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  • Notices

    • 2017

      • 17-10 2017 GASB Accounting Support Fee to Fund the Governmental Accounting Standards Board

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      • 17-09 The National Securities Exchanges and FINRA Issue Joint Guidance on Clock Synchronization and Certification Requirements Under the CAT NMS Plan; Effective Date: March 15, 2017

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        Consolidated Audit Trail (CAT)

        Regulatory Notice
        Notice Type

        Guidance
         
        Suggested Routing

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

        Clock Synchronization
        Consolidated Audit Trail

        On November 15, 2016, the Securities and Exchange Commission (SEC) approved the National Market System Plan Governing the Consolidated Audit Trail (Plan). The Plan, as modified by an exemptive order issued by the SEC, includes synchronization and certification requirements with regard to business clocks that capture time in milliseconds.

        The participants in the Plan, including the national securities exchanges and FINRA, are issuing the attached alert to provide firms with information regarding upcoming deadlines regarding clock synchronization requirements including certifications, that apply to certain firms. In general, if a firm's clocks that are used to record time related to "Reportable Events" in NMS Securities and OTC equity securities currently capture time in milliseconds, the firm must comply with the clock synchronization, documentation and certification requirements set forth in the SROs' compliance rule series, and summarized in Attachment A, by or before March 15, 2017. Under the Plan, the term "Reportable Events" includes, without limitation, the original receipt or origination, modification, cancellation, routing, execution (in whole or in part) and allocation of an order, and receipt of a routed order.

        Questions concerning this Notice should be directed to:

        •   Alex Ellenberg, Associate General Counsel, Office of General Counsel, at (202) 728-8152; or
        •   Paul McKenney, Senior Director, Market Regulation, at (240) 386-5068.

        Attachment A

        Consolidated Audit Trail ("CAT") Clock Synchronization Requirements

        On November 15, 2016, the Securities and Exchange Commission ("SEC") approved the National Market Plan Governing the Consolidated Audit Trail (the "CAT NMS Plan" or the "Plan"). Pursuant to the CAT NMS Plan, each national securities exchange and the Financial Industry Regulatory Authority, Inc. ("FINRA") (each, a "Participant" in the Plan) has filed with the SEC a compliance rule series that requires the Participant's members to comply with the CAT NMS Plan requirements and, ultimately, to report information to the CAT. The Participants are issuing this alert in anticipation of the SEC's approval of the Participants' compliance rule series.

        This alert provides guidance regarding upcoming deadlines regarding clock synchronization requirements, including certifications, that apply to certain members of the Participants.

        Business Clock Synchronization Requirement

        The Participants filed their CAT compliance rule series with the SEC in January and February 2017. Pursuant to the clock synchronization provisions in the CAT compliance rule series, each Participant's member ("Industry Member") shall synchronize its Business Clocks, other than such Business Clocks used solely for Manual Order Events or used solely for the time of allocation on Allocation Reports, at a minimum to within a fifty (50) millisecond tolerance of the time maintained by the atomic clock of the National Institute of Standards and Technology ("NIST"), and maintain such synchronization.1 In addition, each Industry Member shall synchronize its (A) Business Clocks used solely for Manual Order Events and (B) its Business Clocks used solely for the time of allocation on Allocation Reports, at a minimum to within a one second tolerance of the time maintained by NIST, and maintain such synchronization. Under the Plan, as modified by an exemptive order issued by the SEC, each Industry Member must comply with these requirements with regard to Business Clocks that capture time in milliseconds by or before March 15, 2017.

        For purposes of the initial March 15, 2017 clock synchronization and certification (described below) deadlines, "Business Clocks" include those clocks that currently capture time in milliseconds and that are used to record time related to "Reportable Events," as defined under the Plan, including, without limitation, the original receipt or origination, modification, cancellation, routing, execution (in whole or in part) and allocation of an order, and receipt of a routed order, in Eligible Securities (i.e., NMS Securities and OTC Equity Securities).

        Accordingly, if your Business Clocks currently capture time in milliseconds, you must comply with the clock synchronization, documentation and certification requirements set forth in the compliance rule series, and summarized herein, by or before March 15, 2017. However, as noted below, Industry Members will not be required to comply with the violation reporting provision of the clock synchronization requirements until thresholds for reporting are published by the Operating Committee of the CAT NMS Plan.

        Synchronization Procedures

        All Industry Members that have Business Clocks that are subject to the clock synchronization requirements must document and maintain their synchronization procedures and keep a log of the times when they synchronize their Business Clocks and the results of the synchronization process. The Participants expect that each Industry Member will synchronize its Business Clocks every business day before market open, and check synchronization at pre-determined intervals throughout the business day, to reasonably ensure that Business Clocks maintain synchronization. The Participants also expect that each Industry Member's synchronization log will document whenever a Business Clock fails to be within the applicable tolerance of the time maintained by NIST. At a later date, the Operating Committee of the CAT NMS Plan will provide further guidance regarding clock synchronization thresholds and Industry Members' clock synchronization logs. At that time, the Participants will publish this information.

        Certification Regarding Business Clock Synchronization

        The CAT compliance rule series requires each Industry Member to certify that its Business Clocks satisfy the synchronization requirements described above periodically in accordance with the certification schedule established by the Operating Committee of the CAT NMS Plan. As mentioned above, each Industry Member must provide an initial certification—in the form attached hereto—by March 15, 2017. Going forward, Industry Members must complete a new certification annually by March 15 of each year following 2017. For future certifications, Industry Members should use a copy of the form certification attached hereto, unless an updated form certification is available, in which case the Participants will distribute copies of such updated form certification prior to the March 15 deadline. Industry Members are not required to submit such certifications to the exchanges or FINRA. Instead, originals of such certifications must be maintained by Industry Members as part of their books and records and be available to regulators upon request. Industry Members who are members of multiple Participants need only make a single clock synchronization certification.

        Violation Reporting

        Each Participant's compliance rule series provides that each Industry Member with Business Clocks must report to the Plan Processor and the Participant when the Industry Member violates the clock synchronization requirements pursuant to the thresholds set by the Operating Committee of the CAT NMS Plan (the "Compliance Thresholds"). At this time, the Operating Committee has not adopted Compliance Thresholds, so Industry members are not yet required to report violations of the clock synchronization requirements to the Plan Processor or the Participants. At a later date, the Participants will publish the Compliance Thresholds, subject to approval by the Operating Committee of the CAT NMS Plan. At that time, Industry Members will be required to report violations of the Compliance Thresholds to the Plan Processor and the Participants.


        1. Unless otherwise noted, capitalized terms are used as defined in the CAT compliance rule series or herein.


        Attachment B

        CONSOLIDATED AUDIT TRAIL ("CAT")

        CLOCK SYNCHRONIZATION CERTIFICATION BY

        TO

        PARTICIPANTS OF THE CAT NMS PLAN

        MARCH , 2017

        hereby acknowledges that it is a member of the following national securities exchange(s) and/or national securities association(s) (please select all that apply):

        Bats BYX Exchange, Inc. Financial Industry Regulatory Authority, Inc. NASDAQ BX, Inc.
        Bats BZX Exchange, Inc. International Securities Exchange, LLC NASDAQ PHLX LLC
        Bats EDGA Exchange, Inc.   The NASDAQ Stock Market LLC
        Bats EDGX Exchange, Inc. Investors' Exchange LLC National Stock Exchange, Inc.
        BOX Options Exchange LLC ISE Gemini, LLC New York Stock Exchange LLC
        C2 Options Exchange, Incorporated ISE Mercury, LLC NYSE MKT LLC
        Chicago Board Options Exchange, Incorporated Miami International Securities Exchange LLC NYSE Arca, Inc.
        Chicago Stock Exchange, Inc. MIAX PEARL, LLC Other:

        To achieve compliance with the clock synchronization requirements of the CAT compliance rule, including any interpretive or exemptive guidance applicable to such rule, of each national securities exchange and/or national securities association identified above (the "Clock Synchronization Requirement"), the undersigned, who is duly authorized to execute this certification on behalf of , hereby certifies that has:

        (1) synchronized its Business Clocks, other than such Business Clocks used solely for Manual Order Events or used solely for the time of allocation on Allocation Reports, at a minimum to within a fifty (50) millisecond tolerance of the time maintained by the National Institute of Standards and Technology, and maintains such synchronization; and
        (2) synchronized (A) its Business Clocks used solely for Manual Order Events and (B) its Business Clocks used solely for the time of allocation on Allocation Reports at a minimum to within a one second tolerance of the time maintained by the National Institute of Standards and Technology, and maintains such synchronization.

        Capitalized terms are defined as set forth in the CAT compliance rule series of each national securities exchange and national securities association.

        EXECUTED as of the date first written above.

        Industry Member:________________________________________________________________

        By: ________________________________________________________________

        Name: ________________________________________________________________

        Title: ________________________________________________________________

      • 17-08 SEC Approves Amendments to Require Mark-Up/Mark-Down Disclosure on Confirmations for Trades With Retail Investors in Corporate and Agency Bonds; Effective Date: May 14, 2018

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        Pricing Disclosure in the Fixed Income Markets

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 2121
        FINRA Rule 2232
        FINRA Rule 4512
        SEA Rule 10b-10
        Regulatory Notice 14-52
        Regulatory Notice 15-36
        Suggested Routing

        Compliance
        Fixed Income
        Legal
        Operations
        Systems
        Trading
        Training
        Key Topics

        Fixed Income
        Pricing Information
        TRACE
        Transaction Confirmations

        Executive Summary

        The Securities and Exchange Commission (SEC) approved amendments to FINRA Rule 2232 (Customer Confirmations) that require member firms to disclose additional transaction-related information to retail customers for trades in certain fixed income securities. Specifically, amended Rule 2232 requires a member to disclose the amount of mark-up or mark-down it applies to trades with retail customers in corporate or agency debt securities if the member also executes an offsetting principal trade in the same security on the same trading day. The amended rule also requires members to disclose two additional items on all retail customer confirmations for corporate and agency debt security trades: (1) a reference, and a hyperlink if the confirmation is electronic, to a web page hosted by FINRA that contains publicly available trading data for the specific security that was traded, and (2) the execution time of the transaction, expressed to the second. These amendments will become effective on May 14, 2018.

        The amended rule text is available on FINRA's website.

        Questions regarding this Notice should be directed to:

        •   Patrick Geraghty, Vice President, Market Regulation, at (240) 386-4973 or Patrick.Geraghty@finra.org;
        •   Cynthia Friedlander, Director, Fixed Income Regulation, Regulatory Operations, at (202) 728-8133 or Cynthia.Friedlander@finra.org; or
        •   Alex Ellenberg, Associate General Counsel, Office of General Counsel, at (202) 728-8152 or Alexander.Ellenberg@finra.org.

        Background and Discussion

        Pursuant to SEA Rule 10b-10, firms currently are required to provide transaction cost information when acting as principal with customers for equity trades; however, no comparable requirement had existed for bond trades. As part of an initiative to provide retail fixed income investors with additional information about the costs of their transactions, FINRA filed proposed amendments to Rule 2232 to require enhanced transaction cost and related information on customer confirmations.1

        FINRA's amendments to Rule 2232 were developed as the result of a multi-year process during which FINRA twice solicited feedback on related proposals.2 Throughout the process, FINRA worked closely with the Municipal Securities Rulemaking Board (MSRB) to develop similar rules, as appropriate, to ensure consistent disclosures to customers across debt securities and to reduce the operational burdens for firms that trade multiple fixed income securities. The SEC approved FINRA's amendments to Rule 2232, as well as the MSRB's parallel confirmation disclosure proposal, on November 17, 2016.3

        Mark-Up Disclosure Requirements

        When Disclosure is Required

        New Rule 2232(c) requires members to disclose to a non-institutional customer4 the amount of mark-up or mark-down5 the customer paid for a trade in a corporate or agency debt security,6 if the member also executes one or more offsetting principal trades in the same security on the same trading day which in the aggregate meet or exceed the size of the customer trade.

        The following example explains how the "offsetting" language that describes when disclosure is triggered under the rule is intended to operate: If a member purchases 100 bonds at 9:30 a.m., and then sells to three customers, who each buy 50 bonds in the same security on the same day, without purchasing any more of the bonds, the rule requires mark-up disclosure on two of the three trades, since one of the trades would need to be satisfied out of the member's prior inventory, or its short position, rather than offset by the member's same-day principal transaction.7

        FINRA notes that a disclosure obligation under Rule 2232(c) could be triggered by an offsetting principal trade executed by a member's affiliate. Specifically, if a member's offsetting principal trade is executed with a broker-dealer affiliate and did not occur at arm's length,8 the member is required to "look through" to the time and terms of the affiliate's trade to comply with the rule.

        New Rule 2232(d) contains two exceptions to the mark-up disclosure requirements of Rule 2232(c). First, mark-up disclosure is not triggered by principal trades that a member executes on a trading desk that is functionally separate from a trading desk that executes customer trades, provided the member maintains policies and procedures reasonably designed to ensure that the functionally separate trading desk has no knowledge of the customer trades.9 Second, mark-up disclosure does not need to be provided for bonds that are acquired by a member in a fixed-price offering and sold to non-institutional customers at the same offering price on the same day the member acquired the bonds.

        Members may develop reasonable policies and procedures to identify and account for offsetting trades that trigger the disclosure obligations of Rule 2232(c). Members may also choose to provide mark-up disclosure more broadly, for example to all trades with retail customers.

        Methods to Calculate and Disclose Mark-Ups

        Members need to calculate the mark-up that is disclosed on a customer confirmation from the prevailing market price (PMP) for the security, consistent with existing FINRA Rule 2121 (Fair Prices and Commissions) and the supplementary material thereunder, particularly Supplementary Material .02 (Additional Mark-Up Policy for Transactions in Debt Securities, Except Municipal Securities). Members may base their mark-up calculations for confirmation disclosure purposes on the information they have available to them as a result of reasonable diligence at the time they input relevant transaction information into systems to generate confirmations. In other words, amended Rule 2232 does not prevent members from maintaining real-time, intra-day confirmation generation processes. Members can engage third-party service providers to facilitate mark-up disclosure consistent with Rule 2232; however, members retain compliance responsibility and are expected to exercise due diligence and oversight over third party relationships. Members may also choose to automate their mark-up disclosure calculation process according to reasonable, consistently applied policies and procedures, if consistent with Rule 2121.

        Where mark-up disclosure is provided on customer confirmations, Rule 2232(c) requires firms to express the disclosed mark-up as both a dollar amount and a percentage of PMP.10 Members may include accompanying language to provide explanation of mark-up-related concepts, or a member's particular methodology for calculating mark-ups, provided such statements are accurate. However, members may not label mark-ups as "estimated" or "approximate" figures.11

        Requirement to Disclose a Reference or Link to Security-Specific Trade Data

        For all trades with non-institutional customers in corporate and agency debt securities, whether mark-up disclosure is triggered or not, new Rule 2232(e) requires members to provide a reference, and a hyperlink if the confirmation is electronic, to a web page hosted by FINRA that contains TRACE publicly available trading data for the specific security that was traded, along with a brief description of the type of information available on that page.12

        FINRA noted during the rulemaking process that it was working to develop a short Uniform Resource Locator (URL) to try to mitigate the operational burdens of this requirement.13 Based on a variety of factors, including logistical concerns such as length of the link and space available on confirmations, discussions with member firms, as well as research into investor preferences, FINRA has established the following URL: http://bondfacts.finra. org/<CUSIP>. Paper confirmations would be required to include this URL in print form; electronic confirmations would be required to include this URL as a hyperlink to the web page.

        FINRA believes this URL is consistent with the principles it discussed during the rulemaking process, most notably, the need to develop a short, uniform link template that could be subject to automation by members. FINRA also notes that this URL is similar in length and convention to the URL that the MSRB will require for confirmations for transactions in municipal securities with retail customers. Should members wish to provide feedback on the URL that FINRA has chosen, FINRA will consider this input.

        Time of Execution Disclosure Requirement

        Rule 2232(e) further requires members to disclose the time of execution, expressed to the second, for all non-institutional customer trades in corporate and agency debt securities. As with the URL requirement, trade time disclosure is required even in cases where mark-up disclosure is not triggered. Providing customers the time of execution will assist them in identifying their individual trade when accessing the TRACE publicly available information.

        Implementation Period

        The effective date for the above-described amendments to Rule 2232 is May 14, 2018. This effective date, which is eighteen months from when the amendments were approved by the SEC, is the same as the effective date for the MSRB's parallel confirmation disclosure requirements.14

        FINRA recognizes members may still have specific implementation questions and remains committed to working closely with the industry and MSRB during the implementation period to issue further guidance as necessary.


        1. See Securities Exchange Act Release No. 78573 (August 15, 2016), 81 FR 55500 (August 19, 2016) (Notice of Filing of SR-FINRA-2016-032) ("Proposal").

        2. See Regulatory Notice 14-52 (November 2014) and Regulatory Notice 15-36 (15-36). The proposals contained in these Regulatory Notices, and how they differ from the amendmentsto Rule 2232 that FINRA ultimately filed with the SEC, are discussed in the proposal, supra note 1.

        3. See Securities Exchange Act Release No. 79346 (November 17, 2016), 81 FR 84659 (November 23, 2016) (Order Approving SR-FINRA-2016-032) ("Approval Order"); Securities Exchange Act Release No. 79347 (November 17, 2016), 81 FR 84637 (November 23, 2016) (Order Approving SR-MSRB-2016-12).

        4. The term "non-institutional customer" is defined in Rule 2232(f)(4) to mean a customer with an account that is not an institutional account. The term "institutional account" is defined in Rule 4512(c) to mean an account of "(1) a bank, savings and loan association, insurance company or registered investment company; (2) an investment adviser registered either with the SEC under Section 203 of the Investment Advisers Act or with a state securities commission (or any agency or office performing like functions); or (3) any other person (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50 million."

        5. For ease of reference, unless otherwise noted, the term "mark-up" refers to mark-ups and mark-downs, collectively.

        6. The terms "corporate debt security" and "agency debt security" are defined in Rules 2232(f)(1) and (2), respectively.

        7. See Approval Order, supra note 3, at 84663 (discussing FINRA's response to comments submitted to the SEC concerning the proposed amendments.)

        8. The term "arms-length transaction" is defined in Rule 2232(f)(3) to mean "a transaction that was conducted through a competitive process in which non-affiliate firms could also participate, and where the affiliate relationship did not influence the price paid or proceeds received by the member." FINRA has noted that as a general matter, it expects the competitive process used in an "arms-length" transaction to be one in which non-affiliates have frequently participated. See Approval Order, supra note 3, at 84662 n. 43.

        9. For example, this exception allows an institutional desk within a firm to service an institutional customer without necessarily triggering the disclosure requirement for an unrelated trade performed by a separate retail desk within the firm. However, given the "no knowledge" provision of this exception, a firm could not avoid triggering the mark-up disclosure requirement if trades executed on an institutional desk were used to source transactions at the retail desk. See Proposal, supra note 1, at 55502.

        10. Specifically, mark-ups must be disclosed on confirmations as a total dollar amount (i.e., the dollar difference between the customer's price and the security's PMP), and as a percentage amount (i.e., the mark-up's percentage of the security's PMP).

        11. See Approval Order, supra note 3, at 84671.

        12. Each security-specific web page will include information about the prices of other transactions in the same bond, as well as additional market data and educational material that FINRA believes will be useful to retail investors.

        13. See Approval Order, supra note 3, at 84667 (citing to FINRA's response to comments).

        14. See MSRB Regulatory Notice 2016-28 (November 2016).

      • 17-07 Updated SEC No-Action Guidance and Instructions on Electronic Filing of Broker-Dealer Annual Reports

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        Electronic Filing of Broker-Dealer Annual Reports

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        Regulatory Notice 11-46
        Regulatory Notice 16-05
        SEA Rule 17a-5
        SEA Rule 17a-12
        Suggested Routing

        Accounting
        Compliance
        Finance
        Legal
        Regulatory Reporting
        Senior Management
        Key Topics

        Annual Report
        Electronic Filing

        Executive Summary

        This Notice provides firms with information regarding an updated no-action letter1 and updated instructions issued by the staff of the Division of Trading and Markets of the Securities and Exchange Commission (the SEC staff) regarding electronic filing of the annual and supplemental reports required under SEA Rules 17a-5 and 17a-12.

        Questions concerning this Notice should be directed to:

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

        Background & Discussion

        Broker-dealers are required to file annual and supplemental reports under SEA Rule 17a-5, and over-the-counter (OTC) derivatives dealers are required to file annual and supplemental reports under SEA Rule 17a-12. Under SEA Rules 17a-5 and 17a-12, these reports are required to be filed with the SEC in paper form. The annual reports required under SEA Rule 17a-5 must be filed with FINRA electronically.2

        Pursuant to the SEC staff's updated no-action letter, broker-dealers and OTC derivative dealers may file the required annual and supplemental reports with the SEC electronically, in lieu of filing the reports with the SEC in paper form. The reports must be filed electronically through the SEC's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system in accordance with the updated instructions and conditions contained on the SEC's website.

        Filers with procedural and technical questions may contact the SEC's electronic filer support at (202) 551-8900 (option 3). Technicians are available from 9 a.m.-5:30 p.m. Eastern Time filertechunit@sec.gov. Further information concerning electronic filing of broker-dealer annual reports can be found on the SEC's website.

        Substantive questions regarding a broker-dealer's filing requirements should be directed to the Division of Trading and Markets by calling (202) 551-5777 or by emailing tradingandmarkets@sec.gov.


        1. See letter from Michael A. Macchiaroli, Associate Director, Division of Trading and Markets, Securities and Exchange Commission, to Kris Dailey, Vice President, Risk Oversight & Operational Regulation, FINRA (January 27, 2017) (referred to as the updated no-action letter), available on the SEC's website. The updated no-action letter replaces an earlier letter that the SEC staff issued on December 21, 2015, which is withdrawn. FINRA addressed the SEC's earlier letter of December 21, 2015, in Regulatory Notice 16-05 (Electronic Filing of Broker-Dealer Annual Reports) (January 2016). This Notice replaces Regulatory Notice 16-05.

        2. See Regulatory Notice 11-46 (Annual Audit Reports: FINRA to Require Electronic Submission of Annual Audit Reports) (October 2011).

      • 17-06 FINRA Requests Comment on Proposed Amendments to Rules Governing Communications with the Public; Comment Period Expires: March 27, 2017

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        Communications with the Public

        Regulatory Notice
        Notice Type

        Request for Comment
        Referenced Rules & Notices

        FINRA Rule 2210
        FINRA Rule 2241
        FINRA Rule 3110
        Suggested Routing

        Advertising
        Compliance
        Legal
        Operations
        Registered Representatives
        Senior Management
        Key Topics

        Communications with the Public
        Supervision

        Executive Summary

        As part of FINRA's retrospective review of its rules governing communications with the public, FINRA is soliciting comment on proposed amendments to FINRA Rule 2210 (Communications with the Public). The proposed amendments would create an exception to the rule's prohibition on projecting performance to permit a firm to distribute a customized hypothetical investment planning illustration that includes the projected performance of an asset allocation or other investment strategy, but not an individual security, subject to specified conditions.

        The proposed rule text is attached as Attachment A.

        Questions concerning this Notice should be directed to:

        •   Joseph E. Price, Senior Vice President, Corporate Financing/Advertising Regulation, at (240) 386-4623 or by email at joseph.price@finra.org;
        •   Thomas A. Pappas, Vice President, Advertising Regulation, at (240) 386-4553 or by email at tom.pappas@finra.org; or
        •   Joseph P. Savage, Vice President and Counsel, Regulatory Policy, at (240) 386-4534 or by email at joe.savage@finra.org.

        Action Requested

        FINRA encourages all interested parties to comment on the proposal. Comments must be received by March 27, 2017.

        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

        Rule 2210

        Rule 2210 provides that communications may not predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast.3 The general prohibition against performance projections is largely intended to protect retail investors from performance projections of individual investments, which often prove to be spurious, inaccurate or otherwise misleading.

        On the other hand, information regarding the expected performance of an asset allocation or other investment strategy that does not project the performance of individual securities could better inform an investor about assumptions upon which the recommendation to pursue such a strategy is based. Commenters to FINRA's retrospective review of the communications rules suggested that investors would benefit from projections in that more limited context and noted that investment advisers often present performance projections in their communications with their clients, particularly in communications concerning financial planning or asset allocation. The Investment Advisers Act does not prohibit the presentation of projections that comply with the antifraud provisions of the Act.

        Proposed Amendments

        The proposal would provide an exception to the prohibition of projections for a customized hypothetical investment planning illustration.4 The exception would be available for all firms, including firms that operate only an online platform, and could be used with both current and prospective customers. The illustration may project an asset allocation or other investment strategy, but not the performance of an individual security.5 The proposal would require that there be a reasonable basis for all assumptions, conclusions and recommendations, and that the illustration clearly and prominently disclose the fact that the illustration is hypothetical and there is no assurance that any described investment performance or event will occur. All material assumptions and limitations applicable to the illustration would have to be disclosed.

        The "reasonable basis" requirement follows well-established precedents. FINRA Rules 2210 and 2241 (Research Analysts and Research Reports) require a price target in a research report to have a reasonable basis.6 SEC rules also require performance projections contained in offering documents or prospectuses to be based on good faith and have a reasonable basis.7

        A "reasonable basis" might be established, for example, by reference to the historical performance and performance volatility of asset classes, the duration of fixed income investments, the effects of macroeconomic factors such as inflation and changes in currency valuation, the impact of fees, costs and taxes, and expected contribution and withdrawal rates by the customer. An unreasonable emphasis on any one of these factors might cause the projection to be noncompliant. Moreover, basing a projection upon hypothetical back-tested performance (which FINRA has interpreted the communications rules to prohibit in retail communications) or the past performance of particular investments by an asset manager would not be reasonable.8

        The proposal also would establish specific supervisory requirements for the permitted illustrations. A firm could use a template, such as one provided by a reliable off-the shelf software package, to generate the permitted illustration. In that case a registered principal would be required to approve the template before use or distribution, and the illustrations would have to be reviewed in a manner similar to correspondence under FINRA Rule 3110 (Supervision). A firm that does not employ a template would be required to have a registered principal review and approve each illustration before use or distribution.

        Economic Impact Assessment

        The amendments in this rule proposal are intended to better harmonize regulatory standards and allow firms to communicate, subject to limitations, information regarding the expected performance of an asset allocation or other investment strategy.

        FINRA anticipates that most firms that currently file communications associated with investment analysis tools would communicate projections for a customized hypothetical investment planning illustration that are consistent with the proposed amendments. FINRA estimates that there were 20 such firms in 2016. In addition to these firms, the staff believes that many firms providing products and services to retail investors would likely also choose to rely on the proposed exception for projections. FINRA estimates that there are approximately 1,900 such firms that are retail-oriented.9

        FINRA notes that some of the retail-oriented firms may have clients that are already receiving projections-related communications as part of their investment advisory client accounts. For example, some of the retail-oriented firms are dually-registered and have dually-registered representatives that may be already communicating information regarding expected performance or projections to their investment advisory clients.10 Similarly, firms that are not dually registered may still have registered representatives that are dually registered and provide clients investment advisory services that may include performance projections. These dually-registered firms or representatives may choose to align the way they provide projections in their investment advisory business to the proposed amendments, thereby simplifying compliance and minimizing the costs of regulatory oversight.

        Anticipated Benefits

        The proposed amendments would allow firms to communicate information as described above regarding the expected performance of an asset allocation or other investment strategy. Such communication could better inform investors about the recommended investment strategies, including the underlying assumptions upon which the recommendations are based. FINRA anticipates that these benefits would largely accrue to clients that do not have investment advisory accounts, and as a result, are not already receiving projections-related communications. Firms that are not dually registered or that do not employ dually-registered persons may be able to compete more effectively, as they now can provide a potentially valuable service to their clients.

        Anticipated Costs

        Firms that would rely on the exception in the proposal to communicate permitted illustrations would be required to follow supervisory requirements, including review and approval from a registered principal. As a result, these firms would incur costs associated with principal review, including the staff and technology resources needed to conduct the required reviews.

        The proposed amendments would allow firms to use a template to generate the permitted illustrations, in which case the registered principal would be required to approve the template. Alternatively, a firm may choose not to use a template, in which case the principal would be required to review each illustration before use or distribution. Firms would have flexibility in determining whether or not to use a template, which is intended to allow firms to choose the most cost effective option based on their business. Moreover, firms would not be required to file these communications with FINRA for review, and as a result, would not incur any costs associated with filing, such as filing fees.

        Firms likely also would incur costs associated with updating their policies and procedures. These costs would include training their registered representatives that use projections with customers and advertising review staff.

        The proposal permits firms to communicate projections under the described conditions, but does not require them to do so. As such, firms may choose not to incur the costs associated with the proposal.

        Request for Comment

        FINRA requests comment on all aspects of the proposed amendment, including the appropriate scope of these amendments and potential impacts on firms, associated persons and the public. FINRA requests that commenters provide empirical data or other factual support for their comments whenever possible. FINRA specifically request comments concerning the following issues:

        1. In addition to the economic impacts identified in this proposal, are there other significant sources of impacts, including direct or indirect costs and benefits, of the proposed amendments to the firms and investors? What are these economic impacts and what factors contribute to them? What would be the magnitude of these costs and benefits? Please provide data or other supporting evidence.
        2. To what extent do dually-registered firms have customers that do not have investment advisory accounts and as a result are not able to receive projections- related communications consistent with the Advisers Act? To what extent do these firms anticipate using the proposed exception in this proposal for these customers, or other customers? What would be the primary sources of benefits and costs for these firms and their customers?
        3. To what extent will dually-registered firms or representatives align the performance projections in their investment advisory services to the proposed amendments? What aspects of those projections, if any, would not be aligned?
        4. Are there other alternative approaches FINRA should consider to accomplish the goals described in this proposal? If so, what are those alternatives and why are they better suited?
        5. This Regulatory Notice includes examples of factors that would and would not provide a "reasonable basis" for performance projections under the proposal. Are the historical performance and performance volatility of asset classes appropriate factors that would provide a reasonable basis for performance projections? Are there other examples that FINRA should provide that would further clarify what would constitute a "reasonable" basis for a performance projection?
        6. The proposal would not permit performance projections for a single security. Securities Act Rule 156, which governs investment company sales literature, provides in part that a statement could be misleading because it includes representations about future investment performance.11 Are there single investment products that operate like an asset allocation or other investment strategy for which performance projections might be appropriate?
        7. The proposal would permit a single projection in a customized hypothetical investment planning illustration. Requiring a range for projections, however, could make the hypothetical nature of a performance projection more apparent. Should the proposal require a range of projections?

        1. FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Person 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 take effect upon filing with the SEC. See SEA Section 19(b)(3) and SEA Rule 19b-4.

        3. There are four exceptions from the prohibition on projections: hypothetical illustrations of mathematical principles, investment analysis tools, price targets in research reports, and certain projections concerning security futures and options.

        4. A "customized" investment planning illustration is one designed for a particular client or multiple clients who share an account.

        5. The proposal would not limit a firm's ability to provide estimated annual income and estimated yield in customer account statements for individual securities that produce income consistent with the guidance in Regulatory Notice 08-77.

        6. See FINRA Rule 2210(d)(l)(F)(iii) and FINRA Rule 2241(c)(1)(B).

        7. See Securities Act Regulation S-K, 17 CFR § 229.10(b).

        8. Hypothetical back-tested performance attempts to show how a portfolio or index constructed with the benefit of hindsight would have performed during a certain period in the past if the product or index had been in existence during such time. Back-tested performance differs from historical performance in that historical performance measures how a portfolio or index actually performs after the investment allocation decisions have been made, without the benefit of hindsight.

        9. FINRA's estimate is based on member responses to the 2016 Risk Control Assessment (RCA) survey. The RCA survey includes a question on the types of customers that the responding member firm serves. Approximately 2,250 members responded to the RCA survey in 2016. FINRA believes that the responding firms are representative of the overall membership. Based on the RCA responses, FINRA estimates that approximately 48 percent of all members (about 1,900 members) have retail clients, including high net-worth clients.

        10. FINRA estimates that approximately 620 of the firms (or 16 percent of the overall membership) are dually registered as both broker-dealers and investment advisers. FINRA further estimates that these dually-registered firms have approximately 408,100 registered representatives, accounting for 63 percent of total registered representatives. These representatives may be registered solely as broker-dealer representatives or dually registered as both investment adviser and broker-dealer representatives. FINRA notes that some of the dually-registered firms may also have other representatives that are solely registered as investment adviser representatives.

        11. See 17 CFR § 230.156(b)(2).


        Attachment A

        Proposed Changes to Rule 2210 to Allow Projections in Investment Planning Presentations (New text is underlined)

        2210. Communications with the Public
        (a) Definitions

        No change.
        (b) Approval, Review and Recordkeeping
        (1)–(3) No change.
        (4) Customized Hypothetical Investment Planning Illustrations

        A member shall supervise illustrations permitted under paragraph (d)(1)(F)(iv) ("investment planning illustrations") by requiring a registered principal either to:
        (A) review and approve each investment planning illustration before use or distribution; or
        (B) review and approve each template for investment planning illustrations before use or distribution, and supervise and review the investment planning illustrations in the same manner as required for supervising and reviewing correspondence under Rule 3110.
        [(4)] (5) Recordkeeping
        (A) Members must maintain all retail communications and institutional communications for the retention period required by SEA Rule 17a-4(b) and in a format and media that comply with SEA Rule 17a-4. The records must include:
        (i) a copy of the communication and the dates of first and (if applicable) last use of such communication;
        (ii) the name of any registered principal who approved the communication and the date that approval was given;
        (iii) in the case of a retail communication or an institutional communication that is not approved prior to first use by a registered principal, the name of the person who prepared or distributed the communication;
        (iv) information concerning the source of any statistical table, chart, graph or other illustration used in the communication; and
        (v) for any retail communication for which principal approval is not required pursuant to paragraph (b)(1)(C), the name of the member that filed the retail communication with the Department, and a copy of the corresponding review letter from the Department.
        (B) Members must maintain all correspondence in accordance with the record-keeping requirements of Rules 3110.09 and 4511.
        (c) Filing Requirements and Review Procedures

        No change.
        (d) Content Standards
        (1) General Standards
        (A)–(E)

        No change.
        (F) Communications may not predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast; provided, however, that this paragraph (d)(1)(F) does not prohibit:
        (i) A hypothetical illustration of mathematical principles, provided that it does not predict or project the performance of an investment or investment strategy;
        (ii) An investment analysis tool, or a written report produced by an investment analysis tool, that meets the requirements of Rule 2214; [and]
        (iii) A price target contained in a research report on debt or equity securities, provided that the price target has a reasonable basis, the report discloses the valuation methods used to determine the price target, and the price target is accompanied by disclosure concerning the risks that may impede achievement of the price target; and
        (iv) A customized hypothetical investment planning illustration that projects performance of an asset allocation or other investment strategy and not an individual security, provided that:
        a. there is a reasonable basis for all assumptions, conclusions and recommendations; and
        b. the illustration clearly and prominently discloses:
        (I) that the illustration is hypothetical;
        (II) that there is no assurance that any described investment performance or event will occur; and
        (III) all material assumptions and limitations applicable to the illustration.
        (2)–(8)

        No change.
        (e)–(g)

        No change.

      • 17-05 FINRA and ISG Update Certain Electronic Blue Sheet Data Elements; Effective Date: February 6, 2017

        View PDF

        Electronic Blue Sheet Submissions

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        FINRA Rule 8211
        FINRA Rule 8213
        Notice to Members 05-58
        Notice to Members 06-33
        Regulatory Notice 11-56
        Regulatory Notice 12-36
        Regulatory Notice 12-47
        Regulatory Notice 13-16
        Regulatory Notice 13-38
        Regulatory Notice 15-44
        Regulatory Notice 16-24
        SEA Rule 13h-1
        Suggested Routing

        Compliance
        Legal
        Operations
        Senior Management
        Key Topics

        Blue Sheets

        Executive Summary

        FINRA and the other U.S. members of the Intermarket Surveillance Group1 (ISG members) have updated several data elements for Electronic Blue Sheets (EBS). The updates are, in part, in response to the Securities and Exchange Commission's approval, dated December 14, 2016, of the MIAX PEARL. The updates will be effective on February 6, 2017.

        Attachments A and B to this Notice set forth the EBS record layout and reflect the modifications noted below and changes from the version previously published in Regulatory Notice 16-24.

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

        Discussion

        FINRA and the other ISG members have updated the data elements for EBS noted below.

        First, certain data elements were updated in response to the Securities and Exchange Commission's approval, dated December 14, 2016, of the MIAX PEARL.

        The following Requestor Code was added and a modification was made to Attachment A of this Notice:

        •   MIAX PEARL = '8'

        The following Exchange Code was added and a modification was made to Attachment A of this Notice:

        •   MIAX PEARL = '8'

        Second, the following Transaction Type Identifiers were updated for equity and modifications were made to Attachment B of this Notice:

        •   From Non-Program Trading, Agency to Agency = 'A'
        •   From Non-Program Trading, Proprietary to Proprietary = 'P'

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


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


        Attachment A

        Record Layout for Submission of Trading Information

        Field Position Field Length Field Name/Description/Remarks Field Format Justify Picture Clause Default Value
        From To            
              ***This record must be the first record of the file***        
        1 3 3 FILLER A LJ X(3) HDR
        4 5 2 FILLER A LJ X(2) .S
        6 10 5 DTRK-SYSID N LJ 9(5) 12343
        11 12 2 FILLER A LJ X(2) .E
        13 14 2 FILLER N LJ 9(2) 00
        15 16 2 FILLER A LJ X(2) .C
        17 20 4 DTRK-ORIGINATOR
        Please contact SIAC for assignment at efp-support@nyse.com
        A LJ X(4) --
        21 22 2 FILLER A LJ X(2) .S
        23 26 4 DTRK-SUB-ORIGINATOR
        Please contact SIAC for assignment at efp-support@nyse.com
        A LJ X(4) --
        27 27 1 FILLER A LJ X(1) B
        28 33 6 DTRK-DATE
        Contains submission date.
        N LJ 9(6) MMDDYY
        34 34 1 FILLER A LJ X(1) B
        35 59 25 DTRK-DESCRIPTION Required to identify this file. A LJ X(25) FIRM TRADING INFORMATION
        60 80 21 FILLER A LJ X(21) B
        1 1 1 HEADER RECORD CODE Value: Low Values OR ZERO A -- X --
        2 5 4 SUBMITTING BROKER NUMBER
        If NSCC member use NSCC clearing number.
        If not a NSCC member, use clearing number assigned to you by your clearing agency.
        A–R LJ X(4) B
        6 40 35 FIRM'S REQUEST NUMBER Tracking number used by the firm to record requests from an organization. A -- X(35) B
        41 46 6 FILE CREATION DATE
        Format is YYMMDD
        A -- X(6) --
        47 54 8 FILE CREATION TIME
        Format is HH:MM:SS
        A -- X(8) --
        55 55 1 REQUESTOR CODE
        Requesting Organization Identification Values:
        A -- X --
          A = New York Stock Exchange  
        B = NYSE MKT, LLC
        C = Chicago Stock Exchange
        D = NASDAQ OMX
        E = NYSE Arca
        F = NASDAQ OMX BX, Inc.
        G = National Stock Exchange
        H = BATS Exchange, Inc. (Equity and Options)
        I = International Securities Exchange, ISE Gemini and ISE Mercury
        J = EDGA Exchange and EDGX Exchange (Equity and Options)
        K = Chicago Board Options Exchange,C2 Options Exchange and CBSX (CBOE Stock Exchange)
        R = FINRA
        U = BOX Options Exchange, LLC
        X = U.S. Securities and Exchange Commission
        Y = BATS Y-Exchange, Inc.
        3 = Investors Exchange, LLC
        7 = Miami International Securities Exchange
        8 = MIAX PEARL
        56 70 15 REQUESTING ORGANIZATION
        NUMBER
        Number assigned by requesting organization
        A LJ X(15) B
        71 80 10 FILLER A -- X(10) B
        1 1 1 RECORD SEQUENCE NUMBER ONE
        The first record of the transaction.
        Value: 1
        A -- X --
        2 5 4 SUBMITTING BROKER NUMBER
        Identical to Submitting Broker Number in Header Record
        A–R LJ X(4) --
        6 9 4 OPPOSING BROKER NUMBER
        The NSCC clearing house number of the broker on the other side of the trade.
        A–R LJ X(4) B
        10 21 12 CUSIP NUMBER
        The cusip number assigned to the security.
        Left justified since the number is nine characters at present (8+ check digit) but will expand in the future.
        A LJ X(12) B
        22 29 8 TICKER SYMBOL
        The symbol assigned to this security. For options (pre-OSI), the OPRA option symbol (space), OPRA expiration month symbol and OPRA strike price symbol should be used. (Ex. Maytag May 20 call option series would be reported as MYG ED. This example uses six spaces in the field with a space between the OPRA symbol and the OPRA expiration month.)
        Post OSI this field must contain OPTIONXX and a Record Sequence Number Six must be completed
        A–R LJ X(8) B
        30 35 6 TRADE DATE
        The date this trade executed.
        Format is YYMMDD.
        A–R -- X(6) B
        36 41 6 SETTLEMENT DATE
        The date this trade will settle.
        Format is YYMMDD
        A -- X(6) B
        42 53 12 QUANTITY
        The number of shares or quantity of bonds or option contracts.
        N-R RJ 9(12) Z
        54 67 14 NET AMOUNT
        The proceeds of sales or cost of purchases after commissions and
        N RJ S9(12) V99 Z
        68 68 1 BUY/SELL CODE
        Values: 0 = Buy, 1 = Sale, 2 = Short Sale, 3 = Buy Open, 4 = Sell Open, 5 = Sell Close, 6 = Buy Close. A = Buy Cancel, B = Sell Cancel, C = Short Sale Cancel, D = Buy Open Cancel, E = Sell Open Cancel, F = Sell Close Cancel, G = Buy Close Cancel. Values 3 to 6 and D to G are for options only
        A–R -- X B
        69 78 10 PRICE
        The transaction price. Format: $$$$
        CCCCCC.
        N-R RJ 9(4) V(6) Z
        79 79 1 EXCHANGE CODE Exchange where trade was executed. Values: A–R -- X B
              A = New York Stock Exchange        
              B = NYSE MKT, LLC        
              C = Chicago Stock Exchange        
              D = NASDAQ OMX PHLX        
              E = NYSE Arca        
              F = NASDAQ OMX BX, Inc.        
              G = National Stock Exchange        
              H = BATS Exchange, Inc. (Equity and Options)        
              I = International Securities Exchange (Options Only)        
              J = C2 Options Exchange        
              K = Chicago Board Options Exchange        
              L = London Stock Exchange        
              M =Toronto Stock Exchange        
              N = Montreal Stock Exchange        
              O =TSX Venture Exchange        
              P = EDGA Exchange        
              Q = FINRA ADF        
              R = NASDAQ OMX/NASDAQ OMX Options Market        
              S = Over-the-Counter        
              T = Tokyo Stock Exchange        
              U = BOX Options Exchange, LLC        
              V = EDGX Exchange (Equity and Options)        
              W = CBSX (CBOE Stock Exchange)        
              X = NASDAQ OMX PSX        
              Y = BATS Y-Exchange, Inc.        
              Z = Other        
              1 = ISE Gemini        
              2 = ISE Mercury        
              3 = Investors' Exchange, LLC        
              7 = Miami International Securities Exchange        
              8 = MIAX PEARL        
        80 80 1 BROKER/DEALER CODE
        Indicate if trade was done for another Broker/Dealer.
        Values: 0 = No; 1 = Yes
        A–R -- X B
        1 1 1 RECORD SEQUENCE NUMBER TWO
        Value: 2
        A -- X --
        2 2 1 SOLICITED CODE
        Values: 0 = No; 1 = Yes
        A–R -- X B
        3 4 2 STATE CODE
        Standard Postal two character identification.
        A–R -- X(2) B
        5 14 10 ZIP CODE/COUNTRY CODE
        Zip Code–five or nine character (zip plus four)
        Country code–for future use.
        A–R LJ X(10) B
        15 22 8 BRANCH OFFICE/REGISTERED
        REPRESENTATIVE NUMBER
        Each treated as a four-character field.
        Both are left justified.
        A–R LJ X(8) B
        23 28 6 DATE ACCOUNT OPENED
        Format is YYMMDD
        A–R -- X(6) B
        29 48 20 SHORT NAME FIELD
        Contains last name followed by comma (or space) then as much of first name as will fit.
        A LJ X(20) B
        49 78 30 EMPLOYER NAME A LJ X(30) B
        79 79 1 TIN 1 INDICATOR Values: 1 = SS#; 2 = TIN A–R -- X B
        80 80 1 TIN 2 INDICATOR
        Values: 1 = SS#; 2 = TIN–for future use.
        A -- X B
        1 1 1 RECORD SEQUENCE NUMBER THREE Value: 3 A -- X --
        2 10 9 TIN ONE
        Taxpayer Identification Number
        Social Security or Tax ID Number.
        A–R LJ X(9) B
        11 19 9 TIN TWO
        Taxpayer Identification Number #2
        Reserved for future use.
        A LJ X(9) B
        20 20 1 NUMBER OF N&A LINES A -- X B
        21 50 30 NAME AND ADDRESS LINE ONE A–R LJ X(30) B
        51 80 30 NAME AND ADDRESS LINE TWO A–R LJ X(30) B
        1 1 1 RECORD SEQUENCE NUMBER FOUR
        Value: 4
        A -- X --
        2 31 30 NAME AND ADDRESS LINE THREE A–R LJ X(30) B
        32 61 30 NAME AND ADDRESS LINE FOUR A–R LJ X(30) B
        62 62 1 TRANSACTION TYPE IDENTIFIERS
        See Attachment B for current codes.
        A–R -- X B
        63 80 18 ACCOUNT NUMBER
        Account number
        A–R LJ X(18) B
        1 1 1 RECORD SEQUENCE NUMBER FIVE
        Value: 5
        A -- X(1) --
        2 31 30 NAME AND ADDRESS LINE FIVE A–R LJ X(30) B
        32 61 30 NAME AND ADDRESS LINE SIX A–R LJ X(30) B
        62 65 4 PRIME BROKER
        Clearing number of the account's prime broker.
        A–R LJ X(4) B
        66 66 1 AVERAGE PRICE ACCOUNT
        1= recipient of average price transaction.
        2= average price account itself.
        N-R -- 9(1) Z
        67 71 5 DEPOSITORY INSTITUTION
        IDENTIFIER
        Identifying number assigned to the account by the depository institution.
        A–R LJ X(5) B
        72 77 6 Order Execution Time
        HHMMSS–Time format will be in Eastern Time and 24 hour format.
        A–R LJ -- --
        78 80 3 FILLER A -- X B
        1 1 1 RECORD SEQUENCE NUMBER SIX
        Value: 6
        A -- --  
        2 9 8 DERIVATIVE SYMBOL
        The symbol assigned to the derivative
        A–R LJ -- B
        10 15 6 EXPIRATION DATE
        The date the option expires. Format is YYMMDD
        A–R -- -- B
        16 16 1 CALL/PUT INDICATOR C = Call, P = Put A–R -- -- B
        17 24 8 STRIKE DOLLAR
        The dollar amount of the strike price
        N-R RJ -- Z
              STRIKE DECIMAL        
        25 30 6 The decimal amount of the strike price N-R LJ   Z
        31 80 50 FILLER A LJ -- B
        1 1 1 RECORD SEQUENCE NUMBER SEVEN
        Value: 7
        A -- --  
        2 14 13 Large Trader Identification 1 A–R LJ -- Z
        15 27 13 Large Trader Identification 2 A–R LJ -- Z
        28 40 13 Large Trader Identification 3 A–R LJ -- Z
        41 41 1 Large Trader Identification Qualifier A–R LJ -- Z
        42 49 8 Primary Party Identifier

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

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

        Field Format

        A = Alphanumeric (all caps)

        N = Numeric

        P = Packed

        B = Binary

        R = Validation Required

        Default Values

        B = Blanks Z= Zero

        Justify

        RJ = Right Justification of Data LJ = Left Justification of Data


        Attachment B

        Record Layout for Submission of Trading Information

        Transaction Type Security Type
          Equity* Options
        Agency A C
        Proprietary P F
        Market-Maker   M
        Non-Member Market-Maker/Specialist Account   N
        Customer Range Account of a Broker/Dealer   B
        Error Trade Q  
        Professional Customer   W
        Joint Back Office   J
        Riskless Principal R  

        * Equity securities include those securities that trade like equities (e.g., ETFs and structured products). © 2017 FINRA. All rights reserved.

      • 17-04 SEC Approves Amendments to the Customer and Industry Codes of Arbitration Procedure Broadening Chairperson Eligibility in Arbitration; Effective Date: January 9, 2017

        View PDF

        Arbitrator Chairperson Eligibility

        Regulatory Notice
        Notice Type
        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 12400
        FINRA Rule 13400
        Suggested Routing

        Compliance
        Legal
        Registered Representatives
        Senior Management
        Key Topics

        Arbitration
        Chairperson Eligibility
        Codes of Arbitration Procedure

        Summary

        The Securities and Exchange Commission (SEC) approved1 amendments to FINRA Rules 12400 and 13400 (Neutral List Selection System and Arbitrator Rosters) of the Customer and Industry Codes of Arbitration Procedure (Codes) to provide that an attorney arbitrator is eligible for the chairperson roster if he or she has completed chairperson training provided by FINRA and served as an arbitrator through award on at least one arbitration (instead of two arbitrations) administered by a self-regulatory organization (SRO) in which hearings were held.

        The amendments apply to all chairperson applicants and are effective on January 9, 2017.

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

        Questions concerning this Notice should be directed to:

        •   Todd Saltzman, Vice President, Director of Case Administration, Operations, and Neutral Management, FINRA Office of Dispute Resolution, at (212) 858-4273 or todd.saltzman@finra.org; or
        •   Margo Hassan, Associate Chief Counsel, FINRA Office of Dispute Resolution, at (212) 858-4481 or margo.hassan@finra.org.

        Background & Discussion

        FINRA rules require chairpersons, who play a vital role in the administration of arbitration cases, to have arbitrator experience and training to ensure the quality and efficiency of arbitrations. FINRA Rules 12400 and 13400 provide, among other things, that an arbitrator is eligible for the chairperson roster if he or she has completed chairperson training provided by FINRA and:

        •   has a law degree and is a member of a bar of at least one jurisdiction and has served as an arbitrator through award on at least two arbitrations administered by an SRO in which hearings were held (an attorney arbitrator); or
        •   has served as an arbitrator through award on at least three arbitrations administered by an SRO in which hearings were held.

        In addition, in customer disputes or any dispute involving associated persons, chairpersons must be public arbitrators. In 2015, FINRA amended the public arbitrator definition, by adding disqualifications relating to, among other things, affiliations with the securities industry concerning an arbitrator's family member or place of employment.2 As a result of the amendments, FINRA removed approximately 14 percent of its public arbitrators from the roster. Many of these arbitrators were chair-qualified. To ensure that FINRA has a sufficient number of public chairperson arbitrators to serve in each of its 71 arbitration hearing locations, FINRA asks many public chairpersons to travel to nearby hearing locations where there is a need for additional chair-qualified arbitrators. FINRA reimburses these chairpersons for their travel, lodging, and meals. However, forum users have complained that it is inconvenient to schedule hearings with out-of-town arbitrators. Moreover, during inclement weather, arbitrators may not be able to travel to the hearing location, which then requires parties to reschedule and incur additional costs. In addition, some forum users have raised concerns that these arbitrators lack familiarity with local venue customs and procedures.

        To expand the roster of arbitrators who might be eligible to serve as public chairpersons in each hearing location, FINRA has amended Rules 12400 and 13400 to provide that an attorney arbitrator is eligible for the chairperson roster if he or she has completed chairperson training and served as an arbitrator through award on at least one arbitration, instead of two arbitrations, administered by an SRO in which hearings were held. The amendments should provide parties with a greater selection of local chairpersons, without negatively impacting the quality of the chairperson rosters.

        Effective Date

        The amendments apply to all chairperson applicants and are effective on January 9, 2017.


        1. See Securities Exchange Act Release No. 79455 (December 2, 2016), 81 FR 88720 (December 8, 2016) (Order Approving File No. SR-FINRA-2016-033).

        2. See Securities Exchange Act Release No. 74383 (February 26, 2015), 80 FR 11695 (Order Approving Filing No. SR-FINRA-2014-028).


        Attachment A

        New language is underlined; deletions are in brackets

        Customer Code

        12400. Neutral List Selection System and Arbitrator Rosters

        (a) No change.
        (b) Arbitrator Rosters

        FINRA maintains the following roster of arbitrators:
        [•](1) A roster of non-public arbitrators as defined in Rule 12100(p);
        [•](2) A roster of public arbitrators as defined in Rule 12100(u); and
        [•](3) A roster of arbitrators who are eligible to serve as chairperson of a panel as described in paragraph (c). Arbitrators who are eligible to serve as chairperson will also be included in the roster of public arbitrators, but will only appear on one list in a case.
        (c) Eligibility for Chairperson Roster

        In customer disputes, chairpersons must be public arbitrators. Arbitrators are eligible for the chairperson roster if they have completed chairperson training provided by FINRA and:
        [•] (1) Have a law degree and are a member of a bar of at least one jurisdiction and have served as an arbitrator through award on at least [two] one arbitration[s] administered by a self-regulatory organization in which hearings were held; or
        [•](2) Have served as an arbitrator through award on at least three arbitrations administered by a self-regulatory organization in which hearings were held.

        * * * * *

        Industry Code

        13400. Neutral List Selection System and Arbitrator Rosters

        (a) No change.
        (b) Arbitrator Rosters

        FINRA maintains the following roster of arbitrators:
        [•](1) A roster of non-public arbitrators as defined in Rule 13100(p);
        [•]((2) A roster of public arbitrators as defined in Rule 13100(u); and
        [•]((3) A roster of arbitrators who are eligible to serve as chairperson of a panel as described in paragraph (c). Arbitrators who are eligible to serve as chairperson will also be included in the roster of non-public or public arbitrators, depending on composition of the panel under Rule 13402, but will only appear on one list in a case.
        (c) Eligibility for Chairperson Roster

        Arbitrators are eligible to serve as chairperson of panels submitted for arbitration under the Code if they have completed chairperson training provided by FINRA and:
        [•] (1) Have a law degree and are a member of a bar of at least one jurisdiction and have served as an arbitrator through award on at least [two] one arbitration[s] administered by a self-regulatory organization in which hearings were held; or
        [•] (2) Have served as an arbitrator through award on at least three arbitrations administered by a self-regulatory organization in which hearings were held.

      • 17-03 SEC Approves Amendments to the Customer and Industry Codes of Arbitration Procedure Regarding Required Use of the Dispute Resolution Party Portal; Effective Date: April 3, 2017

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        Dispute Resolution Party Portal

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 12000 Series
        FINRA Rule 13000 Series
        FINRA Rule 14000 Series
        Suggested Routing

        Compliance
        Legal
        Registered Representatives
        Senior Management
        Key Topics

        Arbitration
        Codes of Arbitration Procedure
        Code of Mediation Procedure
        Dispute Resolution Party Portal
        Mediation

        Executive Summary

        The Securities and Exchange Commission (SEC) approved1 amendments to the Customer and Industry Codes of Arbitration Procedure (Codes) to require all parties, except customers who are not represented by an attorney or other person (pro se customers), to use the FINRA Office of Dispute Resolution's Party Portal (Party Portal) to file initial statements of claim and to file and serve most pleadings and other documents on FINRA or any other party. FINRA is also amending the Code of Mediation Procedure (Mediation Code) to permit mediation parties to agree to use the Party Portal to submit and retrieve all documents and other communications.

        The amendments are effective for all cases filed on or after April 3, 2017.

        The text of the amended rules is available on FINRA's website.

        Questions concerning this Notice should be directed to:

        •   Todd Saltzman, Vice President, Director of Case Administration, Operations, and Neutral Management, FINRA Office of Dispute Resolution, at (212) 858-4273 or todd.saltzman@finra.org; or
        •   James Schroder, Associate Vice President, FINRA Office of Dispute Resolution, at (212) 858-4321 or james.schroder@finra.org.

        Background & Discussion

        FINRA's Party Portal provides arbitration forum users with a secure, online location for claim filing and interactions relating to case administration. Parties use the Party Portal to, among other things, file claims, pay filing fees, receive documents from and send documents to FINRA, receive service of claims, submit answers to claims, submit additional case documents, view the status of cases, select arbitrators, schedule hearings and send documents to other Party Portal case participants. Currently, parties use the Party Portal on a voluntary basis.

        FINRA is amending the Codes to require all parties, except pro se customers, to use the Party Portal to submit documents and view their arbitration case information. FINRA is also amending the Mediation Code to permit mediation parties to agree to use the Party Portal to submit and retrieve all documents and other communications. The key amendments are described in this Notice.

        Arbitration

        Parties must use the Party Portal to file initial statements of claim and to file and serve pleadings and any other documents on the Director of the Office of Dispute Resolution (Director) or any other party in most instances. The Director may exercise authority to permit the use of other means of filing or service in the case of an extended Party Portal outage or in other extraordinary circumstances. When a party submits pleadings or documents through the Party Portal, the party has accomplished both filing with the Director and, in most instances, service on all other parties and the arbitrators. FINRA staff retains its role in managing the documents parties submit through the Party Portal (e.g., collecting motion papers and responses and distributing them to arbitrators at the appropriate point in the case).

