues including: the existence of duplicative, inconsistent or ineffective regulatory obligations; whether market or other conditions have changed to suggest there are ways to improve the efficiency or effectiveness of a regulatory obligation without loss of investor protections; and potential gaps in the regulatory framework. Upon completion of this assessment, FINRA staff will report its findings to the Board of Governors and make a general staff recommendation as to whether the rule or rule set should be maintained as is, modified or deleted. The staff will also recommend an action plan that will, where appropriate, include recommendations as to how a rule or rule set should be modified or the need for additional research or information gathering. However, FINRA does not intend the findings phase to produce a specific proposal to modify any rules.

      The action phase will then follow. If the findings report recommends modification of rules, FINRA will separately engage in its usual rulemaking process to propose amendments to the rules based on the findings. This process will include input from FINRA's advisory committees and an opportunity for comment on specific proposed revisions in a Regulatory Notice or rule filing with the SEC, or both.

      Request for Comment

      FINRA has identified the gifts and gratuities and non-cash compensation rule set for review. This rule set includes the following rules:

      FINRA Rule 3220 (Influencing or Rewarding Employees of Others)3
      FINRA Rule 2310(c) (Direct Participation Programs)
      FINRA Rule 2320(g)(4) (Variable Contracts of an Insurance Company)
      FINRA Rule 5110(h) (Corporate Financing Rule—Underwriting Terms and Arrangements)
      FINRA Rule 2830(I)(5) (Investment Company Securities)

      FINRA seeks answers to the following questions with respect to this rule set:

      1. Have the rules effectively addressed the problem(s) they were intended to mitigate?
      2. What have been experiences with implementation of the rule set, including any ambiguities in the rules or challenges to comply with them?
      3. What have been the costs and benefits arising from FINRA's rules? Have the costs and benefits been in line with expectations described in the rulemaking?
      4. Can FINRA make the rules more efficient and effective, including FINRA's administrative processes?

      In addition to comments responsive to these questions, FINRA requests any data or evidence in support of comments. While FINRA welcomes specific suggestions as to how the rules should be changed, the purpose of this Notice is to obtain input as to whether or not the current rule set is effective and efficient. As discussed above, FINRA will separately consider during the action phase specific changes to the rules.


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

      2 A rule set is a group of rules identified by FINRA staff to contain a similar subject, characteristics or objectives.

      3 FINRA is including a review of firms' implementation experience with FINRA guidance regarding ordinary and usual business entertainment provided by firms or their associated persons to the firms' clients and their guests. See letter to Henry H. Hopkins and Sarah McCafferty, T. Rowe Price Investment Services, Inc., from R. Clark Hooper, NASD, dated June 10, 1999.

    • 14-14 FINRA Requests Comment on the Effectiveness and Efficiency of its Communications With the Public Rules; Comment Period Expires: May 8, 2014*

      * The comment period has been extended to May 23, 2014.

      View PDF

      Retrospective Rule Review

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Advertising
      Compliance
      Investment Companies
      Registered Representatives
      Research
      Senior Management
      Key Topics

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

      FINRA Rule 2210
      FINRA Rule 2212
      FINRA Rule 2213
      FINRA Rule 2214
      FINRA Rule 2215
      FINRA Rule 2216

      Executive Summary

      FINRA is conducting a retrospective review of several communications with the public rules to assess their effectiveness and efficiency. This Notice outlines the general retrospective rule review process and seeks responses to several questions related to firms' experiences with these specific rules.

      Questions regarding this Notice should be directed to:

      •   Philip Shaikun, Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-8451;
      •   Tom Pappas, Vice President, Advertising Regulation, at (240) 386-4553; or
      •   Hammad Qureshi, Economist, Office of the Chief Economist, at (202) 728-8150.

      Action Requested

      FINRA encourages all interested parties to comment. Comments must be received by May 8, 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.

      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 & Discussion

      FINRA believes that it is appropriate, after a reasonable period of time, to look back at its significant rulemaking to determine whether a FINRA rule or rule set3 is meeting its intended investor-protection objectives by reasonably efficient means. FINRA further believes that a retrospective review should include a review not only of the substance and application of a rule or rule set, but also FINRA's processes to administer the rules. FINRA intends to select relevant rules and to conduct retrospective rule reviews on an ongoing basis to ensure that its rules remain relevant and appropriately designed to achieve their objectives, particularly in light of environmental, industry and market changes.

      FINRA will prioritize rules for review, taking into consideration a number of factors, including:

      •   feedback from FINRA's Member Relations and Education department as to rules most frequently identified by firms as raising questions or concerns;
      •   input from FINRA's advisory committees;
      •   observations and experience of FINRA's operating departments, including examination findings, enforcement actions, interpretive requests and general questions;
      •   how recently the rule(s) have been amended or subjected to industry feedback;
      •   the anticipated length of the review process based on the breadth and complexity of the rule or rule set; and
      •   federal laws, regulations or rules that may preempt or otherwise limit FINRA's ability to amend rules.

      For a newly adopted rule, FINRA will consider it for retrospective review after a reasonable implementation period—allowing FINRA time to gain experience with the rule and to obtain meaningful data to conduct a thorough assessment of the rule's impact.

      The review process will consist of two phases: (1) findings and (2) action. During the findings phase, FINRA will assess the efficacy and efficiency of the rule or rule set as currently implemented, including FINRA's internal administrative processes. FINRA also intends to seek input from affected parties and experts, including its advisory committees, subject-matter experts inside and outside of the organization, and other stakeholders, including industry members, investors, interested groups and the public. FINRA staff will assess issues including: the existence of duplicative, inconsistent or ineffective regulatory obligations; whether market or other conditions have changed to suggest there are ways to improve the efficiency or effectiveness of a regulatory obligation without loss of investor protections; and potential gaps in the regulatory framework. Upon completion of this assessment, FINRA staff will report its findings to the Board of Governors and make a general staff recommendation as to whether the rule or rule set should be maintained as is, modified or deleted. The staff will also recommend an action plan that will, where appropriate, include recommendations as to how a rule or rule set should be modified, or the need for additional research or information gathering. However, FINRA does not intend the findings phase to produce a specific proposal to modify any rules.

      The action phase will then follow. If the findings report recommends modification of rules, FINRA will separately engage in its usual rulemaking process to propose amendments to the rules based on the findings. This process will include input from FINRA's advisory committees and an opportunity for comment on specific proposed revisions in a Regulatory Notice or rule filing with the SEC, or both.

      Request for Comment

      FINRA has identified the communications with the public rule set for review. This rule set includes the following rules:

      •   FINRA Rule 2210 (Communications with the Public)
      •   FINRA Rule 2212 (Use of Investment Company Rankings in Retail Communications
      •   FINRA Rule 2213 (Requirements for the Use of Bond Mutual Fund Volatility Ratings)
      •   FINRA Rule 2214 (Requirements for Use of Investment Analysis Tools)
      •   FINRA Rule 2215 (Communications with the Public Regarding Securities Futures)
      •   FINRA Rule 2216 (Communications with the Public Regarding Collateralized Mortgage Obligations)

      FINRA seeks answers to the following questions with respect to this rule set:

      1. Have the rules effectively addressed the problem(s) they were intended to mitigate?
      2. What have been experiences with implementation of the rule set, including any ambiguities in the rules or challenges to comply with them?
      3. What have been the costs and benefits arising from FINRA's rules? Have the costs and benefits been in line with expectations described in the rulemaking?
      4. Can FINRA make the rules more efficient and effective, including FINRA's administrative processes?

      In addition to comments responsive to these questions, FINRA requests any data or evidence in support of comments. While FINRA welcomes specific suggestions as to how the rules should be changed, the purpose of this Notice is to obtain input as to whether or not the current rule set is effective and efficient. As discussed above, FINRA will separately consider during the action phase specific changes to the rules.


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

      2 A rule set is a group of rules identified by FINRA staff to contain similar subject, characteristics or objectives.

    • 14-13 Extension of Time Requests Relating to New SEA Rule 15c3-3(d)(4); Effective Date: April 2, 2014

      View PDF

      Regulatory Extension (REX) System Update

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Legal
      Operations
      Regulatory Reporting
      Senior Management
      Key Topics

      Extension of Time Requests Relating to SEA Rule 15c3-3(d)(4)
      Referenced Rules & Notices

      SEA Rule 15c3-3(d)(4)
      SEA Rule 15c3-3(n)
      Regulatory Notice 10-28

      Executive Summary

      FINRA is updating the Regulatory Extension (REX) system1 to enable firms to file extension of time requests relating to new SEA Rule 15c3-3(d)(4) as adopted by the SEC in July 2013.2 Firms may file such requests beginning April 2, 2014, by completing the currently available online request form that is accessible by logging in to the REX system via the FINRA Firm Gateway. Firms should note, however, that the REX system will not be able to accept extension of time requests relating to Rule 15c3-3(d)(4) that are submitted via batch file process.3

      Questions concerning this Notice should be directed to:

      •   Glen Garofalo, Director, Credit Regulation, at (646) 315-8464;
      •   Steve Yannolo, Project Manager, Credit Regulation, at (646) 315-8621; or
      •   Theresa Reynolds, Senior Credit Regulation Coordinator, at (646) 315-8567.

      Background & Discussion

      In July 2013, the SEC adopted new paragraph (d)(4) under SEA Rule 15c3-3, which, among other things, requires a broker-dealer to take prompt steps to obtain physical possession or control over securities of the same issue and class as those included "on the broker's or dealer's books or records that allocate to a short position of the broker or dealer or a short position for another person, excluding positions covered by paragraph (m) [of Rule 15c3-3], for more than 30 calendar days."4

      The SEC staff has stated that the 30-calendar day period specified in paragraph (d)(4) begins to run when a broker-dealer identifies a segregation deficit in fully paid and excess margin securities that allocates to a short position (e.g., when the deficit is created).5 Paragraph (d)(4) of Rule 15c3-3 is triggered if the segregation deficit persists for 30 consecutive calendar days without cure.6 Further, the SEC staff has stated that brokerdealers are not required to buy-in securities and, instead, may borrow securities to meet the requirements of Rule 15c3-3(d)(4).7 The SEC also adopted an amendment to paragraph (n) of SEA Rule 15c3-3 to permit FINRA under specified conditions to grant an extension of the 30-calendar day period for purposes of paragraph (d)(4) under the rule.

      REX System Update

      Beginning April 2, 2014, firms may file extension of time requests relating to new Rule 15c3-3(d)(4) by completing the currently available online request form that is accessible by logging in to the REX system via the FINRA Firm Gateway. Firms may submit the extension of time requests on either the first or second business day following the 30th calendar day from the date the deficit under Rule 15c3-3(d)(4) is created. Firms should note that the REX system will not be able to accept extension of time requests relating to Rule 15c3-3(d) (4) that are submitted via batch file process. FINRA will monitor the volume and nature of extension of time requests and may at a future date modify the REX system to enable firms to submit such requests via batch file process using File Transfer Protocol (FTP) or Secure File Transfer Protocol (SFTP). Firms that currently submit their extension of time requests exclusively via batch file process must ensure that they have an active user ID and password to be able to access the online REX system. To ensure they have an active user ID and password to access the online REX system, firms should contact their designated Super Account Administrator (SAA) as soon as possible prior to April 2, 2014.

      Firms are encouraged to review the status of each extension of time request immediately after it is submitted through the online REX system interface and on the firm's daily extension report provided by FINRA (see the "Available Reports" section below). An extension of time request that is denied due to incomplete or inaccurate information may be eligible for reconsideration if corrected and resubmitted via the online REX system by the close of business on the second business day after the 30th calendar day of the paragraph (d)(4) deficit.

      File Format and Data Elements Required for Extension of Time Requests Relating to SEA Rule 15c3-3(d)(4)

      Following are the data elements for extension of time requests relating to new SEA Rule 15c3-3(d)(4):

      •   Request Type—Select request type "15c3."
      •   Rule Type—Select (d)(4) as the rule type.
      •   Reason Code—Select one of the following reason codes:
      •   073—Unable to Buy-In
      •   077—SRO Halted Trading or Buy-In Privilege
      •   080—Other
      •   Request Number—This field will be auto-populated to reflect the number of extension of time requests submitted for a specified request (e.g., whether it is a 1st, 2nd, 3rd extension of time request for the same deficit). Firms cannot edit this field.
      •   Original Request Date—Indicate the date the extension of time request is first made. For an initial request, this must be the date of the initial request. For subsequent requests, firms must use the date of the initial request.
      •   Days Requested—Indicate the number of days being requested for the extension of time request. For Reason Codes 073 and 077, the system will default to 14 calendar days for each request submitted. For Reason Code 080, firms may request up to 7 calendar days each time they submit a request.
      •   Submitter Filing reference ID—This field is optional and is provided to enable the submitting firm to identify or track each extension of time request for internal purposes.
      •   Comment—This field is mandatory for Reason Code 080 and optional for Reason Codes 073 and 077. Use this field to detail the reason for the extension of time request.
      •   Received By—This is a system generated field that indicates if the extension of time request was submitted via a batch file or submitted via User Interface (UI) online. For extension of time requests relating to Rule 15c3-3(d)(4), the indicator will default to "UI."
      •   Withdrawn Flag—Indicate "Yes" if withdrawing a previously submitted extension of time request. Firms must complete the "Comment" field to indicate why the extension of time request is being withdrawn. If the extension of time request is not being withdrawn, this field will default to "No."
      •   Product Code—Indicate the Product Code associated with the security for which the extension of time request is made. The following values are available for this field: Equity; Option; Derivative; Mutual Fund; Bond.
      •   Issue Symbol or CUSIP—Indicate either the Issue Symbol or the standard industry CUSIP associated with the security for which the extension of time request is made.
      •   Share Amount—Indicate the dollar value of the security for which the extension of time is request is made.
      •   Share Quantity—Indicate the number of shares of the security for which the extension of time request is made.
      •   Date of Deficit—Indicate the date when the deficit was created.
      •   Deficit Allocation Information and Allocated Quantity—Indicate what type of account(s) the security in deficit allocates to on the firm's books and records by selecting from as many of the following accounts as applicable: Proprietary Accounts of BD (PAB); Firm Inventory; Customer; and Non-Customer. Also indicate the quantity of shares allocated to each type of account. Note: The total in the "Allocated Quantity" field must equal the number of shares noted in the "Share Quantity" field.

      Available Reports

      Firms will have access via FINRA Firm Gateway to reports FINRA makes available that will include information on all the extension of time requests a firm submits and their associated data elements. Firms will also be able to query the REX system for information on all extension of time requests that are granted, denied or rejected.

      Member firms that encounter technical problems, or otherwise require assistance, should contact the FINRA Gateway Call Center at (301) 869-6699.


      1 FINRA introduced the REX system in August 2010. See Regulatory Notice 10-28 (June 2010) (Extension of Time Requests).

      2 See Securities Exchange Act Release No. 70072 (July 30, 2013), 78 FR 51824 (August 21, 2013) (Financial Responsibility Rules for Broker-Dealers).

      3 FINRA may implement a batch file process capability for purposes of extension of time requests in connection with Rule 15c3-3(d)(4) at a future date. FINRA will announce the implementation in a Regulatory Notice (or similar communication).

      4 The rule provides that the 30-day time period will not begin to run with respect to a syndicate short position established in connection with an offering of securities until the completion of the underwriter's participation in the distribution as determined pursuant to Rule 100(b) under the SEC's Regulation M.

      5 See Question and Answer 4 in SEC Division of Trading and Markets, "Frequently Asked Questions Concerning the Amendments to Certain Broker-Dealer Financial Responsibility Rules" (March 6, 2014) (SEC Staff FAQs).

      6 The SEC staff has further stated that, for purposes of aging deficits that began on or prior to March 3, 2014, broker-dealers may consider March 3, 2014, as "Day 1." See note 5.

      7 See Question and Answer 5 in the SEC Staff FAQs.

    • 14-12 FINRA Announces Updates of the Interpretations of Financial and Operational Rules

      View PDF

      SEC Financial Responsibility Rules

      Regulatory Notice
      Notice Type

      Guidance
      Suggested Routing

      Compliance
      Finance
      Legal
      Operations
      Regulatory Reporting
      Senior Management
      Key Topics

      Books and Records
      Customer Protection
      Net Capital
      Referenced Rules & Notices

      Regulatory Notice 08-56
      Regulatory Notice 13-44
      Regulatory Notice 14-06
      SEA Rule 15c3-1
      SEA Rule 15c3-3
      SEA Rule 15c3-3a
      SEA Rule 17a-3
      SEA Rule 17a-4

      Executive Summary

      FINRA is updating the imbedded text of Securities Exchange Act (SEA) financial responsibility rules in the Interpretations of Financial and Operational Rules to reflect the effectiveness of amendments the SEC adopted.1 The updated imbedded text relates to SEA Rules 15c3-1, 15c3-3, 15c3-3a, 17a-3 and 17a-4.

      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

      In July 2013, the SEC adopted amendments to the financial responsibility rules for broker-dealers. FINRA is updating the imbedded SEC rule text in the Interpretations of Financial and Operational Rules to reflect the amendments that became effective on March 3, 2014, pursuant to a temporary exemption granted by the SEC.2 The updated imbedded text relates to SEA Rules 15c3-1, 15c3-3, 15c3-3a, 17a-3 and 17a-4. These rule text updates are available in portable digital format (pdf) on FINRA's Interpretations of Financial and Operational Rules page.

      Further, SEC staff continues to communicate and issue written and oral interpretations of the financial responsibility and reporting rules including the newly amended sections of such rules. FINRA has previously updated the Interpretations of Financial and Operational Rules on its website in Regulatory Notices 08-56, 13-44 and 14-06. FINRA will publish in a separate Regulatory Notice at a later date interpretation updates in connection with the amendments to the rules that became effective on March 3, 2014.

      FINRA member firms and others that maintain the hardcopy version of the Interpretations of Financial and Operational Rules may refer to the accompanying updated pages, containing the aforementioned rule text updates, which are being made available to enable the replacement of existing pages in the hardcopy version of the Interpretations of Financial and Operational Rules. The filing instructions for the new pages are as follows:

      SEA Rule Remove Old Pages Add New Pages
      15c3-1 319 319
      15c3-3 2001 2001
      15c3-3 2021–2022 2021–2022
      15c3-3 2041–2042 2041–2042
      15c3-3 2102 2102
      15c3-3 2124 2124
      15c3-3 2141-2144 2141-2144
      15c3-3 2201 2201
      15c3-3 2221–2224 2221–2224
      15c3-3 2241 2241
      15c3-3 2301 2301
      15c3-3 2331 2331
      15c3-3 2341 2341
      15c3-3 2401–2408 2401–2408
      15c3-3 2421–2422 2421–2422
      15c3-3 2431–2434 2431–2434
      15c3-3 2451–2452 2451–2452
      15c3-3 2461–2466 2461–2467
      15c3-3 2501–2502 2501
      15c3-3 2511 2511
      15c3-3 2521 2521
      15c3-3 2524 2524
      15c3-3 2531–2532 2531
      15c3-3 2551–2552 2551–2553
      15c3-3 2561 2561
      15c3-3 2581–2582 2581–2582
      15c3-3a 2601–2610 2601–2610
      15c3-3a NA 2615–2616
      17a-3 3042 3042
      17a-4 3102 3102
      17a-4 3106 3106
      17a-4 3112 3112


      1 See Securities Exchange Act Release No. 70072 (July 30, 2013), 78 FR 51824 (August 21, 2013) (Financial Responsibility Rules for Broker-Dealers) (amending SEA Rules 15c3-1, 15c3-1a, 15c3-2, 15c3-3, 15c3-3a, 17a-3, 17a-4 and 17a-11). The SEC subsequently modified the effective date of specified amendments to the rules pursuant to an Exemptive Order. See Securities Exchange Act Release No. 70701 (October 17, 2013), 78 FR 62930 (October 22, 2013) (Order Providing Broker-Dealers a Temporary Exemption from the Requirements of Certain New Amendments to the Financial Responsibility Rules for Broker-Dealers under the Securities Exchange Act of 1934) (granting temporary exemption, until March 3, 2014, from the amendments to: SEA Rule 15c3-3, except paragraph (j)(1); SEA Rule 15c3-3a}; SEA Rule 17a-3; SEA Rule 17a-4; and paragraph (c)(2)(iv)(E)(2) of SEA Rule 15c3-1).

      2 See note 1.

    • 14-11 SEC Approves Amendments to Uniform Branch Office Registration Form (Form BR); Implementation Date: April 7, 2014

      View PDF

      Branch Office Registration

      Regulatory Notice
      Notice Type

      Consolidated Rulebook
      Suggested Routing

      Branch Office
      Compliance
      Continuing Education
      Legal
      Office of Supervisory Jurisdiction
      Operations
      Registered Representatives
      Senior Management
      Training
      Key Topics

      Branch Office Registration
      Central Registration Depository (CRD®)
      Form BR (Uniform Branch Office Registration Form)
      NYSE Branch Office Registration
      Office of Supervisory Jurisdiction
      Referenced Rules & Notices

      NASD Rule 3010

      Executive Summary

      The Securities and Exchange Commission (SEC) approved amendments to Form BR,1 which firms use to register their branch offices with FINRA, the New York Stock Exchange (NYSE), and participating states via the Central Registration Depository (CRD®) system. Form BR enables a firm to register a branch office (either by notice filing or approval) as required by the relevant jurisdiction or self-regulatory organization (SRO), amend a registration, close or terminate a registration, or withdraw a filing in the appropriate participating jurisdiction and SRO.

      In concert with a committee of industry representatives, the North American Securities Administrators Association (NASAA) and participating states (the Form BR Working Group), FINRA undertook a review of Form BR. As a result of this review, Form BR has been amended to:

      •   eliminate Section 6 (NYSE Branch Information), which currently is applicable only to NYSE-registered firms;
      •   add questions relating to space sharing arrangements and the location of books and records that are currently only in Section 6 and make them applicable to all firms;
      •   modify existing questions and instructions to provide more detailed selections for describing the types of activities conducted at the branch office;
      •   add an optional question to identify a branch office as an "Office of Municipal Supervisory Jurisdiction" (OMSJ), as defined under the rules of the Municipal Securities Rulemaking Board (MSRB); and
      •   make other technical changes to adopt uniform terminology and clarify questions and instructions (revised Form BR).

      This Notice gives an overview of the revised Form BR and provides guidance to firms on implementation timelines. The revised Form BR becomes effective April 7, 2014. However, as described below, firms will not be required to immediately file a revised Form BR for existing branch offices on that date. FINRA has also updated the CRD Frequently Asked Questions (FAQ).

      Questions regarding this Notice should be directed to:
      •   Stefanie M. Watkins, Assistant Chief Counsel, Registration and Disclosure, at (240) 386-4824 or by email; or
      •   Kosha Dalal, Associate Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-6903 or by email.

      Background & Discussion

      Branch Office Registration and Reporting

      Form BR was developed jointly in 2005 by a working group consisting of representatives of FINRA (then the National Association of Securities Dealers, Inc. (NASD)), the NYSE, NASAA and the states to establish a uniform electronic process via the CRD system for registering branch offices with various jurisdictions. Form BR replaced Schedule E of the SEC's Form BD (Uniform Application for Broker-Dealer Registration), the NYSE Branch Office Application Form and state branch office forms, and enabled firms to register branch offices electronically with FINRA, the NYSE and participating states via a single filing through the CRD system. Form BR enables firms to file, for notice or approval, Form BR as required by the applicable jurisdiction or SRO.

      Based on the experience gained with Form BR to date by regulators and firms, and in light of amendments to the relevant rules2 (as part of the rulebook consolidation process3 following the consolidation of NASD and NYSE Regulation to form FINRA), FINRA and the Form BR Working Group proposed amendments to Form BR to develop greater efficiencies for both firms and regulators. Specifically, the revised Form BR will make the branch office registration process more efficient by eliminating duplicative provisions, eliciting relevant information items from all filers, and clarifying existing questions so that regulators and firms can better understand the activities of each registered branch office.

      Implementation of Revised Form BR

      The implementation date for the revised Form BR is April 7, 2014.

      •   New Branch Offices Firms registering or notice filing new branch offices will be required to use the revised Form BR on or after the implementation date.
      •   Existing Branch Offices

      Firms with existing registered branch offices will not be required to file the revised Form BR for such existing offices immediately upon the implementation date. Instead, firms will be required to provide the new information elicited on the revised Form BR for each existing registered branch office whenever an amendment is otherwise required, in the ordinary course, to update existing information items that have become inaccurate or incomplete.4 Firms that are Web EFT participants may continue to file Form BR in a batch format.
      •   Future Review of Implementation Timeline

      FINRA intends to evaluate the number of registered branch offices of FINRA firms for which a revised Form BR has not been filed (and, therefore, for which FINRA and other regulators do not have the new information being elicited on the form) one year after implementation of the revised Form BR. Based on that evaluation, FINRA may consider imposing a future deadline for providing the new information elicited in the revised Form BR if a significant number of registered branch offices have not filed the information through an amendment in the ordinary course.

      Organization of Revised Form BR

      The revised Form BR consists of eight sections with the following section titles: (1) General Information; (2) Registration/Notice Filing/Type of Office/Activities; (3) Other Business Activities/ Names/Websites; (4) Branch Office Arrangements; (5) Associated Individuals; (6) Branch Office Closing; (7) Branch Office Withdrawal (Pending Application); and (8) Signature.5

      The revised Form BR sections include numbered and lettered sub-questions to make the form easier to follow and complete.

      Pre-Population of Certain Fields

      As of the implementation date of the revised Form BR, FINRA will, to the extent possible, pre-populate responses to certain questions on the revised Form BR for each existing registered branch office based in large part on questions eliciting the same or similar information on the existing Form BR. Specifically, some information elicited on the existing Form BR will continue to be elicited on the revised Form BR; however, the questions have been modified or relocated to different sections of the revised Form BR. For example, both existing Form BR and the revised Form BR elicit information regarding investment-related activities6 an associated individual conducts at the branch office in addition to the activities the firm conducts at the branch office (the Other Business Activities questions).7 However, the existing Form BR currently elicits this information in a free-text format, while the revised Form BR elicits the information through discrete data fields. Firms should review carefully any pre-populated information for each registered branch office when filing an amendment on the revised Form BR to ensure that the information is complete and accurate prior to submitting the filing.

      Summary of Amendments to Form BR

      The following highlights key revisions provided for in the revised Form BR:

      •   Elimination of Existing Section 6 (NYSE Branch Information)

      The revised Form BR eliminates Section 6 (NYSE Branch Information) of the existing Form BR, which was required only for firms seeking to register branch offices with the NYSE; this section enabled the NYSE to administer a pre-approval process that was in place at the time Form BR was implemented. Following the NASD/NYSE regulatory consolidation, the NYSE amended NYSE Rule 342 to change its branch office registration requirement from a pre-approval process to a notice-filing requirement in an effort to eliminate disparate regulatory standards.8 As a result, requiring a separate section specific to NYSE-registered firms is no longer necessary. The revised Form BR also removes references to the NYSEspecific terms "regular branch" and "small branch."
      •   Section 2: Relocation and Expansion of "Types of Activities" Question

      The revised Form BR relocates the "Types of Activities" question from Section 3 (Other Business/Names/Websites) of existing Form BR to Section 2 (Registration/Notice Filing/ Type of Office/Activities) of the revised Form BR.9 The revised Form BR also expands the list of activity types that firms may select for each registered branch office to (1) include Retail and Institutional (as types of Sales Activity), Public Finance, and Other; (2) add "Trading" to the existing Market Making activity; (3) add "Public Finance" as an option for firms to identify office locations that require a principal to be registered as a Series 53 (Municipal Securities Principal); and (4) combine Investment Banking and Underwriting, which currently are separately listed on Form BR.
      •   Section 2: Revisions to the Supervisor/Person-in-Charge Detail—Option to Identify Type of Activity

      The revised Form BR enables firms (at their option) to identify the "type of activity" associated with each on-site supervisor or person-in-charge listed in Section 2 (Registration/Notice Filing/Type of Office/Activities). Firms will now be able to link each supervisor or person-in-charge10 that is listed for a registered branch office to identified lines of business to better reflect their supervisory responsibilities. The Specific Instructions to revised Form BR clarify how firms may complete the Supervisor and Person-In-Charge details.
      •   Section 2: Option to Identify whether a Branch Is Designated as an OMSJ for MSRB Purposes

      The MSRB regulates brokers, dealers and municipal securities dealers that engage in municipal securities activities. Under MSRB rules, certain of these entities are required to identify whether a branch office is designated as an OMSJ, as defined under MSRB rules. To assist those entities that use Form BR in complying with that MSRB requirement, the revised Form BR adds an optional question to Section 2 (Registration/Notice Filing/Type of Office/Activities) to provide firms that also are registered with the MSRB a more efficient means to track their OMSJs.
      •   Section 4: Space Sharing Arrangements Question

      Section 4 of the revised Form BR (Branch Office Arrangements) asks firms for information regarding space sharing arrangements within a registered branch office. Specifically, the question asks firms to disclose if the registered branch office occupies, shares space with, or jointly markets with any other investment-related entity. If the answer is "yes," the firm must provide the name of the entity and identify the type of investment-related business in which the entity is engaged. The existing Form BR elicited some of this information (through questions in Section 4 and Section 6). As noted above, to the extent possible, FINRA will pre-populate data fields for registered branch offices where firms previously provided information responsive to these questions. In addition, the CRD system automatically will complete the CRD number field (if applicable) when the name of the investment-related entity is entered on the revised Form BR and vice versa. As a result, firms will not be required to seek out the CRD number, if applicable, for each investmentrelated entity with which a registered branch office occupies space. Firms should review carefully any pre-populated information when filing an amendment on the revised Form BR to ensure that such information is complete and accurate prior to submitting the filing.