        Pro Se Customer Exemption

        Pro se customers may elect to use the Party Portal, but are not required to do so. FINRA defines the term pro se customer to mean a party that is not represented by an attorney or others during an arbitration or mediation. If a pro se customer files a claim using the Party Portal, the pro se customer must use the Party Portal for the duration of the arbitration process. The Party Portal includes a warning to pro se customers concerning this requirement. If a pro se customer opts out of using the Party Portal, the pro se customer may serve documents by first-class mail, overnight mail service, overnight delivery service, hand delivery, email, or facsimile. In addition, pro se customers who opt out of using the Party Portal must provide proof of service for any documents served outside of the Party Portal (except for the initial statement of claim because the Director will serve the Claim Notification Letter or initial statement of claim on the respondents).

        Filing Documents With FINRA

        Parties must file initial statements of claim and all pleadings and other documents with the Director through the Party Portal. This includes pleadings and documents served on pro se customers and other parties by other means. Parties must file with the director any written responses relating to discovery requests, but must not file with the Director any of the documents produced in response to discovery requests. Parties must also file arbitrator ranking lists through the Party Portal.

        Filing through the Party Portal is accomplished on the day of submission through the Party Portal. Filing by first-class mail or overnight mail or delivery service is accomplished on the date of mailing. Filing by any other means (e.g., hand delivery, email, facsimile) is accomplished on the date of delivery.

        Serving Documents

        Initial Statement of Claim

        FINRA staff will serve the initial statement of claim. FINRA will serve respondents that are not identified as customers with a Claim Notification Letter. The term "Claim Notification Letter" means the notice provided to respondents that they have been named as a party in a statement of claim. The Claim Notification Letter provides information about accessing the Party Portal to obtain a copy of the statement of claim filed by the claimants and information about the arbitration, including the hearing location selected by the Director and the deadline for filing a statement of answer. If a respondent does not access the Party Portal and view the statement of claim, FINRA staff will contact the respondent and ask if the respondent received the Claim Notification Letter. If the respondent indicates that he or she did not receive the Claim Notification Letter, FINRA staff will offer to serve the statement of claim in another manner such as by email or regular mail to afford the respondent an additional opportunity to receive the statement of claim. The transmission will include instructions on how to access the Party Portal.

        In cases where a firm or associated person names a customer as a respondent in an arbitration, FINRA will not know at the outset whether the customer will be pro se. Therefore, FINRA staff will serve all customer respondents with the initial statement of claim along with the Claim Notification Letter explaining that parties other than pro se customers are required to use the Party Portal, and that pro se customers are invited to use the Party Portal.

        All Other Pleadings and Documents

        In most instances, parties must serve pleadings and other documents on other parties through the Party Portal. However, the Codes outline several exceptions. Parties may use first-class mail, overnight mail service, overnight delivery service, hand delivery, email, or facsimile to serve other parties in these instances. Service through the Party Portal is accomplished on the day of submission through the Party Portal. Service by first-class mail or overnight mail or delivery service is accomplished on the date of mailing. Service by any other means (e.g., hand delivery, email, facsimile) is accomplished on the date of delivery. Parties serving documents outside of the Party Portal must provide proof of service to the Director.

        Key exceptions to service through the Party Portal include:

        •   pro se customers who do not elect to use the Party Portal;
        •   documents produced in response to discovery requests or pursuant to the Discovery Guide;
        •   answers containing third party claims;
        •   amended pleadings that add a party to an arbitration proceeding;
        •   motions to the arbitrators to amend a pleading to add a party;
        •   subpoenas to non-parties;
        •   arbitrator orders to non-parties for the appearance of employees and associated persons of a member, or the production of documents in the possession or control of such persons or members; and
        •   statements of claim requesting permanent injunctive relief.

        Discovery

        Parties must use the Party Portal to file and serve correspondence relating to discovery, but, as discussed above, must not file documents produced in response to discovery requests or pursuant to the Discovery Guide through the Party Portal. FINRA is requiring parties to file correspondence with FINRA in the Party Portal because such correspondence is part of the case record.

        Filing Fees

        Claimants are required to pay all filing fees by credit card or automated clearing house (ACH) through the Party Portal unless the party is a pro se customer who opts out of using the Party Portal. The Party Portal User Guide contains detailed instructions, including screen shots from the system, on how to pay by ACH.2

        Arbitrator Selection

        Parties must complete the arbitrator selection process, including striking and ranking arbitrators, through the Party Portal.

        Mediation

        Parties to a FINRA mediation may agree to use the Party Portal to submit all documents and other communications to each other, to retrieve all documents and other communications, and view mediation case information.

        Effective Date

        The amendments are effective for all cases filed on or after April 3, 2017.


        1. See Securities Exchange Act Release No. 79296 (November 14, 2016), 81 FR 81844 (November 18, 2016) (Order Approving File No. SR-FINRA-2016-029).

        2. The Party Portal User Guide is available on FINRA's website. Directions on paying via ACH appear on page 57.

      • 17-02 SEC Approves Amendments to the Codes of Arbitration Procedure Regarding Motions to Dismiss; Effective Date: January 23, 2017

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        Motions to Dismiss in Arbitration

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 12504
        FINRA Rule 13504
        Suggested Routing

        Compliance
        Legal
        Registered Representatives
        Senior Management
        Key Topics

        Arbitration
        Codes of Arbitration Procedure
        Motions to Dismiss

        Summary

        The Securities and Exchange Commission (SEC) approved1 amendments to FINRA Rules 12504 and 13504 (Motions to Dismiss) of the Customer and Industry Codes of Arbitration Procedure (Codes) to add an additional ground for arbitrators to act on motions to dismiss prior to the conclusion of the claimant's case in chief. The new ground provides that arbitrators may act upon a motion to dismiss a party or claim prior to the conclusion of a party's case in chief if the arbitrators determine that the non-moving party previously brought a claim regarding the same dispute against the same party, and the dispute was fully and finally adjudicated on the merits and memorialized in an order, judgment, award or decision.

        The amendments are effective for motions to dismiss filed on or after January 23, 2017.

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

        Questions concerning this Notice should be directed to:

        •   David Carey, Associate Director, FINRA Office of Dispute Resolution, at (212) 858-4333 or david.carey@finra.org; or
        •   Margo Hassan, Associate Chief Counsel, FINRA Office of Dispute Resolution, at (212) 858-4481 or margo.hassan@finra.org.

        Background & Discussion

        FINRA Rules 12504 and 13504 specify procedures that limit the use of motions to dismiss in arbitration. Under the Codes, arbitrators cannot act upon a motion to dismiss prior to the conclusion of the non-moving party's case in chief unless the arbitrators determine that: (1) the non-moving party previously released the claim in dispute by a signed settlement or written release,2 (2) the moving party was not associated with the account, security or conduct at issue,3 or (3) a claim is not eligible for arbitration because it does not meet the six-year time limit for submitting a claim.4 In addition, parties must file prehearing motions to dismiss in writing, separately from the answer, and only after they file the answer. The full panel of arbitrators must decide a motion to dismiss, and the panel must hold a hearing on the motion unless the parties waive the hearing. If a panel grants a motion to dismiss, the decision must be unanimous, and must be accompanied by a written explanation.

        FINRA has amended the Codes to add an additional ground for arbitrators to act on motions to dismiss prior to the conclusion of the claimant's case in chief. The new ground provides that arbitrators can also act upon a motion to dismiss a party or claim if they determine that the non-moving party previously brought a claim regarding the same dispute5 against the same party that was fully and finally adjudicated on the merits and memorialized in an order, judgment, award or decision.

        The amendments allow arbitrators to grant a motion to dismiss relating to a particular controversy if they believe the matter was adjudicated fully even in instances where a claimant adds a new cause of action or adds additional facts. In order for the arbitrators to grant the motion, the moving party must demonstrate that the non-moving party brought the same dispute against the same party and that the non-moving party had a full opportunity to present its claims in the earlier proceeding.

        Effective Date

        The amendments are effective for motions to dismiss filed on or after January 23, 2017.


        1. See Securities Exchange Act Release No. 79285 (November 10, 2016), 81 FR 81213 (November 17, 2016) (Order Approving File No. SR-FINRA-2016-030).

        2. See FINRA Rules 12504(a)(6)(A) and 13504(a)(6)(A).

        3. See FINRA Rules 12504(a)(6)(B) and 13504(a)(6)(B).

        4. See FINRA Rules 12206 and 13206 (Time Limits), which provide that no claim shall be eligible for submission to arbitration where six years have elapsed from the occurrence or event giving rise to the claim.

        5. FINRA Rules 12100 and 13100 providethat "dispute" means a dispute, claim or controversy, and that it may consist of one or more claims.


        Attachment A

        Customer Code

        12504. Motions to Dismiss

        (a) Motions to Dismiss Prior to Conclusion of Case in Chief
        (1) Motions to dismiss a claim prior to the conclusion of a party's case in chief are discouraged in arbitration.
        (2) Motions under this rule must be made in writing, and must be filed separately from the answer, and only after the answer is filed.
        (3) Unless the parties agree or the panel determines otherwise, parties must serve motions under this rule at least 60 days before a scheduled hearing, and parties have 45 days to respond to the motion. Moving parties may reply to responses to motions. Any such reply must be made within 5 days of receipt of a response.
        (4) Motions under this rule will be decided by the full panel.
        (5) The panel may not grant a motion under this rule unless an in-person or telephonic prehearing conference on the motion is held or waived by the parties. Prehearing conferences to consider motions under this rule will be recorded as set forth in Rule 12606.
        (6) The panel cannot act upon a motion to dismiss a party or claim under paragraph (a) of this rule, unless the panel determines that:
        (A) the non-moving party previously released the claim(s) in dispute by a signed settlement agreement and/or written release; [or]
        (B) the moving party was not associated with the account(s), security(ies), or conduct at issue; or[.]
        (C) The non-moving party previously brought a claim regarding the same dispute against the same party that was fully and finally adjudicated on the merits and memorialized in an order, judgment, award, or decision.
        (7) If the panel grants a motion under this rule (in whole or part), the decision must be unanimous, and must be accompanied by a written explanation.
        (8) If the panel denies a motion under this rule, the moving party may not re-file the denied motion, unless specifically permitted by panel order.
        (9) If the panel denies a motion under this rule, the panel must assess forum fees associated with hearings on the motion against the moving party.
        (10) If the panel deems frivolous a motion filed under this rule, the panel must also award reasonable costs and attorneys' fees to any party that opposed the motion.
        (11) The panel also may issue other sanctions under Rule 12212 if it determines that a party filed a motion under this rule in bad faith.
        (b)–(e) No change.

        Industry Code

        13504. Motions to Dismiss

        (a) Motions to Dismiss Prior to Conclusion of Case in Chief
        (1) Motions to dismiss a claim prior to the conclusion of a party's case in chief are discouraged in arbitration.
        (2) Motions under this rule must be made in writing, and must be filed separately from the answer, and only after the answer is filed.
        (3) Unless the parties agree or the panel determines otherwise, parties must serve motions under this rule at least 60 days before a scheduled hearing, and parties have 45 days to respond to the motion. Moving parties may reply to responses to motions. Any such reply must be made within 5 days of receipt of a response.
        (4) Motions under this rule will be decided by the full panel.
        (5) The panel may not grant a motion under this rule unless an in-person or telephonic prehearing conference on the motion is held or waived by the parties. Prehearing conferences to consider motions under this rule will be recorded as set forth in Rule 13606.
        (6) The panel cannot act upon a motion to dismiss a party or claim under paragraph (a) of this rule, unless the panel determines that:
        (A) the non-moving party previously released the claim(s) in dispute by a signed settlement agreement and/or written release; [or]
        (B) the moving party was not associated with the account(s), security(ies), or conduct at issue; or[.]
        (C) The non-moving party previously brought a claim regarding the same dispute against the same party that was fully and finally adjudicated on the merits and memorialized in an order, judgment, award, or decision.
        (7) If the panel grants a motion under this rule (in whole or part), the decision must be unanimous, and must be accompanied by a written explanation.
        (8) If the panel denies a motion under this rule, the moving party may not re-file the denied motion, unless specifically permitted by panel order.
        (9) If the panel denies a motion under this rule, the panel must assess forum fees associated with hearings on the motion against the moving party.
        (10) If the panel deems frivolous a motion filed under this rule, the panel must also award reasonable costs and attorneys' fees to any party that opposed the motion.
        (11) The panel also may issue other sanctions under Rule 13212 if it determines that a party filed a motion under this rule in bad faith.
        (b)–(e) No change.

      • 17-01 Final Statements for Broker-Dealers, Investment Adviser Firms, Agents and Investment Adviser Representatives, and Branches; Payment Deadline: January 20, 2017

        View PDF

        BD and IA Renewals for 2017

        Regulatory Notice
        Notice Type

        Renewals
         
        Suggested Routing

        Compliance
        Legal
        Operations
        Registration
        Senior Management
        Key Topics

        IARD™
        Registration
        Renewals
        Web CRD®

        Executive Summary

        FINRA is issuing this Notice to help firms review, reconcile and respond to their Final Statements in E-Bill as well as view the reports that are currently available in Web CRD/IARD for the annual registration renewal process. The payment deadline is January 20, 2017.

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

        Background & Discussion

        Final Statements

        On January 3, 2017, Final Statements became available for viewing and printing in E-Bill. These statements reflect the final status of broker-dealer, registered representative, investment adviser firm, investment adviser representative, and branch registrations and/or notice filings as of December 31, 2016. Any adjustments in fees owed because of registration terminations, approvals, IA firm registrations, reporting status or notice filings subsequent to the Preliminary Statement are included in this final reconciled statement. Renewal reports are available in Web CRD/IARD for request, print and/or download.

        If the amount assessed on the Final Statement is greater than the amount assessed on the Preliminary Statement, the additional renewal fees are due by January 20, 2017. If the amount assessed on the Final Statement is less than the amount assessed on the Preliminary Statement, FINRA has issued a credit to the firm's Flex-Funding Account.

        The Final Statements include the following fees (if applicable):

        •   Web CRD/IARD system processing fees;
        •   FINRA branch office and branch processing fees;
        •   participating Self-Regulatory Organization (SRO) 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.

        Renewal Payment

        Web CRD/IARD issues a refund if a firm owes less for registrations at year-end than what was reflected on the Preliminary Statement. FINRA transferred overpayments to firms' Flex-Funding Accounts on January 3, 2017. Firms that have a credit balance in their Flex-Funding Accounts may submit a refund request through E-Bill or leave the funds in their account to pay for other future fees.

        If the Final Statement reflects an amount due, FINRA must receive payment no later than January 20, 2017. Firms may pay electronically through FINRA's E-Bill system, send a wire transfer or mail a check; however, FINRA highly recommends that firms remit funds via E-Bill. 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.

        Electronic Payment via E-Bill

        Firms may submit electronic payments to fund their Renewal Accounts through E-Bill. 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.

        Please Note: Firm users with the proper entitlement may transfer funds from their Flex-Funding Account to their Renewal Account or transfer funds between affiliated firms at any time by using E-Bill. For further details, please refer to the E-Bill User Guide.

        ACH/Wire Transfer and Check Payments

        Wire transfer and check payments are initially deposited into a firm's Flex-Funding Account. Beginning January 20, 2017, if sufficient funds are available, FINRA will systematically transfer funds from Flex-Funding Accounts to Renewal Accounts. Firms do not have to wait for FINRA to systematically transfer funds on January 20 as firms have the ability to transfer funds to their Renewal Accounts using E-Bill. Funds will only be systematically transferred if the entire renewal amount owed is available in the firm's Flex-Funding Account.

        ACH/Wire Transfer

        To initiate a wire or ACH transfer, instruct your firm's bank to contact Bank of America and provide your bank with the following information:

        Wire ABA Number: 026009593

        ACH ABA Number: 054001204

        Beneficiary: FINRA

        FINRA Account: 226005684771

        Reference Number: Firm CRD number

        Inform your bank to credit funds to the FINRA bank account and to only use your firm's CRD number as a reference. Record the confirmation number of the wire transfer provided by your bank.

        If you send your wire transfer by 2 p.m., ET, your firm may confirm receipt the next business day by reviewing your Flex-Funding Account online or calling the FINRA Gateway Call Center at (301) 869-6699. Wire payments received after 2 p.m., ET, should be available in two business days. Please note that while wire transfers are received by FINRA on the same day they are initiated, ACH bank transfers typically take several days longer to be received by FINRA.

        Checks

        Checks should be made payable to FINRA and your firm's CRD number should be written on the check memo line. Processing of check payments may take up to two business days. Please account for mail delivery and payment processing time when sending payment. 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

        Provide the following phone number,
        if required: (800) 376-2703

        Renewal Reports

        Renewal reports include all individual registrations renewed for 2017; however, they do not include registrations that were "pending approval" or "deficient" at year-end. Firms should examine their reports carefully to ensure that all registration approvals are correct. FINRA also suggests that firms include these reports in firms' permanent records.

        •   Firm Renewal Report— lists individuals included in the Renewal Program and includes billing codes (if the firm 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.

        Discrepancies

        If your firm believes there are discrepancies on your Final Statement, report them in writing directly to FINRA by January 20, 2017. Along with your letter describing the discrepancy, please include a copy of your Final Statement and any supporting documentation to:

        FINRA
        Registration & Disclosure—Regulatory Services & Operations
        9509 Key West Avenue
        Rockville, MD 20850

        If you have questions regarding renewal discrepancies, please call FINRA at (240) 386-4182.

    • 2016

      • 16-44 SEC Approves Amendments to the Customer Code of Arbitration Procedure Regarding Panel Selection in Cases with Three Arbitrators; Effective Date: January 3, 2017

        View PDF

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 12403
        Suggested Routing

        Compliance
        Legal
        Registered Representatives
        Senior Management
        Key Topics

        Arbitration
        Customer Code of Arbitration Procedure
        Panel Selection

        Executive Summary

        The Securities and Exchange Commission (SEC) approved1 amendments to FINRA Rule 12403 (Cases with Three Arbitrators) of the Code of Arbitration Procedure for Customer Disputes (Customer Code) to increase the number of arbitrators on the public arbitrator list that FINRA sends to parties during the arbitration panel selection process from 10 to 15. The amendments also increase the number of strikes to the public arbitrator list from four to six, so that the proportion of strikes is the same under the amended rule as it is under the current rule.

        The amendments will become effective for all arbitrator lists FINRA sends to parties on or after January 3, 2017, for panel selection in customer cases with three arbitrators.

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

        Questions concerning this Notice should be directed to:

        •  Chrystal Loyer, Specialist, FINRA Office of Dispute Resolution, at (212) 858-4325 or chrystal.loyer@finra.org; or
        •  Margo Hassan, Associate Chief Counsel, FINRA Office of Dispute Resolution, at (212) 858-4481 or margo.hassan@finra.org.

        Background & Discussion

        FINRA allows parties to participate in selecting the arbitrators who serve on their cases. Parties select their arbitration panel from computer-generated lists of arbitrators that FINRA sends them. Under FINRA Rule 12403(a), in customer cases with three arbitrators, FINRA sends the parties three lists: a list of 10 chair-qualified public arbitrators, a list of 10 public arbitrators and a list of 10 non-public arbitrators. The parties select their panel through a process of striking and ranking the arbitrators on the lists. Under Rule 12403(c)(2), each party is allowed to strike up to four arbitrators on the chair-qualified public list and four arbitrators on the public list. At least six names must remain on each list. However, Rule 12403(c)(1) provides for unlimited strikes on the non-public list so that any party may select a panel of all public arbitrators in a customer case.

        When parties collectively strike all of the non-public arbitrators from the list, FINRA fills all three panel seats from the two 10-person lists of public arbitrators. Specifically, the Customer Code provides that when parties collectively strike all of the arbitrators appearing on the non-public list, FINRA returns to the public list to select the next highest ranked available arbitrator to fill the seat. If no public arbitrators remain available to fill the vacancy, FINRA returns to the chair-qualified public list to select the next highest ranked public chair. In doing so, there is a likelihood that FINRA will appoint an arbitrator who the parties accepted, but who is ranked lower on the public or chair-qualified public lists.

        FINRA believes that parties should have a greater choice of public arbitrators during the panel selection process. Therefore, FINRA amended Rule 12403(a)(1) to increase the number of arbitrators on the public arbitrator list FINRA sends to parties during the arbitration panel selection process from 10 to 15. FINRA also amended Rule 12403(c)(2) to increase the number of strikes to the public arbitrator list from four to six, so that the proportion of strikes is the same under the amended rule as it is under the current rule.

        Effective Date

        The amendments will become effective for all arbitrator lists FINRA sends to parties on or after January 3, 2017 for panel selection in customer cases with three arbitrators.


        1 See Securities Exchange Act Release No. 78836 (September 14, 2016), 81 FR 64564 (September 20, 2016) (Order Approving File No. SRFINRA- 2016-022).


        Attachment A

        New language is underlined; deletions are in brackets.

        12403. Cases with Three Arbitrators

        Composition of Panels
        (a) Generating Lists
        (1) The Neutral List Selection System will generate:
        (A) A list of 10 arbitrators from the FINRA non-public arbitrator roster;
        (B) A list of [10] 15 arbitrators from the FINRA public arbitrator roster; and
        (C) A list of 10 public arbitrators from the FINRA chairperson roster.
        (2) The Neutral List Selection System will generate the chairperson list first. Chairqualified arbitrators who were not selected for the chairperson list will be eligible for selection on the public list. An individual arbitrator cannot appear on both the chairperson list and the public list for the same case.
        (3) The Neutral List Selection System will exclude arbitrators from the lists based upon current conflicts of interest identified within the Neutral List Selection System.
        (b) No change.
        (c) Striking and Ranking Arbitrators
        (1) Non-Public Arbitrator List
        (A) Each separately represented party may strike any or all of the arbitrators from the non-public arbitrator list by crossing through the names of the arbitrators.
        (B) If any names remain on the non-public arbitrator list, each separately represented party shall rank all remaining arbitrators in order of preference, with a "1" indicating the party's first choice, a "2" indicating the party's second choice, and so on.
        (2) Chairperson and Public Lists
        (A) Each separately represented party may strike up to four of the arbitrators from the chairperson list and up to [four] six of the arbitrators from the public arbitrator list for any reason by crossing through the names of the arbitrators. At least six names must remain on [each list] the chairperson list and nine names must remain on the public arbitrator list.
        (B) Each separately represented party shall rank all remaining arbitrators on the lists in order of preference, with a "1" indicating the party's first choice, a "2" indicating the party's second choice, and so on. Each list of arbitrators must be ranked separately.
        (3) The ranked lists must be returned to the Director no more than 20 days after the date upon which the Director sent the lists to the parties. If the Director does not receive a party's ranked lists within that time, the Director will proceed as though the party did not want to strike any arbitrator or have any preferences among the listed arbitrators. A party's failure to comply with the 20-day timeframe may result in the appointment of a panel consisting of two public arbitrators and one non-public arbitrator.
        (4) Parties are not required to send a copy of their ranking list to the opposing parties.
        (d)—(h) No change.

      • 16-43 SEC Approves Rule Amendment to Create a New Academic Corporate Bond TRACE Data Product; Effective Date: February 27, 2017

        View PDF

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 6710
        FINRA Rule 7730
        Suggested Routing

        Fixed Income
        Research
        Trading
        Key Topics

        Corporate Bonds
        Fees
        Fixed Income Securities
        TRACE Eligible Securities
        TRACE Transaction Data

        Executive Summary

        Effective February 27, 2017, FINRA will make available for a fee the Academic Corporate Bond TRACE Data product—an enhanced historical TRACE data product available solely to institutions of higher education. The rule text is available in the online FINRA Manual.

        Questions regarding this Notice should be directed to:

        •  Chris Stone, Vice President, Transparency Services, at (202) 728-8457 or by email at chris.stone@finra.org;
        •  Alié Diagne, Director, Transparency Services, at (212) 858-4092 or by email at alie.diagne@finra.org; or
        •  for legal and interpretive questions, Racquel Russell, Associate General Counsel, Office of General Counsel, at (202) 728-8363 or by email at racquel.russell@finra.org.

        For inquiries regarding how to access Academic Corporate Bond TRACE Data, please contact TRACE Data Services at (888) 507-3665.

        Background and Discussion

        On September 2, 2016, the SEC approved an amendment to FINRA Rule 7730 to create a new Academic Corporate Bond TRACE Data product that will be available solely to institutions of higher education.1 This enhanced data product will further support academic research on corporate bonds by providing academics with access to TRACE historical transaction-level data on corporate bonds, on a 36-month delayed basis, that includes masked identifying information regarding the dealer reporting each transaction.

        FINRA's existing Historic TRACE Data product provides transaction-level data on an 18- month delayed basis for all transactions that have been reported to TRACE in the classes of TRACE-eligible securities that are currently disseminated, but does not include any identifying information regarding the dealer reporting each transaction.2 As a result, academics have requested, and FINRA will now make available, an enhanced version of historical TRACE data that will include masked dealer identities.

        Academic Corporate Bond TRACE Data Product

        FINRA will make the Academic Corporate Bond TRACE Data available only to academics (i.e., requests originating from an institution of higher education), and the institution of higher education seeking to subscribe to Academic Corporate Bond TRACE Data must execute the appropriate agreements with FINRA. The agreements generally will: (1) explicitly require subscribers to agree that they will not attempt to reverse engineer the identity of any market participant; (2) prohibit the redistribution of data in the Academic Corporate Bond TRACE Data product; (3) require users to disclose each intended use of the data (including a description of each study being performed and the names of each individual who will have access to the data for the study); (4) require users to ensure that any data presented in work product be sufficiently aggregated so as to prevent reverse engineering of any dealer or transaction; and (5) require that the data be returned or destroyed if the agreement is terminated.

        The Academic Corporate Bond TRACE Data will comprise historic transaction-level data on all transactions in corporate bonds reported to TRACE, except a transaction that is a List or Fixed Offering Price Transaction,3 or a Takedown Transaction,4 and will include Rule 144A transactions in corporate bonds. Academic Corporate Bond TRACE Data also will include transactions that, at the time of reporting, were not subject to dissemination.5 In addition, Academic Corporate Bond TRACE Data will include certain transaction-level information— such as actual trade volume (or size)—that currently is not publicly available for larger transactions.

        Academic Corporate Bond TRACE Data will be provided on a 36-month delayed basis and will not include specific market participant identifiers (MPIDs), but will substitute a masked dealer identifier for each MPID included in the data. Specifically, the data set will contain transaction-level information, including, among other things:6

        •  bond identifier (FINRA symbol and CUSIP number);
        •  execution date and time;
        •  price;
        •  yield;
        •  quantity (as reported and not subject to caps);
        •  commission;
        •  buy or sell;
        •  capacity (principal or agency); and
        •  reporting party and contra party (masked IDs for FINRA members).

        Elements of the Academic Corporate Bond TRACE Data product may be modified from time-to-time by FINRA in its discretion and as stated in a Regulatory Notice or equivalent publication.

        Fees

        FINRA amended Rule 7730 to incorporate the fees for the Academic Corporate Bond TRACE Data product. The fee to academics (i.e., requests originating from an institution of higher education) will be $500 per calendar year. There also will be a single, one-time set-up fee of $500.7

        Effective Date

        FINRA will make the Academic Corporate Bond TRACE Data product available to institutions of higher education beginning February 27, 2017. On the effective date, requests may be made for data on corporate bonds reported to TRACE from 2002 through 2013. (Note: 2013 is the calendar year that is at least 36 months prior to the effective date of the Academic Corporate Bond TRACE Data product.)


        1 See Securities Exchange Act Release No. 78759 (Sept. 2, 2016), 81 FR 62222 (Sept. 8, 2016) (Order Approving File No. SR-FINRA-2016-024).

        2 FINRA adopted the Historic TRACE Data rule and related fees in 2010. See Securities Exchange Act Release No. 61012 (November 16, 2009), 74 FR 61189 (November 23, 2009) (Order Approving File No. SR-FINRA-2007-006). See also Regulatory Notice 10-14 (March 2010).

        3 Rule 6710(q) generally defines "List or Fixed Offering Price Transaction" as a primary market sale transaction sold on the first day of trading of a security excluding a Securitized Product other than an Asset-Backed Security as defined in Rule 6710(cc): (i) by a sole underwriter, syndicate manager, syndicate member or selling group member at the published or stated list or fixed offering price, or (ii) in the case of a primary market sale transaction effected pursuant to Securities Act Rule 144A, by an initial purchaser, syndicate manager, syndicate member or selling group member at the published or stated fixed offering price.

        4 Rule 6710(r) generally defines "Takedown Transaction" as a primary market sale transaction sold on the first day of trading of a security excluding a Securitized Product other than an Asset-Backed Security: (i) by a sole underwriter or syndicate manager to a syndicate or selling group member at a discount from the published or stated list or fixed offering price, or (ii) in the case of a primary market sale transaction effected pursuant to Securities Act Rule 144A, by an initial purchaser or syndicate manager to a syndicate or selling group member at a discount from the published or stated fixed offering price.

        5 This would include transactions occurring in Non-Investment Grade corporate bonds (as defined in Rule 6710(i)) or Rule 144A transactions executed prior to their dissemination pursuant to TRACE rules, as well as data such as the buy-side of interdealer transactions, which is reported to TRACE but not subject to dissemination.

        6 Complete information regarding the fields contained in the Academic Corporate Bond TRACE Data product will be available on the FINRA TRACE Content Licensing webpage.

        7 See Securities Exchange Act Release No. 79190 (October 28, 2016), 81 FR 76683 (November 3, 2016) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2016-040).

      • 16-42 Broker-Dealer, Investment Adviser Firm, Agent and Investment Adviser Representative, and Branch Renewals for 2017; Payment Deadline: December 16, 2016

        View PDF

        Regulatory Notice
        Notice Type

        Renewals
        Referenced Rules & Notices

        NTM 02-48
        Suggested Routing

        Compliance
        Legal
        Operations
        Registration
        Senior Management
        Key Topics

        IARDTM
        Registration
        Renewals
        Web CRD®

        BD and IA Renewals for 2017

        Executive Summary

        The 2017 Renewal Program begins on November 14, 2016, when FINRA makes the online Preliminary Statements available to all firms in E-Bill.

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

        October 24, 2016 Firms may begin submitting post-dated Form U5 and BR Closing/Withdrawal filings via Web CRD/IARD.
        November 1, 2016 Firms may begin submitting post-dated Form BDW and ADV-W filings via Web CRD/IARD.

        Please Note: Registrations terminated by post-dated filings submitted by 11 p.m., Eastern Time (ET), November 11, 2016, do not appear on the firm's Preliminary Statement. The only allowed date for post-dated filings is December 31, 2016.
        November 14, 2016 Preliminary Statements are available in E-Bill.
        December 16, 2016 Full payment of Preliminary Statements is due.
        January 3, 2017 Final Statements are available in E-Bill.
        January 20, 2017 Full payment of Final Statements is due.

        FINRA advises FINRA-registered firms that failure to remit full payment of their Preliminary Statements to FINRA by December 16, 2016, may cause the firm to become ineligible to do business in the jurisdictions where it is registered, effective January 1, 2017. FINRA-registered firms will also be subject to a late fee if payment is not received by December 16, 2016.

        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 in 2017.

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

        Background & Discussion

        Preliminary Statements

        Beginning November 14, 2016, Preliminary Statements are available for viewing and printing in E-Bill. The statements include the following fees.

        FINRA assesses a fee of $45 for each individual who renews his/her BD registration with any regulator through Web CRD. Firms can access a list of agents (AGs) assessed this fee by requesting the Renewals—Firm Renewal report from Web CRD. FINRA also assesses the annual statutory disqualification fees for registered individuals.

        In addition, any IARD system fees as determined by the North American Securities Administrators Association (NASAA) for investment adviser (IA) firms and their representatives (RAs) who renew through IARD will also be included on the Preliminary 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 Renewal Program. All FINRA-registered firms will receive 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 Report.

        Web CRD/IARD assesses renewal fees for participating state regulators, exchanges, and Self-Regulatory Organizations (SROs). Renewal statements reflect any applicable renewal fees for broker-dealer/investment adviser firm, branch, AG and RA registered with each SRO and/or jurisdiction.

        Some participating jurisdictions may require steps beyond the payment to FINRA of renewal fees to complete their 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 IA renewals, you may also visit the IARD website. For information on states' participation in the IARD Renewal Program, review the Fees and Accounting page on the IARD website.

        FINRA must receive full payment of the Preliminary Statement fees by December 16, 2016.

        If payment is not received by December 16, 2016, FINRA-registered firms will be assessed a Renewal Late Fee. FINRA includes this late fee as part of the Final 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.

        Renewal Payment

        Firms may pay electronically through E-Bill, send a wire transfer or mail a check; however, FINRA highly recommends that firms remit funds via E-Bill. 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.

        Electronic Payment via E-Bill

        Firms may submit electronic payments to fund their Renewal Accounts through E-Bill. 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.

        Please Note: Firm users with the proper entitlement may transfer funds from their Flex-Funding Account to their Renewal Account or transfer funds between affiliated firms at any time by using E-Bill.

        ACH/Wire Transfer

        Wire transfer and check payments are initially deposited into a firm's Flex-Funding Account. Beginning December 16, 2016, if sufficient funds are available, FINRA will systematically transfer funds from Flex-Funding Accounts to Renewal Accounts. Firms do not have to wait for FINRA to systematically transfer funds on December 16 as firms have the ability to transfer funds to their Renewal Accounts using E-Bill. Funds will only be systematically transferred if the entire renewal amount owed is available in the firm's Flex-Funding Account. This automatic Flex-Funding Account-to-Renewal Account transfer process will also be applied daily beginning January 20, 2017, for firms that still owe fees on their Final Statements.

        To initiate a wire or ACH transfer, instruct your firm's bank to contact Bank of America and provide your bank with the following information:

        Wire ABA Number: 026009593
        ACH ABA Number: 054001204
        Beneficiary: FINRA
        FINRA Account: 226005684771
        Reference Number: Firm CRD number

        Inform your bank to credit funds to the FINRA bank account and to only use your firm's CRD number as a reference. Record the confirmation number of the wire transfer provided by your bank.

        If you send your wire transfer by 2 p.m., ET, you may confirm receipt the next business day by reviewing your Flex-Funding Account.

        Checks

        Checks should be made payable to FINRA and your firm's CRD number should be written on the check memo line. Processing of check payments may take up to two business days. Please account for mail delivery and payment processing time when sending payment. 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 Express/Overnight Delivery
        FINRA
        P.O. Box 418911
        Boston, MA 02241-8911

        Note: This P.O. 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

        Provide the following phone number, if required:(800) 376-2703

        Renewal Reports

        When Preliminary Statements are made available, firms should request, print and/or download renewal reports via Web CRD/IARD. The three renewal reports available for reconciliation with the Preliminary 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 on October 24, 2016, and Form BDW and ADV-W filings on November 1, 2016. Post-dated filings are filings that have a termination date of December 31, 2016. 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, 2016, 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 11, 2016, will not be assessed renewal fees for the select registrations on their Preliminary Statements. Firms that submit post-dated termination filings on, or after, November 13, 2016, will not be assessed renewal fees for the select registrations on their Final Statements. Those firms should see a credit balance on their Final Statements if the firm has not requested additional registrations during that time period to offset the credit balance.

        After submitting a 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, 2016.

        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 3, 2017, 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, 2016.

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

        Firms that either unmark a state notice filing on a Form ADV Amendment, (generating the status of "Removal Requested at End of Year") or terminate a state registration on a Form ADV-W filed by 11 p.m., ET, November 11, 2016, will avoid the assessment of applicable renewal fees on their Preliminary Statements. The deadline to submit a form filing that will cancel a notice filing or terminate a state registration before year-end is 6 p.m., ET, December 27, 2016.

        Removing Open Registrations

        The Approved AG Reg Without FINRA Approval 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.

        Renewals Mass Transfer Moratorium

        A mass transfer is used to programmatically transfer individuals and branch offices from one firm to another firm as a result of a merger, acquisition, succession or consolidation. December 9, 2016, is the last day firms will be able to request that a mass transfer occur in 2016. There will be a moratorium on mass transfers from December 27, 2016, through January 3, 2017.

        Final Statements

        On January 3, 2017, FINRA makes available all Final Statements in E-Bill. These statements reflect the status of broker-dealer, AG, investment adviser firm and RA registrations, exempt reporting, or notice filings as of December 31, 2016. Any adjustments in fees owed resulting from registration terminations, approvals, notice filings or transitions after the Preliminary Statement appear on the Final Statement.

        •    The Final Statement reflects an additional amount if a firm owes more for registrations at year-end than what was reflected when the Preliminary Statement was generated.
        •    A refund is issued if a firm owes less for registrations at year-end than what was reflected when the Preliminary Statement was generated. FINRA transfers overpayments to firms' Flex-Funding Accounts on January 3, 2017. Firms that have a credit balance in their Flex-Funding Account may submit a refund request through E-bill.

        When Final Statements are made available, firms should access the Web CRD reports functionality for the Firm Renewal Report, which will list all individuals renewed with SROs/exchanges and each jurisdiction. AGs and RAs whose registrations are "approved" in any of these jurisdictions during November and December will be included in this report. "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 20, 2017, 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 Statement and renewal reports will be available in a January 2017 Regulatory Notice.

      • 16-41 SEC Approves Amendments to Rules Governing Communications With the Public; Effective Date: January 9, 2017

        View PDF

        Communications With the Public

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 2210
        FINRA Rule 2213
        FINRA Rule 2214
        Notice to Members 99-79
        Notice to Members 00-23
        Notice to Members 04-86
        Suggested Routing

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

        Communications with the Public
        Supervision

        Executive Summary

        The SEC has approved amendments to FINRA rules governing communications with the public.1 The amendments revise the filing requirements in FINRA Rule 2210 (Communications with the Public) and FINRA Rule 2214 (Requirements for the Use of Investment Analysis Tools) and the content and disclosure requirements in FINRA Rule 2213 (Requirements for the Use of Bond Mutual Fund Volatility Ratings).

        The rule text is attached as Attachment A.

        Questions concerning this Notice should be directed to:

        •  Joseph E. Price, Senior Vice President, Corporate Financing/Advertising Regulation, at (240) 386-4623 or joseph.price@finra.org;
        •  Thomas A. Pappas, Vice President, Advertising Regulation, at (240) 386-4553 or tom.pappas@finra.org; or
        •  Joseph P. Savage, Vice President and Counsel, Regulatory Policy, at (240) 386-4534 or joe.savage@finra.org.

        Background and Discussion

        Background

        In April 2014, FINRA launched a retrospective review of its communications with the public rules to assess their effectiveness and efficiency. In December 2014, FINRA published a report on the assessment phase of the review.2 The report concluded that, while the rules have met their intended investor protection objectives, they could benefit from some updating to better align the investor protection benefits and the economic impacts. To this end, the report recommended consideration of a combination of rule proposals, guidance and administrative measures to enhance the efficiency of the rules with no reduction in investor protection.

        Pursuant to these recommendations, FINRA is adopting amendments to the filing requirements in FINRA Rules 2210 and 2214 and to the content and disclosure requirements in FINRA Rule 2213.3

        Amendments

        Investment Company Shareholder Reports

        FINRA currently requires firms to file the management's discussion of fund performance (MDFP) portion of a registered investment company shareholder report if the report is distributed or made available to prospective investors.4 FINRA has required the MDFP to be filed because firms sometimes distribute or make shareholder reports available to prospective investors to provide more information about the funds they offer. Thus, FINRA has considered the MDFP to be subject to the filing requirement for investment company retail communications.

        Although Rule 2210 does not contain any express filing exclusion for investment company shareholder reports, FINRA has not required firms to file portions of shareholder reports other than the MDFP, such as the financial statements or schedules of portfolio investments. FINRA has not regarded these other parts of investment company shareholder reports to be subject to the filing requirements of Rule 2210, since they serve a regulatory purpose rather than promoting the sale of investment company securities. Investment companies already must file shareholder reports with the SEC,5 and the MDFP typically presents less investor risk than other types of communications concerning investment companies, since it usually focuses on the most recent period covered by the report rather than containing promotional content that is intended to encourage future investments.

        Accordingly, the amended rule excludes from the filing requirements annual or semi-annual reports that have been filed with the SEC in compliance with applicable requirements.6 The amendment is consistent with other filing exclusions already in the rule, including prospectuses, fund profiles, offering circulars and similar documents that have been filed with the SEC.

        Offering Documents Concerning Unregistered Securities

        Rule 2210(c)(7)(F) currently excludes from filing "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 . . ." (emphasis supplied). FINRA has always intended for this provision to exclude issuer-prepared offering documents concerning securities offerings that are exempt from registration.

        Amended Rule 2210(c)(7)(F) makes this intent more clear. As revised, Rule 2210(c)(7) (F) excludes from filing, among other things, "similar offering documents concerning securities offerings that are exempt from SEC or state registration requirements." While the amendment clarifies this filing exclusion, it does not represent a substantive change to the current exclusion from filing under Rule 2210 for unregistered securities' offering documents.7

        Backup Material for Investment Company Performance Rankings and Comparisons

        Current rules require a firm that files a retail communication for a registered investment company that contains a fund performance ranking or performance comparison to include a copy of the ranking or comparison used in the retail communication.8 When FINRA adopted this requirement, prior to the internet, FINRA staff did not have ready access to the sources of rankings or comparisons. Today, this information typically is easily available online. The amended rules therefore eliminate the requirement to file ranking and comparison backup material and instead expressly require firms to maintain back-up materials as part of their records.9

        Generic Investment Company Communications

        FINRA Rule 2210(c)(3)(A) requires firms to file within 10 business days of first use retail communications "concerning" registered investment companies. The amended filing requirement covers only retail communications that promote a specific registered investment company or family of registered investment companies. Thus, the amended rule no longer requires firms to file generic investment company retail communications.

        An example of such a generic communication is a retail communication that describes different mutual fund types (e.g., a description of "balanced mutual funds") but does not discuss the benefits of a specific fund or fund family. This type of material typically is intended to educate the public about investment companies in general or the types of products that a firm offers, and thus does not present the same risks of including potentially misleading information as communications about specific funds or fund families.

        Investment Analysis Tools

        "Investment analysis tools" are interactive technological tools that produce simulations and statistical analyses that present the likelihood of various investment outcomes if particular investments are made or particular investment strategies or styles are undertaken. Pursuant to FINRA Rules 2210(c)(3)(C) and 2214(a), firms that intend to offer an investment analysis tool must file templates for written reports produced by, or retail communications concerning, the tool, within 10 business days of first use. Rule 2214 also requires firms to provide FINRA with access to the tool itself, and provide customers with specific disclosures when firms communicate about the tool, use the tool or provide written reports generated by the tool.

        Since Rule 2214 became effective in 2005,10 FINRA has found that firms have largely complied with the rule's requirements applicable to templates for written reports produced by investment analysis tools and retail communications concerning such tools. Given this history and in light of the investor protection afforded by other content standards and the requirement that firms provide access to the tools and their output upon request of FINRA staff, the amended Rule 2214 eliminates the filing requirements for investment analysis tool report templates and retail communications concerning such tools and instead requires firms to provide FINRA staff with access to investment analysis tools upon request.11

        Filing Exclusion for Templates

        Currently, firms are not required to file retail communications that are based on templates that were previously filed with FINRA but changed only to update recent statistical or other non-narrative information.12 However, firms are required to refile previously filed retail communications that are subject to filing under FINRA Rule 2210(c) to the extent that the firm has updated any narrative information contained in the prior filing. Often these refiled retail communications are templates for fact sheets concerning particular funds or products and provide quarterly information concerning a product's performance, portfolio holdings and investment objectives.

        Through its review of updated fund fact sheets and other similar templates, FINRA has found that certain narrative information has not presented significant risk to investors, and that these narrative updates typically are consistent with applicable standards. In particular, narrative updates that are not predictive in nature and merely describe market events that occurred during the period covered by the communication, or that merely describe changes in a fund's portfolio, rarely have presented significant investor risks. In addition, firms often will update narrative information concerning a registered investment company, such as a description of a fund's investment objectives, based on information that comes from the fund's regulatory documents filed with the SEC.

        Accordingly, the amended rule expands the template filing exclusion also to allow firms to include updated non-predictive narrative descriptions of market events during the period covered by the communication and factual descriptions of portfolio changes without having to refile the template, as well as updated information that comes from a registered investment company's regulatory documents filed with the SEC.13

        This filing exclusion also applies to updates supplied by a third-party data provider, so long as its information comes from SEC filings. However, to the extent that a firm is relying on a third-party data provider to furnish these updates, the firm should obtain assurances from the data provider regarding the quality of the data and its consistency with the SEC source data.

        Bond Mutual Fund Volatility Ratings

        FINRA Rule 2213 permits firms to use communications that include ratings provided by independent third parties that address the sensitivity of the net asset value of an open-end management investment company's bond portfolio to changes in market conditions and the general economy, subject to a number of requirements. For example, these communications must be accompanied or preceded by the bond fund's prospectus and contain specific disclosures. Firms currently must file retail communications that include bond mutual fund volatility ratings at least 10 business days prior to first use, and withhold them from publication or circulation until any changes specified by FINRA have been made.14

        Despite the potential value to investors, FINRA has found that, since Rule 2213 first became effective in 2000,15 firms have rarely, if ever, filed communications that contain bond fund volatility ratings. In general, in the few cases in which firms filed such communications with FINRA, the staff has found that they have met applicable standards.

        Amended Rule 2213 modifies the requirements to use bond fund volatility ratings while maintaining investor protections. Consistent with the filing requirements for other retail communications about specific registered investment companies, firms are no longer required to accompany or precede a retail communication that includes a bond fund volatility rating with a prospectus for the fund. Firms also may file these communications within 10 business days of first use rather than prior to use.16

        The amendments also streamline the content and disclosure requirements. In particular, the amendments eliminate the requirements: (1) that all disclosures be contained in a separate disclosure statement; (2) to disclose all current bond mutual fund volatility ratings that have been issued with respect to the fund; (3) to explain the reason for any change in the current rating from the most recent prior rating; (4) to describe the criteria and methodologies used to determine the rating; (5) to include a statement that not all bond funds have volatility ratings; and (6) to include a statement that the portfolio may have changed since the date of the rating.


        1. See Securities Exchange Act Release No. 78823 (September 13, 2016), 81 FR 64240 (September 19, 2016) (Notice of Filing of Partial Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change Amending FINRA Rules 2210 (Communications with the Public), 2213 (Requirements for the Use of Bond Mutual Fund Volatility Ratings), and 2214 (Requirements for the Use of Investment Analysis Tools), as Modified by Partial Amendment No. 1).

        2. See Retrospective Rule Report, Communications with the Public, December 2014.

        3. Stakeholders commenting on the retrospective rule review also recommended that FINRA revise Rule 2210's content standards to address other issues, such as the amount of disclosure required in communications with the public and the standards governing online, mobile and social media communications. FINRA is considering whether to provide additional guidance or propose additional changes to Rule 2210 in response to these comments.

        4. See, e.g., Notice to Members 99-79 (September 1999) ("[m]embers are not required to file shareholder reports with [FINRA] if they are only sent to current fund shareholders. However, if a firm uses a shareholder report as sales material with prospective investors, the firm must file the management's discussion of fund performance (MDFP) portion of the report (as well as any supplemental sales material attached to or distributed with the report) with the Department.").

        5. See Section 30 of the Investment Company Act of 1940 and Rules 30a-l and 30bl-l thereunder.

        6. See amendments to FINRA Rule 2210(c)(7)(F). To the extent that a firm distributes or attaches registered investment company sales material along with the fund's shareholder report, such material remains subject to filing under Rule 2210.

        7. Firms maybe required to file unregistered securities offering documents with FINRA pursuant to FINRA Rules 5122 or 5123.

        8. See FINRA Rule 2210(c)(3)(A).

        9. See amendments to FINRA Rules 2210(b)(4)(A)(vi) and 2210(c)(3)(A).

        10. See Notice to Members 04-86 (November 2004).

        11. See amendments to FINRA Rules 2210(c)(3)(C) and 2214(a).

        12. See FINRA Rule 2210(c)(7)(B).

        13. See amendments to FINRA Rule 2210(c)(7)(B).

        14. FINRA Rules 2210(c)(2)(C) and 2213(b) and (c).

        15. See Notice to Members 00-23 (April 2000).

        16. See amendments to FINRA Rules 2210(c) and 2213(b). This change relates only to Rule 2213 and does not affect a firm's obligation to deliver a prospectus for shares issued by companies registered under the Securities Act of 1933 or the Investment Company Act of 1940.


        ATTACHMENT A

        Below is the text of the rule change. New language is underlined; deletions are in brackets.

        2000. DUTIES AND CONFLICTS

        2200. COMMUNICATIONS AND DISCLOSURES

        2210. Communications with the Public

        (a) No Change.
        (b) Approval, Review and Recordkeeping
        (1) through (3) No Change.
        (4) Recordkeeping
        (A) Members must maintain all retail communications and institutional communications for the retention period required by SEA Rule 17a-4(b) and in a format and media that comply with SEA Rule 17a-4. The records must include:
        (i) through (iii) No Change.
        (iv) information concerning the source of any statistical table, chart, graph or other illustration used in the communication; [and]
        (v) for any retail communication for which principal approval is not required pursuant to paragraph (b)(1)(C), the name of the member that filed the retail communication with the Department, and a copy of the corresponding review letter from the Department; and
        (vi) for any retail communication that includes or incorporates a performance ranking or performance comparison of a registered investment company, a copy of the ranking or performance used in the retail communication.
        (B) No Change.
        (c) Filing Requirements and Review Procedures
        (1) No Change.
        (2) Requirement to File Certain Retail Communications Prior to First Use

        At least 10 business days prior to first use or publication (or such shorter period as the Department may allow), a member must file the following retail communications with the Department and withhold them from publication or circulation until any changes specified by the Department have been made:
        (A) through (B) No Change.
        [(C) Retail communications concerning bond mutual funds that include or incorporate bond mutual fund volatility ratings, as defined in Rule 2213.]
        (3) Requirement to File Certain Retail Communications

        Within 10 business days of first use or publication, a member must file the following communications with the Department:
        (A) Retail communications [concerning] that promote or recommend a specific registered investment company or family of registered investment companies (including mutual funds, exchange-traded funds, variable insurance products, closed-end funds, and unit investment trusts) not included within the requirements of paragraphs (c)(1) or (c)(2). [The filing of any retail communication that includes or incorporates a performance ranking or performance comparison of the investment company with other investment companies must include a copy of the ranking or comparison used in the retail communication.]
        (B) No Change.
        [(C) Any template for written reports produced by, or retail communications concerning, an investment analysis tool, as such term is defined in Rule 2214.]
        ([D]C) Retail communications concerning collateralized mortgage obligations registered under the Securities Act.
        ([E]D) Retail communications concerning any security that is registered under the Securities Act and that is derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance or a foreign currency, not included within the requirements of paragraphs (c)(1), (c)(2) or subparagraphs (A) through ([D]C) of paragraph (c)(3).
        (4)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) No Change.
        (B) Retail communications that are based on templates that were previously filed with the Department the changes to which are limited to:
        (i) updates of more recent statistical or other non-narrative information; and
        (ii) non-predictive narrative information that describes market events during the period covered by the communication or factual changes in portfolio composition or is sourced from a registered investment company's regulatory documents filed with the SEC.
        (C) through (E) No Change.
        (F) Prospectuses, preliminary prospectuses, fund profiles, offering circulars, annual or semi-annual reports and similar documents that have been filed with the SEC or any state in compliance with applicable requirements, [or that is] similar offering documents concerning securities offerings that are exempt from [such] SEC and state registration requirements, 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 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 (O) No Change.
        (8) through (9) No Change. (d) through (g) No Change.

        * * * * *

        2213. Requirements for the Use of Bond Mutual Fund Volatility Ratings

        (a) No Change.
        (b) Prohibitions on Use

        Members and persons associated with a member may distribute a retail communication that includes [use] a bond mutual fund volatility rating [only in a communication that is accompanied or preceded by a prospectus for the bond mutual fund ("supplemental sales literature") and] only when the following requirements are satisfied:
        (1) No Change.
        (2) The retail communication[supplemental sales literature] incorporates the most recently available rating and reflects information that, at a minimum, is current to the most recently completed calendar quarter ended prior to use.
        (3) The criteria and methodology used to determine the rating must be based exclusively on objective, quantifiable factors. The rating and the [D]disclosure [Statement] that accompanies the rating must be clear, concise, and understandable.
        (4) The retail communication [supplemental sales literature] conforms to the disclosure requirements described in paragraph (c).
        (5) No Change.
        (c) Disclosure Requirements
        [(1) Supplemental sales literature containing a bond mutual fund volatility rating shall include a Disclosure Statement containing all the information required by this Rule. The Disclosure Statement may also contain any additional information that is relevant to an investor's understanding of the rating.]
        [(2) Supplemental sales literature containing a bond mutual fund volatility rating shall contain all current bond mutual fund volatility ratings that have been issued with respect to the fund. Information concerning multiple ratings may be combined in the Disclosure Statement, provided that the applicability of the information to each rating is clear.]
        ([3]1) [All bond mutual fund volatility ratings shall be contained within the text of the Disclosure Statement.] The following disclosures shall be provided with respect to each [such] bond mutual fund volatility rating:
        (A) the name of the entity that issued the rating;
        (B) the most current rating and date of the current rating[, with an explanation of the reason for any change in the current rating from the most recent prior rating];
        (C) a link to, or website address for, a website that includes the criteria and methodologies used to determine the rating;
        ([C]D) a description of the rating in narrative form, containing the following disclosures:
        (i) a statement that there is no standard method for assigning ratings;
        [(ii) a description of the criteria and methodologies used to determine the rating;]
        [(iii) a statement that not all bond funds have volatility ratings;]
        (ii[v]) whether consideration was paid in connection with obtaining the issuance of the rating;
        (iii[v]) a description of the types of risks the rating measures (e.g., short-term volatility); and
        [(vi) a statement that the portfolio may have changed since the date of the rating; and]
        (iv[ii]) a statement that there is no guarantee that the fund will continue to have the same rating or perform in the future as rated.

        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 upon request[and, (2) pursuant to Rule 2210(c)(3)(C), file with the Department any template for written reports produced by, or retail communications concerning, the tool].
        (b)through (d) No Change.

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

        .01 through .07 No Change.

        * * * * *

      • 16-40 SEC Approves FINRA "Pay-To-Play" and Related Rules; Effective Date: August 20, 2017

        View PDF

        Political Contributions

        Regulatory Notice
        Notice Type

        New Rule
        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
        FINRA Rule 2030
        FINRA Rule 4580
        SEA Rule 15Ba1-1(d)(1)–(4)
        Suggested Routing

        Compliance
        Government Securities
        Legal
        Municipal
        Registered Representatives
        Senior Management
        Key Topics

        Political Contributions
        Recordkeeping

        Effective Date: August 20, 2017

        Executive Summary

        The Securities and Exchange Commission (SEC) approved FINRA Rules 2030 (Engaging in Distribution and Solicitation Activities with Government Entities) and 4580 (Books and Records Requirements for Government Distribution and Solicitation Activities) to establish "pay-to-play"1 and related rules regulating the activities of member firms that engage in distribution or solicitation activities for compensation with government entities on behalf of investment advisers.2

        The rules become effective August 20, 2017.

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

        Questions concerning this Notice should be directed to: Victoria Crane, Associate General Counsel, Office of General Counsel, at (202) 728-8104 or Victoria.Crane@finra.org.

        Background & Discussion

        In July 2010, the SEC adopted Rule 206(4)-5 under the Investment Advisers Act of 1940 (Advisers Act) addressing pay-to-play practices by investment advisers (the SEC Pay-to-Play Rule).3 The SEC Pay-to-Play Rule prohibits, in part, 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."4 The SEC Pay-to-Play Rule defines a "regulated person" to include a member firm, provided that: (a) FINRA rules prohibit member firms from engaging in distribution or solicitation activities if certain political contributions have been made; and (b) the SEC, by order, 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

        Based on this regulatory framework, FINRA Rule 2030 is modeled after the SEC Pay-to-Play Rule, and imposes restrictions on member firms engaging in distribution or solicitation activities that are substantially equivalent to those imposed on investment advisers by the SEC Pay-to-Play Rule.6 On September 20, 2016, the SEC, by order, found that FINRA Rule 2030 imposes substantially equivalent or more stringent restrictions on members firms than the SEC Pay-to-Play Rule imposes on investment advisers and is consistent with the objectives of the SEC Pay-to-Play Rule.7 Furthermore, FINRA Rule 4580 imposes recordkeeping requirements on member firms in connection with political contributions.8

        Rules 2030 and 4580 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. These rules 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.

        Pay-to-Play Rule

        A. Two-Year Time Out

        Rule 2030(a) prohibits a covered member from engaging in distribution9 or solicitation10 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 two years after the contribution is made).

        The rule does not ban or limit the amount of political contributions a covered member or its covered associates can make. Instead, it imposes 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. The 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 and Covered Associates

        Rule 2030(g)(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."11

        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.12 Under such circumstances, MSRB rules applicable to municipal advisors, including the MSRB's pay-to-play rule, would apply to the member firm.13 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 Rule 2030.14

        Rule 2030(g)(2) defines a "covered associate" to mean:
        •  any general partner, managing member or executive officer of a covered member15 or other individual with a similar status or function;
        •  any associated person of a covered member who engages in distribution or solicitation activities with a government entity for such covered member (and such person's supervisor); and
        •  any political action committee (PAC) controlled16 by a covered member or a covered associate.
        2. Investment Advisers

        Rule 2030 applies 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).17 Thus, it does 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.18
        3. Official of a Government Entity

        An official of a government entity includes 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.19 Government entities 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),20 45721 and 529 plans.22

        Thus, the two-year time out is 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. Accordingly, it is the scope of authority of the particular office of an official, not the influence actually exercised by the individual that determines whether the individual has influence over the awarding of an investment advisory contract under the definition.
        4. Contributions

        The rule's time out provisions are triggered by contributions made by a covered member or any of its covered associates. Rule 2030(g)(1) defines a "contribution" to mean any gift, subscription, loan, advance, or deposit of money or anything of value made for:
        •  the purpose of influencing any election for federal, state or local office;
        •  payment of debt incurred in connection with any such election; or
        •  transition or inaugural expenses of the successful candidate for state or local office.
        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.23 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,24 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 rule.25
        5. "Look Back"

        The rule attributes 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" applies to any person who becomes a covered associate, including a current employee who has been transferred or promoted to a position covered by the rule. A person becomes a "covered associate" for purposes of the 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 rule would prohibit the covered member that hires or promotes the contributing covered associate from receiving compensation for engaging in distribution or solicitation activities on behalf of an investment adviser 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 rule's prohibition for the remaining six months of the two-year period. This "look back" provision is designed to prevent covered members from circumventing the rule by influencing the selection process by hiring persons who have made political contributions.26
        B. Prohibition on Soliciting and Coordinating Contributions

        Rule 2030(b) prohibits a covered member or covered associate from soliciting27 or coordinating any person or PAC to make any:
        •  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
        •  payment28 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 intended to prevent covered members or covered associates from circumventing the 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. In addition, a direct contribution to a political party by a covered member or its covered associates will not violate the rule unless the contribution was a means for the covered member to do indirectly what the rule would prohibit if done directly (for example, if the contribution was earmarked or known to be provided for the benefit of a particular government official).
        C. Prohibition on Indirect Contributions or Solicitations

        Rule 2030(e) provides that it shall be a violation of Rule 2030 for any covered member or any of its covered associates to do anything indirectly that, if done directly, would result in a violation of the rule. This provision prevents 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 rule.29 In addition, Rule 2030(e) requires a showing of intent to circumvent the rule in order for such persons to trigger the two-year time out.
        D. Prohibitions as Applied to Covered Investment Pools

        Rule 2030(d)(1) provides that a covered member that engages in distribution or solicitation activities with a government entity on behalf of a covered investment pool30 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 to the covered investment pool directly.31 Rule 2030(d)(2) provides that an investment adviser to a covered investment pool in which a government entity invests or is solicited to invest shall be treated as though that investment adviser were providing or seeking to provide investment advisory services directly to the government entity.

        Rule 2030(d) applies the prohibitions of the rule to situations in which an investment adviser manages assets of a government entity through a hedge fund or other type of pooled investment vehicle. Thus, the provision extends the protection of the 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."
        E. Exceptions and Exemptions

        As discussed in more detail below, Rule 2030(c) contains exceptions for de minimis contributions, new covered associates and returned contributions. In addition, Rule 2030(f) includes an exemptive provision for covered members that allows covered members to apply to FINRA for an exemption from the rule's two-year time out. Under this provision, FINRA may exempt covered members from the 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 provides 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 rule's exceptions. In determining whether to grant an exemption, FINRA will take into account the varying facts and circumstances that each application presents.
        1. De Minimis Contributions

        Rule 2030(c)(1) excepts from the rule's restrictions contributions made by a covered associate that is a natural person to government entity officials for whom the covered associate was entitled to vote32 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. Under both exceptions, primary and general elections are considered separate elections. These exceptions are based on the theory that such contributions are typically made without the intent or ability to influence the selection process of the investment adviser.
        2. New Covered Associates

        Rule 2030(c)(2) provides an exception from the 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. 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.33 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.34
        3. Certain Returned Contributions

        Rule 2030(c)(3) provides an exception from the rule's restrictions for covered members if the restriction is due to a contribution made by a covered associate and:
        •  the covered member discovered the contribution within four months of it being made;
        •  the contribution was less than $350; and
        •  the contribution is returned within 60 days of the discovery of the contribution by the covered member.
        This exception allows 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. The exception is limited to the types of contributions that are less likely to raise pay-to-play concerns. 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 the contribution's 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 rule provides that covered members with 150 or fewer registered representatives may rely on this exception no more than two times per calendar year. All other covered members may rely on this exception no more than three times per calendar year. In addition, a covered member may not rely on an exception more than once with respect to contributions by the same covered associate regardless of the time period.

        Recordkeeping Requirements

        Rule 4580 requires 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 will allow FINRA to examine for compliance with Rule 2030. The rule requires 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 for compensation on behalf of an investment adviser, or which are or were investors in any covered investment pool on behalf of which the covered member has engaged in distribution or solicitation activities with the government entity on behalf of the investment adviser to the covered investment pool, 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 rule requires 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 Rule 2030.

        Effective Date

        Rules 2030 and 4580 become effective on August 20, 2017. The prohibition under Rule 2030(a) will not be triggered by contributions made prior to the effective date. Similarly, the prohibition will not apply to contributions made prior to the effective date by new covered associates to which the two years or, as applicable, six months "look back" applies.

        As of the effective date, member firms must begin to maintain books and records in compliance with Rule 4580. Member firms will not be required, however, to look back for the five years prior to the effective date of the rule to identify investment advisers and government entity clients in accordance with Rule 4580(a)(2) and (a)(3).


        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. See Securities Exchange Act Release No. 78683 (August 25, 2016), 81 FR 60051 (August 31, 2016) (Order Approving File No. SR-FINRA-2015-056) (Approval Order). See also Securities Exchange Act Release No. 76767 (December 24, 2015), 80 FR 81650 (December 30, 2015) (Notice of Filing of File No. SR-FINRA-2015-056) (Proposing Release).

        3. See Investment 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 Investment Advisers Act Release No. 3221 (June 22, 2011), 76 FR 42950 (July 19, 2011) (Rules Implementing Amendments to the Investment Advisers Act of 1940); Investment 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).

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

        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. As discussed in the Approval Order and Proposing Release, FINRA interprets and applies the provisions of its pay-to-play rule consistent with the SEC Pay-to-Play Rule.

        7. Investment Advisers Act Release No. 4532 (September 20, 2016), 81 FR 66526 (September 28, 2016).

        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. Although the rule applies to distribution activities by covered members, the rule does not apply to distribution activities related to registered investment companies that are not investment options of a government entity's plan or program. Thus, the rule applies to distribution activities involving unregistered pooled investment vehicles such as hedge funds, private equity funds, venture capital funds, and collective investment trusts, and registered pooled investment vehicles such as mutual funds, if such registered pools are an investment option of a participant-directed plan or program of a government entity. For a more detailed discussion regarding the rule's applicability to distribution activities, see the Approval Order.

        10. Rule 2030(g)(11) 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 is a solicitation will 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 will 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 27.

        11. As noted above, the SEC Pay-to-Play Rule includes within its definition of "regulated person" SEC-registered municipal advisors, subject to specified conditions. See supra note 5. 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. See SEC Pay-to-Play Rule 206(4)-5(a)(2)(i)(A) and 206(4)-B(f)(9).

        12. See Section 15B(e)(9) of the Securities Exchange Act of 1934 (Exchange Act) and Rule l5Ba1-1(n) thereunder (defining "solicitation of a municipal entity or obligated person" 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 for the purpose of obtaining or retaining an engagement by a municipal 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.")

        13. See, e.g., MSRB Rule G-37.

        14. FINRA notes that a person that is registered under the Exchange Act as a broker-dealer and municipal 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 would be subject to the rules that apply to the services the regulated person is performing.

        15. Rule 2030(g)(B) defines an "executive officer of a covered member" to mean: "(A) The president; (B) Any vice president in charge of a principal business unit, division or function (such as sales, administration or finance); (C) Any other officer of the covered member who performs a policy-making function; or (D) Any other person who performs similar policy-making functions for the covered member."

        FINRA notes that whether a person is an executive officer depends on his or her function or activities and not his or her title. For example, an officer who is a chief executive of a covered member but whose title does not include "president" would nonetheless be an executive officer for purposes of the rule.

        16. FINRA considers 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.

        17. See Rule 2030(g)(7).

        18. The rule does not apply to state-registered investment advisers as few of these smaller firms manage public pension plans or other similar funds.

        19. Rule 2030(g)(8) 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."

        20. 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)).

        21. 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).

        22. A 529 plan is a "qualified tuition plan" established under Section 529 of the Internal Revenue Code of 1986 (26 U.S.C. 529). Rule 2030(g)(6) 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 political 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."

        23. In addition, FINRA generally would not view a covered associate's donation of his or her time 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 was not otherwise paying the employee's salary (e.g., an unpaid leave of absence).

        24. Section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3)) contains a list of charitable organizations that are exempt from Federal income tax.

        25. Note, however, Rule 2030(e) providing that it shall be a violation of Rule 2030 for any covered member or any of its covered associates to do anything indirectly that, if done directly, would result in a violation of the rule.

        26. Similarly, 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 will be subject to the rule's prohibition for the 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 will not relieve the covered member from the two-year time out.

        27. Rule 2030(g)(11)(B) defines the term "solicit" with respect to a contribution or payment as "to communicate, directly or indirectly, for the purpose of obtaining or arranging a contribution or payment." Whether a particular activity involves a solicitation or coordination of a contribution or payment for purposes of the rule would depend on the facts and circumstances. A covered member that consents to the use of its name on fundraising literature for a candidate would be soliciting contributions for that candidate. A covered member that sponsors a meeting or conference which features a government official as an attendee or guest speaker and which involves fundraising for the government official would be soliciting contributions for that government official. Expenses incurred by the covered member for hosting the event would be a contribution by the covered member, thereby triggering the two-year ban on the covered member receiving compensation for engaging in distribution or solicitation activities with the government entity over which that official has influence. Such expenses may include, but are not limited to, the cost of the facility, the cost of refreshments, any expenses paid for administrative staff, and the payment or reimbursement of any of the government official's expenses forthe event. The de minimis exception under Rule 2030(c) (1) would not be available with respect to these expenses because they would have been incurred by the firm, not by a natural person.

        28. Rule 2030(g)(9) defines "payment" as 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).

        29. This provision also covers, for example, situations in which contributions by a covered member are made, directed or funded through a third party with an expectation that, as a result of the contributions, another contribution is likely to be made by a third party to "an official of the government entity," for the benefit of the covered member. Contributions made through gatekeepers thus would be considered to be made "indirectly" for purposes of the rule.

        30. Rule 2030(g)(3) defines a "covered investment pool" to mean: "(A) Any investment company registered underthe Investment Company Act 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 investmentvehicles 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.

        31. 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 for go any compensation related to the assets invested or committed by the government entity in the covered investment pool.

        32. For purposes of Rule 2030(c)(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 running for president, any covered associate in the country may contribute the de minimis amount to the official's presidential campaign.

        33. 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).

        34. See id.

      • 16-39 SEC Approves Rule Change to Require Reporting of Transactions in U.S. Treasury Securities to the Trade Reporting and Compliance Engine (TRACE); Reporting Implementation Date: July 10, 2017

        View PDF

        Reporting Transactions in U.S. Treasury Securities

        Regulatory Notice
        Notice Type

        New Rule
        Referenced Rules & Notices

        Regulatory Notice 14-21
        FINRA Rule 6380A
        FINRA Rule 6380B
        FINRA Rule 6622
        FINRA Rule 6710
        FINRA Rule 6730
        FINRA Rule 7730
        Schedule A to the FINRA By-Laws
        Suggested Routing

        Compliance
        Government Securities
        Institutional
        Internal Audit
        Legal
        Operations
        Registered Representatives
        Senior Management
        Systems
        Trading
        Training
        Key Topics

        Fixed Income
        TRACE
        Trade Reporting
        U.S. Treasury Securities

        Executive Summary

        Beginning July 10, 2017, FINRA member firms must begin reporting transactions in U.S. Treasury Securities to FINRA via TRACE. This Notice describes the scope of the term "U.S. Treasury securities" for purposes of the new reporting requirement; the specific transactions in U.S. Treasury securities that are reportable and those that are exempt from the reporting requirement; and the information that must be reported to TRACE when reporting transactions in U.S. Treasury securities, including a new trade indicator and two new modifiers. FINRA is publishing technical specifications concurrently with this Notice, which are available on FINRA's website. At this time, FINRA will not disseminate information on transactions in U.S. Treasury securities and will not charge transaction-level fees on transactions in U.S. Treasury securities reported to TRACE.

        The new rule text is available in the online FINRA Manual on FINRA's website.

        Questions concerning this Notice should be directed to:

        •  Chris Stone, Vice President, Transparency Services, at (202) 728-8457;
        •  Patrick Geraghty, Vice President, Market Regulation, at (240) 386-4973; or
        •  Brant Brown, Associate General Counsel, Office of General Counsel, at (202) 728-6927.

        Background & Discussion

        Background

        The market in debt securities issued by the U.S. Department of the Treasury (Treasury Department), or "Treasuries," is the deepest and most liquid government securities market in the world. Treasuries—such as bills, notes and bonds—are debt obligations of the U.S. government, and because these debt obligations are backed by the "full faith and credit" of the government, and thus by its ability to raise tax revenues and print currency, Treasuries are generally considered the safest of all U.S. investments. Treasuries are traded by broker-dealers that are FINRA members as well as commercial bank dealers and principal trading firms that are not registered as broker-dealers with the SEC or members of FINRA; however, there is not currently a complete public repository or audit trail for information on transactions in Treasuries.

        In response to unexplained volatility in the U.S. Treasury market in October 2014, an interagency working group (IAWG) led by the Treasury Department issued a detailed joint staff report (JSR) on July 13, 2015, that included a set of preliminary findings on the volatility, described the current state of the U.S. Treasury market, and proposed a series of four "next steps" in understanding the evolution of the U.S. Treasury market.1 Included among these "next steps" was an assessment of the data available to regulators and to the public regarding the cash market for Treasuries.

        Following publication of the JSR, on January 19, 2016, the Treasury Department published a Request for Information (RFI) seeking public comment on structural changes in the U.S. Treasury market and their implications for market functioning.2 The RFI included four sections, each of which expanded upon one of the four "next steps" identified in the JSR, and each section included numerous questions for public consideration and comment. Included within the RFI were numerous questions requesting comment on official sector access to data regarding the cash market for Treasuries and whether dissemination of U.S. Treasury market transaction data to the public would be beneficial.

        Following receipt and review of the comment letters, the Treasury Department and the SEC announced that "they are working together to explore efficient and effective means of collecting U.S. Treasury cash market transaction information," and as part of this effort, they requested that FINRA "consider a proposal to require its member brokers and dealers to report Treasury cash market transactions to a centralized repository."3 The Treasury Department noted that it "will continue working with other agencies and authorities to develop a plan for collecting similar data from institutions who actively trade U.S. Treasury securities but are not FINRA members."4

        In response to this request, on July 18, 2016, FINRA filed a proposed rule change to adopt new reporting requirements for transactions in U.S. Treasury securities, as defined in the TRACE Rules.5 The SEC approved the new requirements, which are described below, on October 18, 2016.6 Beginning July 10, 2017, FINRA member firms must begin reporting transactions in U.S. Treasury securities to FINRA. Firms are not required to include the two new modifiers, as applicable, in their TRACE reports for transactions in U.S. Treasury securities beginning July 10, 2017. FINRA will announce the implementation date for the new modifiers at a later date. At this time, FINRA will not disseminate information on these transactions, and FINRA will not charge fees on transactions in U.S. Treasury securities reported to TRACE.

        Discussion

        Below, the Notice describes:

        •  the scope of the term "U.S. Treasury securities" for purposes of the TRACE reporting requirement;
        •  the transactions in U.S. Treasury securities that are reportable and those that are exempt from the reporting requirement;
        •  the information that must be reported to TRACE when reporting transactions in U.S. Treasury securities, including a new trade indicator and two new modifiers; and
        •  the implementation schedule.

        In addition to this Notice, FINRA is also publishing technical specifications describing the new reporting requirements for U.S. Treasury securities, which are available on FINRA's website.

        Scope of Securities

        The TRACE Rules require the reporting of transactions in all "TRACE-eligible securities." Under the amendments, the term "TRACE-eligible securities" now includes "U.S. Treasury securities," which includes all securities issued by the Treasury Department with the exception of savings bonds.7 Consequently, the TRACE reporting requirements will apply to all marketable Treasuries, including Treasury bills,8 notes, bonds, and inflation-protected securities (often called "TIPS").9 The new reporting requirement also applies to separate principal and interest components of a U.S. Treasury security that have been separated pursuant to the Separate Trading of Registered Interest and Principal of Securities (STRIPS) program operated by the Treasury Department.10

        Reportable Transactions

        In general, any transaction in a TRACE-eligible security is a "reportable TRACE transaction" unless the transaction is subject to an exemption.11 Rule 6730(e) provides several exemptions from the TRACE trade reporting requirements for certain types of transactions. The amendments add an exemption to Rule 6730(e) for purchases of a U.S. Treasury security from the Treasury Department as part of an auction.12 When-issued transactions, which can take place after the Treasury Department's announcement of an auction but before the auction and issuance of the securities, are reportable under the new reporting requirements.

        As amended, Rule 6730(e) exempts an "auction transaction," defined as the purchase of a U.S. Treasury security in an auction, from the TRACE reporting requirements. A when-issued transaction in a U.S. Treasury security must be reported to TRACE with an appropriate trade indicator, as described below. For transaction reporting purposes, reopening transactions in a U.S. Treasury security that is the subject of an auction would also be treated as "when-issued transactions."

        The amendments also codify the long-standing interpretation for all TRACE-eligible securities that repurchase and reverse repurchase transactions are not reportable to TRACE.13 Thus, these types of transactions, including those involving U.S. Treasury securities, are not required to be reported to TRACE.

        As is currently the case with all TRACE reporting obligations, any FINRA member firm that is a "Party to a Transaction" in a TRACE-eligible security is required to report the transaction; thus, a reportable TRACE transaction in U.S. Treasury securities between two FINRA member firms must be reported by both firms.14 The amendments require reportable TRACE transactions in U.S. Treasury securities generally to be reported on the same day as the transaction on an end-of-day basis. Under the amendments to Rule 6730(a), reportable TRACE transactions in U.S. Treasury securities executed on a business day at or after 12:00:00 a.m. Eastern Time through 5:00:00 p.m. Eastern Time must be reported the same day during TRACE system hours.15 Transactions executed on a business day after 5:00:00 p.m. Eastern Time but before the TRACE system closes must be reported no later than the next business day (T + 1) during TRACE system hours, and, if reported on T + 1, designated "as/of" and include the date of execution. Transactions executed on a business day at or after 6:30:00 p.m. Eastern Time through 11:59:59 p.m. Eastern Time—or on a Saturday, a Sunday, a federal or religious holiday or other day on which the TRACE system is not open at any time during that day (determined using Eastern Time)—must be reported the next business day (T + 1) during TRACE system hours, designated "as/of," and include the date of execution. Firms that wish to report transactions in U.S. Treasury securities on an immediate basis may do so; however, those firms that may find it more cost effective or beneficial to report on an end-of-day basis may report pursuant to the timeframes established in Rule 6730.

        Reportable Transaction Information

        Rule 6730(c) lists the following transaction information that must be reported to TRACE for each reportable TRACE transaction:

        (1) CUSIP number or, if a CUSIP number is not available at the time of execution, a similar numeric identifier or a FINRA symbol;
        (2) The size (volume) of the transaction, as required by Rule 6730(d)(2);
        (3) Price of the transaction (or the elements necessary to calculate price, which are contract amount and accrued interest) as required by Rule 6730(d)(1);
        (4) A symbol indicating whether the transaction is a buy or a sell;
        (5) Date of trade execution (for "as/of" trades only);
        (6) Contra-party's identifier (MPID, customer, or a non-member affiliate, as applicable);
        (7) Capacity—principal or agent (with riskless principal reported as principal);
        (8) Time of execution;
        (9) Reporting side executing broker as "give-up" (if any);
        (10) Contra side introducing broker in case of "give-up" trade;
        (11) The commission (total dollar amount);
        (12) Date of settlement;
        (13) If the member is reporting a transaction that occurred on an ATS pursuant to Rule 6732, the ATS's separate MPID obtained in compliance with Rule 6720(c); and
        (14) Such trade modifiers as required by either the TRACE rules or the TRACE users guide.

        The amendments apply these same information requirements to TRACE trade reports in U.S. Treasury securities; however, the amendments clarify how some of this information must be reported when the transaction involves a U.S. Treasury security. First, the amendments clarify that, because when-issued trading is based on yield rather than on price as a percentage of face or par value, the yield should be reported in lieu of the price when the transaction is a when-issued transaction, as defined in the TRACE Rules. The amendments also make clear that, as is the case whenever price is reported for a transaction executed on a principal basis, the yield reported for a when-issued transaction must include any mark-up or mark-down. If the firm is acting in an agency capacity, the total dollar amount of any commission must be reported separately.

        Second, the amendments require reporting of a more precise time of execution for transactions in U.S. Treasury securities that are executed electronically. New Supplementary Material .04 to Rule 6730 requires that, when reporting transactions in U.S. Treasury securities executed electronically, firms report the time of execution to the finest increment of time captured in the firm's system (e.g., milliseconds or microseconds) but, at a minimum, in increments of seconds. Importantly, the amendments do not require firms to update their systems to comply with a finer time increment; rather, the Supplementary Material simply requires a firm to report the time of execution to TRACE in the same time increment its system already captures.16

        Finally, the amendments adopt a new trade indicator and two new trade modifiers that reflect unique attributes of the U.S. Treasury cash market. As amended, Rule 6730 includes a new trade indicator for any reportable TRACE transaction in a U.S. Treasury security that meets the definition of "when-issued transaction." This indicator will permit FINRA to determine whether price is being reported on the transaction based on a percentage of face or par value or whether, as required for when-issued transactions, the firm is reporting the yield, and the indicator can be used to validate transactions in a U.S. Treasury security that are reported with an execution before the auction and issuance of the security have taken place.

        In addition to the new indicator, the amendments to Rule 6730 require the use of two new modifiers, when applicable, to reported transactions in U.S. Treasury securities. Individual transactions in U.S. Treasury securities are often executed as part of larger trading strategies, which can result in individual transactions reported to TRACE being priced away from the current market for legitimate reasons. The amendments include two new modifiers to indicate particular transactions that are part of larger trading strategies and therefore may be executed at prices away from the market at the time of the transaction. The amendments to Rule 6730 require that firms append the following modifiers, as applicable, to trade reports for U.S. Treasury securities:

        •  a ".B" modifier if the transaction being reported is part of a series of transactions where at least one of the transactions involves a futures contract (e.g., a "basis" trade); and
        •  an ".S" modifier if the transaction being reported is part of a series of transactions and may not be priced based on the current market (e.g., a fixed price transaction in an "on-the-run" security as part of a transaction in an "off-the-run" security).

        The ".S" modifier applies more broadly than the ".B" modifier in that it applies to a trade report if the transaction being reported is part of a series of transactions that could result in the reported transaction being executed away from the current market. The ".S" modifier applies to a transaction in a particular strategy that meets the ".S" criteria regardless of whether it is, in fact, off market and is therefore permitted when a transaction is part of a series and could be, but need not be, priced away from the market.

        As noted above, because FINRA believes it may take firms more time to establish and implement a process for appending trade modifiers, the implementation date for the requirement to attach ".B" or ".S" trade modifiers, if applicable, will be announced at a later date. FINRA notes, however, that firms will be permitted to append the modifiers beginning July 10, 2017, which may help reduce potential "false positive" alerts for transactions executed at prices away from the market at the time of the transaction.

        Implementation

        Implementation Dates

        The requirement to report transactions in U.S. Treasury securities to TRACE is being implemented in two separate phases. First, FINRA member firms must begin reporting transactions in U.S. Treasury securities on July 10, 2017. The use of the new ".B" and ".S" trade modifiers—the second phase—will not be required beginning on July 10, 2017, and FINRA will announce the implementation date at a later time. Firms are permitted to append the trade modifiers beginning on July 10, 2017.

        Fees

        At this time, FINRA is not charging TRACE transaction-level fees on reports for U.S. Treasury securities, and FINRA has exempted these transactions from the Trading Activity Fee.17 As in other FINRA trade reporting system contexts, re-reporting and amending of trades are captured in a firm's error statistics published on the TRACE Report Cards even if the transactions are not considered late. However, as no transaction reporting fees are being charged for U.S. Treasury security reporting at this time, there will be no fees charged for re-reports or amendments.

        CUSIP Registration

        FINRA intends to register the CUSIPs for outstanding U.S. Treasury securities with TRACE so firms will not be required to do so, and CUSIPs for these securities will be included on FINRA's daily list of reportable securities. On a going-forward basis, FINRA will register CUSIPs in U.S. Treasury securities for TRACE reporting purposes coincident with the announcement by the Treasury Department of an auction.18


        1. See Joint Staff Report: The U.S. Treasury Market on October 15, 2014, at 7 (July 13, 2015). The IAWG consists of representatives of the Treasury Department, the Federal Reserve Board of Governors, the Federal Reserve Bank of New York, the SEC and the CFTC.

        2. The RFI, which was written in consultation with the staffs of all of the agencies involved in the JSR, was published in the Federal Register on January 22, 2016. See Notice Seeking Public Comment on the Evolution of the Treasury Market Structure, 81 FR 3928 (January 22, 2016).

        3. Press release, U.S. Department of the Treasury, Statement on Trade Reporting in the U.S. Treasury Market (May 16, 2016). See also press release, U.S. Securities and Exchange Commission, Statement on Trade Reporting in the U.S. Treasury Market (May 16, 2016).

        4. In August, the agencies in the IAWG announced that they "will continue to assess effective means to ensure that the collection of data regarding Treasury cash securities market transactions is comprehensive and includes information from institutions are that not FINRA members." See press release, U.S. Department of the Treasury, Statement Regarding Progress on the Review of the U.S. Treasury Market Structure since the July 2015 Joint Staff Report (August 2, 2016).

        5. The term "U.S. Treasury security" is defined in Rule 6710(p).

        6. Securities Exchange Act Release No. 79116 (October 18, 2016).

        7. Unlike other Treasuries, savings bonds issued by the Treasury Department are generally non-transferable and are therefore not marketable securities purchased and sold in the secondary market. See, e.g., 31 CFR 353.15 (providing that Series EE and Series HH "[s]avings bonds are not transferable and are payable only to the owners named on the bonds, except as specifically provided in these regulations and then only in the manner and to the extent so provided"); see also 31 CFR 360.15 (establishing the same transfer provisions for Series I savings bonds).

        8. Rule 6710(o) defines a "money market instrument" as "a debt security that at issuance has a maturity of one calendar year or less, or, if a discount note issued by an Agency, as defined in paragraph (k), or a Government-Sponsored Enterprise, as defined in paragraph (n), a maturity of one calendar year and one day or less." Because money market instruments are excluded from the definition of TRACE-eligible security, the definition of "money market instrument" was amended to exclude U.S. Treasury securities, including U.S. Treasury bills, which have maturities of one year or less. See 31 CFR 356.5(a).

        9. At this time, FINRA is not providing, nor requiring reporting of, factor information when reporting transactions in TIPS to TRACE.

        10. The STRIPS program is a program operated by the Treasury Department under which eligible securities are authorized to be separated into principal and interest components and transferred separately. See 31 CFR 356.2; see generally 31 CFR 356.31 (providing details on how the STRIPS program works).

        11. For purposes of the trade reporting rules, FINRA considers a "trade" or a "transaction" to entail a change of beneficial ownership between parties. See, e.g., Securities Exchange Act Release No. 74482 (March 11, 2015), 80 FR 13940, 13941 (March 17, 2015) (Order Approving SR-FINRA-2014-050); Trade Reporting Frequently Asked Questions, Q100.4, available at www.finra.org/industry/trade-reporting-faq#100 (defining "trade" and "transaction" for purposes of the equity trade reporting rules as a change in beneficial ownership). For this reason, although trading a principal or interest component of a U.S. Treasury security that has been separated under the STRIPS program would constitute a reportable TRACE transaction, the act of separating or reconstituting the components of a U.S. Treasury security under the STRIPS program would not constitute a reportable TRACE transaction. Supplementary Material .05 to Rule 6730 clarifies the reporting obligations in this scenario.

        12. All U.S. Treasury securities reportable to TRACE under the amendments are offered to the public by the Treasury Department through an auction process. The regulations governing this process are set forth in Part 356 of Title 31 of the Code of Federal Regulations.

        13. See Reporting of Corporate and Agencies Debt Frequently Asked Questions, Question 4.6. Although repurchase and reverse repurchase transactions are structured as purchases and sales, the transfer of securities effectuated as part of these transactions is not made as the result of an investment decision but, rather, is more akin to serving as collateral pledged as part of a secured financing. Consequently, repurchase and reverse repurchase transactions are economically equivalent to financings, and the pricing components of these transactions are typically not the market value of the securities.

        14. See Rule 6730(a), (b)(1). The term "party to a transaction" is defined in Rule 6710(e) as "an introducing broker, if any, an executing broker-dealer, or a customer." For purposes of the definition, the term "customer" includes a broker-dealer that is not a FINRA member. See Rule 6710(e).

        15. TRACE system hours are currently 8:00:00 a.m. Eastern Time through 6:29:59 p.m. Eastern Time on a business day. See Rule 6710(f).

        16. FINRA rules governing trade reporting of equity securities currently require firms to report time to the millisecond if the firm captures time to that level of granularity. See Rule 6380A, Supplementary Material .04; Rule 6380B, Supplementary Material .04; Rule 6622, Supplementary Material .04; see also Regulatory Notice 14-21 (May 2014).

        17. FINRA amended Section 1(b)(2) of Schedule A to the FINRA By-Laws to exclude transactions in U.S. Treasury securities from the Trading Activity Fee (TAF) and amended Rule 7730 to exclude transactions in U.S. Treasury securities from the TRACE transaction reporting fees. However, because FINRA will incur costs to expand the TRACE system and to enhance its examination and surveillance efforts to monitor trading activity in U.S. Treasury securities, it is considering the appropriate long-term funding approach for the program and will analyze potential fee structures once it has more data relating to the size and volume of U.S. Treasury security reporting.

        18. Although FINRA will register CUSIPs for U.S. Treasury securities in the TRACE system, FINRA expects that if a FINRA member firm engages in a reportable TRACE transaction in a TRACE-eligible security that is not in the TRACE system, the firm will inform FINRA so that the CUSIP can be added.

      • 16-38 SEC Approves Amendments to Disseminate Collateralized Mortgage Obligation (CMO) Transactions and to Reduce the Reporting Time for CMO Transactions; Effective Date: March 20, 2017

        View PDF

        Trade Reporting and Compliance Engine (TRACE)

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

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

        Compliance
        Fixed Income
        Legal
        Operations
        Systems
        Trading
        Training
        Key Topics

        Collateralized Mortgage Obligations
        Dissemination
        Rule 144A Transactions
        Securitized Products
        Transaction Reporting

        Executive Summary

        The Securities and Exchange Commission (SEC) approved amendments to the Trade Reporting and Compliance Engine (TRACE) rules and dissemination protocols to provide for dissemination of transactions in collateralized mortgage obligations (CMOs), to reduce the time frame for reporting transactions in CMOs executed after issuance, and to simplify the reporting requirements for transactions in CMOs executed prior to issuance. These amendments will become effective on March 20, 2017.

        The amended rule text is available on FINRA's website.

        Questions regarding this Notice should be directed to:

        •  Chris Stone, Vice President, Transparency Services, at (202) 728-8457 or Chris.Stone@finra.org; or
        •  Alex Ellenberg, Associate General Counsel, Office of General Counsel, at (202) 728-8152 or Alexander.Ellenberg@finra.org.

        Background and Discussion

        Over the past several years, FINRA has taken a phased approach to disseminating transaction information for securitized products,1 which were the last group of TRACE-eligible securities to be reported to FINRA but not disseminated. FINRA began with the most liquid types of securitized products, agency pass-through mortgage-backed securities traded to be announced (MBS TBA transactions), and most recently implemented dissemination of asset-backed securities (ABS).2 Today, there are three types of securitized products not yet subject to dissemination: CMOs,3 commercial mortgage-backed securities (CMBSs) and collateralized debt obligations (CDOs).4 CMOs are the most actively traded of these remaining product types.

        On September 23, 2016, the SEC approved amendments to the Rule 6700 Series, Rule 7730, and the TRACE dissemination protocols to provide for the dissemination of transactions in CMOs based on transaction size and level of trading activity in the CMO security.5 To facilitate the dissemination of CMO transaction information, the SEC also approved corresponding changes to Rule 6730 to reduce the time period for reporting to TRACE transactions in CMOs executed after issuance, and to simplify the reporting timeframe for pre-issuance CMO transactions.

        Dissemination

        Under the approved changes to the Rule 6700 Series, and Rule 6750 in particular, FINRA will disseminate information about CMO transactions, including those effected pursuant to Rule 144A, based on transaction size and level of trading activity in the CMO security. Specifically, FINRA will disseminate trade-by-trade information about CMO transactions valued under $1 million (calculated based on original principal balance) immediately upon receipt of the transaction report. For CMO transactions valued at $1 million or more, and where there have been five or more transactions in that security of $1 million or more in the period reported by at least two different market participant identifiers (MPIDs), FINRA will disseminate aggregated information about transactions in that security on a weekly and monthly basis. A CMO transaction that does not meet the criteria for either immediate trade-by-trade dissemination or periodic aggregate dissemination will not be subject to public dissemination, but will be included in the Historic Securitized Products Data Set (Historic SP Data Set), as discussed below.

        FINRA will begin to disseminate CMO transaction information in accordance with the rule amendments on the effective date, March 20, 2017. CMBSs and CDOs will continue to be reported to TRACE but not subject to dissemination.6

        Reporting Time Periods

        The amendments also address the time periods by which firms must report CMO transactions to TRACE. Specifically, Rule 6730(a)(3)(A) currently provides that a CMO transaction executed on or after issuance must be reported to TRACE no later than the close of the TRACE system on the date of execution. Beginning on March 20, 2017, these transactions must be reported within 60 minutes of execution under Rule 6730(a)(3)(H).7 Additionally, Rule 6730(a)(3)(C) currently provides that a CMO transaction executed before the date of issuance of the security must be reported to TRACE by the earlier of (i) the business day that the security is assigned a CUSIP, a similar numeric identifier, or a FINRA symbol; or (ii) the date of issuance of the security. Beginning on March 20, 2017, Rule 6730(a)(3)(C) will provide that such CMO transactions must be reported to TRACE no later than the first settlement date of the security.

        Data Availability

        As of the effective date, under Rule 7730(c), the Securitized Products Data Set will include TRACE data for CMO transactions that are disseminated upon receipt and in periodic aggregated reports. The Historic SP Data Set will include all non-Rule 144A CMO transactions, even if not previously disseminated immediately or as part of a periodic report.8 Similarly, disseminated transactions and periodic reports for transactions in CMOs issued pursuant to 144A will be part of the Rule 144A Data Set, and all Rule 144A transactions in CMOs will become part of the Historic 144A Data Set. The inclusion of this additional data in the data sets will not cause a change in the fees for the data sets.


        1. The term "Securitized Product" is defined in Rule 6710(m).

        2. The terms "TBA," "Agency Pass-Through Mortgage-Backed Security," and "Asset-Backed Security" are defined in FINRA Rule 6710(u), (v), and (cc), respectively.

        3. The term "Collateralized Mortgage Obligation," or CMO, is defined in FINRA Rule 6710(dd) to mean a type of Securitized Product backed by Agency Pass-Through Mortgage-Backed Securities, mortgage loans, certificates backed by project loans or construction loans, other types of mortgage-backed securities or assets derivative of mortgage-backed securities, structured in multiple classes or tranches with each class or tranche entitled to receive distributions of principal and/or interest according to the requirements adopted for the specific class or tranche, and includes a real estate mortgage investment conduit (REMIC).

        4. As part of the amendments that were approved by the SEC, FINRA defined the term "Collateralized Debt Obligation" in Rule 6710(ff).

        5. See Securities Exchange Act Release No. 78925 (September 23, 2016), 81 FR 67023 (September 29, 2016) (Order Approving Proposed Rule Change Relating to TRACE Reporting and Dissemination of CMO Transactions; File No. SR-FINRA-2016-023).

        6. However, agency CMBSs (such as Ginnie Mae Project Loans), which fall within the definition of CMO in FINRA Rule 6710(dd), will be subject to dissemination.

        7. Transactions in CDOs and CMBSs will remain subject to end-of-day reporting according to Rule 6730(a)(3)(A).

        8. See Rule 7730(f)(4).

      • 16-37 SEC Approves FINRA's Capital Acquisition Broker (CAB) Rules; Effective Dates: January 3, 2017 (CAB Member Application and Associated Person Registration Rules) and April 14, 2017 (All Other CAB Rules)

        View PDF

        Capital Acquisition Brokers

        Regulatory Notice
        Notice Type

        New Rule
        Referenced Rules & Notices

        CAB Rules
        FINRA By-Laws
        FINRA Rule 1000 Series
        FINRA Rule 2000 Series
        FINRA Rule 3000 Series
        FINRA Rule 4000 Series
        FINRA Rule 5122
        FINRA Rule 5123
        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 3000 Series
        Suggested Routing

        Compliance
        Legal
        Senior Management
        Key Topics

        Capital Acquisition Brokers
        Corporate Restructuring
        Mergers & Acquisitions
        Private Equity Funds

        Summary

        The Securities and Exchange Commission (SEC) approved1 FINRA's rule set for firms that meet the definition of "capital acquisition broker" (CAB) and that elect to be governed under this rule set. CABs are firms that engage in a limited range of activities, essentially advising companies and private equity funds on capital raising and corporate restructuring, and acting as placement agents for sales of unregistered securities to institutional investors under limited conditions. Firms that elect to be governed under the CAB rule set are not permitted, among other things, to carry or maintain customer accounts, handle customers' funds or securities, accept customers' trading orders, or engage in proprietary trading or market-making.

        The CAB rules become effective on April 14, 2017. In order to provide new CAB applicants with lead time to apply for FINRA membership and obtain the necessary qualifications and registrations, CAB Rules 101–125 will become effective on January 3, 2017. FINRA will begin accepting applications for firms that are not broker-dealers but wish to register as CABs, for existing member firms requesting to elect CAB status, and for CAB associated person registration and qualification, on January 3, 2017.

        The text of the CAB rules is available on FINRA's website.

        Questions concerning this Notice should be directed to Joseph P. Savage, Vice President and Counsel, Regulatory Policy, at (240) 386-4534 or by email at joe.savage@finra.org.

        Background and Discussion

        Some firms, which may or may not be registered as broker-dealers, engage solely in corporate financing activities such as advising companies on mergers and acquisitions, advising issuers on raising debt and equity capital in private placements with institutional investors, and providing advisory services to companies that need assistance analyzing their strategic and financial alternatives. Those firms that are registered as broker-dealers typically do so because they may receive transaction-based compensation.

        These firms do not engage in many of the types of activities typically associated with traditional broker-dealers. For example, these firms typically do not carry or act as an introducing broker with respect to 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.

        For this reason, many FINRA rules should not apply to these firms, or should be modified to reflect their limited business activities. In order to accommodate the limited business activities of these firms while continuing to protect their customers, FINRA has established a separate, narrower set of rules that governs these firms, if they meet the CAB definition and elect to be so governed. FINRA encourages member firms that would qualify as CABs to consider converting to CAB status, to obtain greater assurance that they will be subject to a regulatory regime that is tailored to the limited nature of their business. FINRA also encourages firms that are not members to consider registering as CABs if they would meet the CAB definition. In doing so, these firms would remove any possible ambiguity about their status as non-broker-dealers while coming under a regulatory regime that is tailored to the limited nature of their business.

        This Notice summarizes some of the significant aspects of the CAB rules.

        General Standards (CAB Rule 010 Series)

        CAB Rule 016 sets forth basic definitions modified as appropriate to apply to CABs. The definitions of "capital acquisition broker" and "institutional investor" are particularly important to the application of the rule set.

        The term "capital acquisition broker" means any broker that solely engages in any 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, valuation services, expert testimony, litigation support, and negotiation and structuring services;
        •  qualifying, identifying, soliciting, or acting as a placement agent or finder (i) on behalf of an issuer in connection with a sale of newly-issued, unregistered securities to institutional investors or (ii) on behalf of an issuer or a control person in connection with a change of control of a privately-held company. For purposes of the provision, a "control person" is a person who has the power to direct the management or policies of a company through ownership of securities, by contract, or otherwise. Control will be presumed to exist if, before the transaction, the person has the right to vote or the power to sell or direct the sale of 25 percent or more of a class of voting securities or in the case of a partnership or limited liability company has the right to receive upon dissolution or has contributed 25 percent or more of the capital. For purposes of the provision, a "privately-held company" is a company that does not have any class of securities registered, or required to be registered, with the SEC under Section 12 of the Securities Exchange Act of 1934 (Exchange Act) or with respect to which the company files, or is required to file, periodic information, documents, or reports under Section 15(d) of the Exchange Act; and
        •  effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or the business conducted with the assets of the company, in accordance with the terms and conditions of an SEC rule, release, interpretation or "no-action" letter that permits a person to engage in such activities without having to register as a broker or dealer pursuant to Section 15(b) of the Exchange Act.

        The term "capital acquisition broker" does not include any broker or dealer that:

        •  carries or acts as an introducing broker with respect to 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 (except as permitted by paragraphs (c)(1)(F) and (G) of CAB Rule 016);
        •  has investment discretion on behalf of any customer;
        •  engages in proprietary trading of securities or market-making activities;
        •  participates in or maintains an online platform in connection with offerings of unregistered securities pursuant to Regulation Crowdfunding or Regulation A under the Securities Act of 1933; or
        •  effects securities transactions that would require the broker or dealer to report the transaction under FINRA Rules 6300 Series, 6400 Series, 6500 Series, 6600 Series, 6700 Series, 7300 Series or 7400 Series.2

        The term "institutional investor" has the same meaning as that term has under FINRA Rule 2210 (Communications with the Public), with one exception: the term "institutional investor" in CAB Rule 016, but not FINRA Rule 2210, includes any person meeting the definition of "qualified purchaser" as that term is defined in Section 2(a)(51) of the Investment Company Act of 1940 (1940 Act).3

        A CAB may act as a placement agent for an issuer in a manner consistent with the CAB rules even if the issuer has, on its own, sold its securities to non-institutional investors. For example, a CAB would be permitted to solicit institutional investors to invest in a private fund that is excluded from the definition of "investment company" pursuant to Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, even if the fund has issued shares to persons who do not meet the definition of "institutional investor" under CAB Rule 016(i). In the process of qualifying investors to determine whether they meet the definition of "institutional investor," a CAB may contact and receive information from persons who do not meet this definition. In either case, however, the CAB would not be permitted to solicit, offer, act as a placement agent or receive compensation in connection with the sale of shares to any person who is not an institutional investor.

        Member Application and Associated Person Registration (CAB Rule 100 Series)

        CAB Rules 101–118 set forth the requirements for new firms that wish to register as a CAB and existing FINRA member firms that wish to elect CAB status.

        Existing Members Electing CAB Status

        CAB Rule 116(b) sets forth streamlined procedures for an existing FINRA member firm to elect CAB status if the firm is already approved to engage in CAB activities. If a member firm is approved to engage in private placement or finder activities, intends to continue engaging in these activities as a CAB, and does not intend to change its existing ownership, control or business operations, it is not required to file either a New Member Application (NMA) or a Continuing Membership Application (CMA). Rather, the firm must file a request to amend its membership agreement or obtain a membership agreement (if none exists currently).4 In the membership agreement, the firm would need to represent that its activities will be limited to those permitted for CABs and that it agrees to comply with the CAB rules. There would be no application fee associated with this request.5

        A member firm that is not already approved to engage in CAB activities, or that intends to change its ownership, control or business operations as described in NASD Rule 1017(a), must file a CMA in order to elect CAB status.6

        New Applicants

        A firm that is not registered as a broker-dealer and that wishes to become a CAB generally must follow the same registration and application procedures as any other broker-dealer applicant, by using the NMA. An applicant should indicate within the application that it intends to operate solely as a CAB pursuant to the FINRA CAB Rules. In reviewing an application for membership as a CAB, FINRA will 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 CABs under CAB Rule 016(c).

        Terminating CAB Status

        FINRA has established streamlined procedures under CAB Rule 116(d) to permit a full-service broker-dealer to convert to CAB status, and then return to its former status within a year. The firm must notify FINRA of this change through Firm Gateway, but does not have to file an application for approval of a material change in business operations under NASD Rule 1017. The CAB need only file a request to amend its membership agreement in order to effect this change. In its membership agreement, the firm must agree that it will comply with all FINRA rules, and the membership agreement must impose the same limitations on the firm's activities that existed before the firm converted to CAB status.7

        Beyond the one-year period following conversion to CAB status, in order for a CAB to convert to the status of a full-service broker-dealer, it must file a CMA with FINRA and execute an amended membership agreement to provide that it will comply with all FINRA rules. If a CAB desires to terminate its registration as a broker-dealer, the CAB must follow the same procedures as any other broker-dealer.

        Associated Person Registration

        CAB Rules 119–125 govern the registration and qualification examinations of principals and representatives who are associated with CABs. CAB principals and representatives are subject to the same registration, qualification and continuing education requirements as principals and representatives of other FINRA firms. As with any other broker-dealer, CAB registered principals will need to obtain qualifications commensurate with the activities in which they engage. As a general matter, depending on the types of activities in which a particular principal will engage, these registrations may include the General Securities Principal (Series 24),8 Limited Principal—Financial and Operations (Series 27), Limited Principal—Introducing Broker/Dealer Financial and Operations (Series 28), and Limited Principal—Direct Participation Programs (Series 39).9

        Associated persons of CABs who are included within the definition of representative in NASD Rule 1031 also must be registered.10 Depending on the types of activities in which a particular representative will engage, these registrations may include the General Securities Representative (Series 7), Limited Representative—Direct Participation Programs (Series 22), Limited Representative—Corporate Securities (Series 62), Limited Representative—Investment Banking (Series 79), Limited Representative—Private Securities Offerings (Series 82), and Operations Professional (Series 99).

        Duties and Conflicts (CAB Rule 200 Series)

        The CAB Rule 200 Series establishes a streamlined set of conduct rules. For example, CABs are not subject to FINRA Rules 2121 (Fair Prices and Commissions), 2122 (Charges for Services Performed), and 2124 (Net Transactions with Customers), since CABs' business model does not raise the same concerns that Rules 2121, 2122 and 2124 are intended to address. Even those rules that do apply have been simplified in many cases. For example, CAB Rule 221 is a streamlined version of FINRA Rule 2210 (Communications with the Public), essentially prohibiting false and misleading statements.

        Supervision and Responsibilities Related to Associated Persons (CAB Rule 300 Series)

        The CAB Rule 300 Series establishes a limited set of supervisory rules for CABs. CABs are subject to FINRA Rules 3220 (Influencing or Rewarding Employees of Others), 3240 (Borrowing from or Lending to Customers), and 3270 (Outside Business Activities of Registered Persons). CAB Rule 311 subjects CABs to some, but not all, of the requirements of FINRA Rule 3110 (Supervision) and, consistent with Rule 3110, is designed to provide CABs with the flexibility to tailor their supervisory systems to their business models. For example, CABs are not 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 supervisory procedures for supervisory personnel (paragraph (b)(6)), and internal inspections (paragraph (c)).

        CAB Rule 313 requires CABs to designate and identify one or more principals to serve as a firm's chief compliance officer, similar to the requirements of FINRA Rule 3130(a). However, it does not require chief executive officer certification about its compliance supervisory procedures, which is required for non-CAB firms under FINRA Rules 3130(b) and (c).

        CAB Rule 328 prohibits any person associated with a CAB from participating in any manner in a private securities transaction as defined in FINRA Rule 3280(e).11 This restriction would not prohibit associated persons from investing in securities on their own behalf, or engaging in securities transactions with immediate family members, provided that the associated person does not receive selling compensation.

        CAB Rule 331 requires each CAB to implement a written anti-money laundering program, similar to FINRA Rule 3310, but permits CABs to conduct the required independent testing every two years rather than every year as required by Rule 3310.

        Financial and Operational Rules (CAB Rule 400 Series)

        CAB Rule 400 Series establishes a streamlined set of rules concerning firms' financial and operational obligations. CABs are not subject to FINRA Rules 4370 (Business Continuity Plans and Emergency Contact Information) or 4380 (Mandatory Participation in FINRA BC/DR Testing Under Regulation SCI).

        CAB Rule 411 includes some, but not all, of the capital compliance requirements of FINRA Rule 4110. In particular, CAB Rule 411 excludes the provisions of FINRA Rule 4110 that apply to carrying or clearing member firms, including the provisions authorizing FINRA to prescribe greater net capital or net worth requirements than those otherwise applicable, and the provisions regarding sale-and-leasebacks, factoring, financing, loans and similar arrangements.12

        CAB Rule 452(a) establishes a limited set of requirements for the supervision and review of a firm's general ledger accounts.

        Securities Offerings (CAB Rule 500 Series)

        The CAB Rule 500 Series applies to CABs FINRA Rules 5122 (Private Placements of Securities Issued by Members) and 5150 (Fairness Opinions).

        Investigations and Sanctions, Code of Procedure, and Arbitration and Mediation (CAB Rules 800, 900 and 1000)

        CABs are subject to a narrower rule set than the FINRA Rule 8000 Series governing investigations and sanctions of firms. For example, CABs are not subject to 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).

        CABs are also subject to a narrower rule set than the FINRA Rule 9000 Series governing disciplinary and other proceedings involving firms. CABS are not subject to the FINRA Rule 9700 Series (Procedures on Grievances Concerning the Automated Systems).

        CABs are subject to the FINRA Rule 12000 Series (Code of Arbitration Procedure for Customer Disputes), 13000 Series (Code of Arbitration Procedure for Industry Disputes) and 14000 Series (Code of Mediation Procedure).


        1. See Securities Exchange Act Release No. 78617 (August 18, 2016), 81 FR 57948 (August 24, 2016) (Order Approving Rule Change as Modified by Amendment Nos. 1 and 2 to Adopt FINRA Capital Acquisition Broker Rules; File No. SR-FINRA-2015-054).

        2. See CAB Rule 016(c)(2).

        3. See CAB Rule 016(i).

        4. If an existing FINRA member firm is already approved to engage in the activities permitted for a CAB, but is also approved to engage in activities not permitted for a CAB, the firm may terminate those lines of business not permitted for a CAB as part of its election of CAB status without having to file an NMA or CMA. The firm's request to amend its membership agreement would have to indicate that the firm will no longer engage in these impermissible activities once it becomes a CAB.

        5. The firm also would need to amend Item 12 of its Form BD to indicate that it intends to operate solely as a CAB. The firm should check "Z. Other" and in Schedule D, Page 1 of Section II of the Form BD, indicate that it intends to operate solely as a CAB pursuant to the FINRA Capita Acquisition Broker Rules.

        6. The firm also would need to amend Item 12 of its Form BD to indicate that it intends to operate solely as a CAB, in the manner indicated in endnote 5.

        7. The firm also would need to amend its Form BD to reflect that it no longer intends to operate as a CAB. To the extent that the rules applicable to the firm had been amended since it had changed its status to a CAB, FINRA would have the discretion to modify any limitations to reflect any new rule requirements.

        8. A General Securities Principal may also need to register in a specific prerequisite representative category depending on the scope of his or her activities. For instance, NASD Rule 1022(a)(1) (B) requires that a General Securities Principal with responsibility over the investment banking activities specified in NASD Rule 1032(i) also satisfy the Limited Representative—Investment Banking registration requirement.

        9. A CAB would be permitted to qualify, identify, solicit, or act as a placement agent or finder on behalf of a direct participation program only in connection with securities transactions described in CAB Rules 016(c)(1)(F) and (G).

        10. See NASD Rules 1031(b) and 1032(a); see also CAB Rules 121(d) and 123(b), which provide that all CABs are subject to NASD Rules 1031 and 1032, respectively.

        11. FINRA Rule 3280(e) defines "private securities transaction" as "any securities transaction outside the regular course or scope of an associated person's employment with a member, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of NASD Rule 3050, transactions among immediate family members (as defined in FINRA Rule 5130), for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded."

        12. See FINRA Rules 4110(a) and (d).

      • 16-36 SEC Approves Amendments to the Codes of Arbitration Procedure Regarding Award Offsets; Effective Date: October 24, 2016

        View PDF

        Arbitration Award Offsets

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 12904
        FINRA Rule 13904
        Suggested Routing

        Compliance
        Legal
        Registered Representatives
        Senior Management
        Key Topics

        Arbitration
        Award Offsets
        Codes of Arbitration Procedure

        Executive Summary

        The SEC has approved1 FINRA's rule change amending Rule 12904 (Awards) of the Code of Arbitration Procedure for Customer Disputes (Customer Code) and Rule 13904 (Awards) of the Code of Arbitration Procedure for Industry Disputes (Industry Code) to provide that absent specification to the contrary in an award, when arbitrators order opposing parties to make payments to one another, the monetary awards shall offset and the party assessed the larger amount shall pay the net difference.

        The amendments are effective for arbitration awards rendered on or after October 24, 2016.

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

        Questions concerning this Notice should be directed to:

        •  Kenneth Andrichik, Senior Vice President, Chief Counsel, and Director of Mediation & Strategy, FINRA Office of Dispute Resolution, at (212) 858-3915 or ken.andrichik@finra.org; or
        •  Margo Hassan, Associate Chief Counsel, FINRA Office of Dispute Resolution at (212) 858-4481 or margo.hassan@finra.org.

        Background & Discussion

        FINRA Rule 12904 of the Customer Code and Rule 13904 of the Industry Code address awards issued by arbitrators at FINRA's arbitration forum. The rules provide that awards issued by arbitrators must be in writing and signed by a majority of the arbitrators or as required by applicable law. In addition, the rules require that awards include, among other matters, a statement of the damages and other relief awarded, and that all monetary awards shall be paid within 30 days of receipt unless a motion to vacate has been filed in a court of competent jurisdiction.

        Sometimes arbitrators order opposing parties in a case to pay each other monetary damages. Prior to the amendments, FINRA Rules 12904 and 13904 were silent as to award offsets. Accordingly, when arbitrators order opposing parties in a case to make payments to each other, but do not specify whether the party that owes the higher amount must pay the net difference, the lack of clarity has resulted in parties asking arbitrators to revise an award after a case has closed or in post-award litigation. For example, arbitrators may award damages to a firm because an associated person failed to pay money owed on a promissory note and award a lesser amount to the associated person on a counterclaim. If the arbitrators do not specify that the awards should be offset against each other, the firm may be required to pay the counterclaim even if the associated person refuses or is unable to pay the larger amount. The offset issue could also arise in customer cases, such as those involving margin account disputes.

        To address the lack of clarity in the rules regarding award offsets, FINRA amended Rules 12904(j) and 13904(j) to provide that, absent specification to the contrary, when arbitrators order opposing parties to make payments to one another, the monetary awards shall offset, and the party assessed the larger amount shall pay the net difference. The amendments streamline the payment of arbitration awards and mitigate the risk of failure to pay by an opposing party that may arise when multiple parties in a dispute are found to owe non-equivalent awards simultaneously.

        Effective Date

        The amendments are effective for arbitration awards rendered on or after October 24, 2016.


        1. See Securities Exchange Act Release No. 78557 (August 11, 2016), 81 FR 54901 (August 17, 2016) (Order Approving File No. SR-FINRA-2016-015).


        Attachment A

        Customer Code Rule 12904. Awards

        (a)–(d) No change.
        (e) The award shall contain the following:
        [•] (1) The names of the parties;
        [•] (2) The name of the parties' representatives, if any;
        [•] (3) An acknowledgement by the arbitrators that they have each read the pleadings and other materials filed by the parties;
        [•] (4) A summary of the issues, including the type(s) of any security or product, in controversy;
        [•] (5) The damages and other relief requested;
        [•] (6) The damages and other relief awarded;
        [•] (7) A statement of any other issues resolved;
        [•] (8) The allocation of forum fees and any other fees allocable by the panel;
        [•] (9) The names of the arbitrators;
        [•] (10) The dates the claim was filed and the award rendered;
        [•] (11) The number and dates of hearing sessions;
        [•] (12) The location of the hearings; and
        [•] (13) The signatures of the arbitrators.
        (f)–(i) No change.
        (j) All monetary awards shall be paid within 30 days of receipt unless a motion to vacate has been filed with a court of competent jurisdiction. Absent specification to the contrary in the award, when arbitrators order opposing parties to make payments to one another, the monetary awards shall offset, and the party assessed the larger amount shall pay the net difference. An award shall bear interest from the date of the award:
        [•] (1) If not paid within 30 days of receipt;
        [•] (2) If the award is the subject of a motion to vacate which is denied; or
        [•] (3) As specified by the panel in the award.
        Interest shall be assessed at the legal rate, if any, then prevailing in the state where the award was rendered, or at a rate set by the arbitrator(s).