      The term "jointly markets," as used in Section 4, does not require disclosure of the manufacturer of each insurance product that each branch office is authorized to offer, but instead the question seeks disclosure regarding other investment-related businesses that operate or jointly market business services out of the same physical space as the registered branch office. The question is meant to capture, for example, instances where a registered representative at a registered branch office also operates an insurance business out of that same physical location, a registered branch office location jointly occupies the same physical space with an investment adviser, or the registered branch office jointly markets the location with other investment-related entities as offering services.
      •   Section 4: Location of Books and Records Question

      Section 4 of the revised Form BR (Branch Office Arrangements) asks firms whether books and records pertaining to the registered branch office are maintained at any location other than that branch office, the main office or, if applicable, an office of supervisory jurisdiction (OSJ). If the answer is "yes," the firm must provide the address of such location and the name and telephone number of a contact person.
      •   Technical and Clarifying Changes

      The revised Form BR makes technical and clarifying changes to the existing Form BR. Examples include adoption of uniform terminology for terms such as "CRD number" and "branch office." In addition, the term "individual" (rather than "person") is used when referring to associated individuals.11 In addition, the instructions for the revised Form BR have been amended to clarify that checking the "Private Residence Check Box" when providing the address of a branch office does not act to prevent public disclosure of the branch address. FINRA will continue to disclose the full address of registered branch offices through BrokerCheck, even if the registered branch is a private residence, consistent with existing policy. The term "associated individual" has been added to the Explanation of Terms and the terms "person-in-charge" and "supervisor" have been clarified.

      1 See Securities Exchange Act Release No. 70958 (November 27, 2013); 78 FR 72951 (December 4, 2013) (Order Approving File No. SR-FINRA-2013-035).

      2 The SEC approved 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); 78 FR 79542 (December 30, 2013) (Order Granting Approval of a Proposed Rule Change to Adopt Rules Regarding Supervision in the Consolidated FINRA Rulebook, as Modified by Amendment No. 1) (File No. SR-FINRA-2013-025). The consolidated supervision rules become effective on December 1, 2014. See Regulatory Notice 14-10.

      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 member firms of FINRA that are also members of the NYSE. 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 03/12/03 (Rulebook Consolidation Process).

      4 Firms have a continuing obligation to promptly update Form BR whenever the information becomes inaccurate or incomplete. Amendments require updating only the appropriate section of Form BR. FINRA and most participating jurisdictions require that an amendment be filed not later than 30 days after the firm learns of facts and circumstances giving rise to the amendment.

      5 The existing Form BR consisted of the following nine sections: (1) General Information; (2) Registration/Notice Filing/Type of Office; (3) Types of Activities/Other Business Names/ Websites; (4) Branch Office Arrangements; (5) Associated Individuals; (6) NYSE Branch Information; (7) Branch Closing; (8) Branch Withdrawal (Pending Application); and (9) Signature.

      6 The term "investment-related" is defined in Section 1 (Explanation of Terms) of the revised Form BR to mean "pertains to securities, commodities, banking, insurance, or real-estate (including, but not limited to, acting as or being associated with a Broker-Dealer, issuer, investment company, Investment Adviser, futures sponsor, bank or savings association)." The term has not been amended in the revised Form BR.

      7 See Section 3 of existing Form BR and Section 3, Question A(1) of Revised Form BR.

      8 See Securities Exchange Act Release No. 56143 (July 26, 2007), 72 FR 42453 (August 2, 2007) (Notice of Filing and Immediate Effectiveness of File No. SR-NYSE-2007-59).

      9 See Section 3 of existing Form BR and Section 2, Question D of Revised Form BR.

      10 The terms "person-in-charge" and "supervisor" in Section 1 (Explanation of Terms) of Revised Form BR have been revised to clarify that a "person-in-charge" is a registered person who is physically located at, and manages activities of the individuals working at, a non-OSJ branch office, while the "supervisor" is a registered principal who is physically located at the OSJ branch office.

      11 The use of the word "individual" is intended to make the terminology in the revised Form BR consistent with terminology currently used in Section 5 of the existing Form BR, which elicits information with respect to all registered individuals who are associated with the branch office.

    • 14-10 SEC Approves New Supervision Rules; Effective Date: December 1, 2014*

      *The effective date for the deletion of Incorporated NYSE Rules 343 (Offices – Sole Tenancy, and Hours), 343.10 and NYSE Rule Interpretation 343(a)/01 has been changed to April 7, 2014, to correspond to the effective date of the revised Form BR (See Regulatory Notice 14-11).

      View PDF

      Consolidated Supervision Rules

      Regulatory Notice
      Notice Type

      Consolidated Rulebook
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Key Topics

      Communications
      Holding Customer Mail
      Supervision
      Supervisory Controls
      Taping Rule
      Transaction Review
      Referenced Rules & Notices

      FINRA Rules 3110, 3120, 3150 and 3170
      NASD IM-1000-4
      NASD IM-3010-1
      NASD Rules 3010, 3012 and 3110
      NYSE Rules 342, Rule 342.21, 343,
      351, 354, 401 and 401A
      NYSE Rule Interpretation 351(e)/01
      NTMs 99-45, 04-71, 05-44 and 99-92
      Regulatory Notices 07-53, 07-59, 08-24 and 10-57

      Executive Summary

      The SEC approved FINRA's new consolidated rules governing supervision.1 The new Rules 3110, 3120, 3150 and 3170 NASD Rules 3010, 3012 and 3110(i) and other corresponding NYSE rule provisions.2 The new rules become effective on December 1, 2014.

      The text of the new rules is available at www.finra.org/notices/14-10.

      Questions concerning this Notice should be directed to:

      •   Brant Brown, Associate General Counsel, Office of General Counsel (OGC), at (202) 728-6927; or
      •   Kosha Dalal, Associate Vice President and Associate General Counsel, OGC, at (202) 728- 6903.

      Background & Discussion

      The SEC recently approved new FINRA Rules 3110 (Supervision) and 3120 (Supervisory Control System) to replace NASD Rules 3010 (Supervision), 3012 (Supervisory Control System) and corresponding provisions of the NYSE Rules and Interpretations.3 In addition, new FINRA Rules 3150 (Holding of Customer Mail) and 3170 (Tape Recording of Registered Persons by Certain Firms) replace NASD Rules 3110(i) and 3010(b)(2) (often referred to as the "Taping Rule"), respectively. The new rules, discussed in detail below, become effective on December 1, 2014.

      I. FINRA 3110 (Supervision)
      A. Supervisory System

      FINRA Rule 3110(a) (Supervisory System), based on NASD Rule 3010(a), requires a firm to have a supervisory system for the activities of its associated persons that is reasonably designed to achieve compliance with the applicable securities laws and regulations and FINRA rules, and sets forth the minimum requirements discussed below for a firm's supervisory system.4
      1. Establishing and Maintaining Written Procedures and Designating Principals Responsible for Supervision

      FINRA Rule 3110(a)(1) requires a firm's supervisory system to provide for the establishment and maintenance of written supervisory procedures. In addition, FINRA Rule 3110(a)(2) requires a firm to designate an appropriately registered principal(s) with authority to carry out the supervisory responsibilities for each type of business in which the firm engages for which registration as a broker-dealer is required.
      2. Designating Offices of Supervisory Jurisdiction

      FINRA Rule 3110(a)(3) requires a firm to register and designate as a branch office or an office of supervisory jurisdiction (OSJ) each location, including the main office, that meets the branch office and OSJ definitions in FINRA Rule 3110(e). In addition, FINRA Rules 3110(a) (3) and 3110.01 (Registration of Main Office) require all branch offices and OSJs to be registered. FINRA Rule 3110.02 (Designation of Additional OSJs) adopts, with no substantive changes, the provisions in NASD Rule 3010(a)(3) setting forth factors a firm should consider in designating additional locations as OSJs.5
      3. Designating OSJ/Non-OSJ Branch Principals

      FINRA Rule 3110(a)(4) requires a firm to designate one or more appropriately registered principals in each OSJ (defined in FINRA Rule 3110.03 as the "on-site principal") and one or more appropriately registered representatives or principals in each non-OSJ branch office with authority to carry out the supervisory responsibilities assigned to that office by the firm.

      FINRA Rule 3110.03 (Supervision of Multiple OSJs by a Single Principal) clarifies the requirement in FINRA Rule 3110(a)(4) for a firm to designate one or more appropriately registered principals in each OSJ with the authority to carry out the supervisory responsibilities assigned to that office. The designated on-site principal for each OSJ must have a physical presence, on a regular and routine basis, at each OSJ for which the principal has supervisory responsibilities. The rule establishes a general presumption that a principal will not be designated and assigned to be the on-site principal pursuant to Rule 3110(a)(4) to supervise more than one OSJ. If a firm determines it is necessary to designate and assign a principal to be the on-site principal supervising two or more OSJs, then the firm must consider, among other things, the following factors:
      •   whether the on-site principal is qualified by virtue of experience and training to supervise the activities and associated persons in each location;
      •   whether the on-site principal has the capacity and time to supervise the activities and associated persons in each location;
      •   whether the on-site principal is a producing registered representative;
      •   whether the OSJ locations are in sufficiently close proximity to ensure that the on-site principal is physically present at each location on a regular and routine basis; and
      •   the nature of activities at each location, including size and number of associated persons, scope of business activities, nature and complexity of products and services offered, volume of business done, the disciplinary history of persons assigned to such locations and any other indicators of irregularities or misconduct.
      FINRA Rule 3110.03 further requires the firm to establish, maintain and enforce written supervisory procedures regarding the supervision of all OSJs. In all cases where a firm designates and assigns one on-site principal to supervise more than one OSJ, the firm must document in its written supervisory and inspection procedures the factors used to determine why the firm considers the supervisory structure to be reasonable. In addition, the rule provides that the determination by the firm will be subject to scrutiny by FINRA.
      4. Supervision of One-Person OSJs

      One-person OSJs are subject to the requirement set forth in FINRA Rule 3110(a)(5) that all registered persons must be assigned to an appropriately registered representative(s) or principal(s) who is responsible for supervising that person's activities, as well as FINRA Rule 3110(b)(6), which requires procedures prohibiting supervisory personnel from, among other things, supervising their own activities. FINRA reminds firms to conduct focused reviews of one-person OSJ locations, especially in light of possible conflicts of interest that may arise.6 For its part, FINRA will continue to monitor one-person OSJs to determine whether a firm adequately supervises such locations including, but not limited to, supervision addressing possible conflicts of interest or sales practice violations.
      5. Assigning Supervisors for Registered Representatives and Determining Qualifications of Supervisory Personnel

      FINRA Rule 3110(a)(5) requires that each registered person be assigned to an appropriately registered representative(s) or principal(s) who is responsible for supervising that person's activities. FINRA Rule 3110(a)(6) requires a firm to use reasonable efforts to determine that all supervisory personnel have the necessary experience or training to be qualified to carry out their assigned responsibilities.
      6. Annual Compliance Meeting

      FINRA Rule 3110(a)(7) requires each registered representative and registered principal to participate, at least once each year, in an interview or meeting at which compliance matters relevant to the particular representative or principal are discussed. These meetings need not be in person.7 However, a firm that chooses to conduct compliance meetings using other methods (e.g., on-demand webcast or course, video conference, interactive classroom setting, telephone or other electronic means) must ensure, at a minimum, that each registered person attends the entire meeting. For example, the firm might use on-demand annual compliance webcast requiring each registered person to use a unique user ID and password to gain access and use a technology platform to track the time spent on the webcast, provide click-as-you-go confirmation and have an attestation of completion at the end of a webcast. The firm also must ensure that registered persons are able to ask questions regarding the presentation and receive answers in a timely fashion. For example, a firm could host an on-demand annual compliance webcast that allows registered persons to ask questions via an email to a presenter or a centralized address or via a telephone hotline and receive timely responses directly or view such responses on the firm's intranet site.
      B. Written Procedures

      FINRA Rule 3110(b) (Written Procedures), based on NASD Rule 3010(b), requires a firm to establish, maintain and enforce written procedures to supervise the types of business in which it engages and the activities of its associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA rules.8
      1. Transaction Review and Use of Risk-Based Review

      FINRA Rule 3110(b)(2) (Review of Member's Investment Banking and Securities Business), based on NASD Rule 3010(d)(1), requires a firm to have supervisory procedures for the review by a registered principal, evidenced in writing, of all transactions relating to the firm's investment banking or securities business. However, FINRA Rule 3110.05 (Risk-based Review of Member's Investment Banking and Securities Business) permits a firm to use a risk-based system to review its transactions. The term "risk-based" describes the type of methodology a firm may use to identify and prioritize for review those areas that pose the greatest risk of potential securities laws and self-regulatory organization (SRO) rule violations. In this regard, a firm is not required to conduct detailed reviews of each transaction if the firm is using a reasonably designed risk-based review system that provides the firm with sufficient information to enable the firm to focus on the areas that pose the greatest numbers and risks of violation.