        * * * * *

        Industry Code

        Rule 13904. Awards

        (a)–(d) No change.
        (e) The award shall contain the following:
        [•] (1) The names of the parties;
        [•] (2) The name of the parties' representatives, if any;
        [•] (3) An acknowledgement by the arbitrators that they have each read the pleadings and other materials filed by the parties;
        [•] (4) A summary of the issues, including the type(s) of any security or product, in controversy;
        [•] (5) The damages and other relief requested;
        [•] (6) The damages and other relief awarded;
        [•] (7) A statement of any other issues resolved;
        [•] (8) The allocation of forum fees and any other fees allocable by the panel;
        [•] (9) The names of the arbitrators;
        [•] (10) The dates the claim was filed and the award rendered;
        [•] (11) The number and dates of hearing sessions;
        [•] (12) The location of the hearings; and
        [•] (13) The signatures of the arbitrators.
        (f)–(i) No change.
        (j) All monetary awards shall be paid within 30 days of receipt unless a motion to vacate has been filed with a court of competent jurisdiction. Absent specification to the contrary in the award, when arbitrators order opposing parties to make payments to one another, the monetary awards shall offset, and the party assessed the larger amount shall pay the net difference. An award shall bear interest from the date of the award:
        [•] (1) If not paid within 30 days of receipt;
        [•] (2) If the award is the subject of a motion to vacate which is denied; or
        [•] (3) As specified by the panel in the award.
        Interest shall be assessed at the legal rate, if any, then prevailing in the state where the award was rendered, or at a rate set by the arbitrator(s).

        * * * * *

      • 16-35 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 the Firm Element Advisory (FEA) in a new online format. The FEA, which was previously released semi-annually in document format, will now be available on the web at http://cecouncil.com/firm-element/. The new web format provides easier access to relevant notices and resources about the specified subjects and will be updated quarterly to keep it current and relevant. The categories are expandable and may contain additional information about suitability, supervision and educational resources.

        The Council produces the FEA to identify regulatory and sales practice topics that firms should consider when conducting their needs analysis and developing their Firm Element written training plans. However, firms are reminded that they should not rely on the FEA as a comprehensive list of all areas they should consider. Firms should also 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 historical matrix indicating the topics covered in those editions, will continue to be 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.

      • 16-34 FINRA Requests Comment on a Proposal Relating to Its Inter-Dealer Quotation System for OTC Equity Securities; Comment Period Expires: November 29, 2016

        View PDF

        Display Facility for Quotations in OTC Equity Securities

        Regulatory Notice
        Notice Type

        Request for Comment
        Referenced Rules & Notices

        FINRA Rule 6420
        FINRA Rule 6432
        FINRA Rule 6500 Series
        FINRA Rule 6510
        FINRA Rule 6520
        FINRA Rule 6530
        FINRA Rule 6540
        FINRA Rule 6550
        FINRA Rule 7720
        SEA Rule 15c2-11
        Suggested Routing

        Compliance
        Legal
        Operations
        Technology
        Trading and Market Making
        Key Topics

        Inter-dealer Quotation System
        OTC Equity Security
        Quotations
        SEA Rule 15c2-11

        Summary

        FINRA is soliciting comment on a proposal to provide for a FINRA-sponsored inter-dealer quotation facility for all OTC equity securities. The proposed rule text is attached as Attachment A.

        Questions regarding this Notice should be directed to:

        •   Ola Persson, Vice President, Transparency Services, at (212) 858-4796 or by email at ola.persson@finra.org; or
        •   Racquel Russell, Associate General Counsel, Office of General Counsel, at (202) 728-8363 or by email at racquel.russell@finra.org.

        Action Requested

        FINRA encourages all interested parties to comment on the proposal. Comments must be received by November 29, 2016.

        •   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 Securities Exchange Act of 1934 (SEA).2

        Background and Discussion

        Over the past several years, there have been instances in which market-wide trading halts for all OTC equity securities have been put into effect by FINRA out of concern regarding a substantial lack of transparency due to limited quotation information for these securities. These trading halts followed system failures on an inter-dealer quotation system. While FINRA declared market-wide trading halts in these previous instances of systems failures, FINRA believes that market-wide trading halts should be avoided, and is proposing to operate a facility capable of serving as an alternative interdealer quotation system for OTC equity securities in the event of failure of another inter-dealer quotation system. FINRA believes that operation of an inter-dealer quotation system capable of serving as an alternative display facility should obviate the need for market-wide trading halts in all but extraordinary circumstances.

        In response to these prior occurrences of system failures, staff of the SEC has expressed concern that inter-dealer quotation system failures can leave few ready avenues for pre-trade price transparency in OTC equity securities, and has urged FINRA, as the self-regulatory organization (SRO) with responsibility for the over-the-counter market, to operate a quotation facility that is capable of serving as an alternative in the event of system disturbances or technological failure on another inter-dealer quotation system.

        Thus, FINRA is proposing to enhance its current quoting facility so that it may better serve as an alternative means of quotation transparency in the over-the-counter marketplace in the event of technological disruptions or failures on other inter-dealer quotation systems as well as continuously operating as an inter-dealer quotation system for OTC equity securities. Specifically, FINRA proposes that the FINRA-operated inter-dealer quotation system, the OTC Bulletin Board Service (OTCBB), be expanded to include a broader universe of securities eligible for quotation so that the OTCBB can operate as an alternative interdealer quotation system for any OTC equity security quoted on any other member interdealer quotation system.

        The Current OTCBB

        The OTCBB is an electronic quotation medium for OTC equity securities that meet OTCBB eligibility requirements. The current OTCBB rules generally limit eligibility to the securities of issuers that file current, publicly available financial reports with the SEC or other regulatory authorities that have proper jurisdiction (e.g., Federal banking agency or state bank supervisor). This "reporting company" limitation was approved by the SEC in 1999.3 The OTCBB has been in operation since 19904 and operates today in much the same form as originally adopted.5

        Over the years, as other quotation venues for OTC equity securities have emerged, usage of the OTCBB has significantly declined. Due to this decline, in 2014, FINRA filed with the SEC a proposed rule change to, among other things, cease operation of the OTCBB and delete the Rule 6500 Series.6 In the 2014 proposal, FINRA noted that, in light of the scant usage of the system, FINRA did not believe its discontinuance would have an appreciable impact on issuers, investors or member firms. FINRA also expressed concern that the remaining information being disseminated to investors through the OTCBB was incomplete and, therefore, had the potential to be misleading with respect to current pricing in OTC equity securities.7

        However, FINRA ultimately withdrew its proposal to cease operation of the OTCBB in light of SEC staff concerns that an SRO-sponsored quotation facility should continue to be available to serve as an alternative should existing venues cease to operate either for technological or commercial reasons.8 As a result, FINRA is proposing changes to the current OTCBB rules that would expand the types of securities eligible to be quoted on the system by removing the "reporting company" limitation and other related changes that would support the usefulness of the FINRA quotation system as an alternative inter-dealer quotation system9 and as a source of quotation information on OTC equities.10

        Proposed Revisions to Rules Governing FINRA's Inter-dealer Quotation System

        FINRA is proposing to amend Rule 6530 (OTCBB-Eligible Securities) to expand the universe of securities that are eligible to be quoted to include any OTC equity security—irrespective of whether the issuer is a reporting company.11 FINRA believes that this approach is appropriate—particularly to optimize the potential usefulness of the FINRA facility as an intra-day alternative inter-dealer quotation system for any OTC equity security quoted on another inter-dealer quotation system. In concert with this change, FINRA proposes to indicate whether an issuer is a timely reporting company, a delinquent reporting company or a non-reporting company, using publicly available information.12

        FINRA also is proposing to rename OTCBB as "Over-the-counter Display Facility" or "ODF." While the types of eligible securities will be expanded, FINRA envisions that the general functionality of the ODF system will be similar to the features currently offered by OTCBB. Member firms may use the system to enter, update and display quotations in individual securities on a real-time basis. Such quotation entries may consist of a priced bid and offer; an unpriced indication of interest (including "bid wanted" or "offer wanted" indications); or a bid/offer accompanied by a modifier to reflect unsolicited customer interest. The system would continue to be a display-only system, and would not provide for communication linkages or execution functionality between members. FINRA also is proposing that the current position fee applicable to quoting on the OTCBB be eliminated for the ODF.13

        To facilitate the availability of more pricing information through Level 1, FINRA also is proposing to amend Rule 6520 (Operation of the Service), which, among other things, prescribes the bid-ask calculation methodology for OTCBB best bid and offer quotations, which are disseminated via the Level 1 data feed.14 The current rule provides that a bid-ask calculation is accessible through OTCBB and Level 1 only where the security has at least two market makers displaying two-sided priced quotes.15 Amended Rule 6520 would permit FINRA to disseminate inside bid-ask quotations where there is a single one-sided priced quote or where there is only one market maker displaying a two-sided priced quote.

        Testing Requirements

        FINRA also is proposing to amend the Rule 6500 Series to require member firms that are deemed "active market participants" to test with the FINRA quotation facility. FINRA believes that, in the event of a system disturbance on another inter-dealer quotation system, firms—particularly active market participants&madsh;should be in a position to continue displaying their interest in OTC equity securities notwithstanding such disturbance. FINRA believes that periodic testing to the FINRA facility would further this objective and facilitate stability in the OTC marketplace. Thus, FINRA is proposing to require that, to facilitate the ability to seamlessly transition quotes to the FINRA facility, members meeting specified quotation activity thresholds in OTC equity securities over the prior six months establish connection to the FINRA facility and test that connectivity and limited functionality on at least a semiannual basis. FINRA believes that mandatory testing supports the viability of the system as an alternative venue for the display of quotations in OTC equity securities should another inter-dealer quotation system experience system disturbances.

        Based upon a review of current member quotation activity, FINRA believes that it is appropriate to require testing by any member firm that, on average, displays quotations in at least 500 symbols per day in aggregate across member inter-dealer quotation systems over the applicable six-month period. Using a sample of quotation data covering the six-month period from July 1, 2015, through December 31, 2015, this 500-symbol threshold would require semiannual testing by 23 member firms that, in the aggregate, accounted for 99 percent of all quotes (including unsolicited quotations) on a member inter-dealer quotation system. FINRA intends to publish a list of firms that will be required to participate in testing at least 90 calendar days prior to the scheduled testing date.

        Economic Impact Analysis

        Need for the Rule

        Establishing an expanded display facility for quotations of OTC equity securities is intended to provide increased transparency to the public, including in instances of short or longer-term unavailability of commercial alternatives. The expanded facility is intended to provide an alternative venue for the display of quotations in OTC equity securities. Maintaining continuous trading, where possible, limits disruptions and costs to those interested in buying and selling OTC equity securities. Further, permitting dissemination of inside bid-ask quotations in instances where there is a one-sided market or only one market maker displaying two-sided quotes will provide greater transparency for more OTC equity securities through ODF.

        Economic Baseline

        In March 2016, there were an average of 2,000 trades per day in OTCBB-eligible securities, which represents less than 2 percent of the 103,000 average trades per day in all OTC equity securities. In March 2016, there were quotations in 345 OTCBB-eligible securities; however, this number may fluctuate daily.16 During the month, there was an average of six quote updates per day and transactions reported to the FINRA OTC Reporting Facility in 249 OTCBB-eligible securities. In March 2016, there also were 26 firms that maintained at least one quotation in at least one OTCBB-eligible security on OTCBB. Of these 26 firms, 20 displayed quotations in five or fewer symbols. In contrast, there are approximately 9,800 OTC equity securities that are quoted as of March 2016 on another inter-dealer quotation system (and approximately another 8,000 OTC equities that are not currently quoted anywhere). FINRA understands that approximately 80 firms displayed quotations as of March 2016 in OTC equity securities on another inter-dealer quotation system.

        FINRA's experience with OTC equity securities quoted on the OTCBB suggests that many securities do not have sufficient quotations to permit the calculation of an inside bid-ask under the current rules. For instance, for the week of March 28, 2016, only 57 out of 345 OTCBB-eligible securities had two-sided priced quotes. Of these 57 securities, only two had at least two firms displaying two-sided priced quotes as required today to calculate and disseminate a best bid and offer (BBO). Hence, 288, or approximately 83 percent, of OTC equity securities on OTCBB had either a one-sided priced quote or unpriced quotes.

        FINRA has imposed two market-wide quotation and trading halts in OTC equity securities caused by a lack of pre-trade transparency due to systems issues at another inter-dealer quotation system. The first was on November 7, 2013, and lasted from approximately 11:25 am until 3:00 pm. The second was on October 17, 2014, and lasted from approximately 11:05 am until 1:00 pm.

        Economic Impacts

        The proposed rule would benefit investors who have interest in OTC equity securities as it would provide a vehicle to facilitate the availability of quotation information even in the presence of a system failure on another inter-dealer quotation system. Further, easing the restrictions on the methodology for calculating inside bid-ask quotes for these securities would provide transparency for more securities on the ODF than would be available today in the instance where the Level 1 feed was the primary source of quotation information. Based on the information available to FINRA, as many as an additional 56 firms could rely on the ODF to quote in approximately 9,455 additional OTC equity securities than are currently quoted on the OTCBB.17 FINRA notes, however, that since usage of the ODF system would be voluntary, the actual number of firms quoting on ODF may be significantly lower.

        Amending the methodology for calculating a BBO for OTCBB-eligible securities to permit inclusion of one-sided or two-sided quotes by a single dealer would have led to the dissemination of a BBO for an additional 65 OTC equity securities (as compared to the two under the current methodology).

        Member firms that display quotations in, on average, 500 or more symbols per day would incur some costs. Firms that do not currently quote on the OTCBB would incur costs associated with establishing connections to ODF and regularly testing such connections. FINRA estimates that, based on the sample quotation data covering the six-month period from July 1, 2015, through December 31, 2015, 22 of the 23 active market participants that would be required to conduct the semiannual testing do not currently quote on OTCBB and would potentially incur higher costs relating to establishing and maintaining connectivity to the FINRA facility.

        Since the proposed rule to establish and test connectivity to the FINRA facility is limited to firms that display quotations in an average of 500 symbols per day or more over the applicable six-month period, firms may potentially reduce the number of securities quoted where they have determined that the costs associated with displaying quotations in fewer symbols is less than the direct and indirect costs of establishing and maintaining connection to ODF.

        FINRA has recognized in the past that, if OTCBB has limited firm participation, the disseminated quotations may not fully represent the most recent information about the value of a security. And as such, OTCBB may provide information that is incomplete, potentially misleading investors who rely on it exclusively. This proposal does not alleviate this concern, particularly if few additional firms choose to rely on the ODF as an alternate display facility.

        A requirement that firms deemed active market participants establish and periodically test connectivity with the FINRA quotation facility potentially may impact competition among inter-dealer quotation systems. Specifically, it is possible that those market participants that have incurred the costs associated with mandatory testing with the FINRA facility may choose to continue using the FINRA facility for some or all of their quoted securities, rather than solely limited to circumstances where a back-up is needed due to a system disturbance on a non-FINRA facility, and this determination also may alter these market participants' quoting activities on other inter-dealer quotation systems. Such impact on quoting activities may eventually fragment liquidity in a segment of the market where liquidity is naturally lower.

        Request for Comment

        FINRA requests comment on all aspects of the proposal. FINRA requests that commenters provide empirical data or other factual support for their comments wherever possible. FINRA specifically requests comment concerning the following issues.

        •   FINRA previously noted concerns regarding the dissemination of incomplete quotation information through the OTCBB. These concerns must be weighed along with other considerations, such as the potential benefits to transparency and OTC market stability of maintaining an SRO-sponsored system, including in the event of system disturbances or failure of any other inter-dealer quotation system. Are there alternative means of ensuring that there continues to be an inter-dealer quotation facility available for use by FINRA member firms to display their interest in OTC equity securities?
        •   The proposal would remove the reporting company limitation from current OTCBB-eligibility requirements, thus permitting non-reporting or delinquent filers to be quotable on the FINRA quotation facility. This limitation was adopted in the past due to concerns regarding the need for public information on the securities being quoted and non-reporting securities lacked such mandated public information. Is removal of the reporting company limitation appropriate to facilitate the availability of pricing information for OTC equity securities in light of the proposed changes for the FINRA system?
        •   For symbols quoted on the FINRA facility, FINRA proposes to indicate whether the issuer of each quoted OTC equity security is a timely reporting company, a delinquent reporting company or a non-reporting company. Would this information be useful to market participants?
        •   FINRA proposes that member firms that display quotations in an average of 500 or more symbols per day (including unsolicited quotes) across member inter-dealer quotation systems over a six-month period must participate in connectivity and limited functionality testing to help ensure that, if needed, such members can connect to, and display quotations with, FINRA. Is this threshold appropriate? Are there alternative thresholds that may better achieve the objectives of the proposal?
        •   The Intermarket Symbol Reservation Authority Plan (ISRA Plan) governs the selection and reservation of security symbols among SROs, including OTC equity securities. The symbol assigned to identify an OTC equity security sometimes changes. A change in symbol assignment may occur for a variety of reasons, such as a corporate action or the availability of a previously unavailable symbol. Section IV(d) of the ISRA Plan generally provides, among other things, that a symbol previously used to identify a security may not be reused to identify a new security within 90 calendar days.18 Is this 90-day period useful to minimize confusion with regard to the reuse of a symbol to identify an OTC equity security? Is 90-days sufficient time to minimize the potential for confusion? If not, what time frame would be appropriate and sufficient to minimize investor confusion?
        •   Is removal of the two, two-sided priced quote limitation appropriate to improve the widespread dissemination of pricing information available through the FINRA-sponsored inter-dealer quotation system?
        •   The proposal is intended to permit the ODF to serve as an alternative quotation display facility to already existing facilities. If adopted, how will the proposal impact the existing OTC equities display facilities? Will increased alternatives for this service benefit investors? If not, why not? Will any potential negative impacts be offset by the enhanced protections against the loss of transparency that occurs during disruptions to the existing display facilities? Why or why not?
        •   How many firms might choose to rely on the FINRA-sponsored inter-dealer quotation system as an alternate quotation display facility? Might the number of firms that choose to quote on the FINRA-sponsored inter-dealer quotation system be impacted by the elimination of the $6/security/month position fee?
        •   What direct and indirect costs would firms incur if they must connect to the FINRA-sponsored inter-dealer quotation system for semiannual testing? Please provide any estimate of these costs you may have.

        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 Securities Exchange Act Release No. 40878 (January 4, 1999), 64 FR 1255 (January 8, 1999) (Order approving proposal to limit quotations on OTCBB to reporting companies). See also Securities Exchange Act Rel. No. 40606 (October 27, 1998), 63 FR 59610 (November 4, 1998) (Proposal to limit quotations on OTCBB to reporting companies).

        4. See Securities Exchange Act Release No. 25949 (July 28, 1988), 53 FR 29096 (August 2, 1988) (Notice of Filing of File No. SR-NASD-88-19). See also Securities Exchange Act Release No. 27975A (May 30, 1990), 55 FR 23161 (June 6, 1990) (Corrected Order Approving File No. SRNASD-88-19).

        5. OTCBB provides display technology that permits members to show their quotations in OTC equity securities. The OTCBB system is a display-only system and does not allow trade executions or provide communications linkages.

        6. See Securities Exchange Act Release No. 72575 (July 9, 2014), 79 FR 41339 (July 15, 2014) ("2014 Proposal").

        7. See 2014 Proposal at 41343.

        8. See Securities Exchange Act Release No. 74486 (March 12, 2015), 80 FR 13922 (March 17, 2015) (Notice of Withdrawal of Proposed Rule Change Relating to Quotation Requirements for Unlisted Equity Securities and Deletion of the Rules Related to the OTC Bulletin Board Service). See also Securities Exchange Act Release No. 73313 (October 7, 2014), 79 FR 61677 (October 14, 2014) (Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change Relating to Quotation Requirements for Unlisted Equity Securities and Deletion of the Rules Related to the OTC Bulletin Board Service).

        9. As proposed, FINRA's inter-dealer quotation system would permit quotations in any OTC equity security by a member firm that has complied with Rule 6432 and SEA Rule 15c2-11 and, to the extent the security becomes "piggyback" eligible under SEA Rule 15c2-11(f)(3) on the FINRA facility, other member firms may display quotations in the security. In addition, because the FINRA facility must function as a back-up facility for OTC equity securities quoted on any inter-dealer quotation system, FINRA intends to request relief from SEA Rule 15c2-11 to permit members to display quotations on the FINRA facility in any security that is piggyback-eligible on any inter-dealer quotation system operated by a FINRA member. This relief would be required to permit members to initiate quotations intra-day on securities that are not otherwise piggyback eligible on the FINRA facility but are piggyback eligible on another member inter-dealer quotation system.

        10. As part of these proposed changes, FINRA intends to replace the technology that constitutes the current OTCBB quotation facility with upgraded technology that provides substantially the same quotation functionality.

        11. FINRA will continue to permit quotations in listed companies where the security is undergoing delisting from a national securities exchange for non-compliance with maintenance-of-listing standards and is subject to a trading halt on such exchange preceding the actual delisting.

        12. If a party believes that the reporting company status provided by FINRA reflects an error, such party may contact FINRA. However, FINRA reserves the right to make the final determination as to the status of the issuer based on the sole reasonable discretion of the staff. In addition, consistent with current OTCBB procedures, because FINRA relies solely on publicly available data to track issuer reporting status (i.e., FINRA would not perform independent verification of issuer filing status), issuer status changes would only be made in extraordinary cases and, generally, only if written notice of status change is received by FINRA directly from the SEC or other regulator, as applicable.

        13. Currently, a position charge of $6/security/ month applies to a broker-dealer that displays quotations or trading interest in the OTCBB. See FINRA Rule 7720 (OTC Bulletin Board Service).

        14. The Level 1 feed is a consolidated best bid and offer data feed for Nasdaq-listed securities and OTCBB-eligible securities. The Level 1 feed is carried by virtually all trading firms and market data distributors.

        15. Currently, FINRA Rule 6520 provides, among other things, that "[a] subscribing market maker can also access the proprietary quotations that other firms have entered into the Service along with highest bid and lowest offer (i.e., an inside bid-ask calculation) in any OTCBB-eligible security with at least two market makers displaying two-sided markets."

        16. The number of securities that are OTCBB-eligible fluctuates as issuers fall within or outside of the eligibility requirements set forth in FINRA Rule 6530, such as the requirement that OTCBB issuers be timely reporting companies. Where an issuer no longer is a reporting company or has exceeded the grace period set forth in the rule for filing its reports, the company's stock no longer is OTCBB-eligible. The number of securities quoted on OTCBB also may fluctuate due to the requirements of SEA Rule 15c2-11 and FINRA Rule 6432.

        17. As of May 2016, there were approximately an additional 8,000 symbols that trade in the gray market and are not quoted on any interdealer quotation system. These symbols are not currently OTCBB-eligible, but could quote on ODF if they were to begin quoting over the counter by complying with Rule 6432 and SEA Rule 15c2-11.

        18. The ISRA Plan also generally provides that a symbol may be reused within 90 days where the SRO that previously used the symbol consents and where the SRO seeking to reuse the symbol reasonably determines that such reuse would not cause investor confusion.

      • 16-33 FINRA Adopts Amendments Relating to Use of the Alternative Display Facility for Trade Reporting Purposes Only; Effective Date: September 12, 2016

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        Equity Trade Reporting

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 7120
        FINRA Rule 7510
        FINRA Rule 7520
        Trade Reporting Notice 1/20/2016
        Suggested Routing

        Compliance
        Legal
        Operations
        Senior Management
        Systems
        Trading
        Key Topics

        Alternative Display Facility (ADF)
        NMS Stocks
        Trade Reporting
        Trade Reporting Facilities (TRF)

        Effective Date: September 12, 2016

        Executive Summary

        Effective Monday, September 12, 2016, firms that elect to use the ADF for trade reporting purposes only are subject to annual testing requirements (with exceptions for firms that qualify) and connectivity fees.

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

        Questions regarding this Notice may be directed to:

        •  Brendan Loonam, Director, Business Services, at (212) 858-4203 or brendan.loonam@finra.org; or
        •  Lisa Horrigan, Associate General Counsel, Office of General Counsel, at (202) 728-8190 or lisa.horrigan@finra.org.

        Background and Discussion

        On January 20, 2016, FINRA published a Trade Reporting Notice with guidance on firms' over-the-counter (OTC) equity trade reporting obligations in the event of a systems issue during the trading day that prevents them from reporting OTC trades in NMS stocks in accordance with FINRA rules.1 As set forth in the Trade Reporting Notice, a firm that routinely reports its OTC trades in NMS stocks to only one FINRA trade reporting facility (a firm's "primary facility") must establish and maintain connectivity and report to a second FINRA trade reporting facility (a firm's "secondary facility"), if the firm intends to continue to support OTC trading as an executing broker while its primary facility is experiencing a widespread systems issue.2 FINRA currently has three facilities that support the reporting of OTC trades in NMS stocks: the ADF and two Trade Reporting Facilities (TRFs). The TRFs are facilities that are operated by both FINRA and its exchange partners (NASDAQ and NYSE).

        While the ADF historically has not been used by firms for trade reporting without quoting activity, FINRA rules do not prohibit it. Thus, to better accommodate firms in their efforts to comply with the guidance in the Trade Reporting Notice, and to provide an alternative to connecting to both TRFs, FINRA is making the ADF available to firms for trade reporting purposes only-as either their primary or secondary facility. FINRA currently is making systems updates to the ADF and anticipates that the ADF will be available to firms for new participant testing before the end of this year. Firms interested in using the ADF for trade reporting purposes should contact FINRA Business Services at (866) 953-4672 or FINRABusinessServices@finra.org.

        Firms-including firms that use the ADF for trade reporting only-are prohibited from quoting on the ADF without registering under one of the two categories of "ADF Market Participant" under FINRA rules (i.e., Registered Reporting ADF ECN and Registered Reporting ADF Market Maker) and satisfying all applicable requirements for quoting.3

        New Requirements

        While the substantive trade reporting and trade reporting participation requirements under ADF rules4 mirror the TRF requirements, FINRA recently adopted additional requirements that apply specifically to firms that use the ADF for trade reporting purposes only.5 FINRA notes that these requirements apply only to firms with a Financial Information eXchange (FIX) connection; they do not apply to firms that use only the web browser for trade reporting to the ADF and have no FIX connections.

        Annual Testing Requirements

        Firms that intend to use the ADF for trade reporting purposes only and connect to the ADF via FIX must participate in annual connectivity and capacity/stress testing.6 FINRA will excuse firms that meet certain thresholds from the testing requirements. Specifically, firms that report at least 100 trades per month to the ADF are not required to participate in annual connectivity testing. Firms are not required to participate in annual capacity/ stress testing unless their actual ADF activity levels, or their capacity projections based on their TRF usage,7 increase by more than 20 percent from one year to the next. FINRA notes that these exceptions apply independently. For example, a firm may be subject to annual connectivity testing (because it reports fewer than 100 trades per month to the ADF), while being excused from the capacity/stress testing requirement (because its capacity projection based on its TRF usage has not increased by more than 20 percent from the prior year). 8

        Firms that are required to participate in annual connectivity and capacity/stress testing will not be charged fees for the annual testing. However, any firm requesting additional testing beyond the required annual connectivity and capacity/stress testing will be required to pay fees for testing services under Rule 7530(c).9

        FIX Connectivity Fee

        Firms that use the ADF for trade reporting purposes only and connect to the ADF via a FIX line will be charged a monthly fee of $500.10 This fee applies to all firms that use the ADF for trade reporting purposes only-as either their primary or secondary facility. FINRA notes that this fee is in addition to any charges firms must pay NASDAQ, as FINRA's technology provider for the ADF, under NASDAQ rules.11

        The new requirements for firms using the ADF for trade reporting purposes only are effective on Monday, September 12, 2016.


        1. See Trade Reporting Notice 1/20/2016 (OTC Equity Trading and Reporting in the Event of Systems Issues). See also Trade Reporting Frequently Asked Questions, Section 206.

        2. As discussed in the Trade Reporting Notice, if a firm chooses not to have connectivity to a secondary facility, it should cease executing OTC trades altogether when its primary trade reporting facility is experiencing a widespread systems issue. In that instance, the firm could route orders for execution to an exchange or another FINRA member firm (i.e., a firm with connectivity and the ability to report to a FINRA trade reporting facility that is operational).

        3.For example, in addition to registration, FINRA rules include certification and deposit requirements for ADF quoting participants, as well as capacity fees and penalties. See, e.g., Rules 6271 and 7580.

        4. See Rule 6200 and 7100 Series.

        5. See Securities Exchange Act Release No. 78609 (August 18, 2016), 81 FR 57964 (August 24, 2016) (Notice of Filing and Immediate Effectiveness; File No. SR-FINRA-2016-031).

        6. See Rule 7120(b)(2)(E).

        7. FINRA will develop capacity projections for firms that intend to use the ADF for trade reporting purposes only based on their current usage of a TRF, and firms may be asked to review and confirm these projections from time to time. If a firm's volume on a TRF increases by more than 20 percent from one year to the next, the firm will be required to participate in capacity/stress testing to retain connectivity to the ADF for use as a secondary facility for trade reporting.

        8. FINRA notes that while a firm maybe exempt from the annual testing requirements under Rule 7120(b)(2)(E), it may nonetheless be subject to mandatory business continuity and disaster recovery plan testing for SEC Regulation Systems Compliance and Integrity purposes under Rule 4380. See Regulatory Notice 15-43 (November 2015).

        9.Pursuant to Rule 7530(c)(1), firms are charged $333 per hour for testing with the ADF, subject to the exceptions identified in paragraph (c)(2) of the rule.

        10. See Rule 7520. FINRA notes that firms that trade report to the ADF via web browser pay the monthly fee of $20 per user ID under Rule 7510(c). In addition, all firms that submit trades to the ADF—via FIX or web browser—are subject to the trade reporting fees under Rule 7510(a).

        11. For example, firms that report to the ADF via FIX—either directly or indirectly through third party intermediaries (e.g., service bureaus)—will pay NASDAQ charges associated with FIX ports to connect to the ADF data center. See, e.g., NASDAQ Rule 7015.

      • 16-32 FINRA Announces New Web-based System for the Collection of Short Interest Positions; Effective Date: January 10, 2017

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        Short Interest Reporting

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        FINRA Rule 4560
        FINRA Rule 6420
        Regulation SHO
        Suggested Routing

        Compliance
        Legal
        Operations
        Regulatory Reporting
        Key Topics

        Short Interest Reporting

        Executive Summary

        Effective as of the close of business on January 10, 2017, FINRA will retire the web-based system firms currently use to submit short interest positions. On January 17, 2017, firms will begin submitting short interest reports to FINRA using a new web-based interface, which is accessible via the Firm Gateway. In addition, firms should note that some functionality will be affected by this change and is described in more detail herein. To provide firms with the ability to test any program modifications necessitated by these changes, FINRA will make a test environment available from October 3, 2016, through December 2, 2016.

        Questions regarding this Notice should be directed to:

        •  Legal Section, Market Regulation at (240) 386-5126;
        •  Office of General Counsel at (202) 728-8071;
        •  Jocelyn Mello-Gibbon, Director, Market Regulation, at (240) 386-5091;
        •  Lauren Zito, Manager, Market Regulation, at (240) 386-5432; or

        Background and Discussion

        Short Interest Reporting

        FINRA Rule 4560 requires that each firm maintain a record of total "short" positions in all customer and proprietary firm accounts in all equity securities (other than a "restricted equity security," as defined in Rule 6420) and regularly report such information to FINRA in the manner FINRA prescribes.1 Firms are required to report short interest positions to FINRA twice a month as of pre-determined, "designated," settlement dates, which occur mid-month and end-of-month, and which are publicly available. The mid-month short interest report is based on short positions as reflected on a firm's books and records on the designated settlement date of the 15th day of the month. If the 15th is a non-settlement date, the designated settlement date is the previous business day on which transactions settled. The end-of-month short interest report is based on the last business day of the month on which transactions settle.2 FINRA must receive short interest reports no later than the second business day after each designated settlement date.3

        New Interface Accessible via Firm Gateway

        Effective January 17, 2017, firms will be required to report short interest positions via the new web-based interface, which is accessible via Firm Gateway. The current system will be deactivated as of the close of business on January 10, 2017. During the period of January 11, 2017, through January 16, 2017, firms will not have access to either web-based system. Firms will be able to begin reporting short interest for settlement date January 13, 2017, when the new interface becomes available on January 17, 2017. Users who have entitlement to the current system will automatically be granted access to the new interface as of the effective date.

        Submission of Short Interest Data

        Firms will have the ability to file short interest positions using one of the following methods: manual input into the Data Intake System; File Transfer Procotol (FTP); or an upload of a comma-separated values (".csv") file. The current Job Status Report will be eliminated; going forward, all errors in a firm's file will be identified directly in the online draft, regardless of the method used to submit the data, for increased visibility and ease of correction. A firm will not be able to submit its filing to FINRA until it addresses all errors. A firm has the option to delete all errors in its filing, if desired, by selecting "Delete Symbols with Errors."

        Reporting Positions That Are Active as of the Designated Settlement Date

        FINRA requires firms to report short interest positions in securities that are active as of the close of the designated settlement date. It is the responsibility of each firm to ensure its data is complete and accurate, including confirming that each issue symbol is valid as of the designated settlement date.

        Currently, firms can submit short interest reports on the designated settlement date. Because symbols can expire on an intra-day basis, firms may report a short interest position on the designated settlement date in an issue symbol that expires during the course of the business day and, thus, is invalid by the end of the day. To ensure that FINRA is collecting short interest positions for issue symbols that are active and valid as of the close of the designated settlement date, the new interface will not allow firms to report short interest positions on the designated settlement date; rather, it will begin accepting firms' short interest filings as of 8:00 a.m., Eastern Time, on the business day following the designated settlement date.

        Manual Entry of Short Positions

        Unlike the current process, a draft will no longer be automatically created for a firm for the current reporting cycle. Beginning the day after the designated settlement date, in order to manually report short interest positions directly into the interface, a firm must create a blank draft for the current reporting cycle by selecting "Create Draft" on the "Short Interest Home" page and choosing the appropriate settlement date from the drop down menu.4 The draft will not include any issue symbols or short interest positions from the firm's submission for the previous settlement date.5 Within the draft, a firm must manually select the relevant primary exchange/market code, enter the issue symbol and input a value in the short position column. It should be noted that only whole numbers greater than zero will be accepted.

        FTP

        With respect to the FTP process, firms will continue to be able to submit short interest positions using an ASCII text file; the file specifications remain largely unchanged but were updated to reflect a 13 character limit for position quantity.6 Note: Firms or other users, e.g., service providers, will no longer be able to submit short interest data on behalf of multiple firms in one FTP transmission. Users must submit a separate file for each firm's short interest report to FINRA. Each subsequent FTP submission by a firm for the same settlement date will overwrite all existing data in the draft. Similar to the current process, if the FTP file contains any validation errors, the system will create a draft that the firm must access via the "Short Interest Home" page. The firm must address all errors before it can submit a filing. If a file does not contain any validation errors, it will be automatically submitted to FINRA. Firms that report a large number of short interest positions, e.g., more than 5,000 positions, are encouraged to use the FTP functionality.

        Uploading a .csv File

        With the new interface, firms may upload a file containing short interest positions provided that the file is in a .csv format.7 First, a firm must manually create a draft in the system for the relevant settlement date, as described above.8 Once the firm creates the draft, the system will enable an "Upload File" option. The firm's upload file must meet the .csv file format specifications; if the .csv file is not in the correct format, or if it contains an invalid settlement date , i.e., not a valid date or not the same settlement date as the draft filing, the file will be rejected. The firm must address all errors before it can submit the filing. As with the FTP file, each subsequent upload will overwrite all existing data in the draft.

        Adding Short Interest Positions

        To manually add a security and corresponding short position, a firm should use the "Add Rows" button located at the top of the draft filing. This action will add the chosen number of rows to the top of the draft. A firm must enter the appropriate primary exchange/market code, issue symbol and current short position. If a firm wishes to add numerous short positions to its draft filing, it may also use the "Upload File" feature as described, above. To do so, a firm may download the data contained in its draft filing to a .csv file in Excel. The firm can enter the additional positions into the .csv file in Excel and then re-upload the .csv file into the system.

        Amending a Submission

        Once a firm submits its short interest report, it will have the ability to amend the report if necessary. To amend a filing, the firm must locate the relevant submission on the "Short Interest Home" page and click on the "Amend" icon.9 The filing will re-open in draft status and the firm may add or change the relevant positions online, by uploading a .csv file, or via an FTP submission. As noted above, if uploading a .csv file or submitting an FTP file, firms must be aware that the system will overwrite (or delete) all previously submitted data with the data contained in the .csv or FTP file.10

        Firms are reminded that they must remove all spaces, special characters and lower case letters from an issue symbol prior to submitting a short interest position as they are not currently accepted. Refer to the table below for some examples.

        Issue symbol with spaces/special characters Issue symbol to be reported
        ABC PRA ABCPRA
        ABC.PRA ABCPRA
        ABC.PR.A ABCPRA
        ABC$A ABCPRA
        ABCpA ABCPRA

        Designating an Exchange or Market Code for Each Issue Symbol

        FINRA also reminds firms that an accurate exchange/market code must exist for every issue symbol and short position contained in a firm's filing. The exchange/market code must reflect the primary exchange or market in the United States on which the security is listed as of the designated settlement date. The only exchange/market codes currently accepted are listed below.

        Exchange/Market Code Exchange/Market
        A New York Stock Exchange
        B NYSE MKT, LLC
        E NYSE Arca
        H BATS Exchange
        R NASDAQ
        S Over-the-Counter

        Confirmation of Filing

        Once successfully submitted, a filing will become read-only and a green bar at the top of the draft will indicate the filing was submitted. The submitted date and time appear at the top for reference. The submitted filing will also be available on the Short Interest Home page. Additionally, an email will be sent to the designated contacts (see below for additional details regarding contact information).

        Contact Information

        Firms are required to supply information for one primary and at least one secondary contact who are responsible not only for submitting the firm's reported short interest positions pursuant to Rule 4560, but also for addressing, in a prompt and timely manner, any regulatory inquiries related to such data. Each individual listed may receive regular emails and inquiries relating to the submission and accuracy of the firm's reported short interest data.11 Firms are responsible for ensuring that their contact information is up-to-date at all times. For member firms, contact information for the individuals responsible for short interest reporting will be stored in the FINRA Contact System (FCS).12 To assist firms in ensuring that the required contact information is available in FCS as of the effective date, FINRA will transfer all existing member firms short interest reporting contacts to FCS.13 Data for Non-FINRA member firms will not be stored in FCS; however, such firms must submit written notification via shortinterest@finra.org to update the relevant information with FINRA whenever changes to their contact information are made.

        Testing Relating to System Changes

        FINRA recognizes that the changes may require firms to make modifications to their systems and policies and procedures. As such, firms will have the opportunity to test programming changes beginning on October 3, 2016, using the test site at https://qa2.firms.qa.finra.org. To participate in testing, firms must request log-in credentials by sending an e-mail to DLDataIntakeSupport@finra.org. Additionally, an on-demand training module will be available during the testing phase. FINRA will provide additional details regarding the demonstration separately. Firms that encounter problems or otherwise require assistance should contact FINRA at shortinterest@finra.org.


        1. Firms must report short positions that result from short sales as the term is defined in Rule 200(a) of Regulation SHO, subject to certain limited exceptions.

        2. A schedule of FINRA's designated settlement dates, as well as other relevant dates relating to short interest reporting, can be found on FINRA's website.

        3. Firms are reminded that FINRA must receive their short interest data no later than 6 p.m., ET, on the designated due date.

        4. A draft can only be created for those settlement dates where a draft or submission does not already exist.

        5. As the draft will no longer include firms' prior cycle short interest positions, firms' will no longer be required to report a zero position for issue symbols that had a prior cycle short position but no short position for the current cycle.

        6. See Attachment A for the ASCII text file specifications.

        7. See Attachment B for the .csv file specifications.

        8. As previously stated, the new interface will not automatically create a draft at the start of the short interest cycle.

        9. The Short Interest Home page displays a firm's historical submissions and any draft filings.

        10. The current system gave a firm the option to replace its entire filing, add/merge a new value with an existing value, or replace an existing value with a new value. However, the new interface will replace the entire current draft with the data contained in the new, subsequent upload or FTP submission. If a firm determines that it needs to restart its submission process, it may delete its entire draft from the "Short nterest Home" page and begin again.

        11. An email will be sent to a firm's Chief Compliance Officer if a firm does not have any contacts identified in FCS for short interest reporting.

        12. Due to the retirement of the current system, all existing short interest reporting contact information for both FINRA and non-FINRA members will be migrated to FCS as of the effective date.

        13. FINRA strongly encourages each firm to review and update, if necessary, its contact information either priorto its migration to FCS or immediately upon the effective date to ensure that the relevant individuals continue to receive important information in a timely manner relatingto the reporting of short interest data.


        Attachment A

        FINRA Short Interest FTP Format

        To report a firm's short interest data via the FTP process, the firm must create and save an ASCII text file. The FINRA record format uses four types of records. Below is a detailed description of the required file format. There should be only one occurrence of Record Types 1, 2 and 4 for each Short Interest Filing. Record Type 3 is used to report each short position.

        NOTE: It is the firm's responsibility to ensure that all filings it submits or are submitted on its behalf via FTP are correct. Also, multiple filings in a single FTP file are not permitted.

        Record Type 1—Firm Identification Record

        Record Type 1 must always be the first row in the record submitted to FINRA. Firms must populate the first field in Record Type 1 with "A1." Firms must also populate the Firm Number field. These fields must be correct or the file will be rejected.

        Field Name Type Length Positions Format Description
        1 ID1 CHAR 2 1–2 "A1" Must have the code "A1" to identify the record type.
        2 Firm Name CHAR 30 3–32   Name of the firm reporting the short position
        3 Firm Number NUMBER 6 33–38   Firm Number (may be the CRD #, FINRA # or Broker/ Dealer #)
        4 SEC Number NUMBER 5 39–43 XXXXX SEC Number (do not include the "8-" prefix)
        5 NSCC Number NUMBER 4 44–47 NSCC number
        6 Prepared By CHAR 25 48–72   Name of the person to contact at the firm

        Record Type 2—Firm Contact Record

        Record Type 2 must always be the second row in the record submitted to FINRA. Firms must populate the first field in Record Type 2 with "A2." Firms must also populate the settlement date field with a valid settlement date. These fields must be correct or the file will be rejected.

        Field Name Type Length Positions Format Description
        1 ID2 CHAR 2 1–2 "A2" Must have the code "A2" to identify the record type.
        2 Contact Number CHAR 12 3–14 nnn-nnn-nnnn Telephone number at firm (include the dashes)
        3 Contact Extension NUMBER 4 15–18   Telephone extension number
        4 Contact Title NUMBER 25 19–43   Title of the Contact Person
        5 Settlement Date NUMBER 6 44–49 mmddyy Settlement date
        6 Trade Date CHAR 6 50–55 mmddyy Trade date
        7 CBOE DEA CHAR 1 56–57 "Y" Enter "Y" if CBOE is the firm's designated examining authority.

        Record Type 3—Short Interest Data

        One record of this type must be created for each short position. Firms must populate the first field in this record with the letter "B" followed by a blank space. Record Type 3 will begin at row three.

        Field Name Type Length Positions Format Description
        1 ID3 CHAR 2 1–2 "B" Must have the code "B " (the letter "B" followed by a space) to identify the record type.
        2 Exchange CHAR 1 3 list of valid exchange codes The code supplied should represent the U.S. primary exchange or market on which the security is listed as of the designated Settlement Date.
        3 Symbol CHAR 10 4–13   Symbol for the security, left justified
        4 Security Name CHAR 30 14–43   Name of the security, left justified
        5 Position NUMBER 13 44–55   Short position for the security, right justified

        Record Type 4—Trailer Record

        Record type 4 must contain data identifying the total number of records in the file. The first field in this record should always be "99." Record type 4 is always the last row in the record.

        Field Name Type Length Positions Format Description
        1 ID4 CHAR 2 1–2 "99" Must have the code "99" to identify the record type
        2 Total Records NUMBER 5 3–7   Total number of records in the file, including the header records, but excluding the trailer record. This should be right justified.

        Example Short Position Filing:

        A1ACME SECURITIES, INC. 012345099991111JOE SMITH

        A2202-555-1114 VICE PRESIDENT 101598101298

        B RABCD ALPHABET SOUP CO. 0000000015500

        B BXYZ END OF THE LINE INC. 0000000009950 9900004

        NOTE: If a firm or service provider submits filings for other firms, the submitting entity MUST have been delegated SHORTS privileges by each firm for which it is submitting data. Delegation can only be performed by contacting FINRA's Gateway Call Center at 301-590-6500.


        Attachment B

        Short Interest File Upload Instructions and File Format

        To report short interest data via the file upload option, firms must create and save a .csv file. Below are guidelines for creating the uploading this file format, as well as a detailed description of the required file format.

        File Upload Guidelines

        1. Using Microsoft Excel, Notepad, Notepad++ or similar editor, enter one short position per row. When adding short positions, please note the following.
        a. The first column in each row (column A) must contain the word "Row."
        b. The text in the first two rows and in column A must not be altered, as these cells contain important information that support system processing when the .csv file is uploaded.
        c. Short positions that are 12 characters or longer will automatically be converted to scientific notation in certain spreadsheet editor programs. To ensure that these positions are uploaded properly, the firm has two options.
        i. Change the cell format to "text," then re-enter the short position into the cell; or
        ii. Create the file in Notepad or Notepad ++ and upload that file directly into the firm's draft.
        2. Once the short positions have been added, save the file in .csv format. Firms must exit Microsoft Excel or similar editor or the .csv file will not upload properly.
        3. If the file is not in the valid format, i.e., it is not a .csv file, has an incorrect settlement date, or the first two rows and column A were altered, the file will be rejected.
        4. If the .csv file is in the acceptable format, the draft will be updated and any errors will be displayed within the draft on the screen.

        Field by field detailed instructions and validations

        Field Description Instructions/Validations
        Exchange The exchange code supplied should represent the U.S. primary exchange or market on which the security is listed as of the designated Settlement Date.
        •  Max length 1 character.
        •  Values should be in upper case.
        Symbol Symbol for the security
        •  Max length 10 characters.
        •  Values should be in upper case.
        •  Should be a valid symbol code active in the specified exchange on the designated Settlement Date.
        Position Short position for the security
        •  Max length 13 characters.
        •  Entry must be a whole number greater than zero.
        •bull;  Cell must be formatted as "Text."
        •  Leading zeros are acceptable.

        Sample File Contents

        SettlementDate,10/15/2015,,
        Columns,exchange,symbol,position
        Row,R,MSFT,123
        Row,S,BRFH,550

        Sample File opened in Excel

        Sample File opened in Text editor (notepad)

      • 16-31 SEC Approves Amendments to FINRA Rule 4210 (Margin Requirements) to Establish Margin Requirements for Covered Agency Transactions; Effective Date of Risk Limit Determination Requirements: December 15, 2016; Effective Date of All Other Requirements: December 15, 2017

        View PDF

        Covered Agency Transactions

        Regulatory Notice
        Notice Type

        New Rule
        Referenced Rules & Notices

        FINRA Rule 4210
        FINRA Rule 6710
        SEA Rule 15c3-1
        Suggested Routing

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

        Covered Agency Transactions
        Margin
        TBA Market

        Executive Summary

        The SEC has approved1 FINRA's rule change amending FINRA Rule 4210 to establish margin requirements for Covered Agency Transactions. Covered Agency Transactions include (1) To Be Announced (TBA) transactions, inclusive of adjustable rate mortgage (ARM) transactions, (2) Specified Pool Transactions and (3) transactions in Collateralized Mortgage Obligations (CMOs), issued in conformity with a program of an agency or Government-Sponsored Enterprise (GSE), with forward settlement dates, as discussed more fully in this Notice.

        This Notice provides an overview of the rule change. The rule change becomes effective in two phases:

        •  The amendments relating to the risk limit determination requirements are effective on December 15, 2016. These are shown in Appendix A.
        •  All other amendments pursuant to the rule change go into effect on December 15, 2017. Appendix B shows the complete text of the amendments as effective on that date.

        Questions regarding this Notice should be directed to:

        •  Kris Dailey, Vice President, Risk Oversight & Operational Regulation (ROOR), at (646) 315-8434 or Kris.Dailey@finra.org;
        •  Steven Yannolo, Manager, Credit Regulation, ROOR, at (646) 315-8464 or Steve.Yannolo@finra.org;
        •  Robert Mendelson, Senior Advisor, ROOR, at (646) 315-8660 or Robert.Mendelson@finra.org;
        •  Peter Tennyson, Director, ROOR, at (646) 315-8403 or Peter.Tennyson@finra.org;
        &bbull;  Adam Arkel, Associate General Counsel, Office of General Counsel, at (202) 728-6961 or Adam.Arkel@finra.org.

        Questions may also be directed to covered.agency.margin@finra.org. FINRA will publish additional guidance as appropriate to address questions that FINRA receives.

        Background & Discussion

        Overview

        The SEC has approved FINRA's amendments2 to FINRA Rule 4210 to establish margin requirements for Covered Agency Transactions.

        •  Broadly, under the rule change, unless the rule provides for an exception:
        •  members are required to collect daily mark to market margin from all counterparties for their Covered Agency Transactions; and
        •  in addition to the daily mark to market margin, maintenance margin of two percent is required for accounts that are not "exempt accounts" as that term is defined in FINRA Rule 4210(a)(13) (see note 3 for more information).
        •  Members that engage in Covered Agency Transactions with any counterparty must make and enforce a written risk limit determination for each such counterparty. Risk limit determinations may be made at the investment adviser level if a member engages in transactions with advisory clients of a registered investment adviser.
        •  Broadly, under the rule change, members are required to include any mark to mark loss or maintenance margin deficiency from their Covered Agency Transactions toward the concentration thresholds specified under paragraph (e)(2)(I), as redesignated by the amendments.
        •  The rule change provides for several exceptions or allowances, including:
        •  the new margin requirements do not apply to transactions that are cleared through a registered clearing agency and are subject to the margin requirements of that clearing agency;
        •  the new margin requirements (both daily mark to market and maintenance margin) do not apply to any counterparty that has gross open positions in Covered Agency Transactions with the member amounting to $10 million or less if the counterparty regularly settles its Covered Agency Transactions on a Delivery Versus Payment (DVP) basis or for cash and meets other specified conditions. However, members should be aware that any amounts excepted pursuant to this exclusion must be included toward the concentration thresholds specified in redesignated paragraph (e)(2)(I);
        •  similarly, a non-exempt account is excepted from the two percent maintenance margin requirement if the non-exempt account regularly settles its Covered Agency Transactions on a DVP basis or for cash and meets other specified conditions;
        •  the rule change provides an aggregate $250,000 de minimis transfer amount with a single counterparty, so that if the aggregate required but uncollected maintenance margin or mark to market loss does not exceed that amount, the margin need not be collected or charged to net capital. However, members should be aware that any amounts allowed pursuant to this exclusion must be included toward the concentration thresholds specified in redesignated paragraph (e)(2)(I);
        •  a member is not required to apply the new margin requirements to transactions in multifamily housing securities or project loan program securities, provided the member makes and enforces a written risk limit for each counterparty in these transactions;
        •  subject to specified conditions, members may treat mortgage bankers that hedge their pipeline of mortgage commitments as exempt accounts;
        •  a member may elect not to apply the new margin requirements to any counterparty that is a Federal banking agency, central bank, or other similar instrumentality of sovereign governments, as specified by the rule, provided the member makes and enforces a written risk limit determination for each such counterparty.

        FINRA is implementing the rule change in two phases. First, the requirements to make and enforce written risk limit determinations as specified by the rule become effective on December 15, 2016. Second, the remainder of the rule change becomes effective on December 15, 2017.

        Detailed Discussion

        The core requirements of the rule change are intended to reach members engaging in Covered Agency Transactions with counterparties as specified in the rule. New paragraph (e)(2)(H) establishes a set of definitions and addresses the types of counterparties that are subject to the new requirements, risk limit determinations, specified exceptions or allowances, transactions with exempt accounts,3 transactions with non-exempt accounts, and the treatment of standbys. As discussed further below, the rule change also includes revisions to the concentration limit provisions under newly redesignated paragraph (e)(2)(I) as well as conforming revisions to paragraphs (a)(13)(B)(i), (e)(2)(F), (e)(2)(G) and (f)(6).

        Definitions Established for Purposes of Paragraph (e)(2)(H)

        •  Covered Agency Transactions

        Paragraph (e)(2)(H)(i)c. of the rule defines Covered Agency Transactions to mean:
        •  TBA transactions, as defined in FINRA Rule 6710(u),4 inclusive of ARM transactions, for which the difference between the trade date and contractual settlement date is greater than one business day;
        •  Specified Pool Transactions, as defined in FINRA Rule 6710(x),5 for which the difference between the trade date and contractual settlement date is greater than one business day; and
        •  CMOs, as defined in FINRA Rule 6710(dd),6 issued in conformity with a program of an agency, as defined in FINRA Rule 6710(k),7 or a GSE, as defined in FINRA Rule 6710(n),8 for which the difference between the trade date and contractual settlement date is greater than three business days.

        In addition to Covered Agency Transactions, the rule change establishes the following other key definitions:9

        •  Bilateral transaction: a Covered Agency Transaction that is not cleared through a registered clearing agency as defined in paragraph (f)(2)(A)(xxviii) of Rule 4210;10
        •  Counterparty: any person that enters into a Covered Agency Transaction with a member and includes a "customer" as defined in paragraph (a)(3) of Rule 4210;
        •  Deficiency: the amount of any required but uncollected maintenance margin and any required but uncollected mark to market loss;
        •  Gross open position: with respect to Covered Agency Transactions, the amount of the absolute dollar value of all contracts entered into by a counterparty, in all CUSIPs; provided, however, that such amount shall be computed net of any settled position of the counterparty held at the member and deliverable under one or more of the counterparty's contracts with the member and which the counterparty intends to deliver;
        •  Maintenance margin: margin equal to two percent of the contract value of the net long or net short position, by CUSIP, with the counterparty;
        •  Mark to market loss: the counterparty's loss resulting from marking a Covered Agency Transaction to the market;
        •  Mortgage banker: an entity, however organized, that engages in the business of providing real estate financing collateralized by liens on such real estate;
        •  Round robin trade: any transaction or transactions resulting in equal and offsetting positions by one customer with two separate dealers for the purpose of eliminating a turnaround delivery obligation by the customer; and
        •  Standby: contracts that are put options that trade OTC, as defined in paragraph (f)(2)(A)(xxvii) of Rule 4210, with initial and final confirmation procedures similar to those on forward transactions.

        Requirement to Make and Enforce Risk Limits

        Paragraph (e)(2)(H)(ii)b. of the rule provides that members that engage in Covered Agency Transactions with any counterparty shall make a determination in writing of a risk limit for each such counterparty that the member shall enforce.11 The rule provides that the risk limit determination shall be made by a designated credit risk officer or credit risk committee in accordance with the member's written risk policies and procedures. Further, in connection with risk limit determinations, the rule establishes new Supplementary Material .05, which provides that, for purposes of any risk limit determination pursuant to paragraphs (e)(2)(F), (e)(2)(G)12 or (e)(2)(H) of the rule:

        •  If a member engages in transactions with advisory clients of a registered investment adviser, the member may elect to make the risk limit determination at the investment adviser level;13
        •  Members of limited size and resources that do not have a credit risk officer or credit risk committee may designate an appropriately registered principal to make the risk limit determinations;
        •  The member may base the risk limit determination on consideration of all products involved in the member's business with the counterparty, provided the member makes a daily record of the counterparty's risk limit usage; and
        •  A member shall consider whether the margin required pursuant to the rule is adequate with respect to a particular counterparty account or all its counterparty accounts and, where appropriate, increase such requirements.

        Members should note that the risk limit determination requirements under the rule change become effective on December 15, 2016. See Implementation Phases below.

        Margin Requirements for Covered Agency Transactions

        Key Exceptions or Allowances

        Paragraph (e)(2)(H)(ii)a. provides that all Covered Agency Transactions with any counterparty, regardless of the type of account to which booked, are subject to the provisions of paragraph (e)(2)(H) of the rule. The rule change specifies several exceptions or allowances (see also further discussion in Margin Requirements for Exempt Accounts and Margin Requirements for Non-Exempt Accounts below):

        •  Federal banking agencies and other entities: Paragraph (e)(2)(H)(ii)a.1. of the rule provides that with respect to Covered Agency Transactions with any counterparty that is a Federal banking agency, as defined in 12 U.S.C. 1813(z) under the Federal Deposit Insurance Act,14 central bank, multinational central bank, foreign sovereign, multilateral development bank, or the Bank for International Settlements, a member may elect not to apply the margin requirements specified in paragraph (e)(2)(H) provided the member makes a written risk limit determination for each such counterparty that the member shall enforce pursuant to paragraph (e)(2)(H)(ii)b. (see Requirement to Make and Enforce Risk Limits above).
        •  Multifamily housing securities and project loan program securities: Paragraph (e)(2)(H)(ii)a.2. of the rule provides that a member is not required to apply the margin requirements of paragraph (e)(2)(H) with respect to Covered Agency Transactions with a counterparty in multifamily housing securities or project loan program securities, provided that:
        a. such securities are issued in conformity with a program of an agency, as defined in FINRA Rule 6710(k),15 or a GSE, as defined in FINRA Rule 6710(n),16 and are documented as Freddie Mac K Certificates, Fannie Mae Delegated Underwriting and Servicing bonds, or Ginnie Mae Construction Loan or Project Loan Certificates, as commonly known to the trade, or are such other multifamily housing securities or project loan program securities with substantially similar characteristics, issued in conformity with a program of an agency or a GSE, as FINRA may designate by Regulatory Notice or similar communication; and
        b. the member makes a written risk limit determination for each such counterparty that the member shall enforce pursuant to paragraph (e)(2)(H)(ii)b. (see Requirement to Make and Enforce Risk Limits above).
        •  Registered Clearing Agencies: Paragraph (e)(2)(H)(ii)c.1. provides that the margin requirements specified in paragraph (e)(2)(H) of the rule shall not apply to Covered Agency Transactions that are cleared through a registered clearing agency, as defined in FINRA Rule 4210(f)(2)(A)(xxviii),17 and are subject to the margin requirements of that clearing agency.
        •  Gross Open Positions of $10 Million or Less: Paragraph (e)(2)(H)(ii)c.2. provides that the margin requirements specified in paragraph (e)(2)(H) of the rule shall not apply to any counterparty that has gross open positions in Covered Agency Transactions with the member amounting to $10 million or less in aggregate, if the original contractual settlement for all such transactions is in the month of the trade date for such transactions or in the month succeeding the trade date for such transactions and the counterparty regularly settles18 its Covered Agency Transactions on a Delivery Versus Payment (DVP) basis or for cash; provided, however, that such exception from the margin requirements shall not apply to a counterparty that, in its transactions with the member, engages in dollar rolls, as defined in FINRA Rule 6710(z),19 or round robin trades, or that uses other financing techniques20 for its Covered Agency Transactions. Members should be aware that amounts excepted pursuant to the $10 million exclusion must be included toward the concentration thresholds as set forth under redesignated paragraph (e)(2)(I), as discussed below.

        Note: Members should note that the above-described exceptions are exceptions to the margin requirements under paragraph (e)(2)(H). The requirement to determine risk limits pursuant to paragraph (e)(2)(H)(ii)b. applies.
        •  De Minimis Transfer Amounts: Paragraph (e)(2)(H)(ii)f. of the rule provides that any deficiency, as set forth in paragraph (e)(2)(H)(ii)e. of the rule, or mark to market losses, as set forth in paragraph (e)(2)(H)(ii)d. of the rule, with a single counterparty (whether an exempt or non-exempt account) shall not give rise to any margin requirement, and as such need not be collected or charged to net capital, if the aggregate of such amounts with such counterparty does not exceed $250,000 (referred to as "the de minimis transfer amount"). The rule provides that the full amount of the sum of the required maintenance margin and any mark to market loss must be collected when such sum exceeds the de minimis transfer amount. Members should note that amounts excepted as de minimis transfer amounts must be included toward the concentration thresholds as set forth under redesignated paragraph (e)(2)(I), as discussed below.

        Margin Requirements for Exempt Accounts

        Paragraph (e)(2)(H)(ii)d. of the rule provides that, on any net long or net short position, by CUSIP, resulting from bilateral transactions with a counterparty that is an exempt account,21 no maintenance margin22 shall be required. However, the rule provides that such transactions must be marked to the market daily and the member must collect any net mark to market loss,23 unless otherwise provided under paragraph (e)(2)(H)(ii)f. of the rule.24 The rule provides that if the mark to market loss is not satisfied by the close of business on the next business day after the business day on which the mark to market loss arises, the member shall be required to deduct the amount of the mark to market loss from net capital as provided in SEA Rule 15c3-1 until such time the mark to market loss is satisfied. The rule requires that if such mark to market loss is not satisfied within five business days from the date the loss was created, the member must promptly liquidate positions to satisfy the mark to market loss, unless FINRA has specifically granted the member additional time. FINRA expects to establish a process that members may use to request extensions of time specifically related to Covered Agency Transactions.25

        Paragraph (e)(2)(H)(ii)d. further provides that members may treat mortgage bankers that use Covered Agency Transactions to hedge their pipeline of mortgage commitments as exempt accounts for purposes of paragraph (e)(2)(H). In this regard, the rule change adds new Supplementary Material .02, which provides that, for purposes of paragraph (e)(2)(H)(ii)d. of the rule, members must adopt written procedures to monitor the mortgage banker's pipeline of mortgage loan commitments to assess whether the Covered Agency Transactions are being used for hedging purposes. FINRA has noted that this is intended to ensure that, if a mortgage banker is permitted exempt account treatment, the member has conducted sufficient due diligence to determine that the mortgage banker is hedging its pipeline of mortgage production.26

        Members should note that the exception under the rule change for gross open positions of $10 million or less is available to exempt accounts that meet the specified conditions under the rule. See Gross Open Positions of $10 Million or Less above.

        Margin Requirements for Non-Exempt Accounts

        Paragraph (e)(2)(H)(ii)e. of the rule provides that, on any net long or net short position, by CUSIP, resulting from bilateral transactions with a counterparty that is not an exempt account, maintenance margin, plus any net mark to market loss on such transactions, shall be required margin, and the member shall collect the deficiency, as defined in paragraph (e)(2)(H)(i)d. of the rule,27 unless otherwise provided under paragraph (e)(2)(H)(ii)f. of the rule. The rule provides that if the deficiency is not satisfied by the close of business on the next business day after the business day on which the deficiency arises, the member shall be required to deduct the amount of the deficiency from net capital as provided in SEA Rule 15c3-1 until such time the deficiency is satisfied.28 Further, the rule provides that if such deficiency is not satisfied within five business days from the date the deficiency was created, the member shall promptly liquidate positions to satisfy the deficiency, unless FINRA has specifically granted the member additional time. As noted earlier, FINRA expects to establish a process that members may use to request extensions of time specifically related to Covered Agency Transactions.29

        The rule makes an exception available to non-exempt accounts with respect to the maintenance margin requirement. Specifically, the rule provides that no maintenance margin is required if the original contractual settlement for the Covered Agency Transaction is in the month of the trade date for such transaction or in the month succeeding the trade date for such transaction and the customer regularly settles30 its Covered Agency Transactions on a DVP basis or for cash; provided, however, that such exception from the required maintenance margin shall not apply to a non-exempt account that, in its transactions with the member, engages in dollar rolls, as defined in FINRA Rule 6710(z), or round robin trades, as defined in paragraph (e)(2)(H)(i)i., or that uses other financing techniques31 for its Covered Agency Transactions.

        Members should note that the exception under the rule change for gross open positions of $10 million or less is available to non-exempt accounts that meet the specified conditions under the rule. See Gross Open Positions of $10 Million or Less above.

        Unrealized Profits; Standbys

        Paragraph (e)(2)(H)(ii)g. of the rule provides that unrealized profits in one Covered Agency Transaction position may offset losses from other Covered Agency Transaction positions in the same counterparty's account and the amount of net unrealized profits may be used to reduce margin requirements. The rule provides that, with respect to standbys, only profits (in-the-money amounts), if any, on long standbys shall be recognized.

        Limits on Net Capital Deductions–Redesignated Paragraph (e)(2)(I)

        Current (prior to the rule change) paragraph (e)(2)(H) of FINRA Rule 4210 imposes upon members a specified obligation to notify FINRA and refrain from new transactions if the member's net capital deductions as a result of marked to the market losses incurred under paragraphs (e)(2)(F) and (e)(2)(G) of the rule exceed specified thresholds. The rule change redesignates current paragraph (e)(2)(H) as new paragraph (e)(2)(I) and makes conforming revisions to include Covered Agency Transactions and to reflect the requirements of new paragraph (e)(2)(H). Specifically, new, redesignated paragraph (e)(2)(I)(i) of the rule provides that, in the event that the net capital deductions taken by a member as a result of deficiencies or marked to the market losses incurred under paragraphs (e)(2)(F) and (e)(2)(G) of the rule (exclusive of the percentage requirements established thereunder), plus any mark to market loss as set forth under paragraph (e)(2)(H)(ii)d. of the rule and any deficiency as set forth under paragraph (e)(2)(H)(ii)e. of the rule, and inclusive of all amounts excepted from margin requirements as set forth under paragraph (e)(2)(H)(ii)c.2. of the rule or any de minimis transfer amount as set forth under paragraph (e)(2)(H)(ii)f. of the rule, exceed:

        •  for any one account or group of commonly controlled accounts, 5 percent of the member's tentative net capital (as such term is defined in SEA Rule 15c3-1), or
        •  for all accounts combined, 25 percent of the member's tentative net capital (as such term is defined in SEA Rule 15c3-1), and,
        •  such excess as calculated in paragraphs (e)(2)(I)(i)a. or b. of the rule continues to exist on the fifth business day after it was incurred,

        the member must give prompt written notice to FINRA and shall not enter into any new transaction(s) subject to the provisions of paragraphs (e)(2)(F), (e)(2)(G) or (e)(2)(H) of the rule that would result in an increase in the amount of such excess under, as applicable, paragraph (e)(2)(I)(i) of the rule.

        As discussed earlier, members should note that, under the new rule, de minimis transfer amounts must be included toward the five percent and 25 percent thresholds, as specified, as well as amounts pursuant to the specified exception under new paragraph (e)(2)(H) for gross open positions of $10 million or less in aggregate.

        Implementation Phases

        •  The risk limit determination provisions under the rule change become effective on December 15, 2016. These provisions include new paragraph (e)(2)(H)(ii)b., new Supplementary Material .05, and the second text paragraph under paragraph (e)(2)(F) and paragraph (e)(2)(G), each as revised by the rule change. To help effectuate the application of these provisions, the definition of "counterparty," as set forth in paragraph (e)(2)(H)(i)b., and the definition of "Covered Agency Transaction," as set forth in paragraph (e)(2)(H)(i)c., also become effective on December 15, 2016. In addition, to ensure clarity, FINRA has specified cross-references, text and headers in the rule change that become effective on December 15, 2016.32 Appendix A of this Notice shows the text of the rule change as effective on that date.
        •  All other provisions of the rule change become effective on December 15, 2017. Appendix B of this Notice shows the text of the rule change as effective on that date.

        1. See Securities Exchange Act Release No. 78081 (June 15, 2016), 81 FR 40364 (June 21, 2016) (Notice of Filing of Amendment No. 3andOrder Granting Accelerated Approval to a Proposed Rule Change To Amend FINRA Rule 4210 (Margin Requirements) To Establish Margin Requirements for the TBA Market, as Modified by Amendment Nos. 1, 2, and 3; File No. SR-FINRA-2015-036). The rule change redesignates current (prior to the rule change) paragraph (e)(2)(H) of FINRA Rule 4210 as new paragraph (e)(2)(l), adds new paragraph (e)(2)(H), makes conforming revisions to paragraphs (a)(13)(B)(i), (e)(2)(F), (e)(2)(G), (e)(2)(l) (as redesignated by the rule change), and (f)(6), and adds to the rule new Supplementary Materials .02 through .05.

        2. See note 1.

        3. The term "exempt account" is defined under FINRA Rule 4210(a)(13). Broadly, an exempt account means a FINRA member, non-FINRA member registered broker-dealer, account that is a "designated account" under FINRA Rule 4210(a)(4) (specifically, a bank as defined under SEA Section 3(a)(6), a savings association as defined under Section 3(b) of the Federal Deposit Insurance Act, the deposits of which are insured by the Federal Deposit Insurance Corporation, an insurance company as defined under Section 2(a)(17) of the Investment Company Act, an investment company registered with the Commission under the Investment Company Act, a state or political subdivision thereof, or a pension or profit sharing plan subject to the Employee Retirement Income Security Act or of an agency of the United States or of a state or political subdivision thereof), and any person that has a net worth of at least $45 million and financial assets of at least $40 million for purposes of paragraphs (e)(2)(F) and (e)(2)(G) of the rule, as currently set forth under paragraph (a)(13)(B)(i) of Rule 4210, and meets specified conditions as set forth under paragraph (a)(13) (B)(ii). FINRA notes that the rule change makes a conforming revision to paragraph (a)(13)(B)(i) so that the phrase "for purposes of paragraphs (e) (2)(F) and (e)(2)(G)" as revised reads "for purposes of paragraphs (e)(2)(F), (e)(2)(G) and (e)(2)(H)."

        4. FINRA Rule 6710(u) defines "TBA" to mean a transaction in an Agency Pass-Through Mortgage-Backed Security ("MBS") or a Small Business Administration ("SBA")-Backed Asset-Backed Security ("ABS") where the parties agree that the seller will deliver to the buyer a pool or pools of a specified face amount and meeting certain other criteria but the specific pool or pools to be delivered at settlement is not specified at the Time of Execution, and includes TBA transactions for good delivery and TBA transactions not for good delivery. Agency Pass-Through MBS and SBA-Backed ABS are defined under FINRA Rule 6710(v) and FINRA Rule 6710(bb), respectively. The term "Time of Execution" is defined under FINRA Rule 6710(d).

        5. FINRA Rule 6710(x) defines Specified Pool Transaction to mean a transaction in an Agency Pass-Through MBS or an SBA-Backed ABS requiring the delivery at settlement of a pool or pools that is identified by a unique pool identification number at the Time of Execution.

        6. FINRA Rule 6710(dd) defines CMO to mean a type of Securitized Product backed by Agency Pass-Through MBS, mortgage loans, certificates backed by project loans or construction loans, other types of MBS or assets derivative of MBS, structured in multiple classes or tranches with each class ortranche entitled to receive distributions of principal or interest according to the requirements adopted for the specific class or tranche, and includes a real estate mortgage investment conduit ("REMIC").

        7. FINRA Rule 6710(k) defines "agency" to mean a United States executive agency as defined in 5 U.S.C. 105 that is authorized to issue debt directly or through a related entity, such as a government corporation, or to guarantee the repayment of principal or interest of a debt security issued by another entity. The term excludes the U.S. Department of the Treasury in the exercise of its authority to issue U.S. Treasury Securities as defined under FINRA Rule 6710(p). Under 5 U.S.C. 105, the term "executive agency" is defined to mean an "Executive department, a Government corporation, and an independent establishment."

        8. FINRA Rule 6710(n) defines GSE to have the meaning set forth in 2 U.S.C. 622(8). Under 2 U.S.C. 622(8), a GSE is defined, in part, to mean a corporate entity created by a law of the United States that has a Federal charter authorized by law, is privately owned, is underthe direction of a board of directors, a majority of which is elected by private owners, and, among other things, is a financial institution with power to make loans or loan guarantees for limited purposes such as to provide credit for specific borrowers or one sector and raise funds by borrowing (which does not carry the full faith and credit of the Federal Government) or to guarantee the debt of others in unlimited amounts.

        9. These are found in paragraphs (e)(2)(H)(i)a. through (H)(i)b. and (H)(i)d. through (H)(i)j. of the new rule. See Appendix A and Appendix B.

        10. FINRA Rule 4210(f)(2)(A)(xxviii) defines registered clearing agency to mean a clearing agency as defined in SEA Section 3(a)(23) that is registered with the SEC pursuant to SEA Section 17A(b)(2).

        11. FINRA notes that the rule is intended to require a member to make, and enforce, a written risk limit determinationfor each counterparty with which the member engages in Covered Agency Transactions.

        12. Paragraph (e)(2)(F) addresses transactions with exempt accounts involving certain good faith securities. Paragraph (e)(2)(G) addresses transactions with exempt accounts involving highly rated foreign sovereign debt securities and investment grade debt securities. With regard to risk limit determinations, members should note thatthe rule change makes revisions to both these paragraphs. Specifically, current (priorto the rule change) paragraph (e)(2)(H)(i) provides that members must maintain a written risk analysis methodology for assessing the amount of credit extended to exempt accounts pursuant to paragraphs (e)(2)(F) and (e)(2)(G) which shall be made available to FINRA upon request. The rule change moves this language to paragraphs (e)(2)(F) and (e)(2)(G) and adds to each the requirement that the risk limit determination shall be made by a designated credit risk officer or credit risk committee in accordance with the member's written risk policies and procedures. FINRA notes that the rule change also makes other conforming revisions to paragraphs (e)(2)(F) and (e)(2)(G) in the interest of clarifying the rule's structure and otherwise conforming the rule in light of new paragraph (e)(2)(H). See Appendix A and Appendix B.

        13. FINRA has noted that it expects members to be mindful of their obligations as to making and enforcing risk limits underthe rule. In making risk limit determinations as to advisory accounts, FINRA expects members to exercise appropriate diligence in understanding the extent of their risk and to craft their risk limit determinations accordingly. See SR-FINRA-2015-036, Partial Amendment No. 3.

        14. 12 U.S.C. 1813(z) defines "Federal banking agency" to mean the Comptroller of the Currency, the Board of Governors of the Federa Reserve System, or the Federal Deposit Insurance Corporation.

        15. See note 7.

        16. See note 8.

        17. See note 10.

        18. FINRA has noted that the term "regularly settles" is meant to provide scope for flexibility on members' part as to how they implement the requirement. FINRA expects that members are in a position to make reasonable judgments as to the observed pattern and course of dealing in their customers' behavior by virtue of their interactions with their customers. FINRA views the term "regularly" as conveying the prevailing or dominant pattern and course of the customer's behavior. FINRA would not view, for instance, "substantial portion of the time" as equivalent to "regularly." In ascertaining the customer's regular pattern, a member may use the customer's history of transactions with the member, as well as any other relevant information of which the member is aware. Further, FINRA believes members should be able to rely on the reasonable representations of their customers for purposes of the requirement. See SR-FINRA-2015-036, Partial Amendment No. 1 and Partial Amendment No. 2.

        19. FINRA Rule 6710(z) defines "dollar roll" to mean a simultaneous sale and purchase of an Agency Pass-Through MBS for different settlement dates, where the initial seller agrees to take delivery, upon settlement of the re-purchase transaction, of the same or substantially similar securities.

        20. FINRA has noted that it believes the term "other financing techniques" should be clear as a matter of plain language, that is, transactions other than on a DVP basis orfor cash suggest the use of financing. FINRA does not expect that a customer that engages in a single dollar roll or round robin trade would be denied access to the specified exception provided the member can reasonably demonstrate a regular pattern by the customer of settling its Covered Agency Transactions on a DVP basis or for cash. Again, FINRA has noted a member may use the customer's history of transactions with the member, as well as any other relevant information of which the member is aware. Further, FINRA believes that members should be able to rely on the reasonable representations of their customers where necessary for purposes of the requirement. See SR-FINRA-2015-036, Partial Amendment No. 1.

        21. The rule change adds to FINRA Rule 4210 new Supplementary Material .04, which provides that, for purposes of paragraph (e)(2)(H) of the rule, the determination of whether an account qualifies as an exempt account must be based upon the beneficial ownership of the account. The rule provides that sub-accounts managed by an investment adviser, where the beneficial owner is other than the investment adviser, must be margined individually. As discussed earlier, the new rule provides that risk limit determinations may be made atthe investment adviser level. See Requirement to Make and Enforce Risk Limits above.

        22. As discussed earlier, the definition of "maintenance margin" specifies margin equal to two percent ofthe contract value of the net long or net short position, by CUSIP, with the counterparty.

        23. As discussed above, "mark to market loss" means the counterparty's loss resulting from marking a Covered Agency Transaction to the market.

        24. As discussed above, paragraph (e)(2)(H)(ii)f addresses the treatment of de minimis transfer amounts.

        25. Current (prior to the rule change) paragraph (f)(6) of FINRA Rule 4210 permits up to 15 business days for obtaining the amount of margin or markto market, unless FINRA has specifically granted the member additional time. The rule change makes a conforming revision to paragraph (f)(6) so as to accommodate the five days specified under the new rule. See Appendix B. Members should note that FINRA maintains, and regularly updates, the Regulatory Extension System (REX) for purposes of granting additional time pursuant to Rule 4210. FINRA will announce updates to REX to accommodate firms' requests for extensions of time related to Covered Agency Transactions priortothe effective date of the new margin requirements. FINRA has noted that the Regulatory Extension System does not grant waivers from requirements under Rule 4210, whether permanent or temporary. FINRA grants additional time, pursuantto the rule, for meeting specified obligations and, consistent with longstanding practice underthe rule, FINRA may limit or restrict the extensions granted. See SR-FINRA-2015-036, Partial Amendment No. 2.

        26. See 80 FR 63603, 63607 n. 54. FINRA has noted that it believes members should be able to rely on the reasonable representations of their mortgage banker customers where necessary for purposes of this requirement. See SR-FINRA-2015-036, Partial Amendment No. 1.

        27. As discussed above, "deficiency" means the amount of any required but uncollected maintenance margin and any required but uncollected mark to market loss.

        28. The rule change adds to FINRA Rule 4210 new Supplementary Material .03, which provides that, for purposes of paragraph (e)(2)(H) of the rule, to the extent a markto market loss or deficiency is cured by subsequent market movements priorto the time the margin call must be met, the margin call need not be met and the position need not be liquidated; provided, however, if the mark to market loss or deficiency is not satisfied by the close of business on the next business day after the business day on which the mark to market loss or deficiency arises, the member shall be required to deduct the amount ofthe markto market loss or deficiency from net capital as provided in SEA Rule 15c3-l until such time the markto market loss or deficiency is satisfied.

        29. See note 25.

        30. See note 18.

        31. See note 20.

        32. See 81 FR 40364, 40370 n. 65.


        APPENDIX A

        Following shows the text of the rule change pursuant to SR-FINRA-2015-036 that becomes effective on December 15, 2016. Language that becomes effective on that date is underlined; deletions are in brackets. (For language pursuant to the rule change that becomes effective on December 15, 2017, see Appendix B.)

        4210. Margin Requirements

        (a) through (d) No Change.
        (e) Exceptions to Rule

        The foregoing requirements of this Rule are subject to the following exceptions:
        (1) No Change.
        (2) Exempted Securities, Non-equity Securities and Baskets
        (A) through (E) No Change.
        (F) Transactions with Exempt Accounts Involving Certain "Good Faith" Securities

        On any "long" or "short" position resulting from a transaction involving exempted securities, mortgage related securities, or major foreign sovereign debt securities made for or with an "exempt account," no margin need be required and any marked to the market loss on such position need not be collected. However, the amount of any uncollected marked to the market loss shall be deducted in computing the member's net capital as provided in SEA Rule 15c3-1 and, if applicable, Rule 4110(a), subject to the limits provided in paragraph (e)(2)([H]I) [below] of this Rule.

        Members shall maintain a written risk analysis methodology for assessing the amount of credit extended to exempt accounts pursuant to paragraph (e)(2)(F) of this Rule which shall be made available to FINRA upon request. The risk limit determination shall be made by a designated credit risk officer or credit risk committee in accordance with the member's written risk policies and procedures.
        (G) Transactions With Exempt Accounts Involving Highly Rated Foreign Sovereign Debt Securities and Investment Grade Debt Securities

        On any "long" or "short" position resulting from a transaction made for or with an "exempt account" (other than a position subject to paragraph (e)(2)(F), the margin to be maintained on highly rated foreign sovereign debt and investment grade debt securities shall be, in lieu of any greater requirements imposed under this Rule, (i) 0.5 percent of current market value in the case of highly rated foreign sovereign debt securities, and (ii) 3 percent of current market value in the case of all other investment grade debt securities. The member need not collect any such margin, provided the amount equal to the margin required shall be deducted in computing the member's net capital as provided in SEA Rule 15c3-1 and, if applicable, Rule 4110(a), subject to the limits provided in paragraph (e)(2)([H]I) [below] of this Rule.

        Members shall maintain a written risk analysis methodology for assessing the amount of credit extended to exempt accounts pursuant to paragraph (e)(2)(G) of this Rule which shall be made available to FINRA upon request. The risk limit determination shall be made by a designated credit risk officer or credit risk committee in accordance with the member's written risk policies and procedures.
        (H) Covered Agency Transactions
        (i) Definitions

        For purposes of paragraph (e)(2)(H) of this Rule:
        a. (To be implemented on December 15, 2017.)
        b. The term "counterparty" means any person that enters into a Covered Agency Transaction with a member and includes a "customer" as defined in paragraph (a)(3) of this Rule.
        c. The term "Covered Agency Transaction" means:
        1. To Be Announced ("TBA") transactions, as defined in Rule 6710(u), inclusive of adjustable rate mortgage ("ARM") transactions, for which the difference between the trade date and contractual settlement date is greater than one business day;
        2. Specified Pool Transactions, as defined in Rule 6710(x), for which the difference between the trade date and contractual settlement date is greater than one business day; and
        3. Transactions in Collateralized Mortgage Obligations ("CMOs"), as defined in Rule 6710(dd), issued in conformity with a program of an Agency, as defined in Rule 6710(k), or a Government-Sponsored Enterprise, as defined in Rule 6710(n), for which the difference between the trade date and contractual settlement date is greater than three business days.
        d. through j. (To be implemented on December 15, 2017.)
        (ii) Margin Requirements for Covered Agency Transactions
        a. (To be implemented on December 15, 2017.)
        b. A member that engages in Covered Agency Transactions with any counterparty shall make a determination in writing of a risk limit for each such counterparty that the member shall enforce. The risk limit determination shall be made by a designated credit risk officer or credit risk committee in accordance with the member's written risk policies and procedures.
        c. through g. (To be implemented on December 15, 2017.)
        ([H]I) Limits on Net Capital Deductions for Exempt Accounts
        (i) through (ii) No Change.
        (3) through (8) No Change.
        (f) through (h) No Change.

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

        .01 No Change.
        .02 through .04 (To be implemented on December 15, 2017.)
        .05 Risk Limit Determination.
        (a) For purposes of any risk limit determination pursuant to paragraphs (e)(2)(F), (e)(2)(G) or (e)(2)(H) of this Rule:
        (1) If a member engages in transactions with advisory clients of a registered investment adviser, the member may elect to make the risk limit determination at the investment adviser level;
        (2) Members of limited size and resources that do not have a credit risk officer or credit risk committee may designate an appropriately registered principal to make the risk limit determinations;
        (3) The member may base the risk limit determination on consideration of all products involved in the member's business with the counterparty, provided the member makes a daily record of the counterparty's risk limit usage; and
        (4) A member shall consider whether the margin required pursuant to this Rule is adequate with respect to a particular counterparty account or all its counterparty accounts and, where appropriate, increase such requirements.

        * * * * *


        APPENDIX B

        Following shows the text of the rule change pursuant to SR-FINRA-2015-036 that becomes effective on December 15, 2017. Language that becomes effective on that date is underlined; deletions are in brackets. (Language that becomes effective on December 15, 2016 is shown without underlining as effective. See Appendix A.)

        4210. Margin Requirements

        (a) Definitions

        For purposes of this Rule, the following terms shall have the meanings specified below:
        (1) through (12) No Change.
        (13) The term "exempt account" means:
        (A) No Change.
        (B) any person that:
        (i) has a net worth of at least $45 million and financial assets of at least $40 million for purposes of paragraphs (e)(2)(F), [and] (e)(2)(G)[,] and (e)(2)(H), and
        (ii) No Change.
        (14) through (16) No Change.
        (b) through (d) No Change.
        (e) Exceptions to Rule

        The foregoing requirements of this Rule are subject to the following exceptions:
        (1) No Change.
        (2) Exempted Securities, Non-equity Securities and Baskets
        (A) through (E) No Change.
        (F) Transactions with Exempt Accounts Involving Certain "Good Faith" Securities

        Other than for Covered Agency Transactions as defined in paragraph (e)(2)(H) of this Rule, [O]on any "long" or "short" position resulting from a transaction involving exempted securities, mortgage related securities, or major foreign sovereign debt securities made for or with an "exempt account," no margin need be required and any marked to the market loss on such position need not be collected. However, the amount of any uncollected marked to the market loss shall be deducted in computing the member's net capital as provided in SEA Rule 15c3-1 and, if applicable, Rule 4110(a), subject to the limits provided in paragraph (e)(2)(I) of this Rule.

        Members shall maintain a written risk analysis methodology for assessing the amount of credit extended to exempt accounts pursuant to paragraph (e)(2)(F) of this Rule which shall be made available to FINRA upon request. The risk limit determination shall be made by a designated credit risk officer or credit risk committee in accordance with the member's written risk policies and procedures.
        (G) Transactions With Exempt Accounts Involving Highly Rated Foreign Sovereign Debt Securities and Investment Grade Debt Securities

        On any "long" or "short" position resulting from a transaction made for or with an "exempt account" (other than a position subject to paragraph (e)(2)(F) or (e)(2)(H) of this Rule), the margin to be maintained on highly rated foreign sovereign debt and investment grade debt securities shall be, in lieu of any greater requirements imposed under this Rule, (i) 0.5 percent of current market value in the case of highly rated foreign sovereign debt securities, and (ii) 3 percent of current market value in the case of all other investment grade debt securities. The member need not collect any such margin, provided the amount equal to the margin required shall be deducted in computing the member's net capital as provided in SEA Rule 15c3-1 and, if applicable, Rule 4110(a), subject to the limits provided in paragraph (e)(2)(I) of this Rule.

        Members shall maintain a written risk analysis methodology for assessing the amount of credit extended to exempt accounts pursuant to paragraph (e)(2)(G) of this Rule which shall be made available to FINRA upon request. The risk limit determination shall be made by a designated credit risk officer or credit risk committee in accordance with the member's written risk policies and procedures.
        (H) Covered Agency Transactions
        (i) Definitions

        For purposes of paragraph (e)(2)(H) of this Rule:
        a. The term "bilateral transaction" means a Covered Agency Transaction that is not cleared through a registered clearing agency as defined in paragraph (f)(2)(A)(xxviii) of this Rule.
        b. The term "counterparty" means any person that enters into a Covered Agency Transaction with a member and includes a "customer" as defined in paragraph (a)(3) of this Rule.
        c. The term "Covered Agency Transaction" means:
        1. To Be Announced ("TBA") transactions, as defined in Rule 6710(u), inclusive of adjustable rate mortgage ("ARM") transactions, for which the difference between the trade date and contractual settlement date is greater than one business day;
        2. Specified Pool Transactions, as defined in Rule 6710(x), for which the difference between the trade date and contractual settlement date is greater than one business day; and
        3. Transactions in Collateralized Mortgage Obligations ("CMOs"), as defined in Rule 6710(dd), issued in conformity with a program of an Agency, as defined in Rule 6710(k), or a Government-Sponsored Enterprise, as defined in Rule 6710(n), for which the difference between the trade date and contractual settlement date is greater than three business days.
        d. The term "deficiency" means the amount of any required but uncollected maintenance margin and any required but uncollected mark to market loss.
        e. The term "gross open position" means, with respect to Covered Agency Transactions, the amount of the absolute dollar value of all contracts entered into by a counterparty, in all CUSIPs; provided, however, that such amount shall be computed net of any settled position of the counterparty held at the member and deliverable under one or more of the counterparty's contracts with the member and which the counterparty intends to deliver.
        f. The term "maintenance margin" means margin equal to 2 percent of the contract value of the net "long" or net "short" position, by CUSIP, with the counterparty.
        g. The term "mark to market loss" means the counterparty's loss resulting from marking a Covered Agency Transaction to the market.
        h. The term "mortgage banker" means an entity, however organized, that engages in the business of providing real estate financing collateralized by liens on such real estate.
        i. The term "round robin" trade means any transaction or transactions resulting in equal and offsetting positions by one customer with two separate dealers for the purpose of eliminating a turnaround delivery obligation by the customer.
        j. The term "standby" means contracts that are put options that trade OTC, as defined in paragraph (f)(2)(A)(xxvii) of this Rule, with initial and final confirmation procedures similar to those on forward transactions.
        (ii) Margin Requirements for Covered Agency Transactions
        a. All Covered Agency Transactions with any counterparty, regardless of the type of account to which booked, shall be subject to the provisions of paragraph (e)(2)(H) of this Rule, except:
        1. with respect to Covered Agency Transactions with any counterparty that is a Federal banking agency, as defined in 12 U.S.C. 1813(z), central bank, multinational central bank, foreign sovereign, multilateral development bank, or the Bank for International Settlements, a member may elect not to apply the margin requirements specified in paragraph (e)(2)(H) of this Rule provided the member makes a written risk limit determination for each such counterparty that the member shall enforce pursuant to paragraph (e)(2)(H)(ii)b.; and
        2. a member is not required to apply the margin requirements specified in paragraph (e)(2)(H) of this Rule with respect to Covered Agency Transactions with a counterparty in multifamily housing securities or project loan program securities, provided:
        A. such securities are issued in conformity with a program of an Agency, as defined in Rule 6710(k), or a Government-Sponsored Enterprise, as defined in Rule 6710(n), and are documented as Freddie Mac K Certificates, Fannie Mae Delegated Underwriting and Servicing bonds, or Ginnie Mae Construction Loan or Project Loan Certificates, as commonly known to the trade, or are such other multifamily housing securities or project loan program securities with substantially similar characteristics, issued in conformity with a program of an Agency or a Government-Sponsored Enterprise, as FINRA may designate by Regulatory Notice or similar communication; and
        B. the member makes a written risk limit determination for each such counterparty that the member shall enforce pursuant to paragraph (e)(2)(H)(ii)b.
        b. A member that engages in Covered Agency Transactions with any counterparty shall make a determination in writing of a risk limit for each such counterparty that the member shall enforce. The risk limit determination shall be made by a designated credit risk officer or credit risk committee in accordance with the member's written risk policies and procedures.
        c. The margin requirements specified in paragraph (e)(2)(H) of this Rule shall not apply to:
        1. Covered Agency Transactions that are cleared through a registered clearing agency, as defined in paragraph (f)(2)(A)(xxviii) of this Rule, and are subject to the margin requirements of that clearing agency; and
        2. any counterparty that has gross open positions in Covered Agency Transactions with the member amounting to $10 million or less in aggregate, if the original contractual settlement for all such transactions is in the month of the trade date for such transactions or in the month succeeding the trade date for such transactions and the counterparty regularly settles its Covered Agency Transactions on a Delivery Versus Payment ("DVP") basis or for "cash"; provided, however, that such exception from the margin requirements shall not apply to a counterparty that, in its transactions with the member, engages in dollar rolls, as defined in Rule 6710(z), or "round robin" trades, or that uses other financing techniques for its Covered Agency Transactions.
        d. Transactions with Exempt Accounts: On any net "long" or net "short" position, by CUSIP, resulting from bilateral transactions with a counterparty that is an "exempt account" no maintenance margin shall be required. However, such transactions shall be marked to the market daily and the member shall collect any net mark to market loss, unless otherwise provided under paragraph (e)(2)(H)(ii)f. of this Rule. If the mark to market loss is not satisfied by the close of business on the next business day after the business day on which the mark to market loss arises, the member shall be required to deduct the amount of the mark to market loss from net capital as provided in SEA Rule 15c3-1 until such time the mark to market loss is satisfied. If such mark to market loss is not satisfied within five business days from the date the loss was created, the member shall promptly liquidate positions to satisfy the mark to market loss, unless FINRA has specifically granted the member additional time. Members may treat mortgage bankers that use Covered Agency Transactions to hedge their pipeline of mortgage commitments as exempt accounts for purposes of paragraph (e)(2)(H) of this Rule.
        e. Transactions with Non-Exempt Accounts: On any net "long" or net "short" position, by CUSIP, resulting from bilateral transactions with a counterparty that is not an "exempt account," maintenance margin, plus any net mark to market loss on such transactions, shall be required margin, and the member shall collect the deficiency, as defined in paragraph (e)(2)(H)(i)d. of this Rule, unless otherwise provided under paragraph (e)(2)(H)(ii)f. of this Rule. If the deficiency is not satisfied by the close of business on the next business day after the business day on which the deficiency arises, the member shall be required to deduct the amount of the deficiency from net capital as provided in SEA Rule 15c3-1 until such time the deficiency is satisfied. If such deficiency is not satisfied within five business days from the date the deficiency was created, the member shall promptly liquidate positions to satisfy the deficiency, unless FINRA has specifically granted the member additional time. No maintenance margin is required if the original contractual settlement for the Covered Agency Transaction is in the month of the trade date for such transaction or in the month succeeding the trade date for such transaction and the customer regularly settles its Covered Agency Transactions on a DVP basis or for "cash"; provided, however, that such exception from the required maintenance margin shall not apply to a non-exempt account that, in its transactions with the member, engages in dollar rolls, as defined in Rule 6710(z), or "round robin" trades, or that uses other financing techniques for its Covered Agency Transactions.
        f. Any aforementioned deficiency, as set forth in paragraph (e)(2)(H)(ii)e. of this Rule, or mark to market losses, as set forth in paragraph (e)(2)(H)(ii)d. of this Rule, with a single counterparty shall not give rise to any margin requirement, and as such need not be collected or charged to net capital, if the aggregate of such amounts with such counterparty does not exceed $250,000 ("the de minimis transfer amount"). The full amount of the sum of the required maintenance margin and any mark to market loss must be collected when such sum exceeds the de minimis transfer amount.
        g. Unrealized profits in one Covered Agency Transaction position may offset losses from other Covered Agency Transaction positions in the same counterparty's account and the amount of net unrealized profits may be used to reduce margin requirements. With respect to standbys, only profits (in-the-money amounts), if any, on "long" standbys shall be recognized.
        (I) Limits on Net Capital Deductions [for Exempt Accounts]
        [(i) Members shall maintain a written risk analysis methodology for assessing the amount of credit extended to exempt accounts pursuant to paragraph (e)(2)(F) and (e)(2)(G) which shall be made available to FINRA upon request.]
        ([ii]i) In the event that the net capital deductions taken by a member as a result of deficiencies or marked to the market losses incurred under paragraphs (e)(2)(F) and (e)(2)(G) of this Rule (exclusive of the percentage requirements established thereunder), plus any mark to market loss as set forth under paragraph (e)(2)(H)(ii)d. of this Rule and any deficiency as set forth under paragraph (e)(2)(H)(ii)e. of this Rule, and inclusive of all amounts excepted from margin requirements as set forth under paragraph (e)(2)(H)(ii)c.2. of this Rule or any de minimis transfer amount as set forth under paragraph (e)(2)(H)(ii)f. of this Rule, exceed:
        a. [on] for any one account or group of commonly controlled accounts, 5 percent of the member's tentative net capital (as such term is defined in SEA Rule 15c3-1), or
        b. [on] for all accounts combined, 25 percent of the member's tentative net capital (as such term is defined in SEA Rule 15c3-1), and,
        c. such excess as calculated in paragraphs (e)(2)(I)(i)a. or b. of this Rule continues to exist[s] on the fifth business day after it was incurred,
        the member shall give prompt written notice to FINRA and shall not enter into any new transaction(s) subject to the provisions of paragraphs (e)(2)(F), [or] (e)(2)(G) or (e)(2)(H) of this Rule that would result in an increase in the amount of such excess under, as applicable, [subparagraph (ii)] paragraph (e)(2)(I)(i) of this Rule.
        (3) through (8) No Change.
        (f) Other Provisions
        (1) through (5) No Change.
        (6) Time Within Which Margin or "Mark to Market" Must Be Obtained

        The amount of margin or "mark to market" required by any provision of this Rule, other than that required under paragraph (e)(2)(H) of this Rule, shall be obtained as promptly as possible and in any event within 15 business days from the date such deficiency occurred, unless FINRA has specifically granted the member additional time.
        (7) through (10) No Change.
        (g) through (h) No Change.

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

        .01 No Change.
        .02 Monitoring Procedures. For purposes of paragraph (e)(2)(H)(ii)d. of this Rule, members shall adopt written procedures to monitor the mortgage banker's pipeline of mortgage loan commitments to assess whether the Covered Agency Transactions are being used for hedging purposes.
        .03 Mark to Market Loss/Deficiency. For purposes of paragraph (e)(2)(H) of this Rule, to the extent a mark to market loss or deficiency is cured by subsequent market movements prior to the time the margin call must be met, the margin call need not be met and the position need not be liquidated; provided, however, if the mark to market loss or deficiency is not satisfied by the close of business on the next business day after the business day on which the mark to market loss or deficiency arises, the member shall be required to deduct the amount of the mark to market loss or deficiency from net capital as provided in SEA Rule 15c3-1 until such time the mark to market loss or deficiency is satisfied.
        .04 Determination of Exempt Account. For purposes of paragraph (e)(2)(H) of this Rule, the determination of whether an account qualifies as an exempt account shall be made based upon the beneficial ownership of the account. Sub-accounts managed by an investment adviser, where the beneficial owner is other than the investment adviser, shall be margined individually.
        .05 Risk Limit Determination.
        (a) For purposes of any risk limit determination pursuant to paragraphs (e)(2)(F), (e)(2)(G) or (e)(2)(H) of this Rule:
        (1) If a member engages in transactions with advisory clients of a registered investment adviser, the member may elect to make the risk limit determination at the investment adviser level;
        (2) Members of limited size and resources that do not have a credit risk officer or credit risk committee may designate an appropriately registered principal to make the risk limit determinations;
        (3) The member may base the risk limit determination on consideration of all products involved in the member's business with the counterparty, provided the member makes a daily record of the counterparty's risk limit usage; and
        (4) A member shall consider whether the margin required pursuant to this Rule is adequate with respect to a particular counterparty account or all its counterparty accounts and, where appropriate, increase such requirements.

        * * * * *

      • 16-30 FINRA Reminds Firms of their Obligation to Report Accurately the Time of Execution for Transactions in TRACE-eligible Securities

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        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        FINRA Rule 6710
        FINRA Rule 6730
        Suggested Routing

        Compliance
        Fixed Income
        Legal
        Operations
        Systems
        Trading
        Key Topics

        Fixed Income Securities
        TRACE
        Transaction Reporting

        Executive Summary

        FINRA reminds firms of their obligation under FINRA Rule 6730 (Transaction Reporting) to accurately enter the “time of execution” for transactions on TRACE trade reports. The “time of execution” of a transaction in a TRACE-eligible security1 generally is the time at which the parties to the transaction agree to all of the material terms sufficient to calculate the dollar price of the trade.2

        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;
        •   Racquel Russell, Associate General Counsel, Office of General Counsel, at (202) 728-8363 or by email at Racquel.Russell@finra.org; or
        •   Joseph Schwetz, Associate Director, Market Regulation, at (240) 386-6170 or by email at Joseph.Schwetz@finra.org.

        Discussion

        Rule 6730(c) (Transaction Information to Be Reported) sets forth the items of information required to be included in TRACE trade reports. Firms that are “parties to a transaction”3 in a TRACE-eligible security must report, among other things, the “time of execution”4 of the transaction, which generally is defined as the time when the parties to the transaction agree to all of the material terms sufficient to calculate the dollar price of the trade—i.e., when there has been a “meeting of the minds” with regard to material terms such as price and quantity.

        Importantly, the “time of execution” of a transaction is not necessarily the time that the trade information is entered into the firm's processing system. For example, if a trade is executed on a firm's trading desk at 10:01:30 a.m. Eastern Time (ET), but is not entered into the firm's system until 10:45:00 a.m. ET, the “time of execution” to be reported to TRACE is 10:01:30 a.m. ET, not the time the firm entered the trade into its system at 10:45:00 a.m. Similarly, when a firm executes an inter-dealer transaction on behalf of a corresponding customer order, the firm may be required to report the same “time of execution” for both the inter-dealer and customer trades. For example, if the “meeting of the minds” with regard to the material terms of both the inter-dealer and customer transactions (sufficient to calculate the dollar price) occurred at 10:01:30 a.m. ET, the firm is required to report the same “time of execution”—i.e., 10:01:30 a.m. ET—for both transactions.

        In some instances, a firm may send an electronic notification to its counterparty providing the details of a trade that already has been agreed upon in all material respects. In such cases, the firm should not use the time the notification was sent as the “time of execution” on the TRACE transaction report, as the material terms were agreed upon prior to the time the notification was sent. As such, depending on the specific facts and circumstances, the “time of execution,” may not necessarily be the time the electronic notification was sent to the counterparty. For example, if a trade is agreed upon at 11:10:30 a.m. ET, but the electronic notification detailing the agreed upon trade is not sent to the firm's counterparty until 11:35:00 a.m. ET, the “time of execution” of 11:10:30 a.m. ET is required to be reported to TRACE.

        In addition, when a firm executes a transaction after TRACE system hours or on a nonbusiness day,5 the time of execution, rather than the time that the trade report is submitted to TRACE, is required to be reported on the TRACE report. Thus, even where the TRACE rules permit firms to report a transaction on T+1, firms must accurately report both the “time of execution” and the date of trade execution on the TRACE transaction report.6

        The “time of execution” for a transaction in a new issue is determined in the same manner as with secondary transactions. Therefore, the “time of execution” of a transaction in a new issue occurs when there is a “meeting of the minds” with regard to the material terms of the transaction.7 Thus, if a firm receives a firm commitment to purchase a TRACE-eligible security when it is issued, but prior to the final pricing or determination of other material terms of the new issue, the time of execution has not yet occurred. A “meeting of the minds” cannot occur before the final material terms, such as price, coupon and quantity have been established by the issuer, and such terms are known by the parties to the transaction.8

        In the case of transactions involving TRACE-eligible securities that are trading “when issued” on a yield basis, the time of execution is when the yield for the transaction has been agreed to by the parties to a transaction. For a transaction in a TRACE-eligible security where the actual yield for the transaction is established by determining the yield from one or more designated securities (e.g., a “benchmark security” such as a U.S. Treasury security maturing in 5 years, or a combination of such “benchmark securities”) and adding the agreed upon “yield spread” (e.g., 150 basis points above the benchmark security), the time of execution also occurs when the yield has been agreed to by the parties.


        1. Rule 6710(a) provides that a “TRACE-Eligible Security” is a debt security that is United States 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 governmentsponsored enterprise as defined in paragraph (n). “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).

        2. In 2005, the MSRB issued guidance clarifying the meaning of “time of trade” for purposes of transaction reporting. See MSRB Notice 2005- 02 (January 10, 2005). MSRB recently issued a Regulatory Notice that included Q&As addressing its definition of “time of trade” for reporting transactions in municipal securities to the MSRB's Real-time Transaction Reporting System See MSRB Notice 2016-19 (August 9, 2016).

        3. Rule 6710(e) defines “Party to a Transaction” as an introducing broker-dealer, if any, an executing broker-dealer, or a customer. “Customer” includes a broker-dealer that is not a FINRA member.

        4. Specifically, Rule 6710(d) provides that the “time of execution” for a transaction in a TRACE-eligible security means the time when the parties to a transaction agree to all of the terms of the transaction that are sufficient to calculate the dollar price of the trade.

        5. Rule 6730(a)(1)(C) provides that transactions executed on a business day less than 15 minutes before 6:30:00 p.m. ET must be reported no later than 15 minutes after the TRACE system opens the next business day (T+1), and if reported on T+1, designated “as/of” and include the date of execution. Rule 6730(a)(1)(D) provides that transactions executed on a business day at or after 6:30:00 p.m. ET through 11:59:59 p.m. ET or on a Saturday, a Sunday, a federal or religious holiday or other day on which the TRACE system is not open at any time during that day (determined using Eastern Time) must be reported the next business day (T+1), no later than 15 minutes after the TRACE system opens, designated “as/of” and include the date of execution. 6 The date of trade execution is required to be entered on a transaction report only where the trade is reported on an “as/of” basis. See Rule 6730(c)(5). 7 See TRACE Frequently Asked Questions regarding the reporting of Corporate and Agency Debt, FAQ #4.14.

        6. The date of trade execution is required to be entered on a transaction report only where the trade is reported on an "as/of" basis. See Rule 6730(c)(5).

        7. See TRACE Frequently Asked Questions regarding the reporting of Corporate and Agency Debt, FAQ #4.14.

        8. Firms are reminded that they should be clear in their communications regarding the final terms of a trade and how such terms will be conveyed between the parties. See TRACE Frequently Asked Questions regarding the reporting of Corporate and Agency Debt, FAQ #4.23.

      • 16-29 FINRA Requests Comment on Proposed Amendments to Its Gifts, Gratuities and Non-Cash Compensation Rules; Comment Period Expires: September 23, 2016

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        Gifts, Gratuities and Non-Cash Compensation Rules

        Regulatory Notice
        Notice Type

        Request for Comment
        Referenced Rules & Notices

        FINRA Rule 2310
        FINRA Rule 2320
        FINRA Rule 3220
        FINRA Rule 3221
        FINRA Rule 3222
        FINRA Rule 5110
        NASD Rule 2830
        Notice to Members 06-69
        Suggested Routing

        Compliance
        Investment Companies
        Legal
        Registered Representatives
        Senior Management
        Variable Contracts
        Key Topics

        Business Entertainment
        Commercial Bribery
        Gifts
        Gratuities
        Non-Cash Compensation

        Executive Summary

        FINRA is seeking comment on proposed amendments to FINRA Rule 3220 (Influencing or Rewarding Employees of Others), as well as on proposed FINRA Rule 3221 (Restrictions on Non-Cash Compensation), and proposed FINRA Rule 3222 (Business Entertainment).

        The proposed rule text is available in Attachment A.

        Questions concerning this Notice should be directed to:

        •   Victoria Crane, Associate General Counsel, Office of General Counsel, at (202) 728-8104; or
        •   Joseph Savage, Vice President and Counsel, Regulatory Policy, at (240) 386-4534.

        Action Requested

        FINRA encourages all interested parties to comment on the proposal. Comments must be received by September 23, 2016.

        Comments must be submitted through one of the following methods:

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

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

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

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

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

        Background & Discussion

        In April 2014, FINRA launched a retrospective review of its gifts, gratuities and non-cash compensation rules to assess their effectiveness and efficiency. In December 2014, FINRA published a report on its review.3 The report concluded that while the rules have met their intended investor protection objectives, they could benefit from some updating to better align the investor protection benefits and the economic impacts. To that end, FINRA recommended exploring a combination of proposed rule amendments and guidance.

        As discussed further below, FINRA is proposing amendments to the gifts, gratuities and non-cash compensation rules to, among other things: (1) consolidate the rules under a single rule series in the FINRA rulebook; (2) increase the gift limit from $100 to $175 per person per year and include a de minimis threshold below which firms would not have to keep records of gifts given or received; (3) amend the non-cash compensation rules to cover all securities products, rather than only direct participation programs (DPPs), variable insurance contracts, investment company securities and public offerings of securities; and (4) incorporate existing guidance and interpretive letters into the rules.

        In addition, FINRA is proposing a revised approach to internal sales contests for non-cash compensation such that if payment or reimbursement of expenses associated with the non-cash compensation arrangement is preconditioned on achievement of a sales target, the non-cash compensation arrangement must: (1) be based on the total production with respect to all securities products; and (2) not be based on conditions that would encourage an associated person to recommend particular securities or categories of securities.

        Finally, FINRA is proposing to incorporate into the amended rules a principles-based standard for business entertainment that would require firms to adopt written policies and supervisory procedures for business entertainment.

        Proposed Rule Amendments

        A. Gifts

        FINRA Rule 3220 (Influencing or Rewarding Employees of Others)4 (the Gifts Rule) prohibits any member or person associated with a member, directly or indirectly, from giving anything of value in excess of $100 per year to any person where such payment is in relation to the business of the recipient's employer. The rule also requires members to keep separate records regarding gifts and gratuities.5 The rule seeks both to avoid improprieties that may arise when a member firm or its associated persons give anything of value to an employee of a customer or counterparty and to preserve an employee's duty to act in the best interests of that customer.
        1. $100 Gift Limit

        FINRA proposes to increase the gift limit from $100 to $175 per person per year.6 FINRA believes that an increase in the gift limit to $175 is appropriate because it takes into account the rate of inflation since adoption of the $100 gift limit.7
        2. Incorporation of Existing Guidance and Interpretive Positions

        In 2006, FINRA issued Notice to Members (NTM) 06-69 addressing gifts and business entertainment to clarify the gifts that are subject to the Gifts Rule; that members must aggregate all gifts given by the firm and its associated persons to a particular recipient over the course of a year; the manner by which to value gifts; and the supervision and recordkeeping requirements for gifts.8 In addition, over the years, in response to inquiries regarding the Gifts Rule, the staff has issued various interpretive letters, including a letter regarding the application of the Gifts Rule to bereavement gifts.9

        FINRA proposes to incorporate, without material change, the guidance in NTM 06-69 as well as its interpretation regarding the application of the Gifts Rule to bereavement gifts into FINRA Rule 3220 as Supplementary Material. Thus, the Supplementary Material would provide that: (1) there is no express exclusion from the Gifts Rule for gifts given during the course of business entertainment, unless the gift is of de minimis value, or a promotional or commemorative item; (2) gifts must be valued at the higher of cost or market value;10 (3) members must aggregate all gifts given by the member and each associated person of the member to a particular recipient over the course of the year; (4) bereavement gifts that are customary and reasonable are not considered to be in relation to the business of the recipient and, therefore, are not subject to the restrictions of the Gifts Rule or its recordkeeping requirements; (5) gifts given for infrequent life events (e.g., a wedding gift or congratulatory gift for the birth of a child) are not subject to the restrictions of the Gifts Rule or its recordkeeping requirements provided the gifts are customary and reasonable, personal in nature and not in relation to the business of the employer of the recipient; and (6) gifts of a de minimis value, promotional items of nominal value and commemorative items are not subject to the restrictions of the Gifts Rule or its recordkeeping requirements provided they meet the conditions specified in the Supplementary Material.11 In addition, FINRA proposes to incorporate into the Supplementary Material to FINRA Rule 3220 the guidance in NTM 06-69 regarding supervision and recordkeeping requirements for gifts.
        B. Restrictions on Non-Cash Compensation

        FINRA and NASD rules generally prohibit members and their associated persons from directly or indirectly accepting or making payments or offers of non-cash compensation in connection with the sale of variable insurance contracts,12 investment company securities,13 DPPs14 and the public offerings of debt and equity securities.15 These prohibitions are subject to specified exceptions that permit:
        •   gifts that do not exceed an annual amount per person fixed by the FINRA Board of Governors (currently $100) and are not preconditioned on achievement of a sales target;
        •   an occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target;
        •   payment or reimbursement by "offerors" (product issuers, advisers, underwriters and their affiliates) in connection with training or education meetings, subject to specified conditions, including meeting location restrictions and not preconditioning attendance on achievement of a sales target; and
        •   internal firm non-cash compensation arrangements that are based on total production and equal weighting of product sales.16
        1. Proposed FINRA Rule 3221
        a. Application to Any Security

        FINRA believes that the general prohibitions regarding the payment or receipt of non-cash compensation should be extended beyond investment company securities, variable insurance contracts, DPPs and public offerings of securities as the conflicts underlying these prohibitions exist with respect to all securities. Accordingly, FINRA proposes to eliminate the existing non-cash compensation rules and replace them with proposed FINRA Rule 3221, which would apply to the payment or receipt of non-cash compensation in connection with the sale of any security. Specifically, proposed FINRA Rule 3221(b) would provide that "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 in connection with the sale of securities." This prohibition would be subject to the exceptions discussed below.
        b. Exceptions to the Prohibition on Non-Cash Compensation Arrangements
        i. Gifts From Offerors

        Consistent with the existing non-cash compensation rules, the proposal would except from the prohibitions on non-cash compensation arrangements gifts from offerors17 that do not exceed a specified threshold per individual per year and are not preconditioned on the achievement of a sales target.

        The proposal would define the term "preconditioned on the achievement of a sales target" as describing a non-cash compensation arrangement in which an offeror or member communicates in advance that an associated person will receive non-cash compensation only if the associated person achieves either a dollar-denominated goal for selling securities or a goal of finishing within a defined number of top sellers of securities.18 As with the dollar threshold under the proposed amendments to the Gifts Rule, FINRA proposes to limit the gifts exception under proposed FINRA Rule 3221 to $175.
        ii. Training or Education Meetings

        The proposal would permit an offeror to make payments or reimbursements of associated persons' expenses in connection with a training or education meeting held by an offeror or a member, provided that the meeting meets the following conditions:
        •   Associated persons must obtain the member's prior approval to attend the meeting and attendance, as well as the payment or reimbursement by the offeror, must not be preconditioned on the achievement of a sales target.
        •   The location must be appropriate to the purpose of the meeting. The proposal would establish appropriate locations to be a U.S. office of the offeror or member holding the meeting, a facility located in the vicinity of such office, a U.S. regional location with respect to meetings of associated persons who work within that region or, with respect to meetings dealing with DPPs or real estate investment trusts (REITs), a U.S. location at which a significant or representative asset of the program or REIT is located.
        •   Payment or reimbursement by the offeror must apply only to the training, education, meals, lodging and transportation for associated persons. The proposed rule would make clear that the offeror could not pay or provide reimbursement for the entertainment or expenses of guests of associated persons or for the entertainment of associated persons.
        •   FINRA believes that the conditions relating to training or education meetings are largely consistent with the restrictions relating to such meetings in the existing non-cash compensation rules as well as staff interpretations relating to those rules.19
        iii. Internal Sales Contests

        The existing non-cash compensation rules permit non-cash compensation arrangements between a member and its associated persons or a non-member company and its sales personnel who are associated persons of an affiliated member, provided that: (1) the member's or non-member's non-cash compensation arrangement, if it includes variable contract securities or investment company securities, is based on the total production of associated persons with respect to all variable contract securities or investment company securities, as applicable, distributed by the member; (2) the non-cash compensation arrangement requires that the credit received for each variable contract security or investment company security, as applicable, is equally weighted; (3) no unaffiliated non-member company or other unaffiliated member directly or indirectly participates in the member's or non-member's organization of a permissible non-cash compensation arrangement; and (4) the recordkeeping requirement relating to member compensation is satisfied.20

        FINRA proposes to continue to permit non-cash compensation arrangements between a member and its associated persons or a non-member company and its sales personnel who are associated persons of an affiliated member if payment or reimbursement of expenses associated with the non-cash compensation arrangement is not preconditioned on achievement of a sales target. If payment or reimbursement is preconditioned on achievement of a sales target, the non-cash compensation arrangement must: (1) be based on the total production of associated persons with respect to all securities distributed by the member; and (2) not be based on conditions that would encourage an associated person to recommend particular securities or categories of securities. In addition, no unaffiliated non-member company or other unaffiliated member may directly or indirectly participate in the member's or non-member's organization of a permissible non-cash compensation arrangement.21

        Thus, the proposal would permit members to continue to pay non-cash compensation to their associated persons outside the context of an internal sales contest. For example, this provision would permit a member to send its associated persons to an internal training meeting that is not tied to achievement of a sales target. The meeting would not have to meet the same requirements as a training or education meeting sponsored by a third-party offeror, but no unaffiliated entity could participate in the organization of these types of arrangements.