      If a firm's procedures for the review of its transactions by a registered principal include the use of technology-based review systems with parameters designed to assess which transactions merit further review, a principal must review the parameters and document the review in writing. As is always the case with the exercise of supervision under FINRA rules, a principal using an automated supervisory system, aid or tool for the discharge of supervisory duties remains responsible for the discharge of supervisory responsibilities in compliance with FINRA Rule 3110(b)(2). Also, a principal relying on a risk-based review system is responsible for any deficiency in the system's criteria that would result in the system not being reasonably designed.9

      A firm that does not engage in any transactions relating to its investment banking or securities business (e.g., firm conducting only a mutual fund underwriting business that effects no transactions) does not have any review obligations pursuant to FINRA Rule 3110(b)(2). Moreover, the firm may comply with FINRA Rule 3110(b)(2) by acknowledging in its supervisory procedures that it does not engage in any such transactions and that it must have supervisory policies and procedures in place before doing so.
      2. Correspondence and Internal Communications Review

      FINRA Rule 3110(b)(4) (Review of Correspondence and Internal Communications) generally incorporates the substance of NASD Rule 3010(d)(2) (Review of Correspondence) and requires a firm to have supervisory procedures, which are appropriate for the firm's business, size, structure and customers, to review incoming and outgoing written (including electronic) correspondence and internal communications relating to its investment banking or securities business.10 In particular, the supervisory procedures must require the firm's review of (1) incoming and outgoing written (including electronic) correspondence to properly identify and handle in accordance with firm procedures, customer complaints, instructions, funds and securities and communications that are of a subject matter that require review under FINRA rules and federal securities laws; and (2) internal communications to properly identify communications that are of a subject matter that require review under FINRA rules and federal securities laws.11

      The rule also requires that reviews of correspondence and internal communications be conducted by a registered principal and be evidenced in writing, either electronically or on paper.
      (i) Risk-based Review

      FINRA Rule 3110.06 (Risk-based Review of Correspondence and Internal Communications) reflects existing guidance regarding a firm's ability to use risk-based principles to review its correspondence and internal communications.12 Specifically, a firm, by employing risk-based principles, must decide the extent to which additional policies and procedures for the review of incoming and outgoing written (including electronic) correspondence that fall outside of the subject matters listed in FINRA Rule 3110(b)(4) are necessary for its business and structure. If a firm's procedures do not require that all correspondence be reviewed before use or distribution, the procedures must provide for:
      •   the education and training of associated persons regarding the firm's procedures governing correspondence;
      •   the documentation of such education and training; and
      •   surveillance and follow-up to ensure that such procedures are implemented and followed.
      In addition, with respect to internal communications, FINRA Rule 3110.06 requires a firm, by employing risk-based principles, to decide the extent to which additional policies and procedures for the review of these internal communications that are not of a subject matter that require review under FINRA rules and federal securities laws are necessary for its business and structure. Consistent with the guidance, FINRA Rules 3110(b)(4) and 3110.06 do not require that a firm review every internal communication.13 For instance, if a firm does not engage in any activities that are of a subject matter that require review, a firm would not be required to review its internal communications for references to those activities, provided that its supervisory procedures acknowledged that factor as part of the firm's determination that its procedures were reasonably designed to achieve compliance with applicable federal securities laws and FINRA rules.
      (ii) Evidence of Review

      FINRA Rule 3110.07 (Evidence of Review of Correspondence and Internal Communications) codifies existing guidance that a firm must identify what communication was reviewed, the identity of the reviewer, the date of review and the firm's actions taken as a result of any significant regulatory issues identified during the review. Merely opening a communication is not sufficient review.14

      FINRA Rule 3110.07 permits the use of lexicon-based screening tools or systems; however, as noted in Regulatory Notice 07-59 firms using automated tools or systems in the course of their supervisory review of electronic communications must have an understanding of the limitations of those tools or systems and should consider what, if any, further supervisory review is necessary in light of those limitations. Furthermore, the use of electronic surveillance tools to review communications represents a direct exercise of supervision by the supervisor (including any use of such tools by the supervisor's delegate to review communications). The supervisor remains responsible for the discharge of supervisory responsibilities in compliance with the rule and also is responsible for any deficiency in the system's criteria that would result in the system not being reasonably designed.15

      With respect to communications reviewed by electronic surveillance tools that are not selected for further review, a firm may demonstrate compliance with FINRA Rule 3110.07 if the electronic surveillance system has a means of electronically recording evidence that those communications have been reviewed by that system. With respect to communications that do not generate alerts, a firm may use an electronic surveillance or reviewing tool that only captures the specified information fields to the extent necessary to comply with applicable FINRA and SEC rules.16
      (iii) Delegation of Review

      FINRA Rule 3110.08 (Delegation of Correspondence and Internal Communication Review Functions) codifies guidance that a supervisor or principal may delegate review functions to an unregistered person; however, the provision also codifies the principle noted above, that the supervisor or principal remains ultimately responsible for the performance of all necessary supervisory reviews.17
      (iv) Retention of Communications

      FINRA Rule 3110.09 (Retention of Correspondence and Internal Communications) requires a firm to retain its internal communications and correspondence of associated persons relating to the firm's investment banking or securities business for the period of time and accessibility specified in SEA Rule 17a-4(b).18 The names of the persons who prepared outgoing correspondence and who reviewed the correspondence must be ascertainable from the retained records, and the retained records must be readily available to FINRA upon request.
      3. Review of Customer Complaints

      FINRA Rule 3110(b)(5) (Review of Customer Complaints) requires a firm to have supervisory procedures to capture, acknowledge and respond to all written (including electronic) customer complaints.19 The rule does not include oral complaints because they are difficult to capture and assess and may raise competing views as to the substance of the complaint being alleged. However, FINRA encourages firms to provide customers with a form or other format that will allow customers to communicate their complaints in writing. FINRA also reminds firms that the failure to address any customer complaint, written or oral, may be a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).20
      4. Supervision of Supervisory Personnel

      FINRA Rule 3110(b)(6) (Documentation and Supervision of Supervisory Personnel) eliminates NASD Rule 3012's provisions specifying the supervision of a producing manager's customer account activity and heightened supervision when any producing manager's revenues rise above a specific threshold. Instead, a firm must have procedures to prohibit its supervisory personnel from (1) supervising their own activities; and (2) reporting to, or having their compensation or continued employment determined by, a person the supervisor is supervising.21 FINRA Rule 3110(b)(6) addresses potential abuses in connection with the supervision of all supervisory personnel, rather than addressing only the supervision of a subset of supervisory personnel and their customer account activity. FINRA believes that addressing the supervision of all supervisory personnel, rather than just producing managers, is better designed to prevent supervisory situations from occurring that would not lead to effective supervision.
      (i) Limited Exception

      FINRA Rule 3110(b)(6) provides an exception for a firm that determines, with respect to any of its supervisory personnel, that compliance with either of the prohibitions outlined above is not possible because of the firm's size or a supervisory personnel's position within the firm.22 A firm relying on the exception must document the factors the firm used to reach its determination and how the supervisory arrangement with respect to such supervisory personnel otherwise complies with FINRA Rule 3110(a).23 FINRA Rule 3110.10 (Supervision of Supervisory Personnel) reflects FINRA's expectation that this exception will be used primarily by a sole proprietor in a single-person firm or where a supervisor holds a very senior executive position within the firm. However, FINRA Rule 3110.10's list of situations is non-exclusive, and a firm may still rely on the exception in other instances where it cannot comply because of its size or the supervisory personnel's position within the firm, provided the firm complies with FINRA Rule 3110(b)(6)'s documentation requirements. A firm is not required to notify FINRA of its reliance on the exception.24
      (ii) Conflicts of Interest

      FINRA Rule 3110(b)(6) also requires a firm to have procedures reasonably designed to prevent the standards of supervision required pursuant to FINRA Rule 3110(a) from being compromised due to the conflicts of interest that may be present with respect to the associated person being supervised, such as the supervised person's position, the amount of revenue such person generates for the firm or any compensation that the supervisor may derive from the associated person being supervised.25 This provision does not impose a strict liability obligation to eliminate all conflicts of interest, but rather requires that the supervisory procedures be reasonably designed despite the firm's conflicts of interest.
      5. Maintenance of Written Supervisory Procedures

      FINRA Rule 3110(b)(7) (Maintenance of Written Supervisory Procedures), based on NASD Rule 3010(b)(4), requires a firm to retain and keep current a copy of the firm's written supervisory procedures at each OSJ and at each location where supervisory activities are conducted on the firm's behalf. A firm also must amend its written supervisory procedures to reflect changes in applicable securities laws or regulations and FINRA rules, and as changes occur in its supervisory system. Each firm must promptly communicate its written supervisory procedures and amendments to all associated persons to whom such written supervisory procedures and amendments are relevant based on their activities and responsibilities.

      FINRA Rule 3110.11 (Use of Electronic Media to Communicate Written Supervisory Procedures) permits a firm to satisfy its obligation to communicate its written supervisory procedures (and any amendments) using electronic media, provided that the firm complies with specific conditions, including that the written supervisory procedures have been promptly communicated to, and are readily accessible by, all associated persons to whom such supervisory procedures apply based on their activities and responsibilities.26

      FINRA Rules 3110(b)(7) and 3110.11 reflect FINRA's continued belief that it is important for all associated persons to have knowledge of the supervisory procedures relevant to their activities.27 However, the rule provisions do not prohibit a firm from providing only its supervisory personnel with the written supervisory procedures' parameters detailing how a firm monitors or reviews its associated persons' activities to detect and prevent potential violative conduct (e.g., parameters detailing how a firm reviews an associated person's correspondence or trading).
      C. Inspection Requirements
      1. Mandatory Inspection Cycles

      FINRA Rule 3110(c)(1), based on NASD Rule 3010(c)(1), requires a firm to review, at least annually, the businesses in which it engages.28 The review must be reasonably designed to assist the firm in detecting and preventing violations of, and achieving compliance with, applicable securities laws and regulations and FINRA rules. FINRA Rule 3110(c)(1) also retains NASD Rule 3010(c)(1)'s requirement that a firm review the activities of each office, including the periodic examination of customer accounts to detect and prevent irregularities or abuses. Each firm must retain a written record of the date upon which each review and inspection is conducted. The rule requires a firm to inspect OSJs and supervisory branch offices at least annually (on a calendar-year basis), non-supervisory branch offices at least every three years and non-branch locations on a regular periodic schedule.29

      There is a general presumption that a non-branch location will be inspected at least every three years, even in the absence of any indicator of irregularities or misconduct (i.e., "red flags").30 If a firm establishes a periodic inspection schedule longer than three years, the firm must document in its written supervisory and inspection procedures the factors used in determining that a longer periodic inspection cycle is appropriate. A firm also must retain a written record of each review and inspection, reduce a location's inspection to a written report and keep each inspection report on file either for a minimum of three years or, if the location's inspection schedule is longer than three years, until the next inspection report has been written.31

      As FINRA has previously recognized, a general practice exists where a firm may inspect non-supervisory branch offices on a more frequent cycle than every three years but target only specified areas of the offices' activities during a particular examination.32 Consistent with NASD Rule 3010(c)(1), FINRA Rule 3110(c)(1) requires that a firm engaging in this practice must inspect all of the required areas listed in FINRA Rule 3110(c)(2) within the three-year cycle, regardless of the number of times within that cycle a non-supervisory branch office is inspected. Also a firm must set forth in its written supervisory and inspection procedures the manner in which it will inspect those areas within the three-year cycle.
      2. Inspection Report Content Requirements

      FINRA Rule 3110(c)(2) relocates NASD Rule 3012's requirements regarding the review and monitoring of specified activities, such as transmittals of funds and securities and customer changes of address and investment objectives. Specifically, a firm must test and verify a location's supervisory policies and procedures for:
      •   safeguarding of customer funds and securities;
      •   maintaining books and records;
      •   supervision of supervisory personnel;
      •   transmittals of funds or securities from customers to third party accounts; from customer accounts to outside entities; from customer accounts to locations other than a customer's primary residence; and between customers and registered representatives, including the hand-delivery of checks; and
      •   changes of customer account information, including address and investment objectives changes, and validation of such changes.33
      A firm's policies and procedures for transmittals of funds or securities must include a means or method of customer confirmation, notification or follow-up that can be documented. However, a firm may use reasonable risk-based criteria to determine the authenticity of the transmittal instructions.34

      In addition, a firm's policies and procedures for changes of customer account information must include a means or method of customer confirmation, notification or follow-up that can be documented and that complies with SEA Rules 17a-3(a)(17)(i)(B)(2) and 17a-3(a)(17) (i)(B)(3).35

      With respect to the transmittal of funds or securities from customers to third party accounts, FINRA Rule 3110(c)(2) does not include NASD Rule 3012's parenthetical text ("i.e., a transmittal that would result in a change in beneficial ownership") to clarify that all transmittals to an account where a customer on the original account is not a named account holder are subject to the rule. The rule's follow-up procedures provide an important investor protection function by verifying that the customer was aware of the transfer.

      Similarly, with respect to changes of customer account information, a firm must have procedures to monitor all changes of customer account information and not only address and investment objective changes.36 Examples of other changes to customer account information would include, without limitation, changes to a customer's name, marital status, telephone, email or other contact information. A firm may delegate reviews of such changes to an appropriately qualified person who is not a principal, unless another FINRA or SEC rule would require principal review (e.g., FINRA Rule 4515 (Approval and Documentation of Changes in Account Name or Designation) prohibiting an account name or designation change unless authorized by a qualified and registered principal designated by the firm).

      If a location being inspected does not engage in all of the activities listed above, the firm must identify those activities and document that supervisory policies and procedures must be in place at that location. Firms have the flexibility to provide this information in either their written supervisory procedures or a location's written inspection report.37
      3. Associated Persons Conducting Inspections

      FINRA Rule 3110(c)(3) replaces NASD Rule 3010(c)(3)'s provision prohibiting branch office managers and supervisors and the persons they directly or indirectly supervise from conducting office inspections. FINRA Rule 3110(c)(3) generally prohibits an associated person from conducting a location's inspection if the person either is assigned to that location or is directly or indirectly supervised by, or otherwise reports to, someone assigned to that location.38 This restriction does not prohibit firms from using compliance personnel assigned to a firm's separate compliance department and supervised solely by the compliance department to conduct a location's inspections. Such an arrangement helps to protect against the potential conflicts of interest the provision is designed to address.
      4. Limited Exception

      FINRA Rule 3110(c)(3) retains, with modifications, NASD Rule 3010(c)(3)'s exception for firms with limited size and resources from the general prohibitions regarding who can conduct a location's inspection. Specifically, if a firm determines that it cannot comply with FINRA Rule 3110(c)(3)'s general prohibitions, the firm must document in the inspection report both the factors the firm used to make its determination and how the inspection otherwise complies with FINRA Rule 3110(c)(1).39 A firm will generally rely on the exception in instances where the firm has only one office or has a business model where small or single person offices report directly to an OSJ manager who is also considered the offices' branch office manager (e.g., independent contractor business model).40 However, a firm may still rely on the exception in other instances, provided the firm documents the factors used in making its determination that it needs to rely on the exception.

      FINRA Rule 3110(c)(3) does not include NASD Rule 3010(c)(3)'s restriction that a firm relying on the exception must have a principal who has the requisite knowledge to conduct the inspection. Eliminating this restriction provides a firm with flexibility to assign the most appropriate person who has the requisite knowledge, regardless of registration status, to conduct a location's inspection, taking into consideration the requirement under FINRA Rule 3110(c)(1) that a firm's review of its businesses be reasonably designed to assist the firm in detecting and preventing violations of, and achieving compliance with, applicable securities laws and regulations and FINRA rules.
      5. Conflicts of Interest

      FINRA Rule 3110(c)(3) eliminates NASD Rule 3010(c)(3)'s heightened office inspection requirements firms must implement if the person conducting the office inspection either reports to the branch office manager's supervisor or works in an office supervised by the branch manager's supervisor and the branch office manager generates 20 percent or more of the revenue of the business units supervised by the branch office manager's supervisor. Instead, firms must have procedures reasonably designed to prevent the effectiveness of the inspections from being compromised due to the conflicts of interest that may be present with respect to the location being inspected, including but not limited to, economic, commercial or financial interests in the associated person and businesses being inspected.41

      A firm is not required to eliminate all conflicts of interest with respect to a location's inspections. As stated above, however, a firm's review of its businesses must be reasonably designed to assist the firm in detecting and preventing violations of, and achieving compliance with, applicable securities laws and regulations and FINRA rules. To that end, firms should be diligent in identifying potential conflicts of interest and the manner in which they will be addressed to prevent a location's inspection from being compromised.
      F. Transaction Review and Reporting

      Section 15(g) of the Exchange Act,42 adopted as part of the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA),43 requires every registered broker or dealer to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material, non-public information by the broker or dealer or any associated person of the broker or dealer. To help firms comply with ITSFEA, NYSE Rule 342.21 required firms to review trades in NYSE-listed securities and related financial instruments effected for the firm's account or for the accounts of the firm's employees and family members and to promptly conduct an internal investigation into any trade the firm identified that may have violated insider trading laws or rules. FINRA Rule 3110(d) extends the requirement beyond NYSE-listed securities and related financial instruments to cover all securities.

      In particular, FINRA Rule 3110(d) requires a firm to include in its supervisory procedures a process for reviewing securities transactions that is reasonably designed to identify trades that may violate the provisions of the Exchange Act, its regulations or FINRA rules prohibiting insider trading and manipulative and deceptive devices that are effected for:
      •   accounts of the firm;
      •   accounts introduced or carried by the firm in which a person associated with the firm has a beneficial interest or the authority to make investment decisions;
      •   accounts of a person associated with the firm that are disclosed to the firm pursuant to NASD Rule 3050 or NYSE Rule 407, as applicable; and
      •   covered accounts (as defined below).44
      Firms may take a risk-based approach to monitoring transactions that take into account their specific business models, and firms are encouraged to tailor their policies and procedures to their specific business models. There is no implied obligation on firms as to how best to conduct the reviews.45 For instance, some firms may determine that only specific departments or employees pose a greater risk and examine trading in those accounts accordingly.
      1. Covered Accounts

      FINRA Rule 3110(d) defines the term "covered account" to include any account introduced or carried by the firm that is held by (1) the spouse of a person associated with the firm; (2) a child of the person associated with the firm or such person's spouse, provided that the child resides in the same household as or is financially dependent upon the person associated with the firm; (3) any other related individual over whose account the person associated with the firm has control; or (4) any other individual over whose account the associated person of the firm has control and to whose financial support such person materially contributes.46 Once a firm has identified a potentially violative trade, the firm must conduct promptly an internal investigation into the trade to determine whether a violation of the relevant laws or rules has occurred.47
      2. Internal Investigation Reporting

      Although all firms must include in their supervisory procedures a process for reviewing transactions that is reasonably designed to identify trades for insider trading, only firms engaging in investment banking services must file with FINRA written reports (signed by a senior officer) regarding their internal investigations.48 A firm engages in "investment banking services" if it, without limitation, acts as an underwriter; participates in a selling group in an offering for the issuer or otherwise acts in furtherance of a public offering of the issuer; acts as a financial adviser in a merger or acquisition; or provides venture capital or equity lines of credit or serves as placement agent for the issuer or otherwise acts in furtherance of a private offering of the issuer.49

      Although firms engaged in investment banking services may have special access to information that increases the risk of insider trading by individuals at the firm, FINRA understands that some types of "investment banking services" may present less risk of insider trading than others, and firms should take these risks into account when developing their policies and procedures. As part of implementing a firm's risk-based approach to these requirements, a firm's procedures should include establishing guidelines or criteria for taking reasonable follow-up steps to determine which trades are potentially violative trades and, therefore, merit further review via an internal investigation. FINRA does not expect that every trade highlighted in an exception or other report would require a firm to conduct an internal investigation; however, firms that use such reports should maintain additional written procedures that set forth guidelines or criteria for reasonable follow-up steps for determining which trades initially highlighted merit further review.
      (i) Quarterly Reporting

      FINRA Rule 3110(d) requires firms engaging in investment banking services to make written reports to FINRA within ten business days of the end of each calendar quarter describing each internal investigation initiated in the previous calendar quarter, including the firm's identity, the commencement date of each internal investigation, the status of each open internal investigation, the resolution of any internal investigation reached during the previous calendar quarter, and, with respect to each internal investigation, the identity of the security, trades, accounts, firm's associated persons or family members of such associated person holding a covered account, under review, and a copy of the firm's insider trading review policies and procedures.50 If a firm did not have an open internal investigation, or either initiate or complete an internal investigation during a particular calendar quarter, the firm is not required to submit a report for that quarter.
      (ii) Reporting Insider Trading Violations

      In addition, if a firm determines after an internal investigation that a trade has violated provisions of the Exchange Act, its regulations or FINRA rules prohibiting insider trading and manipulative and deceptive devices, the firm must, within five business days of the internal investigation's completion, file a written report with FINRA. The report must detail the completion of the investigation, including the results of the investigation, any internal disciplinary action taken, and any referral of the matter to FINRA, another SRO, the SEC or any other federal, state or international regulatory authority.51
      (iii) Filing Written Reports with FINRA

      Firms required to file a written report with FINRA under FINRA Rule 3110(d) must provide the report, either in hard copy or electronically, to their Regulatory Coordinator. FINRA is considering alternative methods for filing such reports and will announce any changes to the filing procedures in a future Regulatory Notice (or similar communication).
      E. Branch Office and OSJ Definitions

      FINRA Rule 3110(e) retains NASD Rule 3010(g)'s definitions of "branch office" and "office of supervisory jurisdiction," as well as the definition of "business day."
      II. FINRA Rule 3120 (Supervisory Control System)
      A. Testing and Verifying a Firm's Supervisory Procedures

      FINRA Rule 3120(a), based on NASD Rule 3012(a)(1), requires each firm to designate and identify to FINRA one or more principals who must establish, maintain and enforce a system of supervisory control policies and procedures that (1) test and verify that the firm's supervisory procedures are reasonably designed with respect to the firm's and its associated persons' activities to achieve compliance with applicable securities laws and regulations and FINRA rules, and (2) where necessary, create additional or amended supervisory procedures. The designated principals must also prepare and submit to the firm's senior management a report at least annually summarizing the test results and any necessary amendments to those procedures.
      B. Additional Content Requirements—FINRA Rule 3120(b)

      FINRA Rule 3120(b) requires a firm that reported $200 million or more in gross revenue (total revenue less, if applicable, commodities revenue) on its FOCUS report in the prior calendar year to include, to the extent applicable to the firm's business, a:
      •   tabulation of the reports pertaining to customer complaints and internal investigations made to FINRA during the preceding year; and
      •   a discussion of the preceding year's compliance efforts, including procedures and educational programs, in each of the following areas:
      •   trading and market activities;
      •   investment banking activities;
      •   antifraud and sales practices;
      •   finance and operations;
      •   supervision; and
      •   anti-money laundering.
      The additional content requirements, which are drawn from NYSE Rule 342.30 (Annual Report and Certification), provide valuable information for FINRA's regulatory program and will be valuable compliance information for a firm's senior management. In addition, some content requirements relate to regulatory obligations, such as supervision and anti-money laundering, that apply to all firms, regardless of their business activities. However, because all the content requirements are not relevant to every firm, FINRA Rule 3120 provides that a firm's report must include the additional content only to the extent applicable to the firm's business.
      III. FINRA Rule 3150 (Holding of Customer Mail)

      FINRA Rule 3150, which replaces NASD Rule 3110(i) (Holding of Customer Mail), eliminates the strict time limits in NASD Rule 3110(i) and generally allows a firm to hold a customer's mail for a specific time period in accordance with the customer's written instructions if the firm meets several conditions. Specifically, a firm may hold mail for a customer who will not be receiving mail at his or her usual address, provided that the firm:
      •   receives written instructions from the customer that include the time period during which the firm is requested to hold the customer's mail. If the time period included in the customer's instructions is longer than three consecutive months (including any aggregation of time periods from prior requests), the customer's instructions must include an acceptable reason for the request (e.g., safety or security concerns). Convenience is not an acceptable reason for holding mail longer than three months;
      •   informs the customer in writing of any alternate methods, such as email or access through the firm's website, that the customer may use to receive or monitor account activity and information and obtains the customer's confirmation of the receipt of such information; and
      •   verifies at reasonable intervals that the customer's instructions still apply.
      In addition, the firm must be able to communicate, as necessary, with the customer in a timely manner during the time the firm is holding the customer's mail to provide important account information (e.g., privacy notices, the SIPC information disclosures required by FINRA Rule 2266 (SIPC Information)). A firm holding a customer's mail also must take actions reasonably designed to ensure that the customer's mail is not tampered with, held without the customer's consent, or used by a firm's associated persons in any manner that would violate FINRA rules or the federal securities laws.
      IV. FINRA Rule 3170 (Tape Recording of Registered Persons by Certain Firms)

      FINRA Rule 3170 reconstitutes NASD Rule 3010(b)(2) (Tape Recording of Conversations) without any substantive changes and includes a definition clarifying that the term "tape recording" includes without limitation, any electronic or digital recording that meets the rule's requirements. Specifically, the rule requires a firm to establish, enforce and maintain special written procedures supervising the telemarketing activities of all of its registered persons, including the tape recording of conversations, if the firm has hired more than a specified percentage of registered persons from firms that meet FINRA Rule 3170's definition of "disciplined firm." To assist firms in complying with FINRA Rule 3170, FINRA provides a "Disciplined Firms List" identifying those firms that meet the definition of "disciplined firm."52

      1 See Securities Exchange Act Release No. 71179 (December 23, 2013), 78 FR 79542 (December 30, 2013) (Order Approving Proposed Rule Change as Modified by Amendment No. 1); File No. SR-FINRA-2013-025); see also Regulatory Notice 08-24 (May 2008) (Proposed Consolidated FINRA Rules Governing Supervision and Supervisory Controls).

      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 members, the Incorporated NYSE Rules apply only to those member firms of FINRA that are also members of the NYSE. 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 03/12/03 (Rulebook Consolidation Process).

      3 Effective December 1, 2014, the following NYSE Rules and Interpretations will be deleted from the Transitional Rulebook: (1) NYSE Rule 342 (Offices-Approval, Supervision and Control) and NYSE Rule Interpretations 342(a)(b)/01 through 342(a)(b)/03, 342(b)/01 through 342(b)/02, 342(c)/02, 342(e)/01, 342.10/01, 342.13/01, 342.15/01 through 342.15/05, 342.16/01 through 342.16/03; (2) NYSE Rules 343 (Offices-Sole Tenancy, and Hours), 343.10 and NYSE Rule Interpretation 343(a)/01; (3) NYSE Rule 351(e) (Reporting Requirements) and NYSE Rule Interpretation 351(e)/01 (Reports of investigation); (4) Incorporated NYSE Rule 354 (Reports to Control Persons); and (5) NYSE Rule 401 (Business Conduct); and (6) NYSE Rule 401A (Customer Complaints).

      4 This standard, which requires that a firm's supervisory system be reasonably designed to achieve compliance with applicable federal securities laws and regulations and FINRA rules recognizes that a supervisory system cannot guarantee firm-wide compliance with all applicable laws and regulation and FINRA rules. See Notice to Members 99-45 (June 1999) (noting that NASD Rule 3010's "reasonably designed" standard "recognizes that a supervisory system cannot guarantee firm-wide compliance with all laws and regulations" but that the "reasonably designed" standard requires that the system "be a product of sound thinking and within the bounds of common sense, taking into consideration the factors that are unique to a member's business").

      5 FINRA Rule 3110.02 specifies that, in addition to the locations that meet the definition of OSJ in Rule 3110(e), each firm must also register and designate other offices as OSJs as is necessary to supervise its associated persons in accordance with the standards set forth in Rule 3110. In making a determination as to whether to designate a location as an OSJ, the firm should consider the following factors:

      (a) whether registered persons at the location engage in retail sales or other activities involving regular contact with public customers;
      (b) whether a substantial number of registered persons conduct securities activities at, or are otherwise supervised from, such location;
      (c) whether the location is geographically distant from another OSJ of the firm;
      (d) whether the firm's registered persons are geographically dispersed; and
      (e) whetherthe securities activities at such location are diverse or complex.

      6 See SEC Division of Market Regulation, Staff Legal Bulletin No. 17: Remote Office Supervision (March 19, 2004) (reminding broker-dealers that small, remote offices require vigilant supervision and specifically noting that "[n]o individual can supervise themselves"); NASD Regulatory & Compliance Alert, Volume 11, Number 2 (June 1997) (cited by Staff Legal Bulletin No. 17 as support for statement that individuals cannot supervise themselves); see also In re Stuart K. Patrick, 51 S.E.C. 419, 422 (May 17, 1993) ("[supervision, by its very nature, cannot be performed by the employee himself") (SEC order sustaining application of the New York Stock Exchange's supervisory rule-also cited by Staff Legal Bulletin No. 17 as support for statement that individuals cannot supervise themselves).