        Unlike the existing non-cash compensation rules, however, the proposal would not permit product-specific internal sales contests. FINRA believes that internal sales contests that favor one security (e.g., a proprietary investment company) or one type of security (e.g., investment companies or stocks) potentially create an incentive to engage in sales conduct contrary to the best interests of customers. Consequently, "stock of the day" and similar promotions would be impermissible under the proposal.

        Although the proposed rule change relating to internal sales contests is a significant substantive change to the existing rules, FINRA's impression is that product-specific internal sales contests for non-cash compensation are not widely used today. Moreover, to the extent that firms engage in internal sales contests, FINRA believes that requiring payment or reimbursement to be based on the total production of associated persons with respect to all securities distributed by the member and not be based on conditions that would encourage an associated person to recommend particular securities or categories of securities would reduce the potential for conflicts of interest and risk of abuse.
        c. Incorporation of Existing Guidance and Interpretive Positions

        FINRA proposes to incorporate into proposed FINRA Rule 3221 as Supplementary Material language similar to the language discussed above in connection with the proposed Supplementary Material to the Gifts Rule. Thus, the Supplementary Material would provide that: (1) there is no express exclusion from the restrictions in the non-cash compensation rule for gifts given during the course of business entertainment, unless the gift is of a de minimis value, or a promotional or commemorative item; (2) gifts must be valued at the higher of cost or market value;22 (3) members must aggregate all gifts given by the member and each associated person of the member to a particular recipient over the course of the year; (4) gifts given for infrequent life events (e.g., a wedding gift or congratulatory gift for the birth of a child) are not subject to the restrictions of the non-cash compensation rule or its recordkeeping requirements provided the gifts are customary and reasonable and personal in nature; and (5) gifts of a de minimis value, promotional items of nominal value and commemorative items are not subject to the restrictions of the non-cash compensation rule provided they meet the conditions specified in the Supplementary Material.23

        In addition, FINRA proposes to incorporate into the Supplementary Material prior guidance it has provided regarding training or education meetings. Specifically, the Supplementary Material would provide that the proposed rule's training or education exception "must first and foremost be intended to provide training or education to an associated person. Any training must occupy substantially all of the work day. Payment or reimbursement for any related meals, lodging and transportation is permissible, but reimbursement or payment for outings (e.g., golf outings), tours, or other forms of entertainment while at the location for the purpose of training or education is impermissible."24
        d. Recordkeeping

        The proposal would require a member to retain records of all non-cash compensation provided or received by the member or its associated persons for arrangements permitted under the proposed rule. The records must include: the names of the offerors, non-members or other members making the non-cash compensation contribution; the names of associated persons receiving the non-cash compensation under the arrangements; the nature and value of non-cash compensation provided or received; the location of training or education meetings; and any other information that evidences compliance by the member and its associated persons with the rule.

        The proposed recordkeeping requirements differ from the existing non-cash compensation rules' recordkeeping requirements in that the proposal would require members to retain records of non-cash compensation provided or received by a member or its associated person. The existing non-cash compensation rules require members to maintain records of non-cash compensation received by a member or its associated persons. FINRA believes it would be important for members to retain records of non-cash compensation provided and received to help ensure that members comply with the provisions of the non-cash compensation rule.
        C. Business Entertainment

        In 1999, FINRA staff issued an interpretive letter stating that the Gifts Rule does not prohibit "ordinary and usual business entertainment" (such as an occasional meal, sporting event, theater production or comparable entertainment event) provided that the entertainment "is neither so frequent nor so extensive as to raise any question of propriety."25 The 1999 letter noted that the interpretation was based, in part, on FINRA's rules governing non-cash compensation in connection with the offer and sale of investment company shares and variable annuities.

        FINRA proposes to replace the business entertainment standard in the existing non-cash compensation rules and 1999 letter with proposed FINRA Rule 3222, which would require each member to adopt written policies and supervisory procedures relating to business entertainment tailored to its business needs.26 The proposed rule would explicitly address the content of those policies and procedures and would incorporate elements of the business entertainment standard in the existing non-cash compensation rules and the 1999 letter. Specifically, proposed FINRA Rule 3222 would require that each member's written policies and supervisory procedures: (1) are designed to detect and prevent business entertainment that is intended as, or could reasonably be perceived as intended as, an improper quid pro quo; (2) define forms of permissible and impermissible business entertainment based on the location, nature, frequency and dollar amount of the business entertainment provided, as well as the type and dollar amount of any accommodations or transportation provided in connection with such business entertainment;27 (3) require that the offeror, member or one or more of the member's associated persons hosts the business entertainment; (4) specify that the business entertainment must not be preconditioned on the achievement of a sales target; and (5) require appropriate training and education of all personnel who supervise, administer or are subject to the written policies and supervisory procedures.

        In addition, the proposed rule change would require that each member's written policies and supervisory procedures must require the maintenance of detailed records of business entertainment expenses, including the names of all persons providing and receiving business entertainment, the location, nature, frequency and dollar amount of the business entertainment, and the type and dollar amount of any accommodations or transportation provided.

        Economic Impact Assessment

        Regulatory Need

        The assessment phase of FINRA's retrospective review of the gifts, gratuities and non-cash compensation rules concluded that these rules have been largely effective in meeting their intended investor protection objectives, but there are certain areas where the investor protection benefits may not align with the associated economic costs. For example, the views expressed by the stakeholders during the assessment suggested that a $100 gift limit is too low and that raising the limit would not undermine the purposes of the gifts and non-cash compensation rules. Stakeholders also raised concerns that the gifts, gratuities and non-cash compensation rules are scattered throughout the FINRA rulebook causing difficulties from a reference and compliance standpoint.

        The amendments in this rule proposal are intended to address these current limitations and better align the investor protection benefits and the economic impacts.

        Economic Impacts

        The proposed amendments would directly impact member firms that regularly engage in gift giving and non-cash compensation arrangements. The proposed consolidation of the rules under a single rule series in the FINRA rulebook should simplify the supervisory efforts and could potentially lead to better use of compliance resources elsewhere within the firms. The increase in the gift limit from $100 to $175 per person per year reflects the rate of inflation since adoption of the $100 gift limit, and addresses the increase in not only the prices of goods, but also the shipping costs, taxes and other expenses. Furthermore, the inclusion of a de minimis threshold below which firms would not have to keep records of gifts given or received, and the exception regarding gifts related to specified life events—such as bereavement and wedding gifts, or gifts for the birth of a child—should reduce the costs associated with tracking and supervising such instances.

        The proposal extends the general prohibitions regarding the payment or receipt of non-cash compensation in connection with the sale of investment company securities, variable insurance products, DPPs and public offerings of securities to the sale of all securities products. As mentioned above, such prohibitions on the payment or receipt of non-cash compensation are covered in several FINRA rules,28 so only firm activities that fall outside the scope of the current rules would be impacted by the proposed extension. FINRA identified that a potential area that would be impacted is private placements of securities. Between December 2012 and March 2016, there were 6,702 private placements facilitated by 750 FINRA member firms. While FINRA understands that, due to the nature of the private placements, accepting or making payments or offers of non-cash compensation is not a common industry practice, there may still be instances where the proposed rule may potentially apply.

        The proposal also requires member firms to adopt written policies and supervisory procedures to maintain detailed records of business entertainment expenses. Member firms that have no relevant policies and supervisory procedures in place must dedicate compliance resources to recording and tracking such expenses. In the past several years, FINRA's examination staff has found instances of poor recordkeeping of such expenses. Specifically, the firms' logs that were used to record gifts and business entertainment did not indicate the recipient of each employee's expenditures or its intended business purpose. Member firms are expected to benefit from the reinforcement of more effective recordkeeping requirements. Moreover, the proposed rule would establish a principles-based standard that would allow firms to tailor their written policies and supervisory procedures to meet their business needs and to take a risk-based approach, so that they can allocate compliance resources to more significant issues.

        FINRA also considered the potential impacts of the proposed amendments on investors. FINRA believes the proposed prohibition of product-specific internal sales contests, which typically favor one security or one type of security, reduces the potential for sales of products that are not aligned with the best interests of customers.

        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 amendments would increase the gift limit under FINRA Rule 3220 and proposed FINRA Rule 3221 to $175. What risks, if any, might arise to customers by raising the gift limit? Should FINRA increase the limit to $175? If not, what, if any, would be an appropriate limit?
        2. The Gifts Rule applies to gifts a member firm or its associated persons give and not to gifts the member firm or its associated persons receive. Should the Gifts Rule apply to gifts received as well as gifts given?
        3. The Gifts Rule does not apply to gifts a member firm gives to its own employees or from a member firm's employee to his or her individual retail clients or customers. Should the Gifts Rule apply to gifts a member firm gives to its own employees or from a member firm's employee to his or her individual retail clients or customers? Please explain.
        4. FINRA is proposing a $50 de minimis threshold below which member firms would not have to keep records of gifts given or received. Is a $50 de minimis threshold appropriate? Should the threshold be higher or lower or should FINRA not include a de minimis threshold?
        5. To what extent would FINRA's proposal to no longer allow product-specific internal sales contests for non-cash compensation impact member firms? In what ways, if any, could it potentially impact customers? Is FINRA's proposed approach to internal sales contests for non-cash compensation appropriate? Please explain.
        6. Commenters have said that restricting entertainment at training sessions paid for by offerors is logically inconsistent with the rule's business entertainment approach. Should the requirements for training and education meetings allow entertainment that complies with the limitations on business entertainment provided by members?
        7. Are the proposed recordkeeping requirements appropriately tailored to obtain information that would be relevant for purposes of monitoring for compliance with the proposed rules?
        8. What are the estimated costs of drafting policies and procedures to comply with proposed Rule 3222 relating to business entertainment?
        9. How would the consolidation of the rules governing gifts, gratuities and non-cash compensation in this proposal simplify compliance? What impact would it have on the costs of compliance?
        10. What economic impact, if any, would be associated with the extension of the rules governing non-cash compensation to all securities?
        11. Are there any expected economic impacts associated with the proposed rules not discussed in this Notice? What are they and what are the estimates of those impacts?

        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 take effect upon filing with the SEC. See SEA Section 19(b)(3) and SEA Rule 19b-4.

        3. See Retrospective Rule Review Report: Gifts, Gratuities and Non-Cash Compensation (December 2014).

        4. In 2008, the SEC approved the transfer of NASD Rule 3060 into the Consolidated FINRA Rulebook without material change and renumbered the rule as FINRA Rule 3220.

        5. See FINRA Rule 3220(c).

        6. The current $100 gift limit has been in place since 1992, when the SEC approved an increase in the limit from $50 to $100. See Securities Exchange Act Release No. 31662 (December 28, 1992), 58 FR 370 (January 5, 1993) (Order Approving File No. SR-NASD-92-40). See also Securities Exchange Act Release No. 21074 (June 20, 1984), 49 FR 26330 (June 27, 1984) (Order Approving File No. SR-NASD-84-8) (increasing the gift limit from $25 to $50).

        7. FINRA staff used the annual rate of inflation data for the United States from the Federal Reserve Bank of St. Louis website to estimate the change in consumer prices since 1992, when the SEC approved the increase in the limit from $50 to $100. The average rate of inflation over the 26 years is 2.34 percent and the compound increase in consumer prices over the period is 74.03 percent. Applying this increase to the $100 gift limit results in $174.03.

        8. See NTM 06-69 (December 2006).

        9. See letter from Gary L. Goldsholle, Vice President & Associate General Counsel, FINRA, to Amal Aly, Managing Director & Associate General Counsel, SIFMA, dated December 17, 2007 ("Aly Letter"). In 1999, the staff issued an interpretive letter stating that the Gifts Rule does not prohibit "ordinary and usual business entertainment" provided that the entertainment "is neither so frequent nor so extensive as to raise any question of propriety." That letter is discussed in more detail below in connection with proposed FINRA Rule 3222.

        10. Tickets to sporting or other events would be valued at the higher of cost or face value.

        11. In NTM 06-69, the staff stated that for a promotional item to be considered of nominal value its value must be substantially below $100. In addition, the staff did not specify in NTM 06-69 at what value it would consider a gift to be of de minimis value. Under the proposed rule change, FINRA proposes that gifts of de minimis value or promotional items of nominal value would not be subject to the restrictions of the Gifts Rule or its recordkeeping requirements provided that the value of the gift or promotional item is below $50. A firm or its associated persons may not engage in patterns of providing gifts or promotional items of less than $50 to circumvent the Gifts Rule's restrictions and recordkeeping requirements.

        12. See FINRA Rule 2320(g)(4) (Variable Contracts of an Insurance Company).

        13. See NASD Rule 2830(I)(B) (Investment Company Securities).

        14. See FINRA Rule 2310(c) (Direct Participation Programs).

        15. See FINRA Rule 5110(h) (Corporate Financing Rule—Underwriting Terms and Arrangements).

        16. See NASD Rule 2830(I)(5) and FINRA Rule 2320(g)(4). FINRA Rules 5110 and 2310 do not require internal firm non-cash compensation arrangements in connection with public offerings of securities or direct participation programs to be based on total production and equal weighting of product sales.

        17. The proposed definition of "offeror" is based on the current definitions of "offeror" in the existing non-cash compensation rules. Specifically, the proposal would define the term "offeror" to mean: "(A) with respect to the sale and distribution of variable contracts, an insurance company, a separate account of an insurance company, an investment company that funds a separate account, any adviser to a separate account of an insurance company or an investment company that funds a separate account, a fund administrator, an underwriter and any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of such entities; (B) with respect to the sale and distribution of investment company securities not sold through variable contracts, an investment company, an adviser to an investment company, a fund administrator, an underwriter and any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of such entities; and (C) with respect to the sale and distribution of any other type of security, an issuer, sponsor, an adviser to an issuer or sponsor, an underwriter and any affiliated person of such entities."

        18. To fall with in this definition, a communication may be either explicit or implicit. Thus, an arrangement normally would not be considered preconditioned on the achievement of a sales target if a member or an offeror designates persons to participate in the arrangement in recognition of past sales, without stating the goal in advance. If, however, after several events, the selection criteria of the member or offeror becomes reasonably apparent, there may have been an implicit communication of a goal, and any similar arrangement in the future might be deemed preconditioned on the achievement of a sales target.

        19. See, e.g., "Non-Cash Compensation—Training or Education Meetings," NASD Regulatory & Compliance Alert 13 (Summer 2000), (interpreting the training or education meeting exception in the existing non-cash compensation rules "as an event that is first and foremost intended to provide training or education to an associated person. Any training meeting should occupy substantially all of the work day."). FINRA subsequently published a letter reminding offerers that they may not pay for entertainment expenses of training or education meeting attendees. See letter from Mary L. Schapiro, President, NASD (March 7, 2001).

        20. The total production and equal weighting requirements do not apply to arrangements involving DPPs or public offerings of securities.

        21. Consistent with the existing non-cash compensation rules, the proposal would include a provision that would permit contributions by a non-member company or other member to a non-cash arrangement between a member and its associated persons, or contributions by a member to a non-cash compensation arrangement of a non-member, provided that it meets the requirements for such arrangements, including the total production standard.

        22. As stated above, tickets to sporting or other events would be valued at the higher of cost or face value.

        23. Consistent with the Gifts Rule, FINRA proposes a $50 de minimis threshold. In addition, the proposal would specify that gifts of de minimis value, promotional items of nominal value and commemorative items would not be subject to the proposed recordkeeping requirements relating to non-cash compensation arrangements.

        24. See supra note 19.

        25. See letter from R. Clark Hooper, Executive Vice President, NASD, to Henry H. Hopkins, Director, and Sarah McCafferty, Vice President, T. Rowe Price Investment Services, Inc., dated June 10, 1999 ("1999 letter").

        26. FINRA proposes to include in Supplementary Material to proposed FINRA Rule 3222 language that makes clear that the purpose of the rule is to govern business entertainment provided by a member or its associated persons, as well as business entertainment accepted by a member or its associated persons from an offeror. In addition, the Supplementary Material would provide that business entertainment includes, but it not limited to, an occasional meal, a ticket to an event (e.g., sporting event) or theater and other comparable entertainment.

        27. FINRA notes that a principles-based, rather than prescriptive, approach to what is permissible and impermissible business entertainment would satisfy this requirement of proposed Rule 3222.

        28. See supra notes 12–15.


        Attachment A

        Below is the text of the amendments. New language is underlined; deletions are in brackets.

        * * * * *

        3220. Influencing or Rewarding Employees of Others

        (a) No member or person associated with a member shall, directly or indirectly, give or permit to be given anything of value, including gratuities, in excess of [one hundred dollars] $175 per individual per year to any person, principal, proprietor, employee, agent or representative of another person where such payment or gratuity is in relation to the business of the employer of the recipient of the payment or gratuity. A gift of any kind is considered a gratuity.
        (b) This Rule shall not apply to contracts of employment with, or [to] compensation for services rendered by, persons enumerated in paragraph (a) provided that there is in existence prior to the time of employment or before the services are rendered, a written agreement between the member and the person who is to be employed to perform such services. Such agreement shall include the nature of the proposed employment, the amount of the proposed compensation, and the written consent of such person's employer or principal.
        (c) Subject to Supplementary Material .07, a[A] separate record of all payments or gratuities under this Rule in any amount known to the member, the employment agreement referred to in paragraph (b) and any employment compensation paid as a result thereof, shall be retained by the member for the period specified by SEA Rule 17a-4.

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

        .01 Gifts Incidental to Business Entertainment. There is no express exclusion from the restrictions in paragraph (a) of this Rule for gifts given during the course of business entertainment, unless the gift is of de minimis value, or a promotional or commemorative item consistent with Supplementary Material .06.
        .02 Valuation of Gifts. Gifts must be valued at the higher of cost or market value, exclusive of tax and delivery charges. When valuing tickets for sporting or other events, a member must use the higher of cost or face value. If gifts are given to multiple recipients, members must record the names of each recipient and calculate and record the value of the gift on a pro rata per recipient basis, for purposes of ensuring compliance with the $175 limit in paragraph (a) of this Rule.
        .03 Aggregation of Gifts. Members must aggregate all gifts given by the member and each associated person of the member to a particular recipient over the course of the year. In addition, each member must state in its procedures whether it is aggregating all gifts given by the member and its associated persons on a calendar year, fiscal year, or on a rolling basis beginning with the first gift to any particular recipient.
        .04 Bereavement Gifts. Bereavement gifts that are customary and reasonable are not considered to be in relation to the business of the employer of the recipient and, therefore, are not subject to the restrictions in paragraph (a) of this Rule or the recordkeeping requirements in paragraph (c) of this Rule.
        .05 Personal Gifts. Gifts that are given for infrequent life events (e.g., a wedding gift or a congratulatory gift for the birth of a child) are not subject to the restrictions in paragraph (a) of this Rule or the recordkeeping requirements in paragraph (c) of this Rule, provided the gifts are customary and reasonable, personal in nature and not in relation to the business of the employer of the recipient. In determining whether a gift is "personal in nature and not in relation to the business of the employer of the recipient," members should consider a number of factors, including the nature of any pre-existing personal or family relationship between the person giving the gift and the recipient and whether the associated person paid for the gift. When the member bears the cost of the gift, either directly or by reimbursing an associated person, FINRA presumes that such gift is not personal in nature and instead is in relation to the business of the employer of the recipient.
        .06 De Minimis Gifts and Promotional or Commemorative Items. (a) Gifts of a de minimis value (e.g., pens, notepads or modest desk ornaments) or promotional items of nominal value that display the member's logo (e.g., umbrellas, tote bags or shirts) are not subject to the restrictions in paragraph (a) of this Rule provided that the value of the gift or promotional item is below $50. (b) Customary Lucite stones, plaques or other similar solely decorative items commemorating a business transaction are not subject to the restrictions in paragraph (a) of this Rule. The restrictions of this Rule shall apply, however, where the item is not solely decorative, irrespective of whether the item was intended to commemorate a business transaction.
        .07 Supervision and Recordkeeping. Paragraph (c) of this Rule requires a separate record of payments and gratuities. Rule 3110 requires a member to have a supervisory system reasonably designed to achieve compliance with Rule 3220. To meet these standards, members are required to have systems and procedures reasonably designed to ensure that payments and gratuities in relation to the business of the employer of the recipient given by the member and its associated persons to employees of clients of the member are: (i) reported to the member; (ii) reviewed for compliance with this Rule; and (iii) maintained in the member's records. Such procedures must include provisions reasonably designed to ensure that supervisory personnel, other than the associated person who gives or is permitted to give a payment or gratuity, determines whether such payment or gratuity is personal in nature rather than in relation to the business of the recipient's employer. Gifts of de minimis value or nominal promotional or commemorative items consistent with Supplementary Material .06 are not subject to the recordkeeping requirements of paragraph (c) of this Rule.

        3221. Restrictions on Non-Cash Compensation

        (a) Definitions
        (1) "Affiliated Member" shall mean a member that, directly or indirectly, controls, is controlled by or is under common control with a non-member company.
        (2) "Cash compensation" shall mean any discount, concession, fee, service fee, commission, asset-based sales charge, loan, override or cash employee benefit received in connection with the sale and distribution of securities.
        (3) "Non-cash compensation" shall mean any form of compensation that is not cash compensation, including but not limited to merchandise, gifts and prizes, travel expenses, meals and lodging.
        (4) "Offeror" shall mean:
        (A) with respect to the sale and distribution of variable contracts, an insurance company, a separate account of an insurance company, an investment company that funds a separate account, any adviser to a separate account of an insurance company or an investment company that funds a separate account, a fund administrator, an underwriter and any affiliated person (as defined in Section 2(a) (3) of the Investment Company Act of 1940) of such entities;
        (B) with respect to the sale and distribution of investment company securities not sold through variable contracts, an investment company, an adviser to an investment company, a fund administrator, an underwriter and any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of such entities; and
        (C) with respect to the sale and distribution of any other type of security, an issuer, a sponsor, an adviser to an issuer or sponsor, an underwriter and any affiliated person of such entities.
        (5) "Preconditioned on the achievement of a sales target" shall describe a non-cash compensation arrangement in which an offeror or member communicates in advance that an associated person will receive non-cash compensation only if the associated person achieves either a dollar-denominated goal for selling securities or a goal of finishing within a defined number of top sellers of securities.
        (b) Non-Cash Compensation Arrangements

        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 in connection with the sale of securities, except the following:
        (1) Gifts from offerors that do not exceed $175 per individual per year and are not preconditioned on the achievement of a sales target.
        (2) Payment or reimbursement by an offeror in connection with a meeting held by an offeror or by a member for the purpose of training or education of associated persons of a member, provided that:
        (A) associated persons obtain the member's prior approval to attend the meeting and attendance by a member's associated persons is not preconditioned on the achievement of a sales target;
        (B) the location is appropriate to the purpose of the meeting, which shall mean a United States office of the offeror or the member holding the meeting, or a facility located in the vicinity of such office, or a United States regional location with respect to meetings of associated persons who work within that region or, with respect to meetings dealing with direct participation programs or real estate investment trusts, a United States location at which a significant or representative asset of the program or real estate investment trust is located;
        (C) the payment or reimbursement applies only to training, education, meals, lodging and transportation for associated persons and is not applied to the entertainment or expenses of guests of associated persons or to the entertainment of associated persons; and
        (D) the payment or reimbursement by the offeror is not preconditioned on the achievement of a sales target.
        (3) Non-cash compensation arrangements between a member and its associated persons or a non-member company and its sales personnel who are associated persons of an Affiliated Member, provided that:
        (A)
        (i) payment or reimbursement of expenses associated with the non-cash compensation arrangement is not preconditioned on the achievement of a sales target; or
        (ii) if payment or reimbursement of expenses associated with the non-cash compensation arrangement is preconditioned on the achievement of a sales target, the non-cash compensation arrangement is:
        (a) based on the total production of associated persons with respect to all securities distributed by the member; and
        (b) not based on conditions that would encourage an associated person to recommend particular securities or categories of securities; and
        (B) no unaffiliated non-member company or other unaffiliated member directly or indirectly participates in the member's or non-member's organization of a permissible non-cash compensation arrangement.
        (4) Contributions by a non-member company or other member to a non-cash compensation arrangement between a member and its associated persons, or contributions by a member to a non-cash compensation arrangement of a non-member, provided that the arrangement meets the criteria in paragraph (b)(3).
        (c) Recordkeeping

        A member shall retain records of all non-cash compensation provided or received by the member or its associated persons for arrangements permitted by paragraph (b) for the period specified by SEA Rule 17a-4. The records shall include: the names of the offerors, non-members or other members making the non-cash compensation contribution; the names of associated persons receiving the non-cash compensation under the arrangements; the nature and value of non-cash compensation provided or received; the location of training or education meetings; and any other information that evidences compliance by the member and its associated persons with paragraph (b).

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

        .01 Gifts Incidental to Business Entertainment. There is no express exclusion from the restrictions in paragraph (b) of this Rule for gifts given during the course of business entertainment, unless the gift is of de minimis value, or a promotional or commemorative item consistent with Supplementary Material .05.
        .02 Valuation of Gifts. Gifts must be valued at the higher of cost or market value, exclusive of tax and delivery charges. When valuing tickets for sporting or other events, a member must use the higher of cost or face value. If gifts are given to multiple recipients, members must record the names of each recipient and calculate and record the value of the gift on a pro rata per recipient basis, for purposes of ensuring compliance with the $175 limit in paragraph (b) of this Rule.
        .03 Aggregation of Gifts. Members must aggregate all gifts received or given by the member and each associated person of the member over the course of the year for purposes of ensuring compliance with the $175 limit in paragraph (b) of this Rule. In addition, each member must state in its procedures whether it is aggregating all gifts received or given by the member and its associated persons on a calendar year, fiscal year, or on a rolling basis beginning with the first gift received or given.
        .04 Personal Gifts. Gifts that are given for infrequent life events (e.g., a wedding gift or a congratulatory gift for the birth of a child) are not subject to the restrictions in paragraph (b), or the recordkeeping requirements of paragraph (c), of this Rule provided the gifts are customary and reasonable and personal in nature.
        .05 De Minimis Gifts and Promotional or Commemorative Items. (a) Gifts of a de minimis value (e.g., pens, notepads or modest desk ornaments) or promotional items of nominal value that display the offeror's logo (e.g., umbrellas, tote bags or shirts) are not subject to the restrictions in paragraph (b) of this Rule provided that the value of the gift or promotional item is below $50. (b) Customary Lucite stones, plaques or other similar solely decorative items commemorating a business transaction are not subject to the restrictions in paragraph (b) of this Rule. The restrictions of this Rule shall apply, however, where the item is not solely decorative, irrespective of whether the item was intended to commemorate a business transaction. Gifts of de minimis value or nominal promotional or commemorative items consistent with Supplementary Material .05 are not subject to the recordkeeping requirements of paragraph (c) of this Rule.
        .06 Training or Education Meetings. The training or education exception in paragraph (b)(2) of this Rule must first and foremost be intended to provide training or education to an associated person. Any training must occupy substantially all of the work day. Payment or reimbursement for any related meals, lodging and transportation is permissible, but reimbursement or payment for outings (e.g., golf outings), tours, or other forms of entertainment while at the location for the purpose of training or education is impermissible. In addition, there is no express exclusion from the restrictions in paragraph (b) of this Rule for gifts given during the course of training or education meetings, unless the gift is of de minimis value, or a promotional or commemorative item consistent with Supplementary Material .05.

        3222. Business Entertainment

        (a) Each member that engages in business entertainment must have written policies and supervisory procedures with respect to business entertainment that:
        (1) Are designed to detect and prevent business entertainment that is intended as, or could reasonably be perceived as intended as, an improper quid pro quo;
        (2) Define forms of permissible and impermissible business entertainment based on the location, nature, frequency and dollar amount of the business entertainment provided, as well as the type and dollar amount of any accommodations or transportation provided in connection with such business entertainment;
        (3) Require that the offeror, member or one or more of the member's associated persons hosts the business entertainment;
        (4) Specify that the business entertainment must not be pre-conditioned on the achievement of a sales target; and
        (5) Require appropriate training and education of all personnel who supervise, administer or are subject to the written policies and supervisory procedures.
        (b) Each member's written policies and supervisory procedures must require the maintenance of detailed records of business entertainment expenses, including the names of all persons providing and receiving the business entertainment, the location, nature, frequency and dollar amount of the business entertainment, and the type and dollar amount of any accommodations or transportation provided.

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

        .01 Definitions. The terms "offeror" and "preconditioned on the achievement of a sales target" shall have the same meanings as in Rule 3221.
        .02 Purpose. The purpose of Rule 3222 is to govern business entertainment provided by a member or its associated persons, as well as business entertainment accepted by a member or its associated persons from an offeror. Business entertainment includes, but is not limited to, an occasional meal, a ticket to an event (e.g., sporting event) or the theater and other comparable entertainment.
        .03 Obligations of Persons Associated with a Member. Consistent with Rule 0140, persons associated with a member must comply with such member's written policies and supervisory procedures as established pursuant to this Rule 3222. In addition, consistent with Rule 0140, it shall be a violation of this Rule for an associated person to engage in the conduct to be prevented (i.e., business entertainment that is intended as, or could reasonably be perceived as intended as, an improper quid pro quo) through the establishment, maintenance and enforcement of the policies and procedures required by this Rule.

        3223. Exemptions

        Pursuant to the Rule 9600 Series, FINRA staff, for good cause shown after taking into consideration all relevant factors, may conditionally or unconditionally grant an exemption from any provision of the 3200 Series to the extent that such exemption is consistent with the purpose of the 3200 Series, the protection of investors, and the public interest.

      • 16-28 SEC Approval of FINRA Rule 4554 (Alternative Trading Systems—Recording and Reporting Requirements of Order and Execution Information for NMS Stocks); Implementation Date: November 7, 2016

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        ATS Order Reporting Requirements

        Regulatory Notice
        Notice Type

        New Rule
        Referenced Rules & Notices

        FINRA Rule 4554
        FINRA Rule 6220
        FINRA Rule 7400 Series
        Rule 300(a)(1) of SEC
        Regulation ATS
        Suggested Routing

        Compliance
        Legal
        Operations
        Systems
        Trading
        Key Topics

        Alternative Trading Systems
        Order Audit Trail System
        Order Book Reporting

        Executive Summary

        Effective November 7, 2016, new FINRA Rule 4554 requires alternative trading systems (ATSs) to submit additional order information to FINRA.

        The rule text is available in the online FINRA Manual.

        Questions regarding this Notice should be directed to:

        •   Shelly Bohlin, Vice President, Market Regulation, at (240) 386-5029 or by email at Shelly.Bohlin@finra.org; or
        •   Andrew Madar, Associate General Counsel, Office of General Counsel, at (202) 728-8056 or by email at Andrew.Madar@finra.org.

        Background and Discussion

        Under the current Order Audit Trail System (OATS) rules (Rule 7400 Series), ATSs1 are required to record and report order-related information to FINRA. To further enhance FINRA's ability to more fully reconstruct an ATS's order book and better perform order-based surveillance—including layering, quote spoofing and mid-point pricing manipulation surveillance—FINRA proposed, and the SEC approved, Rule 4554 (Alternative Trading Systems—Recording and Reporting Requirements of Order and Execution Information for NMS Stocks), which requires ATSs to report additional ATS-specific data elements in existing OATS reports for orders in NMS stocks.

        Rule 4554 sets forth four categories of additional reporting requirements: (1) data to be reported by all ATSs at the time of order receipt; (2) data to be reported by all ATSs at the time of order execution; (3) data to be reported by ATSs that display subscriber orders; and (4) data specific to ATSs that are registered as ADF Trading Centers. The new requirements apply to order and execution information for NMS stocks.

        Specifically, Rule 4554 requires that all ATSs report the following information on all orders received:

        •   whether the ATS displays subscriber orders outside of the ATS;
        •   if the ATS displays subscriber orders outside of the ATS, whether subscriber orders are displayed to subscribers only, or are distributed for publication in the consolidated quotation data;
        •   whether the ATS is an ADF Trading Center as defined in FINRA Rule 6220;
        •   whether the order can be routed away from the ATS for execution;
        •   whether there are any counter-party restrictions on the order;
        •   a unique identifier representing the specific order type (other than market and limit orders that have no other special handling instructions);
        •   the National Best Bid or Offer (NBBO) (or relevant reference price) in effect at the time of order receipt and the timestamp of when the ATS captured the effective NBBO (or relevant reference price);2 and
        •   the market data feed the ATS used to obtain the NBBO (or relevant reference price).3

        To allow FINRA to map the unique identifier to a specific order type as noted above, an ATS must provide FINRA with a list of all of its order types 20 days before such order types become effective, and, if the ATS makes any subsequent changes to its order types, 20 days before such changes become effective.

        Rule 4554 also requires that all ATSs report the following information when reporting the execution of an order to OATS:

        •   the NBBO (or relevant reference price) in effect at the time of order execution;
        •   the timestamp of when the ATS captured the effective NBBO (or relevant reference price); and
        •   the market data feed used by the ATS to obtain the NBBO (or other reference price).4

        This information above must be reported to FINRA no later than 8:00 a.m. Eastern Time on the calendar day following receipt of the order in the ATS in an electronic form as prescribed by FINRA.

        In addition to the information listed above, Rule 4554 requires that ATSs that display orders outside the ATS report the following information for each order:

        •   whether the order is hidden or displayable;
        •   display quantity;
        •   reserve quantity, if applicable;
        •   displayed price;
        •   the price entered; and
        •   the time of order modification and the applicable new display price or size, if the matching engine re-prices a displayed order or changes the display quantity of a displayed order.

        For ATSs that are ADF Trading Centers, Rule 4554 also requires that these ATSs report the following information:

        •   the quote identifier provided to the ADF if a change to the displayed size or price of an order resulted in a new quote being transmitted to the ADF; and
        •   a new quote identifier if an order held by the ADF Trading Center becomes associated with a quote identifier based on an action by the matching engine related to different order(s).

        FINRA Rule 4554 will become effective on November 7, 2016. To enable FINRA to map an order identifier to a specific order type upon the effective date of the rule, all ATSs must provide FINRA with a list of their current order types no later than October 19, 2016.


        1. Rule 4554 defines an ATS as any alternative trading system, as defined in Rule 300(a)(1) of SEC Regulation ATS, that has filed a Form ATS with the SEC and that is required to report pursuant to FINRA's Order Audit Trail System and equity trade reporting rules.

        2. An ATS would comply with the requirement to report the NBBO capture time by reporting the time that the matching engine referenced the NBBO in order to determine how to further process or execute an order.

        3. The new rule included a requirement to report a sequence number for new orders. However, FINRA anticipates submitting a proposed rule change to the SEC that would require ATSs to provide a sequence number for all OATS event types. Therefore, FINRA is deferring the implementation of this requirement to report a sequence number for new orders.

        4. For purposes of reporting the market data feed used by the ATS to obtain the NBBO (or other reference price), if the ATS uses a data feed that differs from the data feed that was reported on its ATS data submission, the ATS must notify FINRA via email of the fact that an alternative source was used, identify the alternative source, and specify the date, time and securities for which the alternative source was used.

      • 16-27 FINRA Announces Changes Relating to Composition, Terms of Members and Election Procedures for the National Adjudicatory Council; Effective Date: August 11, 2016

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        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Regulation By-Laws
        Suggested Routing

        Compliance
        Executive Representatives
        Legal
        Registered Representatives
        Senior Management
        Key Topics

        National Adjudicatory Council

        Executive Summary

        The SEC has approved FINRA's proposed rule change to amend the By-Laws of FINRA Regulation, Inc. (FINRA Regulation By-Laws) to expand the size of the National Adjudicatory Council (NAC) by one member and apply the requirement that the NAC have more Non-Industry Members than Industry Members, lengthen the terms of future NAC members by one year, and update the process used for sending and counting ballots in the event of a contested election to fill vacancies for certain Industry Members.

        The revised FINRA Regulation By-Laws are available on FINRA's website. They take effect on August 11, 2016.

        Questions concerning this Notice should be directed to:

        •   Alan Lawhead, Vice President and Director – Appellate Group, Office of General Counsel (OGC) at (202) 728-8853 or Alan.Lawhead@finra.org; or
        •   Gary Dernelle, Associate General Counsel, OGC, at (202) 728-8255 or Gary.Dernelle@finra.org.

        Background & Discussion

        The NAC acts on behalf of FINRA in several capacities. The NAC presides over disciplinary matters appealed to or called for review by the NAC. The NAC also acts, when requested, in statutory disqualification and membership proceedings; considers the appeals of members seeking exemptive relief; and retains the authority to review decisions proposed in other proceedings as set forth in the Code of Procedure. For most matters, the NAC prepares a proposed written decision, which becomes final FINRA action if the Board of Governors of FINRA (FINRA Board) does not call the matter for review.

        The NAC is currently composed of 14 members, with the number of Non-Industry Members equaling the number of Industry Members. The seven Industry Members include two Small Firm NAC Members, one Mid-Size Firm NAC Member, two Large Firm NAC Members and two at-large Industry Members.

        The FINRA Board currently appoints NAC members to serve staggered three-year terms. The FINRA Board appoints Non-Industry Members and at-large Industry Members from candidates recommended by the Nominating Committee. The FINRA Board also appoints Small Firm, Mid-Size Firm and Large Firm NAC Members, either from candidates recommended by the Nominating Committee, or in the event of a contested election for a Small Firm, Mid-Size Firm or Large Firm NAC Member vacancy, the candidate who wins an election in which FINRA members have an opportunity to vote directly for a candidate based on firm size.

        Changes to NAC Composition, Member Terms and Election Process

        On June 17, 2016, the Securities and Exchange Commission approved a proposed rule change to amend the FINRA Regulation By-Laws in three principal ways.1 First, the rule change amends Section 5.2 of the FINRA Regulation By-Laws to expand the size of the NAC to 15 members and apply the requirement that the NAC have more Non-Industry Members than Industry Members. Accordingly, FINRA will add one Non-Industry Member to the current 14-member committee and align its composition more closely with that of the FINRA Board, which must have more Public Governors than Industry Governors.

        Second, the rule change amends Section 5.6 of the FINRA Regulation By-Laws to extend by one year, to four total years, the terms of new NAC members.2 The result is a NAC that is divided into four classes, rather than the current three, which allows FINRA to utilize the skills, expertise and institutional knowledge of each NAC member for an additional year.3

        Finally, the rule change amends Section 6.7 of the FINRA Regulation By-Laws to allow FINRA members to vote in NAC elections by using online and telephonic methods in addition to paper ballots. The rule change also amends Section 6.10 of the FINRA Regulation By-Laws by eliminating the provision that permits NAC candidates to observe the Independent Agent's accounting of ballots in contested NAC elections, thus expediting the accounting process and permitting the Secretary of FINRA to notify the candidates more quickly of NAC election results. The changes streamline the NAC election process and align it with the current process for elections involving the FINRA District Committees.


        1. See Securities Exchange Act Release No. 78094 (June 17, 2016), 81 FR 40932 (June 23, 2016) (Order Approving Proposed Rule Change Relating to Composition, Terms of Members and Election Procedures for the National Adjudicatory Council; File No. SR-FINRA-2016-14).

        2. The rule change does not alter or extend the term of any NAC member serving currently; the rule change is applied prospectively.

        3. The rule change provides a three-year transitional period during which the FINRA Board may appoint new NAC members to terms of office less than four years to achieve the staggering necessary to divide the NAC into four classes. FINRA anticipates that, beginning in January 2017, and ending in December 2019, new NAC members shall be appointed to terms of either three years or four years to achieve the result of a NAC that is divided into four classes, with each NAC member serving a term of four years.

      • 16-26 FINRA Adopts Amendments Relating to the Regulation NMS Plan to Address Extraordinary Market Volatility; Effective date: August 22, 2016

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        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 6121.01
        FINRA Rule 6190
        Suggested Routing

        Compliance
        Legal
        Operations
        Senior Management
        Systems
        Trading
        Key Topics

        Limit Up/Limit Down (LULD)
        NMS Security
        Regulatory Halt
        Trading Center
        Trading Halt
        Trading Pause

        Executive Summary

        On July 22, 2016,1 FINRA filed a rule change with the SEC to clarify the operation of the Regulation NMS Plan to Address Extraordinary Volatility ("LULD Plan") following a trading pause or regulatory halt in a security subject to the LULD Plan. The rule text is available in the online FINRA Manual.

        Questions regarding this Notice should be directed to:

        •   FINRA Operations at (866) 776-0800; or
        •   Office of General Counsel at (202) 728-8071.

        Background and Discussion

        FINRA Rule 6121.01 (Resumption of Trading in Securities Subject to the Regulation NMS Plan to Address Extraordinary Market Volatility) provides, among other things, that no trades in an NMS stock are permitted to occur during a trading pause. The rule also addresses the resumption of trading otherwise than on an exchange in an NMS stock following a trading pause.2 The amendment to Rule 6121.01 is part of an effort by FINRA and other self-regulatory organizations to clarify the operation of the LULD Plan during the short period of time following the resumption of trading after a trading pause or regulatory halt and before the price bands are received from the processor for securities that are subject to the LULD Plan.3

        Specifically, amended FINRA Rule 6121.01 provides that, following a trading pause or regulatory halt in an NMS stock that is subject to the LULD Plan, a firm may resume trading otherwise than on an exchange if trading has commenced on the primary listing exchange (or on another national securities exchange in the case of the resumption of trading following a ten-minute trading pause)4 and either: (1) the firm has received the price bands from the processor; or (2) if immediately following a trading pause or regulatory halt the firm has not yet received the price bands from the processor, the firm has calculated an upper price band and lower price band consistent with the methodology provided for in Section V of the LULD Plan and ensures that any transactions prior to the receipt of the price bands from the processor are within the ranges provided for pursuant to the plan, consistent with Section VI(A)(1) of the LULD Plan.

        The amendment is intended to help ensure that trades do not occur outside of the bands prescribed by the LULD Plan by requiring firms to take measures to ensure bands are in place (either by waiting for the receipt of the price bands from the processor or calculating an interim upper price band and lower price band and ensuring that trades occur within those bands).5 A firm may not rely on interim bands beyond the short period of time (generally up to three milliseconds) between the resumption of trading and the receipt of price bands by market participants.


        1. See Securities Exchange Act Release No. 78435 (July 28, 2016) (File No. SR-FINRA-2016-028).

        2. The pilot period for the LULD Plan was recently extended through April 21, 2017. See Securities Exchange Act Release No. 77679 (April 21, 2016), 81 FR 24908 (April 27, 2016).

        3. See NASDAQ Equity Trader Alert # 2016-79 (NASDAQ Announces Improved Protections for Equity Markets Coming Out of Halts ("Leaky Bands")) (April 12, 2016); See Bats Release Notes (Bats Announces Updates to Halt Resumption Behavior Effective July 15, 2016) (June 2, 2016). FINRA anticipates that other SROs will adopt similar measures to calculate an interim band for their listed securities to be applied in the brief time between the resumption of trading and when the price bands are subsequently received from the processor.

        4. Where the primary listing exchange does not re-open for trading at the end of a ten-minute trading pause (and has issued notice that it cannot resume trading for a reason other than a significant imbalance), a firm may resume trading otherwise than on an exchange if trading has commenced in such NMS stock on at least one other national securities exchange if the other requirements of the rule are met.

        5. FINRA Rule 6190 (Compliance with Regulation NMS Plan to Address Extraordinary Market Volatility) provides, among other things, that a member that is a trading center in an NMS stock must establish, maintain and enforce written policies and procedures reasonably designed to comply with the requirements of the LULD Plan, including to prevent the execution of trades at prices below the lower price band or above the upper price band for an NMS stock.

      • 16-25 Forum Selection Provisions Involving Customers, Associated Persons and Member Firms

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        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        FINRA Rule 2010
        FINRA Rule 2263
        FINRA Rule 2268
        FINRA Rule 12200
        FINRA Rule 12206
        FINRA Rule 12504
        FINRA Rule 12904
        FINRA Rule 13200
        FINRA Rule 13904
        IM-12000
        IM-13000
        SEA Section 29
        Suggested Routing

        Compliance
        Legal
        Registered Representatives
        Senior Management
        Key Topics

        Arbitration
        Dispute Resolution
        Forum Selection Provisions
        Predispute Agreements
        Predispute Arbitration Agreements

        Summary

        FINRA reminds member firms that customers have a right to request arbitration at FINRA's arbitration forum at any time and do not forfeit that right under FINRA rules by signing any agreement with a forum selection provision specifying another dispute resolution process or an arbitration venue other than the FINRA arbitration forum.

        In addition, FINRA reminds member firms that FINRA rules do not permit member firms to require associated persons to waive their right to arbitration under FINRA's rules in a predispute agreement.

        A member firm's failure to comply with FINRA's rules relating to predispute arbitration agreements with customers or predispute agreements with associated persons, or failure to submit a dispute to FINRA arbitration as required by FINRA's rules, would violate FINRA rules, and member firms may be subject to disciplinary action.

        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, Associate Chief Counsel, Dispute Resolution, at (212) 858-4481 or margo.hassan@finra.org.

        Background & Discussion

        FINRA Arbitration Forum

        FINRA operates the largest securities dispute resolution forum in the United States to assist in the resolution of disputes involving customers, associated persons and member firms. FINRA's arbitration forum provides a fair, efficient and economical alternative to litigation, particularly for customers with small claims: cases are resolved more quickly; the overall costs are less; and customers may appear without counsel. All FINRA awards are publicly available in a searchable online database.1 In addition, FINRA actively suspends member firms and associated persons that fail to pay arbitration awards or agreed-upon settlements, which incents payment of awards.2

        FINRA's arbitration forum promotes investor protection and market integrity and undergirds FINRA's rules requiring firms to arbitrate with customers and associated persons at their request.

        Customer Disputes

        Predispute Arbitration Agreements; FINRA Rules 12200 and 2268

        FINRA Rule 12200 of the FINRA Code of Arbitration Procedure for Customer Disputes (Customer Code), titled "Arbitration Under an Arbitration Agreement or the Rules of FINRA," requires parties to arbitrate a dispute under the Customer Code in certain circumstances, as follows:

        Parties must arbitrate a dispute under the Code if:

        •   Arbitration under the Code is either:
        (1) Required by a written agreement, or
        (2) Requested by the customer;
        •   The dispute is between a customer and a member or associated person of a member; and
        •   The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.

        This rule preserves a customer's ability to resolve disputes through FINRA arbitration, regardless of whether arbitration is required by a written agreement.

        Many member firms require customers opening accounts to agree in writing to arbitrate disputes concerning the account.3 To help ensure that customers understand these predispute arbitration agreements, FINRA Rule 2268 sets forth requirements that apply when firms use predispute arbitration agreements. These requirements include that any predispute arbitration clause must be highlighted and immediately preceded by a disclosure that the agreement contains a predispute arbitration clause and that by signing an arbitration agreement the parties agree that:

        1. All parties to this agreement are giving up the right to sue each other in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed.
        2. Arbitration awards are generally final and binding; a party's ability to have a court reverse or modify an arbitration award is very limited.
        3. The ability of the parties to obtain documents, witness statements and other discovery is generally more limited in arbitration than in court proceedings.
        4. The arbitrators do not have to explain the reason(s) for their award unless, in an eligible case, a joint request for an explained decision has been submitted by all parties to the panel at least 20 days prior to the first scheduled hearing date.
        5. The panel of arbitrators may include a minority of arbitrators who were or are affiliated with the securities industry.
        6. The rules of some arbitration forums may impose time limits for bringing a claim in arbitration. In some cases, a claim that is ineligible for arbitration may be brought in court.
        7. The rules of the arbitration forum in which the claim is filed, and any amendments thereto, shall be incorporated into this agreement.4

        In addition, FINRA Rule 2268(d) prohibits any predispute arbitration agreement from including any condition that: (1) limits or contradicts the rules of any self-regulatory organization (SRO),5 or (2) limits the ability of a party to file any claim in arbitration.6 These requirements make clear that predispute arbitration agreements must preserve the rights of the contracting parties under SRO rules and that arbitration must be a choice for the parties as a means of dispute resolution.

        Federal Appellate Court Decisions

        FINRA is aware of federal appellate court decisions that have held that forum selection clauses in agreements between member firms and customers supersede the requirements of FINRA Rule 12200, permitting member firms to require customers to arbitrate in a private arbitration forum or to litigate in state or federal court.7 FINRA notes that the reasoning giving rise to these decisions is mixed and conflicts with FINRA's views regarding the application of its arbitration rules.

        The holdings of these courts rest on the assumption that the duty to arbitrate under FINRA rules, or to arbitrate in FINRA's arbitral forum, is merely "contractual" and can be superseded or waived.8 This assumption is inconsistent with the fact that the Exchange Act requires most broker-dealers to be members of FINRA and that FINRA's rules are approved by the Securities and Exchange Commission (SEC), binding on FINRA member firms and associated persons, and have the force of federal law.9 FINRA rules are not mere contracts that member firms and associated persons can modify.

        Furthermore, those courts that have upheld forum selection clauses have relied on authority that traces back to two appellate decisions in the 1990s that never actually decided whether a member firm may obtain and enforce a waiver of its obligation to arbitrate as set forth in FINRA Rules 12200 and 13200.10 Subsequent court decisions repeatedly assumed that the issue had already been resolved and failed to recognize the mandatory nature of the FINRA rules' requirement that FINRA arbitration must be available upon the customer's request, even in the absence of an agreement to arbitrate.11 As one federal appellate court has correctly indicated, Rule 2268(d)—which provides that member firms may not include terms in predispute arbitration agreements with customers that "limit[] or contradict[] the rules of" FINRA—is a clear statement that member firms cannot require customers to waive Rule 12200 in those agreements.12

        In addition, these court decisions potentially remove an important investor protection provided by FINRA Rule 12200 by allowing member firms to deny investors the benefits of FINRA's arbitration program, which may, as a practical matter, foreclose customers from asserting their claims, particularly small claims. Litigation in a judicial forum can be complicated, protracted and costly, which may deter customers from bringing their claims before a court. By contrast, FINRA's arbitral forum provides customers with a simple, relatively fast and inexpensive way for their claims to be heard. As the SEC has commented on several occasions, FINRA's arbitration rules "provide[] its members, their employees, and their public customers with a very useful mechanism for resolving disputes."13 Moreover, FINRA's arbitration rules ensure that its forum is fair and protective of investors. In approving these rules, the SEC found that they were "designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade,. . . and, in general, to protect investors and the public interest," in compliance with the requirements of Section 15A(b)(6) of the Exchange Act.14

        Member firms' use of forum-selection clauses in customer agreements undermines this design and contravenes the important public policies embodied in FINRA's arbitration rules. Furthermore, the SEC's judgment that these rules serve the public interests delineated in the Exchange Act is entitled to significant weight.15 Thus, preserving a customer's right to arbitration under FINRA Rule 12200 is necessary for the protection of investors and as a matter of public policy.

        FINRA is concerned regarding the potential impact of this line of judicial decisions and that member firms are requiring customers to sign predispute arbitration agreements or otherwise enter into agreements that include exclusive forum selection provisions, with the potential effect of limiting the customer's ability to exercise his or her arbitration rights under FINRA Rule 12200 and in contravention of the requirements of FINRA Rule 2268. Thus, FINRA is issuing this Notice to remind member firms of the requirements of FINRA's arbitration rules and their obligations under these rules.

        Right to Arbitrate under FINRA Rules

        As discussed above, FINRA's rules require that predispute arbitration agreements not limit or contradict its rules, or limit the ability of a party to file a claim in arbitration. In addition, FINRA rules require FINRA arbitration if there is a written agreement requiring FINRA arbitration or if requested by the customer. FINRA recognizes that even with a predispute arbitration agreement, member firms and customers may elect, by mutual consent, to resolve their disputes in a forum other than at FINRA, such as at a private arbitration forum or by civil litigation, after a dispute has arisen between the parties. Similarly, if a written agreement to arbitrate at FINRA does not exist or if the customer does not request FINRA arbitration, the parties to a dispute may proceed to agree to resolve their disputes at a private arbitration forum or in civil litigation. A customer's right to request FINRA arbitration at any time under FINRA rules, however, cannot be superseded or disclaimed by any separate agreement between the customer and member firm.

        FINRA rules set forth specific requirements relating to predispute arbitration agreements and when a customer dispute must be arbitrated at FINRA. They are not default rules that may be overridden by more specific or separate contractual terms without consequences under FINRA rules. Thus, any member firm's denial, limitation or attempt to deny or limit a customer's right to request FINRA arbitration, even if the customer seeks to exercise that right after having agreed to a forum selection clause specifying a venue other than a FINRA arbitration forum, would violate FINRA Rules 2268 and 12200. In addition, in FINRA's view, the failure to submit a dispute to arbitration under the Customer Code as required by the Code would violate FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).16

        Member firms with provisions in predispute arbitration agreements or any other customer agreements that do not comply with FINRA rules may be subject to disciplinary action.17 Accordingly, member firms should promptly review their predispute arbitration agreements and any other customer agreements and ensure that the agreements comply with FINRA rules. In addition, a member firm cannot use an existing non-compliant agreement as a basis to deny a customer the right to FINRA arbitration at the customer's request, without violating FINRA rules.

        Recommended Language for Agreements with Customers

        If a member firm is using a forum selection provision in a predispute arbitration agreement or any other customer agreement that includes forums other than FINRA's arbitration forum, FINRA recommends that the member firm use a non-exclusive forum selection provision and include the following language in the provision:

        This agreement does not prohibit or restrict you from requesting arbitration of a dispute in the FINRA arbitration forum as specified in FINRA rules.

        Associated Person Disputes

        FINRA is also concerned that member firms are including in predispute agreements with associated persons provisions that have the effect of waiving the associated person's right to obtain FINRA arbitration of any disputes arising out of the agreement.18 For example, these provisions might require associated persons to resolve employment, business, commercial, or competition disputes at a private arbitration forum or in civil litigation. In FINRA's view, FINRA rules do not allow for the waiver of the Industry Code requirement to arbitrate disputes at FINRA in advance of a dispute.

        FINRA Rule 13200 of the Code of Arbitration Procedure for Industry Disputes (Industry Code), titled "Required Arbitration," provides that member firms and associated persons must arbitrate certain of their disputes, as follows:

        (a) Generally

        Except as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among:
        •   Members;
        •   Members and Associated Persons; or
        •   Associated Persons.

        FINRA is aware of a recent Second Circuit decision in which the court stated that even though FINRA Rule 13200 by its terms requires arbitration in a FINRA forum, that requirement can be waived in a predispute agreement to arbitrate in a private, non-FINRA arbitral forum.19 The court pointed to several cases in which it has held that an SRO's arbitration provisions are default rules which may be overridden by more specific contract terms.20 In addition, the court stated that although FINRA Rule 13200 states that employee-related disputes must be arbitrated "under the Code," it does not address the issue of whether arbitration in a FINRA forum may be waived before a dispute arises. The court noted that "[h]ad FINRA wished to clearly state that Rule 13200 cannot be waived, it could have done so. In the customer-member context, FINRA requires that a predispute arbitration agreement not include any condition that 'limits or contradicts the rules of any self-regulatory organization.' Rule 2268(d)(1)."21

        As stated above in connection with customer disputes, FINRA's arbitration rules are not default rules. FINRA Rule 13200 specifically states that industry disputes must be arbitrated at FINRA, except as otherwise provided in the Industry Code. Thus, any attempt to override this requirement of FINRA Rule 13200 in a predispute agreement by more specific contractual terms would violate FINRA rules.

        Moreover, the absence of a provision similar to FINRA Rule 2268(d)(1) in connection with predispute agreements under the Industry Code does not lead to the result that a member firm can require an associated person to waive the requirements of FINRA Rule 13200. Under the Industry Code, FINRA IM-13000 states that "[i]t may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Rule 2010 for a member to require an associated person to waive the arbitration of disputes contrary to the provisions of the Code of Arbitration Procedure," or to "fail to submit a dispute for arbitration under the Code as required by the Code."22 Through IM-13000, FINRA has made clear to member firms and associated persons that they have the mandatory and non-waivable duty to arbitrate disputes, and (with certain exceptions) to arbitrate them before FINRA.23

        Thus, FINRA considers actions by member firms that require associated persons to waive their right under the Industry Code to arbitration of disputes at FINRA in a predispute agreement as a violation of FINRA Rule 13200 and as conduct inconsistent with just and equitable principles of trade and a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).24

        FINRA notes that it has a statutory obligation under the Exchange Act to "enforce compliance by its members and persons associated with its members, with the provisions" of, among other things, the Exchange Act and FINRA's rules, which include the requirement to arbitrate before FINRA.25 Furthermore, FINRA may sanction its members or associated persons for violating any of its rules by "expulsion, suspension, limitation of activities, functions, and operations, fine, censure, being suspended or barred from being associated with a member, or any other fitting sanction."26

        Member firms with provisions in predispute agreements that do not comply with FINRA rules may be subject to disciplinary action.27 Accordingly, member firms should promptly review their predispute agreements to ensure that the agreements comply with FINRA rules. In addition, a member firm cannot use an existing non-compliant agreement as a basis to deny an associated person the right to FINRA arbitration as specified in FINRA rules, without violating FINRA rules.

        Recommended Language for Predispute Agreements with Associated Persons

        If a member firm is using a forum selection provision in a predispute agreement with an associated person that includes forums other than FINRA's arbitration forum, FINRA recommends that the firm use a non-exclusive forum selection provision and include the following language in the provision:

        This agreement does not prohibit or restrict you from filing an arbitration claim in the FINRA arbitration forum as specified in FINRA rules.

        1. See http://finraawardsonline.finra.org.

        2. Unless a party files a motion to vacate or modify an award, awards must be paid within 30 days of the award date. See FINRA Rules 12904(j) and 13904(j). If the award is not paid within 30 days, interest will accrue at the legal rate or at the rate specified by the arbitrators in the award. In addition, pursuant to FINRA Rule 9554, FINRA may initiate suspension proceedings for failure to comply with an award. FINRA notes that often the threat of suspension results in payment or settlement of an award by the member firm or associated person.

        3. FINRA notes that between the Supreme Court's decision in Wilko v. Swan, 346 U.S. 427 (1953), overruled by Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989), until the Supreme Court's decision in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987), the courts would not enforce predispute arbitration agreements relating to federal securities law claims. Instead, the arbitration of claims was strictly voluntary. In addition, until its rescission in 1987, Rule 15c2-2(a) under the Securities Exchange Act of 1934 (Exchange Act) provided that: "It shall be a fraudulent, manipulative or deceptive act or practice for a broker or dealer to enter into an agreement with any public customer which purports to bind the customer to the arbitration of future disputes between them arising under the federal securities laws, or to have in effect such an agreement, pursuant to which it effects transactions with or for a customer." The SEC noted that it adopted Rule 15c2-2 "[b]ecause years of informal discussions have failed to correct" the practice of agreements to arbitrate future disputes between broker-dealers and their public customers arising under the federal securities laws. See Securities Exchange Act Release No. 20397 (November 18, 1983), 48 FR 53404 (November 28, 1983); see also Securities Exchange Act Release No. 25034 (October 15, 1987), 52 FR 39216 (October 21, 1987) (Rescission of Rule Governing Use of Predispute Arbitration Clauses in Broker-Dealer Customer Agreements). In McMahon, the Supreme Court held that predispute arbitration agreements are enforceable as to claims brought under the Exchange Act. As a result, firms can compel arbitration of customer claims through inclusion of predispute arbitration provisions in their agreements with customers.

        4. FINRA Rule 2268(a).

        5. This provision is consistent with Section 29(a) of the Exchange Act.

        6. See FINRA Rule 2268(d)(1) and (2). FINRA Rule 2268(d) also prohibits a predispute arbitration agreement from including any condition that limits the ability of a party to file a claim in court permitted to be filed in court under the rules of the forums in which a claim may be filed under the agreement, or limits the ability of arbitrators to make an award. See FINRA Rule 2268(d)(3) and (4).

        7. See, e.g., Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth., 764 F.3d 210 (2d Cir. 2014) (holding that a forum selection clause requiring "all actions and proceedings" to be brought in federal court supersedes the agreement under FINRA Rule 12200 to arbitrate with customers); Goldman, Sachs & Co. v. City of Reno, 747 F.3d 733 (9th Cir. 2014) (majority holding that the forum selection clauses in broker-dealer agreements between the parties superseded the "default obligation" to arbitrate under FINRA rules and that by agreeing to these clauses, the customer disclaimed any right it might otherwise have had to a FINRA arbitration forum); and Applied Energetics, Inc. v. NewOak Capital Markets, LLC, 645 F.3d 522 (2d Cir. 2011) (concluding that subsequent adjudication and merger clauses specifically preclude arbitration and, by operation of law, displace the previous arbitration clause because "[b]oth provisions are all-inclusive, both mandatory, and neither admits the possibility of the other"). But cf. UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319 (4th Cir. 2013) (holding that the forum selection clause did not have the effect of superseding or waiving the customer's right to arbitration). Although the court in Carilion Clinic did not conclude that the forum selection clause superseded or waived the customer's right to arbitration, the court determined that the obligation to arbitrate under FINRA Rule 12200 can be superseded and displaced by a more specific agreement between the parties. See Carilion Clinic, 706 F.3d at 328.

        8. See, e.g., Kidder, Peabody & Co. v. Zinsmeyer Trusts Partnership, 41 F.3d 861, 863–64 (2d Cir. 1994) (construing the inclusion in the "NASD rules and regulations" of a "duty to submit to arbitration upon a customer's demand" as an "agreement in writing," or contract); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Georgiadis, 903 F.2d 109, 113 (2d Cir. 1990) ("[T]he rules of a securities exchange are contractual in nature.").

        9. See Credit Suisse First Boston Corp. v. Grunwald, 400 F.3d 1119, 1128 (9th Cir. 2005) ("[W]e hold that the NASD arbitration procedures in dispute here," which the SEC approved, "have preemptive force over conflicting state law.").

        10. These two decisions are Kidder, Peabody & Co. v. Zinsmeyer Trusts Partnership, 41 F.3d 861 (2d Cir. 1994), and Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Georgiadis, 903 F.2d 109 (2d Cir. 1990). In Kidder, the Second Circuit expressly stated that it did "not consider the broader issue of whether a customer can waive entirely the option to arbitrate conferred by the broker's exchange membership obligations," and that its prior decision in Georgiadis also did not address that question. 41 F.3d at 864. Georgiadis addressed only whether the parties could agree to an arbitral forum different from the forum specified in an exchange's constitution. 903 F.2d at 112. The court thus had no occasion to determine whether a customer's right to arbitration conferred by an SRO's arbitration rules could validly be waived by a pre-dispute agreement.

        11. See, e.g., Anderson v. Beland (In re Am. Express Fin. Advisors Secs. Litig.), 672 F.3d 113, 132–33 (2d Cir. 2011) (relying on Kidder, Peabody to support holding that FINRA member's obligation to arbitrate could be superseded by later agreement); UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319, 328 (4th Cir. 2013) (relying on American Express to conclude "that the obligation to arbitrate under FINRA Rule 12200 can be superseded and displaced by a more specific agreement between the parties"); Goldman, Sachs & Co. v. City of Reno, 747 F.3d 733, 741 (9th Cir. 2014) (relying on Carilion Clinic to conclude that "a contract between the parties can supersede the default obligation to arbitrate under the FINRA Rules"). See also Credit Suisse Sec (USA) LLC v. Tracy, 812 F.3d 249, 254–56 (2d Cir. 2016) (relying on American Express, Georgiadis, Kidder, Peabody, and their progeny to conclude that "an SRO's arbitration provisions are default rules which may be overridden by more specific contractual terms").

        12. Tracy, 812 F.3d at 255 n.12 (quoting Rule 2268(d)(1)).

        13. Daniel Joseph Avant, Securities Exchange Act Release No. 36423, 52 S.E.C. 442, 443 (1995); see also, e.g., Jerry L Marcus, Securities Exchange Act Release No. 15755, 47 S.E.C. 72, 73 (1979) (same); Josephthal & Co., Complaint No. CAF000015, 2002 NASD Discip. LEXIS 8, at 17 (NASD NAC May 6, 2002) (NASD "arbitrators fulfill a critical role in a highly beneficial program.").

        14. 15 U.S.C. § 78o-3(b)(6); see Securities Exchange Act Release No. 58643 (September 25, 2008), 73 FR 57174 (October 1, 2008) (Order Approving File Nos. SR-FINRA-2008-021, SR-FINRA-2008-022, SR-FINRA-2008-026, SR-FINRA-2008-028, and SR-FINRA-2008-029); see also Securities Exchange Act Release No. 16860 (May 30, 1980), 45 FR 39608 (June 11, 1980) (Order Approving File No. SR-NASD-79-11) (approving NASD's revised arbitration rules and noting that "[a] primary purpose of this proposal is to provide investors and members of the NASD with a simple and inexpensive procedure for the resolution of their controversies").

        15. See FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 132 (2000) (explaining that where statute is silent or ambiguous on a subject, courts afford deference to agency's interpretation because "the responsibilities for assessing the wisdom of . . . policy choices and resolving the struggle between competing views of the public interest are not judicial ones,. . . and because of the agency's greater familiarity with the ever-changing facts and circumstances surrounding the subjects regulated" (internal quotation marks and citation omitted)); cf. SEC v. Citigroup Global Mkts., Inc., 752 F.3d 285, 296 (2d Cir. 2014) ("The job of determining whether the proposed SEC consent decree best serves the public interest, however, rests squarely with the SEC, and its decision merits significant deference[.]").

        16. See FINRA IM-12000 (Failure to Act Under Provisions of Code of Arbitration Procedure for Customer Disputes). FINRA IM-12000 provides: "It may be deemed conduct inconsistent with just and equitable principles of trade and a violation of Rule 2010 for a member or a person associated with a member to: (a) fail to submit a dispute to arbitration under the Code as required by the Code . . . ."

        17. For example, in 2014, FINRA's Board of Governors issued a decision finding that a firm violated FINRA rules when it inserted provisions in predispute arbitration agreements that prevented customers from bringing or participating in judicial class actions and prevented FINRA arbitrators from consolidating more than one party's claims. See Dep't of Enforcement v. Charles Schwab & Co., No. 2011029760201, 2014 FINRA Discip. LEXIS 5 (FINRA Bd. of Governors Apr. 24, 2014).

        18. Such agreements include predispute clauses in employment agreements. FINRA's Form U4 (Uniform Application for Securities Industry Registration or Transfer) requires associated persons to sign the Form U4 as a condition of employment in the securities industry. The Form U4 requires associated persons to submit to arbitration any claim that is eligible for arbitration under the rules of the SRO with which he or she registers. Specifically, the Form U4 provides: "I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the SROs indicated in Section 4 (SRO REGISTRATION) as may be amended from time to time and that any arbitration award rendered against me may be entered as a judgment in any court of competent jurisdiction." Form U4, Section 15A, Item 5 (Individual/Applicant's Acknowledgement and Consent). See also FINRA Rule 2263 (Arbitration Disclosure to Associated Persons Signing or Acknowledging Form U4).

        19. See Credit Suisse Sec. (USA) LLC v. Tracy, 812 F.3d 249 (2d Cir. 2016).

        20. See Tracy, 812 F.3d at 255 (discussing, among other cases, Merrill Lynch, Pierce, Fenner & Smith Inc. v. Georgiadis, 903 F.2d 109 (2d Cir. 1990), Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth., 764 F.3d 210 (2d Cir. 2014) and Cohen v. UBS Fin. Servs., Inc., 799 F.3d 174 (2d Cir. 2015)).

        21. See Tracy, 812 F.3d at 256, n.12. Notably, in contrast, the court stated "[i]t is true . . . that a pre-dispute complete waiver of arbitration has been held to be unenforceable in the employment context." In support of this statement, the court cited to its decision in Thomas James Associates v. Jameson, 102 F.3d 60 (2d Cir. 1996). The court stated that in Jameson, it held the arbitration waiver unenforceable based on the public policy favoring arbitration of disputes. The court, however, distinguished its decision in Jameson from its decision in Tracy stating that "[r]ather than waive the ability to arbitrate, Employees merely waive the right to arbitrate in a FINRA forum." (emphasis omitted). Tracy, 812 F.3d at 256.

        22. FINRA IM-13000 (Failure to Act Under Provisions of Code of Arbitration Procedure for Industry Disputes).

        23. In Tracy, the court also referenced the FINRA Board of Governors decision in Schwab, see supra note 17, in support of its position that member firms may prohibit employees from arbitrating their disputes with the member firm in FINRA's dispute resolution forum. Specifically, the court cited to the Board's statement that "there are no restrictions upon firms regarding the content of predispute arbitration agreements with employees." See Tracy, 812 F.3d at 256, n.14. Although Schwab centered on predispute agreements with customers, the Board's decision included language concerning employment disputes. Specifically, the Board disagreed with Schwab's argument that several court cases involving class action waivers inserted in employment agreements between firms and associated persons should direct the outcome of the Enforcement action concerning the customer agreements. The Board distinguished the cases by stating that: "The cases upon which Schwab relies analyze Rule 13204 of the Industry Code. While Rule 13204(a)'s text is identical to Rule 12204 of the Customer Code, there are no restrictions upon firms regarding the content of predispute arbitration agreements with employees, unlike the strict parameters set forth by FINRA Rule 2268 for predispute agreements with customers. In comparison, FINRA Rule 2268 expressly prohibits provisions that contradict SRO rules or which limit the ability of customers to file the kind of claims that FINRA arbitration rules determine can be brought in court. This difference makes the employment agreement cases inapplicable to this dispute." FINRA views these statements in Schwab as dicta and notes that the discussion in this Notice regarding the application of FINRA's arbitration rules supersedes these statements in Schwab. In addition, as discussed in this Notice, the absence of a provision similar to Rule 2268(d)(1) for predispute agreements under the Industry Code does not mean that a member firm may prohibit employees from arbitrating their disputes with the member firm in FINRA's dispute resolution forum as part of such an agreement. Such a prohibition would be impermissible under FINRA's arbitration rules and IM-13000.

        24. See FINRA IM-13000.

        25. 15 U.S.C. § 78o-3(b)(2).

        26. Id. § 78o-3(b)(7).

        27. For example, in 2015, a firm consented to the imposition of a censure and a $150,000 fine for filing actions against associated persons to recover pre-paid securities commissions in state courts, instead of submitting the disputes for resolution in FINRA's arbitration forum as required by the Industry Code. See AXA Advisors, LLC, FINRA AWC No. 2012034518801 (February 26, 2015). Similarly, in 2012, a firm consented to the imposition of a censure and a fine of $1,000,000 for structuring its "Advisor Transition Program" to circumvent the requirement to arbitrate disputes under the Industry Code. See Merrill Lynch, Pierce, Fenner & Smith, Inc., FINRA AWC No. 2009020188101 (January 25, 2012).

      • 16-24 FINRA and ISG Modify Certain Electronic Blue Sheet Data Elements

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        Electronic Blue Sheet Submissions

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Regulatory Notices

        FINRA Rule 8211
        FINRA Rule 8213
        Notice to Members 05-58
        Regulatory Notice 11-56
        Regulatory Notice 12-36
        Regulatory Notice 12-47
        Regulatory Notice 13-16
        Regulatory Notice 13-38
        Regulatory Notice 15-44
        SEA Rule 13h-1
        Suggested Routing

        Compliance
        Legal
        Operations
        Senior Management
        Key Topics

        Blue Sheets

        Executive Summary

        FINRA and the other U.S. members of the Intermarket Surveillance Group1 (ISG members) have modified certain equity and option data elements for Electronic Blue Sheets (EBS), which will become effective on December 30, 2016. FINRA and the other ISG members are modifying certain equity data elements to be consistent with NYSE Regulation Information Memorandum Number 16-2 and NYSE Arca Equities Regulatory Bulletin Number 16-39.

        FINRA and the other ISG members are also updating certain data elements in response to the Securities and Exchange Commission's (SEC) approval, dated June 17, 2016, of the Investors Exchange, LLC (IEX).

        Attachment A to this Notice sets forth the EBS record layout, which shows the modifications noted below and changes from the version previously published in Regulatory Notice 15-44.

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

        Discussion

        FINRA and the other ISG members have modified certain equity and option data elements for EBS, as noted below. FINRA and the other ISG members are modifying certain equity data elements to be consistent with NYSE Regulation Information Memorandum Number 16-2 and NYSE Arca Equities Regulatory Bulletin Number 16-39. These equity and option modifications will become effective on December 30, 2016. It should be noted that broker-dealers may submit the modified values prior to December 30, 2016; and FINRA, the other ISG members and the SEC will accept them.

        The following Transaction Type Identifiers were removed for equity and modifications were made to Attachment A of this Notice:

        •   Non-Index Arbitrage, Program Trading, Proprietary = 'C'
        •   Index Arbitrage, Program Trading, Proprietary = 'D'
        •   Index Arbitrage, Program Trading, Individual Investor = 'J'
        •   Non-Index Arbitrage, Program Trading, Individual Investor = 'K'
        •   Non-Program Trading, Individual Investor = 'I'
        •   Non-Index Arbitrage, Program Trading, Agency = 'Y'
        •   Index Arbitrage, Program Trading, Agency = 'U'
        •   Designated Market Makers = 'S'

        The following Transaction Type Identifier was added for equity and a modification was made to Attachment A of this Notice:

        •   Riskless Principal = 'R'

        Additionally, the following Transaction Type Identifiers were removed for options and modifications were made to Attachment A of this Notice:

        •   Designated Market Makers = 'S'
        •   Stock Specialist—Assignment = 'Y'
        •   Registered Trader Market Maker Transaction Regardless of the Clearing Number = 'P'

        The following Transaction Type Identifier was renamed for options and a modification was made to Attachment A of this Notice:

        •   From Voluntary Professional to Professional Customer = 'R'

        FINRA and the other ISG members are also updating certain data elements in response to the SEC's approval, dated June 17, 2016, of the IEX. For Blue Sheet reporting purposes, broker-dealers should be consistent with the option that they selected when submitting orders to OATS during the transition period.

        The following Requestor Code was added and a modification was made to Attachment A of this Notice:

        •   Investors Exchange, LLC = '3'

        The following Exchange Code was added and a modification was made to Attachment A of this Notice:

        •   Investors Exchange, LLC = '3'

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


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


        Attachment A— Record Layout for Submission of Trading Information

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

        Post OSI this field must contain OPTIONXX and a Record Sequence Number Six must be completed
        A–R LJ X(8) B
        30 35 6 TRADE DATE
        The date this trade executed.
        Format is YYMMDD.
        A–R -- X(6) B
        36 41 6 SETTLEMENT DATE
        The date this trade will settle.
        Format is YYMMDD
        A -- X(6) B
        42 53 12 QUANTITY
        The number of shares or quantity of bonds or option contracts.
        N–R RJ 9(12) Z
        54 67 14 NET AMOUNT
        The proceeds of sales or cost of purchases after commissions and other charges.
        N RJ S9(12) V99 Z
        68 68 1 BUY/SELL CODE
        Values: 0 = Buy, 1 = Sale, 2 = Short Sale, 3 = Buy Open, 4 = Sell Open, 5 = Sell Close, 6 = Buy Close. A = Buy Cancel, B = Sell Cancel, C = Short Sale Cancel, D = Buy Open Cancel, E = Sell Open Cancel, F = Sell Close Cancel, G = Buy Close Cancel. Values 3 to 6 and D to G are for options only
        A–R -- X B
        69 78 10 PRICE
        The transaction price. Format: $$$$ CCCCCC.
        N–R RJ 9(4)V(6) Z
        79 79 1 EXCHANGE CODE
        Exchange where trade was executed. Values:
        A = New York Stock Exchange
        B = NYSE MKT, LLC (Equity and Options)
        C = Chicago Stock Exchange
        D = NASDAQ OMX PHLX
        E = NYSE Arca (Equity and Options)
        F = NASDAQ OMX BX, Inc.
        G = National Stock Exchange
        H = BATS Exchange, Inc. (Equity and Options)
        I = International Securities Exchange (Options Only)
        J = C2 Options Exchange
        K = Chicago Board Options Exchange
        L = London Stock Exchange
        M =Toronto Stock Exchange
        N = Montreal Stock Exchange
        0=TSX Venture Exchange
        P = EDGA Exchange
        Q=FINRA ADF
        R = NASDAQ OMX/NASDAQ OMX Options Market
        S = Over-the-Counter
        T = Tokyo Stock Exchange
        U = BOX Options Exchange, LLC
        V= EDGX Exchange (Equity and Options)
        W = CBSX (CBOE Stock Exchange)
        X = NASDAQ OMX PSX
        Y= BATS Y-Exchange, Inc. Z = Other
        1= ISE Gemini
        2= ISE Mercury
        3= Investors Exchange, LLC
        7 = Miami International Securities Exchange
        A–R -- X B
        80 80 1 BROKER/DEALER CODE
        Indicate if trade was done for another Broker/Dealer.
        A–R -- X B
        1 1 1 RECORD SEQUENCE NUMBER TWO
        Value: 2
        A -- X --
        2 2 1 SOLICITED CODE
        Values: 0 = No; 1 = Yes
        A–R -- X B
        3 4 2 STATE CODE
        Standard Postal two character identification.
        A–R -- X(2) B
        5 14 10 ZIP CODE/COUNTRY CODE
        Zip Code-five or nine character (zip plus four)
        Country code-for future use.
        A–R LJ X(10) B
        15 22 8 BRANCH OFFICE/REGISTERED REPRESENTATIVE NUMBER
        Each treated as a four-character field.
        Both are left justified.
        A–R LJ X(8) B
        23 28 6 DATE ACCOUNT OPENED
        Format is YYMMDD
        A–R -- X(6) B
        29 48 20 SHORT NAME FIELD
        Contains last name followed by comma (or space) then as much of first name as will fit.
        A LJ X(20) B
        49 78 30 EMPLOYER NAME A LJ X(30) B
        79 79 1 TIN 1 INDICATOR
        Values: 1 = SS#; 2 = TIN
        A–R -- X B
        80 80 1 TIN 2 INDICATOR
        Values: 1 = SS#; 2 = TIN-for future use.
        A -- X B
        1 1 1 RECORD SEQUENCE NUMBER THREE
        Value: 3
        A -- X --
        2 10 9 TIN ONE
        Taxpayer Identification Number
        Social Security or Tax ID Number.
        A–R LJ X(9) B
        11 19 9 TIN TWO
        Taxpayer Identification Number #2
        Reserved for future use.
        A LJ X(9) B
        20 20 1 NUMBER OF N&A LINES A -- X B
        21 50 30 NAME AND ADDRESS LINE ONE A–R LJ X(30) B
        51 80 30 NAME AND ADDRESS LINE TWO A–R LJ X(30) B
        1 1 1 RECORD SEQUENCE NUMBER FOUR
        Value: 4
        A -- X --
        2 31 30 NAME AND ADDRESS LINE THREE A–R LJ X(30) B
        32 61 30 NAME AND ADDRESS LINE FOUR A–R LJ X(30) B
        62 62 1 TRANSACTION TYPE IDENTIFIERS
        See Attachment B for current codes.
        A–R -- X B
        63 80 18 ACCOUNT NUMBER
        Account number
        A–R LJ X(18) B
        1 1 1 RECORD SEQUENCE NUMBER FIVE
        Value: 5
        A -- X(1) --
        2 31 30 NAME AND ADDRESS LINE FIVE A–R LJ X(30) B
        32 61 30 NAME AND ADDRESS LINE SIX A–R LJ X(30) B
        62 65 4 PRIME BROKER
        Clearing number of the account's prime broker.
        A–R LJ X(4) B
        66 66 1 AVERAGE PRICE ACCOUNT
        1= recipient of average price transaction.
        2= average price account itself.
        N–R -- 9(1) Z
        67 71 5 DEPOSITORY INSTITUTION IDENTIFIER
        Identifying number assigned to the account by the depository institution.
        A–R LJ X(5) B
        72 77 6 Order Execution Time
        HHMMSS—Time format will be in Eastern Time and 24 hour format.
        A–R LJ -- --
        78 80 3 FILLER A -- X B
        1 1 1 RECORD SEQUENCE NUMBER SIX
        Value: 6
        A -- --  
        2 9 8 DERIVATIVE SYMBOL
        The symbol assigned to the derivative
        A–R LJ -- B
        10 15 6 EXPIRATION DATE
        The date the option expires. Format is YYMMDD
        A–R -- -- B
        16 16 1 CALL/PUT INDICATOR
        C = Call, P = Put
        A–R -- -- B
        17 24 8 STRIKE DOLLAR
        The dollar amount of the strike price
        N–R RJ -- Z
        25 30 6 STRIKE DECIMAL
        The decimal amount of the strike price
        N–R LJ -- Z
        31 80 50 FILLER A LJ -- B
        1 1 1 RECORD SEQUENCE NUMBER SEVEN
        Value: 7
        A -- --  
        2 14 13 Large Trader Identification 1 A–R LJ -- Z
        15 27 13 Large Trader Identification 2 A–R LJ -- Z
        28 40 13 Large Trader Identification 3 A–R LJ -- Z
        41 41 1 Large Trader Identification Qualifier A–R LJ -- Z
        42 49 8 Primary Party Identifier
        Identity of the party to the trade that is represented by the Submitting Broker of an EBS. Acceptable values include MPID, CRD or OCC Clearing Number.
        A–R LJ -- B
        50 57 8 Contra Party Identifier
        Identity of the contra party to the trade that is represented by the Opposing Broker of an EBS. Acceptable values include MPID, CRD or OCC Clearing Number.
        A–R LJ -- B
        58 80 23 FILLER A LJ -- B
        1 1 1 TRAILER RECORD DATE
        One record per submission. Must be the last record on the file. Value: High Values or "9"
        A -- X --
        2 17 16 TOTAL TRANSACTIONS
        The total number of transactions.
        This total excludes Header and Trailer Records.
        N RJ 9(16) B
        18 33 16 TOTAL RECORDS ON FILE
        The total number of 80 byte records.
        This total includes Header and Trailer Records, but not the Datatrak Header Record (i.e., it does not include the first record on the file).
        N RJ 9(16) Z
        34 80 47 FILLER A -- X(47) B
                       
              Field Format
        A = Alphanumeric (all caps)
        N = Numeric
        P = Packed
        B = Binary
        R = Validation Required
        Default Values B =Blanks
        Z= Zero
        Justify RJ = Right Justification of Data
        LJ = Left Justification of Data
           

        Attachment B—Record Layout for Submission of Trading Information

        Transaction Type Security Type
        Equity* Options
        Non-Program Trading, Agency A C
        Non-Program Trading, Agency, Proprietary P F
        Market-Maker   M
        Non-Member Market-Maker/Specialist Account   N
        Customer Range Account of a Broker/Dealer   B
        Error Trade Q  
        Professional Customer   W
        Joint Back Office   J
        Riskless Principal R  

        * Equity securities include those securities that trade like equities (e.g., ETFs and structured products). ©2015 FINRA. All rights reserved.

      • 16-23 SEC Approves Rule Change to Reduce the Clock Synchronization Tolerance for Computer Clocks Used To Record Events in NMS Securities and OTC Equity Securities; Effective Date: August 15, 2016; Phase 1 Implementation Date*

        *(systems that capture in milliseconds): February 20, 2017 Phase 2 Implementation Date (systems that do not capture in milliseconds): February 19, 2018

        View PDF

        Clock Synchronization

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules and Regulatory Notices

        FINRA Rule 4590
        FINRA Rule 7430
        Regulatory Notice 14-47
        SEC Rule 613
        Suggested Routing

        Compliance
        Legal
        Operations
        Systems
        Trade Reporting
        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

        Summary

        The Securities and Exchange Commission (SEC) approved a new clock synchronization standard of 50 milliseconds applicable to computer clocks that are used to record certain events in NMS securities or OTC equity securities. Firms have six months from the effective date, until February 20, 2017, to apply the new 50 millisecond standard to impacted system clocks that capture time in milliseconds. Firms have eighteen months from the effective date, until February 19, 2018, to apply the new standard to impacted system clocks that do not capture time in milliseconds.

        The new rule text is available on FINRA's website.

        Questions regarding this Notice should be directed to:

        •   Shelly Bohlin, Vice President, Quality of Markets, at (240) 386-5029 or Shelly.Bohlin@finra.org;
        •   Alex Ellenberg, Assistant General Counsel, Office of General Counsel (OGC), at (202) 728-8152 or Alexander.Ellenberg@finra.org; or
        •   Cara Rosen, Attorney, OGC, at (202) 728-8852 or Cara.Rosen@finra.org.

        Background and Discussion

        On April 8, 2016, the SEC approved FINRA's proposed rule change to reduce the synchronization tolerance for computer clocks that are used to record events in NMS securities and OTC equity securities from one second to 50 milliseconds.1 Current FINRA rules require that firms synchronize any business clock that is used for the purpose of recording the date and time of any event that must be recorded pursuant to the FINRA By-Laws or other FINRA rules. Business clocks subject to the current requirement must be synchronized to within one second of the National Institute of Standards and Technology (NIST) atomic clock.

        Under the rule change, computer clocks that are used to record events in NMS securities and OTC equity securities must be synchronized to within a 50 millisecond drift tolerance of the NIST atomic clock. The tolerance includes:

        •   the difference between the NIST standard and a time provider's clock;
        •   transmission delay from the source; and
        •   the amount of drift in the member's clock.

        Firms will have six months from the effective date, until February 20, 2017, to meet the new synchronization standard for clock systems that capture time in milliseconds. Firms will have 18 months from the effective date, until February 19, 2018, to meet the new synchronization standard for clock systems that do not capture time in milliseconds.2 Based on this implementation schedule, a firm may have some systems subject to the rule by February 20, 2017, and other systems subject to the rule by February 19, 2018.

        FINRA notes that the approved rule change only tightens the clock synchronization requirements already applicable to business clocks used to record events in NMS securities and OTC equity securities. FINRA is not making any other substantive changes to the scope or application of its existing synchronization requirement. For technical clarity, the approved change relocates FINRA's clock synchronization rule from the OATS rule set to the generally applicable rule set for firm operations.3 However, the scope and application of the rule have not changed except for the adoption of the 50 millisecond standard described above.

        The relocated rule—new FINRA Rule 4590—continues to require synchronization of business clocks that are used for the purpose of recording the date and time of any event that must be recorded pursuant to the FINRA By-Laws or other FINRA rules.4 Rule 4590 would continue to apply a one-second synchronization standard to clocks not subject to the new 50 millisecond standard, such as mechanical time stamping devices or computer clocks that are used to record events for securities other than NMS securities or OTC equity securities. Finally, Rule 4590 also continues to provide the same guidance in supplementary material on recordkeeping for purposes of demonstrating clock synchronization compliance.


        1. See Securities Exchange Act Release No. 77565 (April 8, 2016), 81 FR 22136 (April 14, 2016) (Order Approving SR-FINRA-2016-005).

        2. FINRA notes that since the SEC approved this rule change, the SEC published notice of the NMS Plan to create a Consolidated Audit Trail that was submitted by the exchanges and FINRA pursuant to SEC Rule 613 (CAT NMS Plan). The CAT NMS Plan, as required by Rule 613, proposes its own clock synchronization requirements. The CAT NMS Plan may require FINRA to re-evaluate its clock synchronization standard or implementation timeline.

        3. As FINRA explained when it filed the rule change with the SEC, the existing clock synchronization rule was located in the OATS rule set, although it applied more broadly to any clocks used to record the date and time of any event that must be recorded under FINRA By-Laws or rules. See Securities Exchange Act Release No. 77196 (February 19, 2016), 81 FR 9550 (February 25, 2016) (Notice of Filing of SR-FINRA-2016-005). As part of the rule relocation, FINRA will move its existing FAQs on clock synchronization from the OATS FAQ set to its own page.

        4. To the extent a firm maintains a system that records information solely for events that do not need to be recorded under FINRA By-Laws or rules, the system would not be subject to FINRA synchronization requirements. See, e.g., Securities Exchange Act Release No. 77724 (April 27, 2016), 81 FR 30614, 30659–30674 (May 17, 2016) (publishing notice of the CAT NMS Plan and describing the current state of trade and order data recording and reporting).

      • 16-22 SEC Approves Consolidated FINRA Rule 3210 (Accounts At Other Broker-Dealers and Financial Institutions); Effective Date: April 3, 2017

        View PDF

        Regulatory Notice
        Notice Type

        Consolidated Rulebook
        New Rule
        Referenced Rules and Regulatory Notices

        FINRA Rule 3110
        NASD Rule 3050
        NYSE Rule 407A
        NYSE Rule Interpretation 407/01
        NYSE Rule Interpretation 407/02
        Suggested Routing

        Compliance
        Legal
        Senior Management
        Key Topics

        Securities Transactions of Associated Persons
        Supervision

        Executive Summary

        The SEC has approved1 FINRA's proposed rule change to adopt a new, consolidated2 rule governing accounts opened or established by associated persons at firms other than the firm at which they are employed. The new rule—FINRA Rule 3210 (Accounts At Other Broker-Dealers and Financial Institutions)—helps facilitate effective oversight of such accounts. New FINRA Rule 3210 replaces NASD Rule 3050, Incorporated NYSE Rules 407 and 407A and Incorporated NYSE Rule Interpretations 407/01 and 407/02.

        The text of new FINRA Rule 3210 is available in Attachment A.

        The rule change takes effect on April 3, 2017.

        Questions regarding this Notice should be directed to Adam Arkel, Associate General Counsel, Office of General Counsel, at (202) 728-6961 or adam.arkel@finra.org.

        Background & Discussion

        Sound supervisory practices require that a member firm monitor personal accounts opened or established outside of the firm by its associated persons. New FINRA Rule 3210 combines and streamlines longstanding provisions of the NASD and NYSE rules that address this area3 and, in combination with FINRA Rule 3110(d), which addresses securities transactions review and investigation,4 helps facilitate effective oversight of the trading activities of associated persons of member firms. This Regulatory Notice provides an overview of the requirements of new Rule 3210.

        Obligations of Associated Persons

        Prior Written Consent Requirement

        FINRA Rule 3210 requires that an associated person5 must obtain the prior written consent of his or her employer when opening an account, as specified by the rule, at another member or other financial institution. Specifically, paragraph (a) under the rule provides that no person associated with a member (referred to as the "employer member") shall, without the prior written consent of the member, open or otherwise establish at a member other than the employer member (referred to as the "executing member"), or at any other financial institution,6 any account in which securities transactions can be effected7 and in which the associated person has a beneficial interest.8

        Presumption of Beneficial Interest; Rebutting the Presumption

        The rule specifies accounts in which an associated person is presumed to have a beneficial interest. As such, the rule's requirements would apply to these accounts. Specifically, Supplementary Material .02 provides that, for purposes of Rule 3210, the associated person shall be presumed to have a beneficial interest in, and to have established, any account that is held by:9

        a. the spouse of the associated person;
        b. a child of the associated person or of the associated person's spouse, provided that the child resides in the same household as or is financially dependent upon the associated person;
        c. any other related individual over whose account the associated person has control; or
        d. any other individual over whose account the associated person has control and to whose financial support the associated person materially contributes.

        However, the rule makes allowance for rebutting the presumption as to specified accounts. Specifically, Supplementary Material .02 provides that, for purposes of spouse and child accounts as set forth in (a) and (b) above, an associated person need not be presumed to have a beneficial interest in, or to have established, an account if the associated person demonstrates, to the reasonable satisfaction of the employer member, that the associated person derives no economic benefit from, and exercises no control over, the account.

        FINRA notes that, because the accounts specified in (c) and (d) above involve control by the associated person, there would be no meaningful purpose in attempting to rebut the presumption of the associated person's beneficial interest in such accounts.10 As such, the rule's requirements would apply to these accounts.

        Notification Requirement

        Associated persons have notification obligations under the new rule. Paragraph (b) of Rule 3210 provides that any associated person, prior to opening or otherwise establishing an account subject to the rule, must notify in writing the executing member, or other financial institution, of his or her association with the employer member.11

        Accounts Established Prior to Association With the Member

        The rule makes allowance for accounts opened by an associated person prior to his or her association with the employer member. Specifically, Supplementary Material .01 provides that, if the account was opened or otherwise established prior to the person's association with the employer member, the associated person, within 30 calendar days of becoming so associated, must obtain the written consent of the employer member to maintain the account and must notify in writing the executing member or other financial institution of his or her association with the employer member.12

        Accounts at Non-Member Financial Institutions

        Supplementary Material .04 of the new rule provides that, with respect to an account subject to the rule at a financial institution other than a member, the employer member must consider the extent to which it will be able to obtain, upon written request, duplicate copies of confirmations and statements, or the transactional data contained therein, directly from the non-member financial institution in determining whether to provide its written consent to an associated person to open or maintain such account.

        Obligations of Executing Members

        Executing members have specified obligations under the rule. Paragraph (c) under Rule 3210 provides that an executing member must, upon written request by the employer member, transmit duplicate copies of confirmations and statements, or the transactional data contained therein, with respect to an account subject to the rule.13

        Transactions and Accounts Not Subject to the Rule

        Supplementary Material .03 of the rule provides that the rule's requirements shall not apply to transactions in unit investment trusts, municipal fund securities as defined under MSRB Rule D-12,14 qualified tuition programs pursuant to Section 529 of the Internal Revenue Code and variable contracts or redeemable securities of companies registered under the Investment Company Act, as amended, or to accounts that are limited to transactions in such securities,15 or to Monthly Investment Plan type accounts.


        1 See Securities Exchange Act Release No. 77550 (April 7, 2016), 81 FR 21924 (April 13, 2016) (Order Approving Proposed Rule Change to Adopt FINRA Rule 3210 (Accounts At Other Broker-Dealers and Financial Institutions), as Modified by Partial Amendment No. 1 and Partial Amendment No. 2; File No. SR-FINRA-2015-029).

        2 The current FINRA rulebook consists of: (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the Transitional Rulebook). While the NASD Rules generally apply to all FINRA member firms, the Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (Dual Members). The FINRA Rules apply to all FINRA member firms, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process, see Information Notice 03/12/08 (Rulebook Consolidation Process). For convenience, the Incorporated NYSE Rules are referred to as the "NYSE Rules."

        3 See NASD Rule 3050, Incorporated NYSE Rules 407 and 407A and Incorporated NYSE Rule Interpretations 407/01 and 407/02. These rules will be deleted from the FINRA rulebook as of April 3, 2017, the effective date of new Rule 3210.

        4 FINRA Rule 3110(d) (Transaction Review and Investigation) sets forth requirements for supervisory procedures for members to comply with the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA) (Pub. L. No. 100-704, 102 Stat. 4677). Paragraph (d)(1) of Rule 3110 requires that a member's supervisory procedures must include a process for the review of securities transactions 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 the accounts specified under paragraphs (d)(1)(A) through (d)(1)(D) of the rule. In the interest of clarity, FINRA has reminded members that, though new Rule 3210 includes the objective of working in combination with Rule 3110(d), the new rule's scope is not limited to reviews pursuant to that provision. See SR-FINRA-2015-029, Partial Amendment No. 1. Members may among other things need the information that they obtain pursuant to Rule 3210 for purposes of helping manage conflicts of interest in their businesses. See, e.g., Report on Conflicts of Interest (October 2013). More broadly, FINRA noted in Partial Amendment No. 1 that members are responsible for establishing and maintaining systems for the supervision of their associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. As such, members' reviews of the outside transactions of their associated persons could relate to other facets of conduct under FINRA rules, not just FINRA Rule 3110(d).

        5 The terms "person associated with a member" and "associated person of a member" include, among others, registered representatives. See paragraph (rr) of Article I of the FINRA By-Laws.

        6 Supplementary Material .05 provides that, for the purposes of the rule, the terms "other financial institution" and "financial institution other than a member" include, but are not limited to, any broker-dealer that is registered pursuant to SEA Section 15(b)(11), domestic or foreign nonmember broker-dealer, investment adviser, bank, insurance company, trust company, credit union and investment company.

        7 The phrase "any account in which securities transactions can be effected" is intended to include any account, regardless of type, where securities transactions can take place as specified under the rule.

        8 "Beneficial interest" refers, broadly, to any economic interest. See, e.g., FINRA Rule 5130(i)(1), which defines "beneficial interest" to mean, in part, "any economic interest, such as the right to share in gains or losses."

        9 Members should note that these types of accounts are intended to generally align with "covered accounts" as defined pursuant to FINRA Rule 3110(d)(4)(A) for purposes of the transaction review and investigation provisions under Rule 3110(d)(1). See note 4.

        10 See SR-FINRA-2015-029, Partial Amendment No. 2.

        11 FINRA has noted that the prior written consent and notification requirements of paragraph (a) and paragraph (b) under the new rule would go to accounts that the associated person opens or establishes, as specified by the rule, on or after the new rule's effective date of April 3, 2017. See SR-FINRA-2015-029, Partial Amendment No. 1.

        12 The requirements of Supplementary Material .01 apply without regard to when the account was opened (including, for instance, accounts opened before the new rule's effective date) whenever the associated person enters into a new association with a member. See SRFINRA- 2015-029, Partial Amendment No. 1.

        13 The rule does not prescribe any particular methodology as to transmission of the specified information. FINRA noted in Partial Amendment No. 1 that the rule is intended to permit members all reasonable flexibility as to the manner of obtaining and reviewing the information, whether by hard copy or electronic means. See SR-FINRA-2015-029, Partial Amendment No. 1.

        14 MSRB Rule D-12 defines municipal fund security to mean "a municipal security issued by an issuer that, but for the application of Section 2(b) of the Investment Company Act of 1940, would constitute an investment company within the meaning of Section 3 of the Investment Company Act of 1940."

        15 FINRA notes that "limited" means that only transactions as set forth in the Supplementary Material can be effected in the account.


        ATTACHMENT A

        Text of New FINRA Rule 3210

        *****

        3210. Accounts At Other Broker-Dealers and Financial Institutions

        (a) No person associated with a member ("employer member") shall, without the prior written consent of the member, open or otherwise establish at a member other than the employer member ("executing member"), or at any other financial institution, any account in which securities transactions can be effected and in which the associated person has a beneficial interest.
        (b) Any associated person, prior to opening or otherwise establishing an account subject to this Rule, shall notify in writing the executing member, or other financial institution, of his or her association with the employer member.
        (c) An executing member shall, upon written request by an employer member, transmit duplicate copies of confirmations and statements, or the transactional data contained therein, with respect to an account subject to this Rule.

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

        .01 Account Opened Prior to Association With Employer Member. If the account was opened or otherwise established prior to the person's association with the employer member, the associated person, within 30 calendar days of becoming so associated, shall obtain the written consent of the employer member to maintain the account and shall notify in writing the executing member or other financial institution of his or her association with the employer member.

        .02 Related and Other Persons. For purposes of this Rule, the associated person shall be presumed to have a beneficial interest in, and to have established, any account that is held by:

        (a) the spouse of the associated person;
        b) a child of the associated person or of the associated person's spouse, provided that the child resides in the same household as or is financially dependent upon the associated person;
        (c) any other related individual over whose account the associated person has control; or
        (d) any other individual over whose account the associated person has control and to whose financial support the associated person materially contributes.
        For purposes of paragraphs (a) and (b) of this Supplementary Material .02, an associated person need not be presumed to have a beneficial interest in, or to have established, an account if the associated person demonstrates, to the reasonable satisfaction of the employer member, that the associated person derives no economic benefit from, and exercises no control over, the account.

        .03 Transactions and Accounts Not Subject To This Rule. The requirements of this Rule shall not apply to transactions in unit investment trusts, municipal fund securities as defined under MSRB Rule D-12, qualified tuition programs pursuant to Section 529 of the Internal Revenue Code and variable contracts or redeemable securities of companies registered under the Investment Company Act, as amended, or to accounts that are limited to transactions in such securities, or to Monthly Investment Plan type accounts.

        .04 Accounts At a Financial Institution Other Than a Member. With respect to an account subject to this Rule at a financial institution other than a member, the employer member shall consider the extent to which it will be able to obtain, upon written request, duplicate copies of confirmations and statements, or the transactional data contained therein, directly from the non-member financial institution in determining whether to provide its written consent to an associated person to open or maintain such account.

        .05 Other Financial Institution. For purposes of this Rule, the terms "other financial institution" and "financial institution other than a member" include, but are not limited to, any broker-dealer that is registered pursuant to Section 15(b)(11) of the Exchange Act, domestic or foreign non-member broker-dealer, investment adviser, bank, insurance company, trust company, credit union and investment company.

        *****

      • 16-21 SEC Approves Rule to Require Registration of Associated Persons Involved in the Design, Development or Significant Modification of Algorithmic Trading Strategies; Effective Date: January 30, 2017

        View PDF

        Qualification and Registration of Associated Persons Relating to Algorithmic Trading

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules and Regulatory Notices

        FINRA Rule 3110
        NASD Rule 1032
        Regulatory Notice 15-09
        Suggested Routing

        Compliance
        Legal
        Operations
        Technology
        Trading and Market Making
        Key Topics

        Algorithmic Trading
        High Frequency Trading
        Securities Trader
        Series 57

        Executive Summary

        The SEC approved an amendment to NASD Rule 1032(f) that expands the scope of persons required to register as a Securities Trader.1 Specifically, beginning January 30, 2017, each associated person who is primarily responsible for the design, development or significant modification of an algorithmic trading strategy relating to equity, preferred or convertible debt securities, or who is responsible for the day-to-day supervision or direction of such activities, must pass the Series 57 exam and register as a Securities Trader. The rule text is available in the online FINRA Manual.

        Questions regarding this Notice should be directed to:

        •   Susan Tibbs, Vice President, Quality of Markets, Market Regulation, at (240) 386-5082 or by email at susan.tibbs@finra.org;
        •   Joe McDonald, Senior Director, Testing and Continuing Education, at (240) 386-5065 or by email at joe.mcdonald@finra.org; or
        •   for legal and interpretive questions, Racquel Russell, Associate General Counsel, Office of General Counsel, at (202) 728-8363 or by email at racquel.russell@finra.org.

        Background and Discussion

        On April 7, 2016, the SEC approved an amendment to NASD Rule 1032(f) to expand the scope of persons required to register as a Securities Trader. Specifically, the amendment requires each person associated with a member to register as a Securities Trader if such person is: (i) primarily responsible for the design, development or significant modification of an algorithmic trading strategy relating to equity, preferred or convertible debt securities; or (ii) responsible for the day-to-day supervision or direction of such activities. This amendment is part of FINRA's initiatives relating to equity market structure and automated trading activities, including high frequency trading.2

        Scope of "Algorithmic Trading Strategy"

        Under the rule, an "algorithmic trading strategy" is an automated system that generates or routes orders (including sending orders for routing and order-related messages, such as cancellations), but does not include an automated system that solely routes orders, in their entirety, to a market center. Covered systems include those that generate or route orders (or order-related messages) in any equity security (including options), preferred security or convertible debt security, whether sent to an exchange or handled over the counter. Examples of systems that are considered algorithmic trading strategies if they generate or route orders include:

        •   an arbitrage strategy, such as index or exchange-traded fund (ETF) arbitrage;
        •   a hedging or loss-limit algorithmic strategy that generates orders on an automated basis;
        •   a strategy that involves simultaneously trading two or more correlated securities due to the divergence in their prices or other trading attributes;
        •   an order generation, routing and execution program used for large-sized orders that involve dividing the order into smaller-sized orders less likely to result in market impact;
        •   an order routing strategy used to determine the price or size for routed orders, the use of "parent" or "child" orders, or displayed versus non-displayed trading interest;
        •   a trading strategy that becomes more or less aggressive to correlate with trading volume in specified securities;
        •   a trading strategy that generates orders based on moving reference prices;
        •   a trading strategy that minimizes intra-day slippage in connection with achieving volume-weighted average prices and time-weighted average prices; and
        •   a strategy that creates or liquidates baskets of securities, including those that track indexes or ETFs.

        The above list is not an exhaustive list of the systems that fall within the scope of an "algorithmic trading strategy" today and, as markets change the systems that will fall within scope in the future will continue to evolve.

        Because an automated system that solely routes orders received in their entirety to a market center is not considered an "algorithmic trading strategy" under the rule, a standard order router that routes retail orders in their entirety to a particular market center for handling and execution is not covered. If an order router performs any of the additional functions listed above it would be considered an "algorithmic trading strategy."

        Similarly, an algorithm that solely generates trading ideas or investment allocations, including an automated investment service that constructs portfolio recommendations, but that is not equipped to automatically generate orders or order-related messages to effectuate such trading ideas into the market (whether independently or via a linked router), would not constitute an algorithmic trading strategy under the rule. However, if an order router or investment algorithm performs additional functions that include the generation or routing of orders or order-related messages, such system would be considered an "algorithmic trading strategy."

        Persons Required to Register

        The registration requirement applies to an associated person if such person is (i) primarily responsible for the design, development or significant modification3 of an algorithmic trading strategy relating to equity, preferred or convertible debt securities; or (ii) responsible for the day-to-day supervision or direction of such activities.

        FINRA understands that workflows, structures and roles vary across firms. However, in identifying persons required to register as Securities Traders under the amendments to NASD Rule 1032(f), firms should keep in mind that, in adopting this requirement, FINRA's goal is to ensure that firms identify and register one or more associated persons who possess knowledge of, and responsibility for, both the design of the intended trading strategy (e.g., the arbitrage strategy) and the technological implementation of such strategy (e.g., coding), sufficient to evaluate whether the resultant product is designed not only to achieve business objectives, but also regulatory compliance.

        FINRA does not intend that the registration requirement apply to every associated person who touches or otherwise is involved in the design or development of a trading algorithm. However, each associated person who is primarily responsible for the design, development, or significant modification of an algorithmic trading strategy or the day-to-day supervision or direction of these activities must register. For example, if a sole associated person determines the design of the trading strategy employed by an algorithm, writes the code to effectuate such strategy, and executes or directs the significant modification of such code going forward, then that person alone would be required to register as a Securities Trader under the rule with respect to that algorithm.4

        In addition, if, for example, a lead developer liaises with a head trader (and the head trader, a Securities Trader, is primarily responsible for the "design" of the trading strategy employed by the algorithm), but the lead developer is the associated person primarily responsible for the supervision of the development of the algorithm to meet such head trader's objectives, such lead developer also must be a Securities Trader because the developer is the associated person "primarily responsible for the development of the algorithmic trading strategy" and the day-to-day "supervision or direction" of the team of developers. Individuals under the lead developer's supervision would not be required to register if they are not primarily responsible for any covered activities with regard to an algorithmic trading strategy or are not responsible for the day-to-day supervision or direction of others on the team with regard to the design, development or significant modification of an algorithmic trading strategy. Thus, for example, a junior developer on the lead developer's team presumably is not "primarily" responsible for the design, development or significant modification of an algorithmic trading strategy and, therefore, would not be required to register as a Securities Trader.5

        FINRA notes that FINRA Rule 3110(a)(2) generally requires that all registered persons be designated to an appropriately registered principal or principals with authority to carry out the supervisory responsibilities of the member for each type of business in which it engages for which registration as a broker-dealer is required. In addition, FINRA Rule 3110(a)(5) requires the assignment of each registered person to an appropriately registered representative or principal who will be responsible for supervising that person's activities. With the addition of this new activity to the Securities Trader registration category, firms will be required to designate developers to registered persons for Rule 3110(a) purposes. In practice, these developers may not currently report to a registered person. In such instances, FINRA believes it is acceptable for firms to "assign" a lead algorithm developer (or other non-trading personnel) engaging in covered activities to one or more other registered persons of the firm that supervise trading activities outside such developer's or other non-trader's usual reporting line.

        While the adequacy of a firm's supervisory structure must be evaluated on a firm-by-firm basis, firms are afforded a degree of flexibility in arranging for the appropriate supervision of a lead developer (or other non-trading personnel) registered as a Securities Trader, such as by assigning such person to:

        •   a Securities Trader Principal in the firm's trading business line (e.g., the Securities Trader Principal in the reporting line of a Securities Trader primarily responsible for the design of any algorithmic trading strategy); or
        •   a Securities Trader in the firm's trading business line (e.g., a Securities Trader primarily responsible for the design of an algorithmic trading strategy, including the strategy developed by the lead developer); or
        •   more than one registered person, provided that the supervisor responsible for the lead algorithm developer's activities requiring registration as a Securities Trader is registered as a Securities Trader or Securities Trader Principal.6

        As such, depending upon a firm's structure, a lead developer's "business line" supervisor may not necessarily be required to register as a Securities Trader or Securities Trader Principal if that person is not involved in the day-to-day supervision or direction of the development process with regard to an algorithmic trading strategy or otherwise engaged in activities requiring registration as a Securities Trader. However, in all cases, the firm must ensure that it has designated an appropriately registered person to be responsible for supervising algorithmic trading strategy activities under the rule.

        Third-Party Algorithms

        In some cases, a firm may use an algorithmic trading strategy that did not originate in-house and, therefore, was not designed or built by the firm's associated persons. In such cases where the design and development of an algorithmic trading strategy was performed solely by a third-party, the registration requirement would not be triggered with respect to the firm's activities relating to the design or development of such algorithm. However, to the extent associated persons are able to significantly modify the algorithmic trading strategy in-house, such significant modifications must be performed by a Securities Trader.

        In other cases, a firm may engage a third-party to custom-build an algorithmic trading strategy for the firm. In such cases, the associated person responsible for directing the third-party in the design or development of the algorithmic trading strategy must be a Securities Trader.7 If the firm directs a third-party to significantly modify an algorithmic trading strategy, such direction also must be by a Securities Trader. Similarly, after the firm has launched the externally built algorithm, the associated person primarily responsible for any significant modifications made in-house by the firm must be a Securities Trader.

        As is the case today, associated persons responsible for monitoring or reviewing the performance of an algorithmic trading strategy must be registered pursuant to NASD Rule 1032(f); a firm's trading activity must always be supervised by an appropriately registered person. Therefore, even where a firm purchases an algorithm off-the-shelf and does not significantly modify the algorithm, the associated person responsible for monitoring or reviewing the performance of the algorithm must be a Securities Trader.

        Effective Date

        An associated person who is (i) primarily responsible for the design, development or significant modification of an algorithmic trading strategy relating to equity, preferred or convertible debt securities; or (ii) responsible for the day-to-day supervision or direction of such activities, may register voluntarily as a Securities Trader beginning on the date of this Notice and must be registered as a Securities Trader beginning on January 30, 2017.


        1. See Securities Exchange Act Release No. 77551 (April 7, 2016), 81 FR 21914 (April 13, 2016) (Order Approving File No. SR-FINRA-2016-007).

        2. See FINRA news release "FINRA Board Approves Series of Equity Trading and Fixed Income Rulemaking Items" dated September 19, 2014.

        3. A "significant modification" to an algorithmic trading strategy generally would be any change to the code of the algorithm that impacts the logic and functioning of the trading strategy employed by the algorithm. Therefore, for example, a data feed/data vendor change generally would not be considered a "significant modification," whereas a change to a benchmark (such as an index) used by the strategy generally would be considered a "significant modification."

        FINRA notes that, even in cases where a modification is not significant and, therefore, would not be required to be performed by a Securities Trader, as stated in Regulatory Notice 15-09, firms should also focus efforts on the development of algorithmic strategies and on how those strategies are tested and implemented, including, among other things, implementing a change management process that tracks the development of new trading code or material changes to existing code. An effective process should include a review of test results and a set of approval protocols that are appropriate given the scope of the code or any change(s) to the code. See Regulatory Notice 15-09 (Guidance on Effective Supervision and Control Practices for Firms Engaging in Algorithmic Trading Strategies) (March 2015).

        4. It is understood that various technology and other firm personnel are involved in additional tasks necessary to launch an algorithmic trading strategy into production—such as integrating the algorithm into the firm's technological infrastructure and testing linkages. However, because these activities generally would not be considered to be design, development or significant modification activities with respect to the algorithm itself, such activities would not be required to be performed by a Securities Trader.

        5. By limiting the registration requirements to those persons primarily responsible for the design, development or significant modification of algorithmic trading strategies (or responsible for the day-to-day supervision or direction of such activities), FINRA aims to ensure that the member has identified the individuals primarily responsible for the design, development, significant modification and day-to-day supervisory activities described in the rule and has equipped such persons with a basic level of familiarity with the regulatory obligations of the firm employing the algorithm by requiring them to register as Securities Traders. FINRA expects that the competency of these registered persons will inform the behaviors of those acting under their supervision or at their direction.

        6. Another registered person—e.g., a General Securities Representative—may be assigned to supervise the lead algorithm developer with regard to other general areas applicable to registered representatives, such as outside business activities. As always, if the activities of a registered representative are assigned to be supervised by more than one registered representative or principal, the member must clearly document which activities are assigned to be supervised by each responsible party.

        7. FINRA notes that, irrespective of whether an algorithm is designed or developed in-house or by a third-party, the firm employing the algorithm continues to be responsible for the algorithm's activities. Thus, in all cases, robust supervisory procedures, both prior to and after deployment of an algorithmic trading strategy, are a key component in protecting against problematic behavior stemming from algorithmic trading.

      • 16-20 SEC Approves OATS Amendments to Require Identification of Non-FINRA Member Broker-Dealers; Effective Date: August 1, 2016

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        Order Audit Trail System (OATS)

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 7410
        FINRA Rule 7440
        Suggested Routing

        Compliance
        Institutional
        Legal
        Operations
        Registered Representatives
        Senior Management
        Systems
        Trading
        Key Topics

        OATS

        Summary

        Beginning August 1, 2016, firms that report information to OATS will be required to include on their reports the identity of U.S.-registered broker-dealers that are not FINRA members and broker-dealers that are not registered in the U.S. but have received an SRO-assigned identifier. The identities may be reported using either the broker-dealer's Central Registration Depository (CRD®) number or an SRO-assigned identifier. FINRA will provide a list of all acceptable CRD numbers for firms to use to facilitate compliance with the new requirements.

        Questions concerning this Notice should be directed to:

        •   OATS Helpdesk at (800) 321-6273; or
        •   For legal and interpretive questions, Brant Brown, Associate General Counsel, Office of General Counsel, at (202) 728-6927 or by email at brant.brown@finra.org.

        Background & Discussion

        On April 5, 2016, the SEC approved amendments to FINRA Rules 7410 and 7440 to require firms that report order information to OATS (reporting members)1 to identify on their OATS reports certain broker-dealers that are not FINRA members when the reporting members have received an order from such a broker-dealer.2 Beginning August 1, 2016, reporting members must specifically identify two types of non-FINRA member broker-dealers as part of the OATS report when they receive orders from these firms: (1) U.S.-registered broker-dealers that are not FINRA members; and (2) broker-dealers that are not registered in the U.S. but have received an SRO-assigned identifier to access certain FINRA trade reporting facilities.3

        Under either of these circumstances, reporting members may report any one of the following: the firm's CRD number;4 an SRO-assigned identifier assigned to the broker-dealer (e.g., a market participant identifier (MPID) assigned by a national securities exchange); or, if the broker-dealer does not have a CRD number or an SRO-assigned identifier (e.g., a foreign broker-dealer), a value indicating that the firm has no CRD number or SRO-assigned identifier.5 FINRA will provide on its public website a list of CRD numbers for reporting members to use to aid in implementing the rule amendments.