      7 See FINRA Rule 3110.04 (Annual Compliance Meeting) (codifying existing guidance that a firm is not required to conduct in-person meetings with each registered person or groups of registered persons to comply with the annual compliance meetings required by FINRA Rule 3110(a)(7)); see also Notices to Members 99-45 (June 1999) and 05-44 (June 2005); see also Letter from Afshin Atabaki, FINRA, to Evan Charkes, Citigroup Global Markets, Inc., dated November 30, 2006 (firms may use on-demand webcast technology to satisfy the annual compliance meeting requirement, subject to specified safeguards and conditions); letter from Afshin Atabaki, FINRA, to S. Kendrick Dunn, Pacific Select Distributors, Inc., dated February 5, 2013 (firms may use on-demand course without voice narration to satisfy annual compliance meeting requirement, subject to specified safeguards and conditions).

      8 See FINRA Rule 3110(b)(1) (General Requirements).

      9 See also Regulatory Notice 07-53 (November 2007) (Deferred Variable Annuities) (discussing use of automated supervisory systems).

      10 FINRA Rule 3110(b)(4) and FINRA Rules Rule 3110.06-.08 refer to "correspondence," consistent with FINRA Rule 2210's (Communications with the Public) definition and use of the term "correspondence."

      11 Communications that are of a subject matter that require review under FINRA rules and the federal securities laws include (without imitation):

      •   Communications between non-research and research departments concerning a research report's contents (NASD Rule 2711(b)(3) and NYSE Rule 472(b)(3));
      •   Certain communications with the public that require a principal's pre-approval (FINRA Rule 2210);
      •   The identification and reporting to FINRA of customer complaints (FINRA Rule 4530) (as further detailed herein, FINRA Rule 3110(b) (5) also affirmatively requires firms to capture, acknowledge and respond to all written (including electronic) customer complaints); and
      •   The identification and prior written approval of changes in account name(s) (including related accounts) or designation(s) (including error accounts) regarding customer orders (FINRA Rule 4515).

      12 See Regulatory Notice 07-59 (December 2007) (FINRA Provides Guidance Regarding the Review and Supervision of Electronic Communications).

      13 See id. at 3, 9 ("with the exception of the enumerated areas requiring review by a supervisor, members may decide, employing risk-based principles, the extent to which review of any internal communications is necessary in accordance with the supervision of their business"); see also id. at 3 (specifically noting that the guidance neither created new supervisory requirements nor required the review of every communication).

      14 See id.

      15 See Regulatory Notice 07-53 (November 2007) (Deferred Variable Annuities) (discussing use of automated supervisory systems).

      16 See FINRA Rule 3110.09 (Retention of Correspondence and Internal Communications) and SEA Rule 17a-4(b)(4) (requiring, among other things, that a broker-dealer's retained communications records include any approvals of communications sent).

      17 See Regulatory Notice 07-59 (December 2007).

      18 The rule purposefully aligns the record retention period for communications with the SEC's record retention period for the same types of communications to achieve consistent regulation in this area.

      19 Although NYSE Rule 401A previously required firms to acknowledge and respond to specified customer complaints (both oral and written), to harmonize the NASD and NYSE rules in the interim period before completion of the Consolidated FINRA Rulebook, FINRA amended incorporated NYSE Rule 351(d) (Reporting Requirements) to limit the definition of "customer complaint" to include only written complaints, thereby making the definition substantially similar to that in NASD Rule 3070(c) (Reporting Requirements). See Securities Exchange Act Release No. 58533 (September 12, 2008), 73 FR 54652 (September 22, 2008) (Order Approving File No. SR-FINRA-2008-036). FINRA adopted FINRA Rule 4530 to replace NASD Rule 3070 and comparable provisions in NYSE Rule 351. See Securities Exchange Act Release No. 63260 (November 5, 2010), 75 FR 69508 (November 12, 2010) (Notice of Filing of Amendments No. 1 and 2 and Order Granting Accelerated Approval of File No. SR-FINRA-2010-034). FINRA Rule 4530 became effective on July 1, 2011. See Regulatory Notice 11-06 (February 2011).

      20 In addition, FINRA's investor education literature advises customers to communicate any complaints to their broker-dealer in writing, especially if customers have lost money or there were any unauthorized trades made in the customers' accounts. See FINRA's pamphlet Investor Complaint Program: What to Do When Problems Arise; see also NASD Rule 2340(a) (Customer Account Statements) (requiring a customer account statement to, among other things, advise the customer that any oral communications should be re-confirmed in writing to further protect the customer's rights, including rights under the Securities Investor Protection Act (SIPA)).

      21 FINRA Rule 3110(b)(6)(C)(i) and (ii). FINRA Rule 3110(b)(6) also requires that a firm's supervisory procedures include the titles, registration status and locations of the required supervisory personnel and the responsibilities of each supervisory person as these relate to the types of business engaged in, applicable laws and regulations, and FINRA rules, as well as a record of the names of its designated supervisory personnel and the dates for which such designation is or was effective. FINRA Rule 3110(b)(6)(A) and (B).

      22 FINRA Rule 3110(b)(6)(C)(ii)a.

      23 FINRA Rule 3110(b)(6)(C)(ii)a.1 and .2.

      24 NASD Rule 3012 requires a firm relying on a similar exception to notify FINRA through an electronic process (or any other process prescribed by FINRA) within 30 days of the date on which the firm first relies on the exception, and annually thereafter. Firms provide this notification through the FINRA Contact System (FCS). Effective December 1, 2014, firms will no longer be required to provide this information, and FINRA intends to disable FCS's notification feature.

      25 FINRA Rule 3110(b)(6)(D).

      26 Specifically, FINRA Rule 3110.11 provides that a firm may use electronic media to communicate its written supervisory procedures (and amendments) provided that (1) the written supervisory procedures have been promptly communicated to, and are readily accessible by, all associated persons to whom such supervisory procedures apply based on their activities and responsibilities through, for example, the firm's intranet system; (2) all amendments to the written supervisory procedures are promptly posted to the firm's electronic media; (3) associated persons are notified that amendments relevant to their activities and responsibilities have been made to the written supervisory procedures; (4) the firm has reasonable procedures to monitor and maintain the security of the material posted to ensure that it cannot be altered by unauthorized persons; and (5) the firm retains current and prior versions of its written supervisory procedures in compliance with SEA Rule 17a-4(e)(7)'s applicable record retention requirements.

      27 See also Notice to Members 99-45 (June 1999) (distinguishing between a firm's compliance procedures and written supervisory procedures and specifying that "[i]t is crucial that all persons associated with a member be informed of any changes in the supervisory system and applicable written procedures. [NASD Rule 3010(b)(3)], therefore, requires members to inform all associated persons of such changes.").

      28 For purposes of FINRA Rule 3110(c)(1), the term "annually" means on a calendar-year basis.

      29 See FINRA Rule 3110(c)(1)(A)–(C). In addition, FINRA Rule 3110.12 (Standards for Reasonable Review) retains the content of NASD IM-3010-1 (Standards for Reasonable Review) setting forth the standards for the reasonable review of offices.

      30 FINRA Rule 3110.13 (General Presumption of Three-Year Limit for Periodic Inspection Schedules).

      31 FINRA Rule 3110(c)(2).

      32 See Notice to Members 04-71 (October 2004).

      33 FINRA Rule 3110(c)(2)(A).

      34 FINRA Rule 3110(c)(2)(B). See Regulatory Notice 09-64 (November 2009) (Verification of instructions to Transmit or Withdraw Assets from Customer Accounts) (guidance on firms' policies and procedures to verify transmittal instructions).

      35 FINRA Rule 3110(c)(2)(C).

      36 This requirement is consistent with NASD Rule 3010(c)'s requirement that a firm have supervisory policies and procedures for validating changes in customer account information. See NASD Rule 3010(c)(2)(F).

      37 FINRA Rule 3110(c)(2)(D).

      38 FINRA Rule 3110(c)(3)(B).

      39 FINRA Rule 3110(c)(3)(C).

      40 See FINRA Rule 3110.14 (Exception to Persons Prohibited from Conducting Inspections).

      41 FINRA Rule 3110(c)(3)(A).

      42 15 U.S.C. 78o(g).

      43 See Insider Trading and Securities Fraud Enforcement Act of 1988, Pub. L No. 100-704, 102 Stat. 4677.

      44 FINRA Rule 3110(d)(1)(A)–(D).

      45 FINRA Rule 3110(d)(1)'s "reasonably designed" standard acknowledges that firms with different business models may adopt different procedures and practices.

      46 FINRA Rule 3110(d)(4)(A).

      47 FINRA Rule 3110(d)(2).

      48 FINRA Rule 3110(d)(3).

      49 FINRA Rule 3110(d)(4)(B).

      50 FINRA Rule 3110(d)(3)(A).

      51 FINRA Rule 3110(d)(3)(B).

      52 FINRA previously provided the list to assist firm's supervisory obligations under NASD Rule 3010(b)(2).

    • 14-09 FINRA Requests Comment on a Proposed Rule Set for Limited Corporate Financing Brokers; Comment Period Expires: April 28, 2014

      View PDF

      Limited Corporate Financing Brokers

      Regulatory Notice
      Notice Type

      Request for Comment
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topics

      Corporate Restructuring
      Limited Corporate Financing
      Brokers
      Mergers & Acquisitions
      Private Equity Fun
      Referenced Rules & Notices

      FINRA Rule 1000 Series
      FINRA Rule 2000 Series
      FINRA Rule 3000 Series
      FINRA Rule 4000 Series
      FINRA Rule 5122
      FINRA Rule 8000 Series
      FINRA Rule 9000 Series
      FINRA Rule 10000 Series
      FINRA Rule 12000 Series
      FINRA Rule 13000 Series
      FINRA Rule 14000 Series
      NASD Rule 1000 Series
      NASD Rule 2000 Series
      NASD Rule 3170

      Executive Summary

      FINRA is soliciting public comment on a proposed rule set for firms that meet the definition of "limited corporate financing broker" (LCFB). An LCFB is a firm that engages in a limited range of activities, essentially advising companies and private equity funds on capital raising and corporate restructuring. The rule set would not apply to firms that carry or maintain customer accounts, handle customers' funds or securities, accept customers' trading orders, or engage in proprietary trading or market-making.

      The proposed rules are available as Attachment A at www.finra.org/ notices/14-09.

      Questions concerning this Notice should be directed to Joseph P. Savage, Vice President and Counsel, Regulatory Policy, at (240) 386-4534.

      Action Requested

      FINRA encourages all interested parties to comment on the proposed rule set. Comments must be received by April 28, 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 proposed rule set.

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

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

      Background & Discussion

      Some FINRA-regulated firms are solely corporate financing firms that advise companies on mergers and acquisitions, advise issuers on raising debt and equity capital in private placements with institutional investors, or provide advisory services on a consulting basis to companies that need assistance analyzing their strategic and financial alternatives. These firms often are registered as broker-dealers because they may receive transaction-based compensation as part of their services.

      Nevertheless, these firms do not engage in many of the types of activities typically associated with traditional broker-dealers. For example, these firms do not maintain customer accounts, handle customer funds or securities, accept orders to purchase or sell securities either as principal or agent for the customer, exercise investment discretion on behalf of any customer, or engage in proprietary trading of securities or market-making activities.

      FINRA is proposing to establish a separate rule set that would apply exclusively to firms that meet the definition of limited corporate financing broker. An LCFB would be subject to the FINRA By-Laws, as well as core FINRA rules that FINRA believes should apply to all firms. The rule set would include other FINRA rules that are tailored to address an LCFB's business activities.

      General Standards (LCFB Rule 010 Series)

      Proposed LCFB Rule 014 provides that an LCFB and persons associated with an LCFB will be subject to the FINRA By-Laws (including the schedules thereto), unless the context requires otherwise, and the Limited Corporate Financing Broker Rules. Proposed LCFB Rule 015 provides that the LCFB Rules do not apply to transactions in, and business activities relating to, municipal securities as that term is defined in the Exchange Act.

      LCFB Rule 016 sets forth basic definitions modified as appropriate to apply to an LCFB. The proposed definitions of "limited corporate financing broker" is particularly important to the application of the rule set.

      The term "limited corporate financing broker" would include any broker that solely engages in one or more of the following activities:

      •   advising an issuer, including a private fund, concerning its securities offerings or other capital raising activities;
      •   advising a company regarding its purchase or sale of a business or assets or regarding its corporate restructuring, including a going-private transaction, divestiture or merger;
      •   advising a company regarding its selection of an investment banker;
      •   assisting in the preparation of offering materials on behalf of an issuer;
      •   providing fairness opinions; and
      •   qualifying, identifying or soliciting potential institutional investors.3

      A firm would be permitted to register as, or change its status to, an LCFB only if the firm solely engages in one or more of these activities.

      The term limited corporate financing broker would not include any broker or dealer that:

      •   carries or maintains customer accounts;
      •   holds or handles customers' funds or securities;
      •   accepts orders from customers to purchase or sell securities either as principal or as agent for the customer;
      •   possesses investment discretion on behalf of any customer; or
      •   engages in proprietary trading of securities or market-making activities.4

      Member Application and Associated Person Registration (LCFB Rule 100 Series)

      The proposed LCFB Rule 100 series sets forth the requirements for firms that wish to register as an LCFB. The proposed LCFB Rule 100 series generally incorporates by reference FINRA Rules 1010 (Electronic Filing Requirements for Uniform Forms), 1122 (Filing of Misleading Information as to Membership or Registration), and 1230(b)(6) (Operations Professional), and NASD Rules 1011 (Definitions), 1012 (General Provisions), 1013 (New Member Application and Review), 1014 (Department Decision), 1015 (Review by National Adjudicatory Council), 1016 (Discretionary Review by FINRA Board), 1017 (Application for Approval of Change in Ownership, Control, or Business Operations), 1019 (Application to Commission for Review), 1090 (Foreign Members), 1100 (Foreign Associates) and IM-1011-1 (Safe Harbor for Business Expansions). Accordingly, an LCFB applicant would follow the same procedures for membership as any other FINRA applicant, with four modifications.

      •   First, an applicant for membership that seeks to qualify as an LCFB would have to state in its application that it intends to operate as such.
      •   Second, in reviewing an application for membership as an LCFB, the FINRA Member Regulation Department would consider, in addition to the standards for admission set forth in NASD Rule 1014, whether the applicant's proposed activities are consistent with the limitations imposed on an LCFB under LCFB Rule 016(g).
      •   Third, proposed LCFB Rule 116(b) sets forth the procedures for an existing FINRA firm to change its status to an LCFB. If an existing firm is already approved to engage in the activities of an LCFB, and the firm does not intend to change its existing ownership, control or business operations, it would not be required to file either a New Member Application (NMA) or a Change in Membership Application (CMA). Instead, such a firm would be required to file a request to amend its membership agreement or obtain a membership agreement (if none exists currently) to provide that: (i) the firm's activities will be limited to those permitted for an LCFB under LCFB Rule 016(g), and (ii) the firm agrees to comply with the LCFB Rules.5
      •   Fourth, proposed LCFB Rule 116(c) sets forth the procedures for an existing LCFB to terminate its status as such and continue as a FINRA firm. Such a firm would be required to file a CMA with the FINRA Member Regulation Department, and to amend its membership agreement to provide that the firm agrees to comply with all FINRA Rules.6

      The proposed LCFB Rule 100 series also would govern the registration and qualification examinations of principals and representatives that are associated with an LCFB. These rules incorporate by reference NASD Rules 1021 (Registration Requirements—Principals), 1031 (Registration Requirements—Representatives), 1060 (Persons Exempt from Registration), 1070 (Qualification Examinations and Waiver of Requirements), and 1080 (Confidentiality of Examinations), and FINRA Rule 1230(b)(6) (Operations Professional). Accordingly, LCFB firm principals and representatives would be subject to the same registration and qualification examination requirements as principals and representatives of other FINRA firms.

      However, LCFB firm principals and representatives would be eligible for fewer registration categories.7 LCFB principals would be eligible to register as a general securities principal (Series 24), limited principal—financial and operations (Series 27), limited principal—introducing broker/dealer financial and operations (Series 28), and limited principal—general securities sales supervisor (Series 9 and 10). LCFB associated persons would be eligible to register as a general securities representative (Series 7), limited representative—corporate securities (Series 62), limited representative—private securities offerings (Series 82), limited representative—investment banking (Series 79) and operations professional (Series 99).

      Proposed LCFB Rule 125 would subject an LCFB to continuing education requirements that are more streamlined than those imposed on other firms under FINRA Rule 1250. Proposed LCFB Rule 125 would not impose any Regulatory Element continuing education requirements on an LCFB, but would impose Firm Element requirements. The Firm Element requirements would apply to any person registered with an LCFB who has direct contact with customers in the conduct of the firm's corporate financing activities, and to their immediate supervisors.

      The proposed rule would require an LCFB to establish and implement Firm Element programs that are appropriate for the LCFB's business, to administer the program in accordance with its annual evaluation and written plan, and to maintain records documenting the program's content and completion by covered persons. The rule would require covered persons to take all appropriate and reasonable steps to participate in continuing education programs required by their firms. The rule also would authorize FINRA to require an LCFB to provide special training to its covered persons in such areas as FINRA deems appropriate.

      Duties and Conflicts (LCFB Rule 200 Series)

      The proposed LCFB Rule 200 series would establish a streamlined set of conduct rules. An LCFB would be subject to FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade), 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices), 2070 (Transactions Involving FINRA Employees), 2080 (Obtaining an Order of Expungement of Customer Dispute Information from the CRD System), 2263 (Arbitration Disclosure to Associated Persons Signing or Acknowledging Form U4), and 2268 (Requirements When Using Predispute Arbitration Agreements for Customer Accounts), and NASD Rule 2420 (Dealing with Non-Members) and IM-2420-1 (Transactions Between Members and Non- Members).

      LCFB Rules 209 and 211 would impose more streamlined know-your-customer and suitability obligations than are imposed under FINRA Rules 2090 and 2111.

      Proposed LCFB Rule 221 is an abbreviated version of FINRA Rule 2210 (Communications with the Public), essentially prohibiting false and misleading statements.

      Under proposed LCFB Rule 240, if an LCFB or associated person of an LCFB had engaged in activities that would require the LCFB to register as a broker or dealer under the Exchange Act, and that are inconsistent with the limitations imposed on an LCFB under LCFB Rule 016(g), FINRA could examine for and enforce all FINRA rules against the broker or associated person, including any rule that applies to a FINRA broker-dealer that is not an LCFB or to an associated person who is not associated with an LCFB.

      Supervision and Responsibilities Related to Associated Persons (LCFB Rule 300 Series)

      The proposed LCFB Rule 300 series would establish a limited set of supervisory rules for an LCFB. An LCFB would be subject to FINRA Rules 3220 (Influencing or Rewarding Employees of Others), 324 (Borrowing from or Lending to Customers), and 327 (Outside Business Activities of Registered Persons).

      Proposed LCFB Rule 311 would subject an LCFB to some, but not all, of the requirements of FINRA Rule 3110 (Supervision) and, consistent with Rule 3110, is designed to permit an LCFB flexibility to tailor its supervisory systems to its business models. An LCFB would be subject to many of the provisions of Rule 3110 concerning the supervision of offices, personnel, customer complaints, correspondence and internal communications. However, an LCFB would not be subject to the provisions of Rule 3110 that require annual compliance meetings (paragraph (a)(7)), review and investigation of transactions (paragraphs (b)(2) and (d)), specific documentation and supervision procedures for supervisory personnel (paragraph (b)(6)), and internal inspections (paragraph (c)).

      Proposed LCFB Rule 313 would require an LCFB to designate and identify one or more principals to serve as a firm's chief compliance officer.

      Proposed LCFB Rule 331 would require each LCFB to implement a written anti-money laundering (AML) program. This is consistent with the SEC's requirements and Chapter X of Title 31 of the Code of Federal Regulations. Accordingly, the proposed rule is similar to FINRA Rule 3310 (Anti-Money Laundering Compliance Programs); however, the proposed rule contemplates that an LCFB would be eligible to conduct the required independent testing for compliance every two years.

      Financial and Operational Rules (LCFB Rule 400 Series)

      The proposed LCFB Rule 400 series would establish a streamlined set of rules concerning firms' financial and operational obligations. An LCFB would be subject to FINRA Rules 4140 (Audit), 4150 (Guarantees by, or Flow through Benefits for, Members), 4160 (Verification of Assets), 4360 (Fidelity Bonds), 4511 (Books and Records—General Requirements), 4513 (Records of Written Customer Complaints), 4530 (Reporting Requirements), and 4570 (Custodian of Books and Records), and NASD Rules 1150 (Executive Representative), 1160 (Contact Information Requirements) and 3170 (Mandatory Electronic Filing Requirements).

      Proposed LCFB Rule 411 includes some, but not all, of the capital compliance requirements of FINRA Rule 4110. An LCFB would be required to suspend business operations during any period a firm is not in compliance with the applicable net capital requirements set forth in SEA Rule 15c3-1, and the rule also would authorize FINRA to direct an LCFB to suspend its operation under those circumstances. Proposed LCFB Rule 411 also sets forth requirements concerning withdrawal of capital, subordinated loans, notes collateralized by securities and capital borrowings.

      Because an LCFB would not carry or maintain customer accounts, it would have more limited customer information requirements than is imposed under FINRA Rule 4512.8 Each LCFB would have to maintain each customer's name and residence, whether the customer is of legal age (if applicable), and the names of any persons authorized to transact business of the customer. An LCFB would still have to maintain all records required under SEA Rules 17a-3 and 17a-4.

      Proposed LCFB Rule 452 establishes a limited set of requirements for the supervision and review of a firm's general ledger accounts.

      Investigations and Sanctions, Code of Procedure, and Arbitration and Mediation (LCFB Rules 800, 900 and 1000)

      Each LCFB would be subject to the FINRA Rule 8000 series governing investigations and sanctions of firms, other than FINRA Rules 8110 (Availability of Manual to Customers), 8211 (Automated Submission of Trading Data Requested by FINRA), and 8213 (Automated Submission of Trading Data for Non-Exchange-Listed Securities Requested by FINRA).

      An LCFB would be subject to the FINRA Rule 9000 series governing disciplinary and other proceedings involving firms, other than the FINRA Rule 9700 series (Procedures on Grievances Concerning the Automated Systems). Proposed LCFB Rule 900(c) would provide that any LCFB may be subject to a fine under FINRA Rule 9216(b) with respect to an enumerated list of FINRA By-Laws, LCFB Rules and SEC Rules under the Exchange Act. Proposed LCFB Rule 900(d) would authorize FINRA staff to require an LCFB to file communications with the FINRA Advertising Regulation Department at least ten days prior to use if the staff determined that the LCFB had departed from LCFB Rule 221's standards.

      An LCFB would be subject to the FINRA Rule 10000 series (Code of Arbitration Procedure), 12000 series (Code of Arbitration Procedure for Customer Disputes), 13000 (Code of Arbitration Procedure for Industry Disputes) and 14000 series (Code of Mediation Procedure).

      Request for Comment

      FINRA requests comment on all aspects of the proposed rules, including any impact on institutional customers and issuers, potential costs and burdens that the proposal could impose on an LCFB, and any cost savings and reduced burdens that the proposal would create for an LCFB. FINRA also requests comment on whether an LCFB should be subject to any FINRA Rules that are not included in the proposed rule set.

      FINRA particularly requests comment concerning the following issues:

      •   Does the proposed rule set provide sufficient protections to customers of an LCFB? If not, what additional protections are warranted and why?
      •   Does the proposed rule set appropriately accommodate the scope of LCFB business models? If not, what other accommodations are necessary and how would customers be protected?
      •   Is the definition of "limited corporate financing broker" appropriate? Are there any activities in which broker-dealers with limited corporate financing functions typically engage that are not included in the definition? Are there activities that should be added to the list of activities in which an LCFB may not engage?
      •   Are there firms that would qualify for the proposed rule set but that would choose not to be treated as an LCFB? If so, what are the reasons for this choice?
      •   What is the likely economic impact to an LCFB, other broker-dealers and their competitors of adoption of the LCFB rules?
      •   FINRA welcomes estimates of the number of firms that would be eligible for the proposed rule set.
      •   Proposed LCFB Rule 123 would limit the principal and representative registration categories that would be available for persons associated with an LCFB. Are there any registration categories that should be added to the rule? Are there any registration categories that are currently included in the proposed rule but that are unnecessary for persons associated with an LCFB?
      •   Should principals and representatives that hold registration categories not included within LCFB Rule 123 be permitted to retain these registrations?
      •   Does an LCFB normally make recommendations to customers to purchase or sell securities? Should an LCFB be subject to rules requiring firms to know their customers (LCFB Rule 209) and imposing suitability obligations (LCFB Rule 211) to an LCFB?
      •   Does the SEC staff no-action letter issued to Faith Colish, et al., dated January 31, 2014,9 impact the analysis of whether a firm would become an LCFB? Is it likely that some limited corporate financing firms will not register as a broker consistent with the fact pattern set forth in the no-action letter, or will they register as an LCFB?

      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 proposed LCFB Rule 016(g)(1). An LCFB would not be permitted to qualify, identify or solicit potential purchasers of securities unless the purchaser meets the definition of "institutional investor." However, an LCFB would be allowed to serve clients (such as individuals or entities seeking advice on securities offerings or sales of businesses) who do not meet the "institutional investor" definition.

      The term "institutional investor" would have the same meaning as that term has under FINRA Rule 2210 (Communications with the Public). The term would include any:

      •   bank, savings and loan association, insurance company or registered investment company;
      •   governmental entity or subdivision thereof;
      •   employee benefit plan, or multiple employee benefit plans offered to employees of the same employer, that meet the requirements of Section 403(b) or Section 457 of the Internal Revenue Code and in the aggregate have at least 100 participants, but does not include any participant of such plans;
      •   qualified plan, as defined in Section 3(a)(12) (C) of the Exchange Act, or multiple qualified plans offered to employees of the same employer, that in the aggregate have at least 100 participants, but does not include any participant of such plans;
      •   other person (whether a natural person, corporation, partnership, trust, family office or otherwise) with total assets of at least $50 million; and
      •   any person acting solely on behalf of any such institutional investor.

      See proposed LCFB Rule 016(f).

      FINRA purposely does not propose to define "institutional investor" based on a more inclusive standard, such as the definition of "accredited investor" in Regulation D under the Securities Act of 1933. See 17 C.F.R. § 230.501(a). The LCFB Rules are intended to govern the activities of firms that engage in a limited range of activities, such as advising companies and private equity funds on capital raising and corporate restructuring. As part of these activities, an LCFB would be permitted to qualify, identify and solicit potential institutional investors, as defined by the LCFB Rules.

      FINRA's regulatory programs have uncovered serious concerns with the manner in which firms market and sell private placements to accredited investors. Application of the LCFB Rules to firms that market and sell private placements to accredited investors would require FINRA to expand the applicable conduct rules and other provisions. Therefore, lowering the threshold of "institutional investor" would eviscerate the benefits of a streamlined rule set.

      4 See proposed LCFB Rule 016(g)(2).

      5 There would not be an application fee associated with this request.

      6 Absent a waiver, such a firm would have to pay an application fee associated with the CMA. See FINRA By-Laws, Schedule A, Section 4(i).

      7 See proposed LCFB Rule 123.

      8 See proposed LCFB Rule 451(b).

      9 See Faith Colish, Esq., Carter Ledyard & Milburn LLP, et al., SEC no-action letter (Jan. 31, 2014).

    • 14-08 SEC Approves Changes to Expand the Categories of Civil Judicial Disclosures Permanently Included in BrokerCheck and to Include in BrokerCheck Information About Member Firms and Their Associated Persons of Any Registered National Securities Exchange That*

      *Uses the CRD System for Registration Purposes; Effective Date: June 23, 2014

      View PDF

      FINRA BrokerCheck

      Regulatory Notice
      Notice Type

      Rule Amendment
      Suggested Routing

      Compliance
      Legal
      Operations
      Registered Representatives
      Registration
      Senior Management
      Key Topics

      BrokerCheck
      Central Registration Depository
      Uniform Registration Forms
      Referenced Rules & Notices

      Exchange Act Section 15A(i)
      FINRA Rule 8312

      Executive Summary

      The SEC approved two rule changes related to FINRA Rule 8312 (FINRA BrokerCheck Disclosure). First, the SEC approved amendments to permanently make publicly available in BrokerCheck information about former associated persons of a FINRA member firm who were registered on or after August 16, 1999, and who have been the subject of an investment-related civil action brought by a state or foreign financial regulatory authority that was dismissed pursuant to a settlement agreement.1 Second, the SEC approved amendments to include in BrokerCheck information about member firms and their associated persons of any registered national securities exchange that uses the Central Registration Depository (CRD®) for registration purposes.2 Both rule changes will become effective on June 23, 2014.

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

      Questions concerning this Notice should be directed to FINRA's Gateway Call Center at (301) 590-6500.

      Background & Discussion

      FINRA Rule 8312 governs the information FINRA releases to the public via BrokerCheck. FINRA established BrokerCheck in 1988 (then known as the Public Disclosure Program) to provide the public with information on the professional background, business practices, and conduct of FINRA member firms and their associated persons. The information that FINRA releases to the public through BrokerCheck is derived from the CRD system, the securities industry online registration and licensing database. Firms, their associated persons and regulators report information to the CRD system via the uniform registration forms.3 Among other things, BrokerCheck helps investors make informed choices about the individuals and firms with which they conduct business.

      Expansion of the Categories of Civil Judicial Disclosures Permanently Included in BrokerCheck

      Pursuant to FINRA Rule 8312, BrokerCheck provides information regarding current and former member firms, as well as current associated persons and persons who were associated with a member firm within the preceding 10 years. In addition, BrokerCheck makes publicly available on a permanent basis information about former associated persons of a member firm who have not been associated with a member firm within the preceding 10 years, and (a) were ever the subject of a final regulatory action, or (b) were registered on or after August 16, 1999, and were (i) convicted of or pled guilty or nolo contendere to a crime; (ii) the subject of a civil injunction in connection with investment-related activity or a civil court finding of involvement in a violation of any investment-related statute or regulation (Civil Judicial Disclosures); or (iii) named as a respondent or defendant in an investment-related arbitration or civil litigation which alleged that the person was involved in a sales practice violation and which resulted in an arbitration award or civil judgment against the person.

      Beginning on June 23, 2014, FINRA will expand the categories of Civil Judicial Disclosures that are permanently included in BrokerCheck. Specifically, FINRA will permanently make publicly available in BrokerCheck information about former associated persons of a member firm who were registered on or after August 16, 1999, and who have been the subject of an investment-related civil action brought by a state or foreign financial regulatory authority that was dismissed pursuant to a settlement agreement, as reported to the CRD system via a uniform registration form.4

      FINRA will disclose through BrokerCheck information concerning such settlements, administrative information (e.g., employment and registration history), and information as to passed qualification examinations regarding these formerly registered individuals. FINRA also will provide the most recently submitted comment, if any has been provided by the formerly registered individual, presuming the comment is in the form, in accordance with the procedures established by FINRA, and relates to the information provided through BrokerCheck.

      Inclusion in BrokerCheck of Information About Member Firms and Their Associated Persons of Any Registered National Securities Exchange that Uses the CRD System for Registration Purposes

      Since BrokerCheck's establishment in 1988, the registration information available through BrokerCheck has been limited to firms and individuals that have been registered with FINRA. BrokerCheck has not contained information regarding firms or individuals whose registrations have been exclusively with a registered national securities exchange (although such information is contained in the CRD system for exchanges that use the CRD system for registration purposes).

      Congress amended Section 15A(i) of the Securities Exchange Act of 1934 to, among other things, require FINRA to provide through BrokerCheck registration information on the members and their associated persons of any registered national securities exchange that uses the CRD system for the registration of its members and their associated persons.5 Accordingly, beginning on June 23, 2014, FINRA will expand BrokerCheck to include information about these non-FINRA registered firms and individuals.6 The information that will be disclosed through BrokerCheck for these firms and their associated persons will be the same as the information disclosed about FINRA member firms and their associated persons pursuant to FINRA Rule 8312. In addition, these non-FINRA registered firms and individuals will be able to dispute inaccuracies in their BrokerCheck reports as provided for in FINRA Rule 8312(e).


      1 See Securities Exchange Act Release No. 71196 (December 27, 2013), 79 FR 417 (January 3, 2014) (Order Approving SR-FINRA-2013-048).

      2 See Securities Exchange Act Release No. 71195 (December 27, 2013), 79 FR 419 (January 3, 2014) (Order Approving SR-FINRA-2013-047). The amendments also include non-substantive technical changes to FINRA Rule 8312 to reflect a change in FINRA's style convention for referencing the CRD system.

      3 The uniform registration forms are Form U4 (Uniform Application for Securities Industry Registration or Transfer), Form U5 (Uniform Termination Notice for Securities Industry Registration), Form U6 (Uniform Disciplinary Action Reporting Form), Form BD (Uniform Application for Broker-Dealer Registration), Form BDW (Uniform Request for Broker-Dealer Withdrawal), and Form BR (Uniform Branch Office Registration Form).

      4 This information currently is elicited by Question 14H(1)(c) on Form U4.

      5 See Military Personnel Financial Services Protection Act, Pub. L. No. 109-290, 120 Stat. 1317 (2006).

      6 Firms and individuals that have been registered exclusively with a registered national securities exchange will be included in BrokerCheck only if such registration occurred on or after August 16, 1999.


      Attachment A

      New language is underlined; deletions are in brackets.

      * * * * *

      8000. INVESTIGATIONS AND SANCTIONS

      * * * * *

      8300. SANCTIONS

      * * * * *

      8312. FINRA BrokerCheck Disclosure

      (a) In response to a written inquiry, electronic inquiry, or telephonic inquiry via a toll-free telephone listing, FINRA shall release through FINRA BrokerCheck information regarding: [a current or former member or current or former associated person through FINRA BrokerCheck.]
      (1) a current or former FINRA member or a current or former member of a registered national securities exchange that uses the Central Registration Depository ("CRD") for registration purposes ("CRD Exchange") (collectively, "BrokerCheck Firms"); or
      (2) a current or former associated person of a BrokerCheck Firm.
      (b)(1) Except as otherwise provided in paragraph (d) below, FINRA shall release the information specified in subparagraph (2) below for inquiries regarding a current or former BrokerCheck Firm [member], a person currently associated with a BrokerCheck Firm [person], or a person who was associated with a BrokerCheck Firm [member] within the preceding ten years.
      (2) The following information shall be released pursuant to this paragraph (b):
      (A) through (B) No Change.
      (C) summary information about certain arbitration awards against a BrokerCheck Firm [member] involving a securities or commodities dispute with a public customer;
      (D) through (G) No Change.
      (H) the name and succession history for current or former BrokerCheck Firms [members].
      (c)(1) Except as otherwise provided in paragraph (d) below, FINRA shall release the information specified in subparagraph (2) below for inquiries regarding a person who was formerly associated with a BrokerCheck Firm [member], but who has not been associated with a BrokerCheck Firm [member] within the preceding ten years, and:
      (A) was ever the subject of a final regulatory action as defined in Form U4 that has been reported to the CRD system on a Registration Form; or
      (B) was registered with FINRA or a CRD Exchange on or after August 16, 1999, and any of the following applies, as reported to the CRD system on a Registration Form:
      (i) No Change.
      (ii) was the subject of a civil injunction in connection with investment-related activity, [or] a civil court finding of involvement in a violation of any investment-related statute or regulation, or an investment-related civil action brought by a state or foreign financial regulatory authority that was dismissed pursuant to a settlement agreement; or
      (iii) No Change.
      (2) No Change.

      For purposes of this paragraph (c), a final regulatory action as defined in Form U4 may include any final action, including any action that is on appeal, by the SEC, the Commodity Futures Trading Commission, a federal banking agency, the National Credit Union Administration, another federal regulatory agency, a state regulatory agency, a foreign financial regulatory authority, or a self-regulatory organization (as those terms are used in Form U4).
      (d) FINRA shall not release:
      (1) through (5) No Change.
      (6) the most recent information reported on a Registration Form, if:
      (A) FINRA has determined that the information was reported in error by a BrokerCheck Firm [member], regulator or other appropriate authority;
      (B) No Change.
      (7) No Change.
      (e) Eligible parties may dispute the accuracy of certain information disclosed through FINRA BrokerCheck pursuant to the administrative process described below:
      (1) Initiation of a Dispute
      (A) The following persons (each an "eligible party") may initiate a dispute regarding the accuracy of information disclosed in that eligible party's BrokerCheck report:
      (i) any current BrokerCheck Firm [member];
      (ii) any former BrokerCheck Firm [member], provided that the dispute is submitted by a natural person who served as the former BrokerCheck Firm's [member's] Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Legal Officer or Chief Compliance Officer, or individual with similar status or function, as identified on Schedule A of Form BD at the time the former BrokerCheck Firm [member] ceased being registered with FINRA or a CRD Exchange; or
      (iii) any associated person of a BrokerCheck Firm [member] or person formerly associated with a BrokerCheck Firm [member] for whom a BrokerCheck report is available.
      (B) No Change.
      (2) No Change.
      (3) Investigation and Resolution of Disputes
      (A) If FINRA determines that the written notice and supporting documentation submitted by the eligible party is sufficient to update, modify or remove the information that is the subject of the request, FINRA will make the appropriate change. If the written notice and supporting documentation do not include sufficient information upon which FINRA can make a determination, FINRA, under most circumstances, will contact the entity that reported the disputed information (the "reporting entity") to the CRD system [Central Registration Depository] and request that the reporting entity verify that the information, as disclosed through BrokerCheck, is accurate in content and presentation. If a reporting entity other than FINRA is involved, FINRA will defer to the reporting entity about whether the information received is accurate. If the reporting entity acknowledges that the information is not accurate, FINRA will update, modify or remove the information, as appropriate, based on the information provided by the reporting entity. If the reporting entity confirms that the information is accurate in content and presentation or the reporting entity no longer exists or is otherwise unable to verify the accuracy of the information, FINRA will not change the information.
      (B) through (C) No Change.
      (f) No Change.

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

      .01 No Change.
      .02 Disputes Not Eligible for Investigation. For purposes of paragraph (e) of this Rule, examples of situations in which FINRA will determine that a dispute is not eligible for investigation include, but are not limited to:
      (a) through (e) No Change.
      (f) a dispute that involves information contained in the CRD system [Central Registration Depository] that is not disclosed through BrokerCheck.
      .03 Availability of Information Regarding Firms and Associated Persons Registered Exclusively With a CRD Exchange. Information about firms and associated persons that have been registered exclusively with a CRD Exchange is available through BrokerCheck only if the firm or associated person has been registered with a CRD Exchange on or after August 16, 1999.
      * * * * *

    • 14-07 SEC Approves New Requirements for Alternative Trading Systems; Implementation Dates: May 12, 2014 (ATS Reporting Requirement); November 10, 2014 (MPID Requirement)

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      Alternative Trading Systems

      Regulatory Notice
      Notice Type

      New Rule
      Rule Amendment
      Suggested Routing

      Compliance
      Institutional
      Internal Audit
      Legal
      Operations
      Registered Representatives
      Risk
      Senior Management
      Systems
      Trading
      Key Topics

      Alternative Trading Systems
      Market Participant Identifiers
      Trade Reporting
      Referenced Rules & Notices

      Regulatory Notice 09-08
      FINRA Rule 4552
      FINRA Rule 6160
      FINRA Rule 6170
      FINRA Rule 6480
      FINRA Rule 6720
      FINRA Rule 7440
      SEA Rule 3b-16

      Executive Summary

      The SEC approved a rule change to require alternative trading systems (ATS) to (i) report to FINRA weekly volume information and number of securities transactions within the ATS by security and (ii) acquire and use a single, unique market participant identifier (MPID) when reporting information to FINRA.1 The ATS reporting requirement will be implemented beginning May 12, 2014. The first ATS reports for the week of May 12 through May 16, 2014, will then be due by May 28, 2014. Each ATS must begin reporting order and trade information to FINRA using a unique MPID by November 10, 2014. This Notice provides more information for firms regarding each of these new requirements.

      Questions concerning this Notice should be directed to:

      •   FINRA Product Management at (866) 899-2107;
      •   FINRA Market Operations at (866) 776-0800; or
      •   for legal and interpretive questions, Brant Brown, Associate General Counsel, Office of General Counsel, at (202) 728-6927.

      Background & Discussion

      On January 17, 2014, the SEC approved a proposed rule change to (i) adopt FINRA Rule 4552 to require each ATS2 to report to FINRA weekly volume information and number of securities transactions within the ATS (ATS reporting requirement); and (ii) amend FINRA Rules 6160, 6170, 6480 and 6720 to require each ATS to acquire and use a single, unique MPID when reporting information to FINRA (MPID requirement). As part of these new requirements, FINRA will make the reported volume and trade count information for equity securities publicly available on its website as described below. The ATS reporting requirement will be implemented beginning May 12, 2014. The first ATS reports for the week of May 12 through May 16, 2014, will then be due by May 28, 2014. Each ATS must begin reporting order and trade information to FINRA using a unique MPID by November 10, 2014.

      ATS Reporting Requirement

      New FINRA Rule 4552 requires each ATS that has filed a Form ATS with the SEC to report to FINRA its aggregate weekly volume information and number of trades, by security, per ATS in both equity securities and debt securities subject to FINRA trade reporting requirements.3 The ATS reporting requirement thus applies to any NMS stock,4 OTC Equity Security,5 or any debt security subject to FINRA's Trade Reporting and Compliance Engine (TRACE) rules (TRACE-eligible securities).6 Rule 4552 requires this information to be reported to FINRA on a security-by-security basis within seven business days after the end of each calendar week. FINRA will make the reported information for equity securities publicly available on a delayed basis as described below.

      To ensure consistent reporting and to avoid potential over-counting of volume, Rule 4552 and Supplementary Material .01 specify how an ATS should calculate and report the volume of securities traded and the number of trades. Under the rule, an ATS must include only those trades executed within the ATS. If two orders are crossed by the ATS, the volume calculation would include only the number of shares or par value of bonds crossed as a single trade (e.g., crossing a buy order of 1,000 shares with a sell order of 1,000 shares would be calculated as a single trade of 1,000 shares of volume). An ATS should only report trades executed within the ATS (not orders routed out of the ATS) and should only report the volume of each executed trade once (not separate or double counting for the buy and sell side of a trade).

      Under Supplementary Material .01, volume is considered to be "within an ATS" for purposes of Rule 4552 if the ATS (i) executes the trade; (ii) is considered the "executing party" to the trade under FINRA rules; or (iii) othe