        The rule does not mandate which identifier reporting members must use. If a broker-dealer that must be identified does not have an SRO-assigned identifier that is available to FINRA, the reporting member receiving the order must report the firm's CRD number.6 Similarly, for a non-U.S.-registered broker-dealer that has been provided with an SRO-assigned identifier to access a FINRA trade reporting facility pursuant to FINRA Rule 7220A or 7320 but does not have a CRD number, the reporting member receiving the order must report the SRO-assigned identifier for the broker-dealer.

        In conjunction with the implementation of this rule change, FINRA is updating the OATS Reporting Technical Specifications to require that OATS reports specifically identify a non-FINRA member broker-dealer to which an order is routed. For orders routed from a reporting member to a non-FINRA member, including both non-FINRA member broker-dealers and national securities exchanges, FINRA Rule 7440(c)(6)(I) requires the reporting of the identity of the non-FINRA member to which the order was routed. Although the OATS Reporting Technical Specifications have required that OATS reports include a specific identifier for each national securities exchange to which an order is routed, only a generic identifier for non-FINRA member broker-dealers previously was required.7 To conform the reporting of orders received from and orders routed to non-FINRA member broker-dealers, in addition to the rule amendments described above, FINRA is updating the OATS Reporting Technical Specifications to require that reporting members provide either an SRO-assigned identifier or a CRD number when routing an order to a non-FINRA member broker-dealer.8 These updates to the OATS Reporting Technical Specifications will also be implemented on August 1, 2016.


        1. Rule 7410(o) defines a reporting member as "a member that receives or originates an order and has an obligation to report information under Rules 7440 and 7450." The rule also contains exceptions from the definition. See Rule 7410(o) (1) and (2).

        2. See Securities Exchange Act Release No. 77523 (April 5, 2016), 81 FR 21427 (April 11, 2016) (Order Approving SR-FINRA-2016-006).

        3. The amendment to Rule 7410 defines an "SRO-assigned identifier" as "a unique identifier assigned to a broker or dealer by a national securities exchange or national securities association for use by such broker or dealer when accessing the exchange or a facility of the association." For purposes of the definition, the identifier is "unique" provided the identifier assigned by the exchange or association is used to identify only a single broker-dealer.

        4. To register as a broker-dealer and have a CRD number, firms are required to file a Form BD with CRD. See 17 CFR 240.15b1-1(b). Consequently, all U.S.-registered broker-dealers have a CRD number.

        5. Because non-U.S. broker-dealers generally do not have SRO-assigned identifiers or CRD numbers, the amendments do not require specific identification of non-U.S. broker-dealers when those firms do not have SRO-assigned identifiers or CRD numbers. In these cases, FINRA intends to permit a value whereby the reporting member can indicate that the order was received from a non-U.S. broker-dealer without a CRD number or SRO-assigned identifier.

        6. Currently, all U.S.-registered broker-dealers have at least one SRO-assigned identifier that is available to FINRA through publicly-available information or by contractual arrangement.

        7. See OATS Reporting Technical Specifications, at 4-4, and A-4 to A-5 (January 11, 2016 ed.).

        8. As noted above, in the case of a non-U.S. broker-dealer that does not have a CRD number or an SRO-assigned identifier, FINRA will provide an indicator for "non-U.S. broker-dealer" for use in the destination code field (for routes to a non-member broker-dealer) and as a member type code (for orders received from a non-member broker-dealer).

      • 16-19 FINRA Issues Guidance Regarding the Use of Stop Orders During Volatile Market Conditions

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        Stop Orders

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules

        FINRA Rule 5350
        FINRA Rule 6121
        FINRA Rule 6190
        FINRA Rule 11892
        Suggested Routing

        Compliance
        Internal Audit
        Legal
        Operations
        Risk
        Senior Management
        Systems
        Trading
        Training
        Key Topics

        Customer Protection
        Extraordinary Market Volatility
        Order Types
        Stop Orders

        Summary

        FINRA encourages firms to review their practices regarding stop (or stop-loss) orders, with an emphasis on educating investors regarding the risks and benefits of stop orders and special considerations around the use of stop orders during volatile market conditions. To accomplish this, firms should consider, among other things, providing targeted training to registered representatives regarding the risks associated with stop orders and, where appropriate, making alternative recommendations to meet customer objectives. Firms that allow customers to enter stop orders directly online should ensure that they prominently provide clear and comprehensive disclosures to customers at the time of order entry. Firms should also consider implementing systemic safeguards around the use of stop orders.

        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.

        Discussion

        On occasion U.S. equity markets experience periods of extraordinary volatility and price dislocation; sometimes these occurrences are prolonged and at other times they are of limited duration. FINRA and other self-regulatory organizations have instituted regulatory safeguards to help address potentially destabilizing market volatility, including recalibrating the market-wide circuit breakers,1 revising clearly erroneous transactions rules,2 and implementing limit up/limit down price bands and trading pauses.3 Nonetheless, significant price volatility may still occur and regulators and market participants have been exploring possible causes and contributing factors, including the role that stop orders and market orders may play in contributing to downward price pressure and market volatility.

        Registered representatives often recommend, and investors use, stop orders as a tool for managing market risk.4 Investors generally use stop sell orders to protect a profit position in the event the stock's price declines. Investors with a short position generally use stop buy orders to limit losses in the event the stock's price increases. However, because stop orders, once triggered, become market orders, investors immediately face the same risks inherent with market orders—particularly, that during volatile market conditions, their orders may be executed at prices materially above or below their price expectations.

        FINRA is issuing this Notice to encourage firms to (1) educate registered representatives on advising their customers regarding the use of stop orders; (2) disclose risks prominently where investors are able to enter stop orders directly online; (3) review their customer base to determine whether any safeguards should be put into effect around the availability and use of stop orders; and (4) consider whether systemic safeguards around the use of specific order types is appropriate.5

        Disclosure to Customers

        While stop orders may be a useful tool for investors who are unable to regularly monitor the price of their positions, stop orders are not without potential risks. Therefore, firms that encourage stop orders should educate their customers about the risks inherent in the use of stop orders. Firms that allow customers to enter stop orders directly online should ensure that they prominently provide clear and comprehensive disclosures to customers at the time of order entry, and registered representatives should do the same when advising their customers. For example, firms and registered representatives should inform customers that:

        •   Stop prices are not guaranteed execution prices. A "stop order" becomes a "market order" when the "stop price" is reached and firms are required to execute a market order fully and promptly at the current market price. Therefore, the price at which a stop order ultimately is executed may be very different from the investor's "stop price." Accordingly, while a customer may receive a prompt execution of a stop order that becomes a market order, during volatile market conditions, the execution may be at a significantly different price from the stop price if the market is moving rapidly.
        •   Stop orders may be triggered by a short-lived, dramatic price change. Customers should be informed that, during periods of volatile market conditions, the price of a stock can move significantly in a short period of time and trigger an execution of a stop order (and the stock may later resume trading at its prior price level). Investors should understand that if their stop order is triggered under these circumstances, they may sell at an undesirable price even though the price of the stock may stabilize during the same trading day.
        •   Sell stop orders may exacerbate price declines during times of extreme volatility. The activation of sell stop orders may add downward price pressure on a security. If triggered during a precipitous price decline, a sell stop order also is more likely to result in an execution well below the stop price.
        •   Placing a "limit price" on a stop order may help manage some of these risks. A stop order with a "limit price" (a "stop limit" order) becomes a "limit order" when the stock reaches the "stop price." A "limit order" is an order to buy or sell a security for an amount no worse than a specific price (i.e., the "limit price"). By using a stop limit order instead of a regular stop order, a customer will receive additional certainty with respect to the price the customer receives for the stock. However, investors also should be aware that, because brokers cannot sell for a price that is lower (or buy for a price that is higher) than the limit price selected, there is the possibility that the order will not be executed at all. Customers should be encouraged to use limit orders in cases where they prioritize achieving a desired target price more than getting an immediate execution irrespective of price.
        •   Improving communication with customers regarding market conditions. Customers may not regularly monitor overall market conditions. Registered representatives should include information regarding volatile market conditions when advising customers in selecting a stop order type and the stop price (or the stop and limit prices for a stop limit order). In addition, firms that allow customers to enter stop orders directly online should include information regarding volatile market conditions at the time of order entry if markets are abnormal.

        Systemic Safeguards

        In addition to reviewing the order types made available to customers to determine whether current disclosures are sufficient, firms also should consider whether any systemic safeguards around the use of specific order types is appropriate. For example, with regard to stop orders, firms may consider:

        •   Prominent disclosures at the time or order entry. For example, firms should consider steps to educate and alert investors before permitting them to confirm entry of a stop order. This may include the use of an affirmative pop-up when an investor attempts to enter a stop order, which explains the operation of the order type as well as discloses other relevant factors, such as special considerations applicable during volatile markets.
        •   Controls on the use of stop orders that do not carry a limit price. Firms should consider making stop limit orders the default type of stop order. Requiring customers to acknowledge disclosures regarding the risks of unpriced stop orders and affirmatively choose the stop market order type should help make customers aware of their options and help ensure that they are informed and deliberate in making their decision.
        •   Special terms on stop orders. Firms should consider restricting the time of day during which a stop order may be triggered to preclude the activation of stop orders around the open and close when markets may be more volatile. These measures may be of increased importance for illiquid stocks, which may become even harder to sell and experience added price dislocation during times of extraordinary market volatility.
        •   Expiration of good-til-cancelled stop orders. Firms should consider adopting and disclosing to customers a policy around the expiration of good-til-cancelled stop and stop limit orders. For example, firms may limit the life of good-til-cancelled stop and stop limit orders to 90 days, notifying customers of impending expirations and advising them that they must re-price and re-enter the order, if desired. Firms also should consider accompanying good-til-canceled stop orders with additional disclosures.

        1. Rule 6121.02 (Market-wide Circuit Breakers in NMS Stocks) generally provides that FINRA will halt all over-the-countertrading in all NMS stocks when a circuit breaker has been triggered on the primary listing market.

        2. Rule 11892 (Clearly Erroneous Transactions in Exchange-Listed Securities) generally provides for uniform treatment across self-regulatory organizations of clearly erroneous reviews for executions in NMS stocks, including in the case of multi-stock events involving 20 or more securities.

        3. FINRA Rule 6190 (Compliance with Regulation NMS Plan to Address Extraordinary Market Volatility) requires firms to comply with the NMS Plan to Address Extraordinary Market Volatility (the Plan), which provides for a market-wide limit up and limit down mechanism to prevent trades in NMS stocks from occurring outside of specified price bands, coupled with trading pauses in the event of more significant and prolonged price moves. The Plan generally prohibits the display of offers at prices below the lower price band and bids above the upper price band and the execution of trades outside the price bands.

        4. FINRA Rule 5350 (Stop Orders) defines "stop order" and provides that a stop order must be triggered by a transaction at the stop price, rather than another trigger—e.g., a quotation at the stop price. Supplementary Material .01 further provides, among other things, that a firm may offer an order type that activates as a market or limit order using a triggering event other than a transaction at the stop price, however, such order cannot be labeled a "stop order" or a "stop limit order" and must be clearly distinguishable from a "stop order" or a "stop limit order." In addition, the firm must disclose to the customer, in paper or electronic form, prior to the time the customer places the order, a description of the order type including the triggering event. A firm that permits customers to engage in securities transactions online also must post the required disclosures on the firm's website in a clear and conspicuous manner.

        A "stop" order is an order to buy (or sell) that becomes a market order to buy (or sell) when a transaction occurs at or above (below) the stop price. The "stop price" is the price, selected in advance by the investor, at which the order becomes a market order to buy (or sell). For a buy stop order, investors choose a stop price that is above the current market price for the security, whereas, for a sell stop order, investors would choose stop price that is below the current market price.

        5. On April 19, 2016, the Equity Market Structure Advisory Committee (EMSAC) Customer Issues Subcommittee issued a status report recommending, among other things, that the SEC and FINRA consider issuing additional guidance to further emphasize the importance of effective practices relating to stop orders. See EMSAC Customer Issues Subcommittee Status Report.

      • 16-18 SEC Approves Rule Requiring Delivery of an Educational Communication to Customers of a Transferring Representative; Effective Date: November 11, 2016

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        Recruitment Practices

        Regulatory Notice
        Notice Type

        New Rule
        Referenced Rules & Notices

        FINRA Rule 2273
        FINRA Rule 4512
        Suggested Routing

        Compliance
        Legal
        Operations
        Registered Representatives
        Senior Management
        Key Topics

        Conflicts of Interest
        Customer Account Transfers
        Disclosure

        Summary

        The SEC approved the adoption of FINRA Rule 2273 (Educational Communication Related to Recruitment Practices and Account Transfers), which establishes an obligation to deliver an educational communication in connection with firm recruitment practices and account transfers.1 The rule becomes effective November 11, 2016.

        The rule text is available in Attachment A. The educational communication is available as Attachment B.

        Questions regarding this Notice should be directed to:

        •   Philip Shaikun, Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8451 or Philip.Shaikun@finra.org; or
        •   Jeanette Wingler, Assistant General Counsel, OGC, at (202) 728-8013 or Jeanette.Wingler@finra.org.

        Background and Discussion

        Representatives who leave their firms often contact former customers and emphasize the benefits the former customers would experience by transferring their assets to the firm that recruited the registered representative (recruiting firm) and maintaining their relationship with the representative. In this situation, the former customer's confidence in and prior experience with the representative may be one of the customer's most important considerations in determining whether to transfer assets to the recruiting firm. However, former customers may not be aware of other important factors to consider in making a decision whether to transfer assets to the recruiting firm, including direct costs that the customer may incur. Therefore, to provide former customers with a more complete picture of the potential implications of a decision to transfer assets, Rule 2273 requires delivery of a FINRA-created educational communication by the recruiting firm that highlights key considerations for former customers in transferring assets to the recruiting firm, and the direct and indirect impacts of such a transfer on those assets.

        Scope of New Rule

        Educational Communication

        The rule requires a firm that hires or associates with a registered representative to provide to a former customer of the representative, individually, in paper or electronic form, an educational communication prepared by FINRA.2 The rule requires delivery of the educational communication when:

        •   the firm, directly or through a representative, individually contacts a former customer of that representative to transfer assets; or
        •   a former customer of the representative, absent individual contact, transfers assets to an account assigned, or to be assigned, to the representative at the firm.3

        To facilitate uniform communication under the rule and to minimize the burden on firms in providing the communication to former customers of a representative, the rule requires firms to provide the FINRA-created communication, in paper or electronic form, and does not permit firms to use an alternative format.

        The educational communication focuses on important considerations for a former customer who is contemplating transferring assets to an account assigned to his or her former representative at the recruiting firm. The educational communication highlights the following potential implications of transferring assets to the recruiting firm:

        •   whether financial incentives the representative receives may create a conflict of interest;
        •   that some assets may not be directly transferrable to the recruiting firm and as a result the customer may incur costs to liquidate and move those assets or incur account maintenance fees to leave them with his or her current firm;
        •   potential costs related to transferring assets to the recruiting firm, including differences in the pricing structure and fees the customer's current firm and the recruiting firm impose; and
        •   differences in products and services between the customer's current firm and the recruiting firm.

        The educational communication is intended to prompt a former customer to make further inquiries of the transferring representative (and, if necessary, the customer's current firm), to the extent that the customer considers the information important to his or her decision making.

        Requirement to Deliver Educational Communication

        The rule intends for a broad range of communications by a recruiting firm or its registered representative to constitute individualized contact that would trigger the delivery requirement. These communications may include, but are not limited to, oral or written communications by the transferring representative:

        •   informing the former customer that he or she is now associated with the recruiting firm;
        •   suggesting that the former customer consider transferring his or her assets or account to the recruiting firm;
        •   informing the former customer that the recruiting firm may offer better or different products or services; or
        •   discussing with the former customer the fee or pricing structure of the recruiting firm.

        Furthermore, FINRA would consider oral or written communications to a group of former customers to similarly trigger the requirement to deliver the educational communication under the rule. These types of oral or written communications by a firm, directly or through the representative, to a group of former customers may include, but are not limited to:

        •   mass mailing of information;
        •   sending copies of information via email; or
        •   automated phone calls or voicemails.

        Timing and Means of Delivery of Educational Communication

        The rule requires a firm to deliver the educational communication at the time of first individualized contact with a former customer by the firm, directly or through the representative, regarding the former customer transferring assets to the firm. If such contact is in writing, the rule requires the educational communication to accompany the written communication. If the contact is by electronic communication, the rule permits the firm to hyperlink directly to the educational communication.

        If the first individualized contact with the former customer is oral, the rule requires the firm or representative to notify the former customer orally that an educational communication that includes important considerations in deciding whether to transfer assets to the firm will be provided not later than three business days after the contact. The rule requires the educational communication be sent within three business days from such oral contact or with any other documentation sent to the former customer related to transferring assets to the firm, whichever is earlier.

        If the former customer seeks to transfer assets to an account assigned, or to be assigned, to the representative at the firm, but no individualized contact with the former customer by the representative or firm occurs before the former customer seeks to transfer assets, the rule mandates that the firm deliver the educational communication to the former customer with the account transfer approval documentation. The educational communication requirement in the rule applies for a period of three months following the date that the representative begins employment or associates with the recruiting firm.

        The educational communication requirement would not apply when the former customer expressly states that he or she is not interested in transferring assets to the firm. If the former customer subsequently decides to transfer assets to the firm without further individualized contact within the period of three months following the date that the representative begins employment or associates with the firm, then the educational communication is required to be provided with the account transfer approval documentation.


        1. See Securities Exchange Act Release No. 77430 (March 23, 2016), 81 FR 17513 (March 29, 2016) (Order Approving File No. SR-FINRA-2015-057).

        2. For purposes of the rule, a "former customer" includes any customer that had a securities account assigned to a registered person at the representative's previous firm. The term "former customer" does not include a customer account that meets the definition of an "institution a account" pursuant to FINRA Rule 4512(c) (Customer Account Information); provided, however, accounts held by a natural person do not qualify for the institutional account exception.

        3. FINRA has interpreted the rule as not applying to circumstances where a customer's account is proposed to be transferred to a new firm via a bulk transfer or due to a change of broker-dealer of record. See Securities Exchange Act Release No. 76757 (December 23, 2015), 80 FR 81590 (December 30, 2015) (Notice of Filing of File No. SR-FINRA-2015-057).


        ATTACHMENT A

        * * * * *

        Text of New FINRA Rule

        * * * * *

        2200. COMMUNICATIONS AND DISCLOSURES

        * * * * *

        2273. Educational Communication Related to Recruitment Practices and Account Transfers
        (a) Educational Communication Delivery Requirement

        A member that hires or associates with a registered person shall provide to a former customer of the registered person, individually, in paper or electronic form, an educational communication prepared by FINRA when (1) the member, directly or through that registered person, individually contacts the former customer of that registered person to transfer assets or (2) the former customer of that registered person, absent individualized contact, transfers assets to an account assigned, or to be assigned, to the registered person at the member.
        (b) Means and Timing of Delivery
        (1) A member shall deliver the communication in paragraph (a) at the time of first individualized contact with a former customer by the registered person or the member regarding the former customer transferring assets to the member.
        (A) If the contact is in writing, the written communication required in paragraph (a) must accompany the written communication. If the contact is by electronic communication, the member may hyperlink directly to the educational communication.
        (B) If the contact is oral, the member or registered person must notify the former customer orally that an educational communication that includes important considerations in deciding whether to transfer assets to the member will be provided not later than three business days after the contact. The educational communication must be sent within three business days from such oral contact or with any other documentation sent to the former customer related to transferring assets to the member, whichever is earlier.
        (2) If a former customer attempts to transfer assets to an account assigned, or to be assigned, to the registered person at the member, but no individualized contact with the former customer by the registered person or member occurs before the former customer seeks to transfer assets, the member shall deliver the educational communication in paragraph (a) to the former customer with the account transfer approval documentation.
        (3) The delivery of the communication required by paragraph (a) shall apply for a period of three months following the date the registered person begins employment or associates with the member.

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

        .01 Definition. For the purpose of this Rule, the term "former customer" shall mean any customer that had a securities account assigned to a registered person at the registered person's previous firm. This term shall not include an account of a non-natural person that meets the definition of an institutional account pursuant to Rule 4512(c).

        .02 Express Rejection by Former Customer. The requirement in paragraph (a) shall not apply when the former customer who the member, directly or through that registered person, individually contacts to transfer assets expressly states that he or she is not interested in transferring assets to the member. If the former customer subsequently decides to transfer assets to the member without further individualized contact within the period of three months following the date the registered person begins employment or associates with the member, then the requirements of paragraph (b)(2) shall apply.

        * * * * *


        ATTACHMENT B

        Issues to consider when your broker changes firms

        You're receiving this notice because your broker has changed firms. If you're thinking about whether to follow your broker or stay with your current firm, it's a good idea to examine key issues that will help you make an informed decision.

        A good relationship with your broker is surely valuable to you, but it's not the only factor in determining what's in your best interest. Before making a final decision, talk to your broker or someone at your current firm about the following questions, and make sure you're comfortable with the answers.

        Could financial incentives create a conflict of interest for your broker?

        In general, you should discuss the reasons your broker decided to change firms. Some firms pay brokers financial incentives when they join, which could include bonuses based on customer assets the broker brings in, incentives for selling in-house products or a higher share of commissions. Similarly, some firms pay financial incentives to retain brokers or customers. While there's nothing wrong with these incentives in either case, they can create a conflict of interest for the broker. Whether you stay or go, you should carefully consider whether your broker's advice is aligned with your investment strategy and goals.

        Can you transfer all your holdings to the new firm? What are the implications and costs if you can't?

        Some products, such as certain mutual funds and annuities, may not be transferable. If that's the case, you'll face an additional decision if you follow your broker to the new firm: whether to liquidate the non-transferable holdings or keep just these holdings at your current firm. Either way, there could be costs to you, such as fees or taxes if you liquidate, or different service fees if you leave some assets at the current firm. Your broker should be able to explain the implications and costs of each scenario.

        What costs will you pay—both in the short term and ongoing—if you change firms?

        In addition to liquidation fees or taxes if you sell non-transferable assets, you may have to pay account termination or transfer fees if you close your current account, or account opening fees at the new firm. (Even if the new firm waives its fees as an incentive to transfer, that wouldn't reduce any transfer or closure costs at your current firm.) Moving forward, the new firm may have a different pricing structure for maintaining your account or making transactions (such as fee-based instead of commissions, or vice versa), which could increase or lower your account costs. Your broker should be able to explain the pricing structure of the new firm and how your ongoing costs would compare.

        How do the products at the new firm compare with your current firm?

        Of course, not all firms offer the same products. There may be some types of investments you've purchased in the past or are considering for the future that aren't available at the new firm.

        If that happens, you should feel comfortable with the products they offer as alternatives. If you tend to keep a lot of cash in your account, ask what investment vehicles are available at the new firm for the cash sweep account and whether the interest rate would have an effect on your return.

        What level of service will you have?

        Whether you follow your broker to the new firm or choose another broker at your current firm, consider whether you'll have access to the types of service, support and online resources that meet your needs.

        FINRA is the Financial Industry Regulatory Authority.

        FINRA is an independent, not-for-profit organization with a public mission: to protect America's investors by making sure the securities industry operates fairly and honestly. FINRA is not a part of the government, but we play a critical role in safeguarding investors by enforcing high ethical standards, bringing the necessary resources and expertise to regulation, and promoting investor education—all at no cost to taxpayers.

        Learn more at www.finra.org.

      • 16-17 FINRA Reminds Firms of Their Obligations When Reporting Large Options Positions

        View PDF

        Options Positions Reporting

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        FINRA Rule 2360
        Notice to Members 94-46
        Notice to Members 97-56
        Notice to Members 98-92
        Notice to Members 05-22
        Notice to Members 07-03
        Regulatory Notice 09-47
        Suggested Routing

        Compliance
        Institutional
        Legal
        Operations
        Options
        Risk
        Senior Management
        Systems
        Technology
        Training
        Key Topics

        Aggregation
        Conventional (or OTC) Index Options
        Conventional (or OTC) Options
        In Concert Reporting
        Large Options Positions Report
        Options
        Reporting
        Standardized Index Options
        Standardized Options

        Executive Summary

        In light of recent disciplinary actions against firms, FINRA reiterates and reminds firms of their obligations under FINRA Rule 2360(b)(5) to report large options positions to the Large Options Positions Reporting (LOPR) system,1 in a manner prescribed by the U.S. options exchanges and FINRA. This Notice provides an overview of the options reporting requirements and consolidates and summarizes previously issued guidance.2

        Questions concerning this Notice should be directed to:

        •   Max Tourtelot, Director, Options Regulation, at (212) 457-5366 or Max.Tourtelot@finra.org;
        •   James Turnbull, Associate Director, Options Regulation, at (212) 457-5367 or James.Turnbull@finra.org; or
        •   Kathryn Moore, Associate General Counsel, Office of General Counsel, at (202) 728-8200 or Kathryn.Moore@finra.org.

        Background & Discussion

        FINRA Rule 2360(b)(5) requires a firm to report (or have reported on its behalf) any options position in an account in which the firm has an interest and each customer, non-member broker, or non-member dealer account that has established, acting alone or in concert, an aggregate option positions of 200 or more option contracts (whether long or short) of the put class and the call class on the same side of the market covering the same underlying security or index.3 These positions must be reported to the LOPR system no later than the close of business on the next day following the day on which the transaction or transactions requiring the filing of such report occurred.4 For aggregate positions that meet the 200 contract reporting threshold, the option position for each individual account must be reported to the LOPR system.5

        FINRA has provided below a summary of previously issued guidance relating to the reporting of standardized and conventional option positions, aggregation of accounts and positions, reporting format and specifications, changes to account information, in concert reporting, position maintenance records, rejections and effective supervision practices.

        Standardized Options Positions

        FINRA member firms that conduct a business in standardized options but are not themselves members of the options exchange on which such options are listed and traded (referred to as "access firms") are required under FINRA Rule 2360(b)(5)(A)(i)b to report to the LOPR system positions in standardized options covering the same underlying security or index that meet the 200 contract reporting threshold. Positions resulting from trades effected by the broker-dealer or that are maintained on the broker-dealer's books must be reported to the LOPR system.6 This includes, but is not limited to: (1) accounts of public customers; (2) accounts of broker-dealer customers; (3) proprietary accounts held in the same account type (as discussed below) at the OCC as non-proprietary accounts;7 and (4) any accounts that FINRA or a U.S. options exchange directs a firm to report to the LOPR system. In general, self-clearing firms' proprietary standardized option positions are satisfied by the OCC's publication of positions held in the Account Type of "F" (for Firm) by Clearing Member number; however, hedge instrument positions, where required by rule,8 must be reported.9

        Conventional Options Positions

        FINRA Rule 2360(b)(5)(A)(i)a requires that all members report to the LOPR system positions in conventional (or OTC) options covering the same underlying security or index that meet the 200 contract reporting threshold. Options positions for all accounts, including proprietary accounts, where the position is maintained on the broker-dealer's books or where the trade was effected by the broker-dealer must be reported to the LOPR system.10 The reporting requirement applies to conventional options covering (1) equity securities and (2) indexes that underlie, or are substantially similar to indexes that underlie, standardized index options. Conventional index options based on an index that does not underlie, or is not substantially similar to an index that underlies a standardized index option (e.g., is based on a customized basket of securities) does not need to be reported to the LOPR system, provided the option on the basket of securities meets the definition of conventional index option.11 In the case where an option on a basket of securities does not meet the definition of conventional index option, the option must be deconstructed into its various underlying components and each underlying component must be reported to the LOPR system as a separate position.12

        Aggregation of Accounts

        Firms must identify all accounts that are under common control or those acting in concert and aggregate the options positions of such accounts to determine if the 200 contract reporting threshold is met. "Control" is defined as the power or ability of an individual or entity to make investment decisions for an account or accounts, or influence, directly or indirectly, the investment decisions of any person or entity that makes investment decisions for an account. Control is presumed to exist for:

        •   all parties to a joint account who have the authority to act on behalf of the account;
        •   all general partners to a partnership account;
        •   a person or entity that:
        •   holds an ownership interest of 10 percent or more in an entity (ownership of less than 10 percent will not preclude aggregation), or
        •   shares in 10 percent or more of profits and/or losses of an account;
        •   accounts with common directors or management; and
        •   an individual or entity with authority to execute transaction in an account.13

        For example, without limitation, accounts for which a registered representative has trading authority, accounts of wholly-owned subsidiaries, multiple accounts held by related people or entities that have a common beneficial owner would be considered to be under common control and acting in concert. Firms must have reasonable policies and procedures that are documented and applied consistently to identify accounts under common control or acting in concert. Some effective practices to consider are identifying the appropriate In Concert Group, if any, during the account opening process and to regularly monitor the accuracy of the control and in concert relationships reported to the LOPR system. In addition, if an account can be considered as part of multiple In Concert Groups, effective practices include identifying the In Concert Group based on the largest contract volume or by sequentially applying control relationships (e.g., first identifying accounts as part of an In Concert Group for all accounts with the same beneficial owner(s), then identifying In Concert Groups by registered representative for any accounts not assigned an In Concert Group based on beneficial owner, then identifying In Concert Groups by trading authority for accounts not previously assigned an In Concert Group).14

        In addition, FINRA or a U.S. options exchange may require a firm to consider specific accounts as under common control or acting in concert, even where they do not meet the criteria described above. FINRA will consider the following factors15 in determining whether aggregation of accounts is required:

        •   similar patterns of trading activity among separate entities;
        •   the sharing of kindred business purposes and interests;
        •   whether there is common supervision of the entities, which extends beyond assuring adherence to each entity's investment objectives and/or restrictions; and
        •   the degree of contact and communication between directors and/or managers of separate accounts.

        If FINRA makes the determination that certain accounts should be identified as In Concert, FINRA will notify the firm in writing with the list of the accounts determined to be acting in concert.

        Aggregation of Positions

        For each account, or accounts acting in concert, the firm must aggregate all positions for each underlying security or index in each options class (i.e., puts or calls) on the same side of the market (aggregating long calls and short puts and short calls and long puts) to determine if the 200 contract reporting threshold has been met.16 With respect to options positions overlying the same security or index on the same side of the market, once a firm determines that the reporting threshold has been met for a particular account or accounts acting in concert, all positions for the account or each account acting in concert must be reported to the LOPR system. Firms cannot net options positions on the opposite sides of the market when determining if the reporting threshold has been met or when reporting the positions to the LOPR system.

        Reporting Positions to the LOPR System

        For each position reported to the LOPR system, firms must submit detailed account information relating to the account holding the position in the format specified in the OCC's Reference Guide for LOPR Firms.

        Unique Fields

        The following reported fields are considered "unique fields," which the OCC uses to group incoming reports to ensure there is no duplication of reporting:

        •   Firm (provide the clearing member OCC number)17
        •   Account Type18
        •   Branch
        •   Tax Number19
        •   Account Number
        •   Instrument Symbol
        •   Security Type Put/Call
        •   Strike Price
        •   Contract Date (Expiration Day/Month/Year)
        •   Exercise Style (OTC Options Only)
        •   Underlying Symbol (OTC Options Only)
        •   Underlying Quantity (OTC Options Only)

        Effective Date Reporting

        Firms must report the effective date of each position. The effective date of each position is the date on which the position being reported was established at that reporting firm. In general, the effective date of the position is the same as the trade date. For positions that are transferred to a firm after clearing, the receiving firm should use the transfer date as the effective date.20 In the case where an execution, CMTA or transfer brings a customer, acting alone or in concert, above the 200 contract reporting threshold, the entire position must be reported to the LOPR system with the same effective date.21

        Submission of Add, Modify and Delete Records

        Each position reported to the LOPR system must be identified as Add, Modify or Delete records as follows with examples of each below:

        •   Add records are for positions reported to the LOPR system that do not currently exist.
        •   Modify records are for positions reported to the LOPR system where the position being reported is different from the position previously reported to the LOPR system.
        •   Delete records are for positions reported to the LOPR system where the position is being set to zero, for a position previously reported to the LOPR system.

        Examples of when Add records must be submitted:

        •   A firm executes an order for its customer whose previous position was not currently open on the LOPR system and that account, or accounts acting in concert, now meets the reporting threshold.
        •   A firm receives a transferred position for its customer whose previous position was not currently open on the LOPR, and that account, or accounts acting in concert, now meets the reporting threshold.

        Examples of when Modify records must be submitted:22

        •   A firm executes an opening trade for its customer whose previous position is currently open on the LOPR system, where the customer's position changes from their prior day's position.
        •   A firm executes a closing trade that reduces a customer's position, currently open on the LOPR system, below the reporting threshold, but does not eliminate the position.23
        •   A firm is assigned contracts by the OCC. Following the firm's internal assignment process, some assigned contracts are allocated to an account whose previous position is currently open on the LOPR system, and the assignment changes from the customer's position compared to that of the prior day.
        •   A firm partially exercises contracts held by a customer whose previous position is currently open on the LOPR system.

        Examples of when Delete records must be submitted: 24

        •   A firm executes an order for its customer closing the entire reported position.
        •   A firm exercises all contracts held by a customer on a day that is not the option's expiration date.
        •   A firm, which had mistakenly reported swap contracts to the LOPR system, removes these non-reportable positions from the LOPR system.25
        •   A firm receives and allocates an assignment that eliminates a reported position.

        Changes to Account Information

        The OCC will not accept Modify records where the position is unchanged. If the firm requires a change to one of the non-unique fields, the firm must either submit a Delete and an Add record or wait until the position changes, at which time a Modify record will be accepted.26 In cases where a unique field (those identified above) requires an update, a firm must submit a Delete and an Add record.27

        In rare cases, where there are significant reporting errors that cannot reasonably be resolved with Delete and Add records, a firm can request a purge of its LOPR records at the OCC. Such a request must be submitted in writing and must be approved in advance by the U.S. options exchanges and FINRA.

        In Concert Reporting

        In addition to aggregating all positions under common control or acting in concert to determine if the LOPR reporting threshold has been met (as well as for position limit purposes), a firm must also submit the accounts acting in concert to the OCC.28 As described in the OCC's Reference Guide for LOPR Firms, firms must create a unique "In Concert ID" for each group of accounts under common control or acting in concert referred to as an in concert group. When an "in concert group" meets the 200 contract reporting threshold, the firm must report each account within the in concert group and the unique In Concert ID to the LOPR system. The OCC follows a similar Add and Delete process for in concert reporting. Each account within the in concert group must be identified with the same unique In Concert ID, which allows FINRA and the US options exchanges to identify positions held by individual accounts as well as aggregate positions held by groups of accounts under common control.

        Introducing Firms

        An introducing firm that clears on an omnibus basis must report all individual positions for customer and proprietary options positions to the LOPR system.29 In addition, these introducing firms must identify and report all in concert information to the OCC.

        An introducing firm that clears on a fully disclosed basis must report customer and proprietary options positions to the LOPR system (unless the clearing firm files on its behalf). These introducing firms are also responsible for identifying in concert relationships and reporting these relationships to the LOPR system (or having their clearing firm report on their behalf). An effective practice is for clearing firms to have a reasonable process to identify potential in concert groups based on the positions of the introducing firms that clear on a fully disclosed basis.30 The clearing firm must establish a reasonable system or process to collect in concert information from its introducing firms, if reporting on their behalf, and notify their introducing firm of accounts with potential in concert relationships identified in their review for potential inclusion.

        Position Maintenance Records

        As noted above, a firm must report options positions to the LOPR system by no later than the close of business on the next business day following the day on which the transaction or transactions requiring the filing of such report occurred. However, the OCC allows a five day reporting window for submitting updates relating to adjustments, assignments, error corrections and position transfers.31 All reports submitted by a firm must have an effective date within the five day reporting window. If the firm identifies positions that should have been reported (or should have been reported with different information than what was reported) with an effective date prior to the five day window, the firm must report the current position to the LOPR system immediately.

        Rejected LOPR records

        The OCC does not check for the accuracy of the positions reported by firms, but does validate the format of the record type (Add, Modify or Delete) as well as the format and length of the various fields. The OCC will reject reports if the fields are improperly formatted, including, but not limited to:

        •   field lengths longer than what is specified in the OCC's documentation; and
        •   missing data in required fields.

        Supervision

        Firms should have reasonable controls in place to ensure the accuracy of their compliance with their reporting requirements, including but not limited to:

        •   identification of any related accounts for in concert reporting purposes during the account opening process;
        •   periodic routine review of the accuracy of the firm's in concert groups;
        •   periodic routine review of the accuracy of the firm's data reported to the LOPR system, including data as well as positions reported;
        •   review of the firm's rejected LOPR records; and
        •   review of over-the-counter products to assess whether they meet the definition of "option" under FINRA Rule 2360(a)(21), to determine the applicability of reporting to the LOPR system and other option provisions.32

        To aid the supervisory efforts of the firms, the OCC provides daily files containing the following:

        •   the current positions as known by the OCC and provided to FINRA and the U.S. options exchanges (a.k.a. "Snapshot");
        •   the current in concert relationships as known by the OCC and added to the position records during processing; and
        •   the LOPR and in concert records rejected from processing by the OCC.

        1. The Options Clearing Corporation (OCC) is currently hosting the LOPR system and collects and disseminates all LOPR data for the U.S. options exchanges and FINRA.

        2. This Notice consolidates and provides an overview of guidance previously issued in the following Notices: NTM 94-46, NTM 97-56, NTM 98-92, NTM 05-22, NTM 07-03, and Regulatory Notice 09-47. Firms should also review the OCC's Reference Guide for LOPR Firms and the OCC LOPR FAQs.

        3. In the context of options reporting, in aggregating options on "the same side of the market", long call positions are aggregated with short put positions (bullish) and long put positions are aggregated with short call positions (bearish). Bullish and bearish positions are not netted or combined.

        4. See FINRA Rule 2360(b)(5)(A)(ii).

        5. The end of day quantity reported should include any and all executions, adjustments, transfers, exercises and assignments for the effective date of such transaction, excluding the expiration and assignment processing the OCC performs at option expiration. See OCC LOPR FAQs #67.

        6. Trades required to be intermediated by a U.S. broker-dealer under SEA Rule 15a-6(a)(3) or 15a-6(a)(4) must be reported to the LOPR system. See previously issued guidance in Notice to Members 98-92.

        7. This may occur when a self-clearing firm also reports positions for other broker-dealers with which they have a Joint Back-Office agreement.

        8. See previously issued guidance in Notice to Members 97-56. See also, for example, CBOE Rules 4.13(b) and 24.4, Interpretations and Policies .03.

        9. As with customer accounts and co-mingled customer and proprietary accounts, if the firm's affiliate positions are held in Account Type "C" (for Customer), the positions must be reported.

        10. Unlike standardized options, if a firm enters into a conventional option transaction with a customer creating a reportable position for both the firm and the customer, FINRA rule 2360(b)(5)(A)(i)a. requires the firm submit an LOPR report for the position of both the customer and the firm. See previously issued guidance in Notice to Members 05-22.

        11. See FINRA Rule 2360(a)(8). For example, among other requirements, the basket underlying the option must include nine or more equity securities.

        12. See previously issued guidance in Notice to Members 07-03. In addition, each of the components would be separately subject to position and exercise limits.

        13. See FINRA Rule 2360(a)(6)(A). See also FINRA Rule 2360(a)(6)(B); the control presumed by one or more of the above circumstances may be rebutted by providing an affidavit to FINRA proving the factor does not exist or by showing other factors that negate the presumption of control. See previously issued guidance in Notices 97-56 and 07-03.

        14. See OCC LOPR FAQs #48.

        15. See FINRA Rule 2360(a)(6)(C) and previously issued guidance in Notice to Members 07-03.

        16. The 200 contract reporting threshold is based on the definition of Options Contract in FINRA Rule 2360(a)(23). Options contracts covering 100 shares, when written, are considered one (1) option contract for the life of the contract, regardless of any splits, reverse splits or other corporate actions that may impact the number of deliverable shares. For example: a mini option that, when written delivers 10 shares per contract, is considered one tenth (l/10th) of an option contract towards the reporting threshold for the life of the contract; however, an option that, when written delivers 100 shares per contract that undergoes a 10:1 reverse split and now delivers 10 shares per contract, will be considered one (1) contract for the life of the contract.

        17. A firm must report the clearing member number where the reportable position is held at the OCC.

        18. The Account Type for standardized options is the same as where the position resides at the OCC (i.e., "C" for customer, "F" for firm or "M" for market maker). See LOPR FAQs #53. Similarly, the Account Type for conventional options is determined by the account holding the position (i.e., proprietary accounts are "F" and customer or non-proprietary accounts are "C").

        19. For foreign accounts, if the foreign tax number is known and can be reported, the firm should report the foreign tax number and report in the Tax Number Type field "J." If there is no foreign tax number or it cannot be reported (e.g., the account is an omnibus account or the account is in a jurisdiction where the laws prohibit the sharing of this information), a firm should report all nines (999999999) for the Tax Number field and a Tax Number Type of "J." For foreign accounts, the Tax Number Type should be reported as "J" even when using a domestic mailing address for any foreign omnibus reporting. Also, dashes ("-") are not required when submitting data in the Tax Number field.

        20. While receiving firms may use the trade date if it is known to them, it is the transferring firm's responsibility to report the position to the LOPR system for any dates between the trade date and the transfer date, if required.

        21. The LOPR system is a position reporting system and not a trade reporting system. The effective date on these records signifies the date the aggregate position met the reporting threshold.

        22. Modify records can only be submitted with an effective date later or equal to the effective date of the latest record submitted.

        23. No subsequent position reports are required until such time as the account, or accounts acting in concert, again meet the 200 contract reporting threshold. However, a firm may elect to submit a Delete record for aggregate positions below the reporting threshold, provided the effective date of the Delete record is at least one day after the effective date the position was modified below the 200 contract reporting threshold. See OCC LOPR FAQs #24 and #59.

        24. Delete records can only be submitted with an effective date later or equal to the effective date of the latest record submitted.

        25. In these situations, the "Correction Text" field should be populated with a description. The effective date of the Delete record should be the same date as the effective date of the original position, if possible.

        26. Firms should consider the nature and scope of the information change when determining which method to follow. Firms may contact FINRA Options Regulation with any questions. For example, an updated address does not need to be reported until the position changes, however incorrectly populated addresses should be corrected as soon as practicable. In addition, in light of OCC's method for processing records, changes to non-unique fields require Delete and Add records with the same effective date be submitted over two days. See OCC LOPR FAQs #62.

        27. Delete and Add records used to change a unique field must be submitted on the same day for the same effective date.

        28. See previously issued guidance in Notice to Members 97-56 and ISG Important Notice, Large Options Position Report (LOPR)/Mandatory Automated Reporting Requirement Notice dated May 1,1991.

        29. If an introducing firm uses its clearing firm or third party service provider to report positions on its behalf, the firm must ensure the accuracy of such reporting.

        30. See OCC LOPR FAQs #51. The clearing firm would not need to review for potential in concert relationships for accounts held across broker-dealers, including the clearing firm and its introducing firms. As detailed above, the clearing firm must identify and report in concert groups for its own accounts.

        31. See previously issued guidance in Regulatory Notice 09-47.

        32. Some effective practices to consider are involving legal, compliance and trading personnel in these discussions. The outcome and rationale, including the factors considered should be documented and maintained by the firm.

      • 16-16 2016 GASB Accounting Support Fee to Fund the Governmental Accounting Standards Board

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        GASB Accounting Support Fee

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules and Notices

        Dodd-Frank Act Section 978
        FINRA By-Laws, Schedule A
        MSRB Rule G-14(b)
        Regulatory Notice 12-15
        Regulatory Notice 13-17
        Regulatory Notice 14-17
        Regulatory Notice 15-12
        Securities Act Section 19(g)
        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

        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 $8,310,500 to adequately fund the GASB's annual budget by collecting $2,077,625 from its member firms each calendar quarter beginning in April 2016.

        Questions concerning this Notice should be directed to:

        •   Finance Department at (240) 386-5399; 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 2016, GASB's annual budget expenses of $10,811,000 will be partially funded from $2,500,500 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 $8,310,500;3 therefore, FINRA will collect $2,077,625 from its members each quarter beginning in April 2016.4

        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 2015 and the 2016 GASB budget, FINRA estimates that the GASB Accounting Support Fee for 2016 will be between $0.0024 and $0.0030 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 15-12 (April 2015); Regulatory Notice 14-17 (April 2014); 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 2016 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 received in January 2016 covers the fourth quarter of GASB's 2015 budget and is based on the amounts set forth in Regulatory Notice 15-12. As required by Section 19(g) of the Securities Act, any GASB Accounting Support Fees collected by FINRA are remitted to the FAF and used to support the efforts of the GASB to establish standards of financial accounting and reporting applicable to state and local governments. See 15 U.S.C. 77s(g)(l), (3). Section 19(g)(4) of the Securities Act prohibits FINRA from collecting GASB Accounting Support Fees for a fiscal year in excess of GASB's recoverable annual budgeted expenses. See 15 U.S.C. 77s(g)(4).

      • 16-15 Exemption from Trade Reporting Obligation for Certain Transactions on Alternative Trading Systems; Effective Date: July 18, 2016

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        Trade Reporting and Compliance Engine (TRACE)

        Regulatory Notice
        Notice Type

        New Rule
        Referenced Rules and Notices

        FINRA Rule 6720
        FINRA Rule 6730
        FINRA Rule 6732
        FINRA Rule 7730
        FINRA Rule 9600 Series
        Regulatory Notice 14-53
        Suggested Routing

        Compliance
        Fixed Income
        Legal
        Operations
        Systems
        Trading
        Key Topics

        Alternative Trading Systems
        Fixed-Income Securities
        TRACE
        Transaction Reporting

        Summary

        On July 18, 2016, new FINRA Rule 6732 (Exemption from Trade Reporting Obligation for Certain Transactions on an Alternative Trading System) becomes effective. Rule 6732 provides FINRA staff with the authority to grant a member alternative trading system (ATS) an exemption from the TRACE trade reporting obligations of Rule 6730 (Transaction Reporting) for transactions occurring on an ATS that meet specified conditions.1

        The rule text is available in the online FINRA Manual.

        Questions concerning this Notice should be directed to:

        •   FINRA Product Management at (866) 899-2107;
        •   for information on how to apply for exemptive relief, Patrick Geraghty, Vice President, Market Regulation (MR), at (240) 386-4973 or by email at patrick.geraghty@finra.org; or Joseph Schwetz, Associate Director, MR, at (240) 386-6170 or by email at joseph.schwetz@finra.org; or
        •   for legal and interpretive questions, Racquel Russell, Associate General Counsel, Office of General Counsel, at (202) 728-8363 or by email at racquel.russell@finra.org.

        Background and Discussion

        Rule 6732 generally provides that, pursuant to the Rule 9600 Series (Procedures for Exemptions), FINRA staff may exempt, upon application, a member ATS from the trade reporting obligation under Rule 6730 with regard to certain transactions.2

        FINRA will consider exemptive applications on a case-by-case basis, taking into consideration all the relevant factors. Specifically, FINRA staff may grant an exemption to a member ATS if such exemption is consistent with the protection of investors and the public interest and only where all of the following criteria are satisfied:

        •   the trade is between FINRA members;
        •   the trade does not pass through any ATS account, and the ATS does not exchange TRACE-eligible securities3 or funds on behalf of the subscribers, take either side of the trade for clearing or settlement purposes, including, but not limited to, at DTC or otherwise, or in any other way insert itself into the trade;
        •   the ATS agrees to provide to FINRA on a monthly basis, or such other basis as prescribed by FINRA, data relating to each exempted trade occurring on the ATS's system pursuant to Rule 6732, and the ATS acknowledges that failure to report such data to FINRA, in addition to constituting a violation of FINRA rules, will result in revocation of any exemption granted pursuant to the rule;
        •   the ATS remits to FINRA a transaction reporting fee based on the fee schedule set forth in Rule 7730(b)(1) (Trade Reporting Fee) for each exempted sell transaction occurring on the ATS; and
        •   the ATS has entered into a written agreement with each member that is a "Party to a Transaction"4 with respect to any trade for which the ATS is exempted under the rule specifying that such trade must be reported by such party pursuant to Rule 6730(c)(13), identifying that the trade occurred on the ATS using the ATS's separate MPID obtained in compliance with Rule 6720(c) (Alternative Trading Systems).

        FINRA emphasizes that, if the staff grants an exemption, members engaging in trades on an ATS that received an exemption must report additional information to TRACE with respect to exempted trades pursuant to the last criteria above; specifically, the unique MPID of the ATS. Accordingly, member ATSs receiving an exemption must enter into an affirmative written agreement with each member that is or may be a party to an exempt transaction, as described in Rule 6732, to ensure they understand and agree to their additional reporting responsibilities. Negative consent letters would not satisfy the condition that the member ATS enter into a written agreement with each member that is a Party to a Transaction concerning exempt trades.

        Monthly Information on Exempted Transactions

        If the staff grants a Rule 6732 exemption to an ATS, such ATS must report transaction information with respect to each exempt trade on a monthly basis.5 The data file provided by the ATS must contain the following information relating to each exempt trade that occurred on its system during a calendar month and must be received by FINRA no later than the tenth business day following the completion of each calendar month:

        •   CUSIP number or if a CUSIP number is not available at the time of execution, a similar numeric identifier (e.g., a mortgage pool number) or a FINRA symbol;
        •   the size (volume) of the transaction as required by FINRA Rule 6730(d)(2);
        •   price of the transaction (or the elements necessary to calculate price, which are contract amount and accrued interest) as required by FINRA Rule 6730(d)(1);
        •   date of trade execution;
        •   time of execution;
        •   MPID of the seller; and
        •   MPID of the buyer.

        Data Submission Information

        Each ATS granted a Rule 6732 exemption must report the required transaction information to FINRA via the Secure File Transfer Protocol (SFTP). To submit files via SFTP, an ATS must have an FTP account set up with appropriate privileges. If an ATS does not already have an FTP account with FINRA, it must submit a request to create an FTP account. Once an ATS has received authorization for its FTP account, it will be able to submit its data to FINRA via SFTP.

        If you have questions concerning FINRA Entitlement, please refer to the FINRA Entitlement Program or contact the FINRA Entitlement Group, at (240) 386-4185 or the FINRA Gateway Call Center at (301) 869-6699.


        1. See Securities Exchange Act Release No. 76677 (December 17, 2015), 80 FR 79966 (December 23, 2015) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2015-055) ("ATS Exemption Filing").

        2. An ATS is a Party to a Transaction in a TRACE-eligible security occurring through its system and has a TRACE transaction reporting obligation, unless an exception or exemption applies. See ATS Exemption Filing. See also Regulatory Notice 14-53 (November 2014) (FINRA Reminds ATSs and ATS Subscribers of Their Trade Reporting Obligations in TRACE-Eligible Securities).

        3. Rule 6710 provides that a "TRACE-Eligible Security" is a debt security that is United States 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). "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).

        4. Rule 6710 defines a "Party to a Transaction" as an introducing broker-dealer, if any, an executing broker-dealer or a customer. "Customer" includes a broker-dealer that is not a FINRA member.

        5. FINRA publishes letters or summaries of its letters in response to requests for exemption at http://www.finra.orq/industry/exernptive-letters.

      • 16-14 FINRA Announces Implementation Date for Publication of ATS Block-Size Trade Data; Implementation Date: October 3, 2016

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        Alternative Trading Systems (ATSs)

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 6110
        Regulatory Notice 14-07
        Regulatory Notice 15-48
        Suggested Routing

        Compliance
        Institutional
        Legal
        Operations
        Senior Management
        Systems
        Trading
        Key Topics

        Alternative Trading Systems
        Block-Size Trades
        NMS Stocks
        OTC Equity Securities
        OTC Reporting Facility
        Trade Reporting
        Trade Reporting Facilities

        Executive Summary

        Beginning on Monday, October 3, 2016, FINRA will expand its alternative trading system (ATS) transparency initiative to publish monthly information on block-size trades occurring on ATSs. The data will be available free of charge on FINRA's website.

        The amended rule text is available on FINRA's website.

        Questions concerning this Notice should be directed to:

        •   Dave Chapman, Director, Market Regulation, at (240) 386-4995 or dave.chapman@finra.org;
        •   Brendan Loonam, Director, Business Services, at (212) 858-4203 or brendan.loonam@finra.org; or
        •   Brant Brown, Associate General Counsel, Office of General Counsel, at (202) 728-6927 or brant.brown@finra.org.

        Background & Discussion

        Under the transparency initiative, which FINRA designed to provide additional transparency to over-the-counter (OTC) trading in equity securities, FINRA began making volume and trade count information for equity securities executed in an ATS publicly available on its website in June 2014.1 FINRA recently expanded this initiative and, on April 25, 2016, will begin publishing the remaining, non-ATS OTC equity volume by member firm and security.2

        Under new amendments to FINRA Rule 6110, beginning October 3, 2016, FINRA will begin publishing monthly ATS block-size trading statistics in all NMS stocks, in addition to the ATS and non-ATS data available.3

        FINRA believes that these additional ATS statistics will prove beneficial to firms and the general public and provide interested parties with more detailed information on ATS trading activities, thus further enhancing transparency in the OTC market.

        The statistics regarding ATS block-size trades will be aggregated across all NMS stocks (i.e., there will be no security-by-security block data),4 will be for a time period of one month of trading,5 and will be published no earlier than one month following the end of the month for which trading was aggregated. Rather than narrowly defining what constitutes a "block-size" trade for purposes of this transparency initiative, FINRA concluded it would be most beneficial to provide firms and the public with information on trades using share-based thresholds, dollar-based thresholds, and thresholds that include both shares and dollar amount. Initially, FINRA will publish data with thresholds for ATS block-size trades in the following categories:6

        •   10,000 or more shares
        •   $200,000 or more in dollar value
        •   10,000 or more shares and $200,000 or more in dollar value
        •   2,000 to 9,999 shares
        •   $100,000 to $199,999 in dollar value
        •   2,000 to 9,999 shares and $100,000 to $199,999 in dollar value

        For each of these categories, FINRA will publish monthly trade count and volume information for each ATS aggregated across all NMS stocks. As a convenience for users, FINRA will also calculate and display the average trade size and each ATS's rank as well as "ATS Block Market Share" (i.e., the proportion of each ATS's block-size trading volume in relation to total block-size trading by all ATSs) and "ATS Block Business Share" (i.e., the proportion of a particular ATS's overall trading volume that was done as block-size trades) and rankings of those metrics for each of the above categories.

        Firms and members of the public can access ATS volume data and non-ATS volume data on the same page of FINRA's website. Specifically, the OTC Transparency Data page includes tabs for both ATS and non-ATS trade data. Beginning October 3, 2016, the monthly block-size trade data for ATSs will be available under an ATS Blocks tab on the OTC Transparency Data page as well as under an ATS Blocks Download tab. The ATS block-size trade data published will be one month delayed, such that the reports published on October 3, 2016, will reflect ATS trades during August 2016.


        1. See Regulatory Notice 14-07 (February 2014). The information is available at www.finra.org/ats.

        2. See Regulatory Notice 15-48 (November 2015).

        3. See Securities Exchange Act Release No. 76931 (January 19, 2016), 81 FR4076 (January 25, 2016) (Notice of Filing and Immediate Effectiveness of SR-FINRA-2016-002).

        4. Initially, the published information will be limited to trades in NMS stocks and therefore will not include data on ATS block-size trades in OTC Equity Securities. FINRA intends to periodically reassess whether, in the future, the publication of block-size trade data should be expanded to include trades in OTC Equity Securities or some subset thereof.

        5. All monthly information will be calculated using calendar months. Because the reports will be based on aggregated monthly data rather than weekly data and will include all NMS stocks, Tier 1 and Tier 2 NMS stocks will not be treated differently for purposes of disseminating block-size trading statistics.

        6. Any future changes to these thresholds will be announced in advance in a Regulatory Notice or similar publication. See Rule 6110(c)(2).

      • 16-13 Revised SEC No-Action Guidance Expanding the Definition of "Ready Market" for Certain Foreign Equity Securities

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        Foreign Equity Securities

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        FINRA Rule 4210
        Regulation T
        Regulatory Notice 12-58
        SEA Rule 15c3-1
        Suggested Routing

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

        Foreign Equity Securities
        Foreign Margin Stock
        Net Capital
        "Ready Market"

        Summary

        The staff of the Division of Trading and Markets of the Securities and Exchange Commission (SEC staff) has issued a revised no-action letter (the February 2016 letter)1 setting forth conditions under which broker-dealers may treat certain foreign equity securities as having a "ready market" under SEA Rule 15c3-1(c)(11)(i) and subject to the haircuts under SEA Rule 15c3-1(c)(2)(vi)(J). The February 2016 letter replaces the previous SEC staff no-action letter, issued in November 2012, that addressed this subject matter (the November 2012 letter).2

        The February 2016 letter is available on the SEC's website.

        Questions concerning this Notice should be directed to:

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

        Background & Discussion

        In the November 2012 letter, the SEC staff set forth conditions under which broker-dealers may treat certain foreign equity securities as having a "ready market" under SEA Rule 15c3-1(c)(11)(i) and subject to the haircuts under SEA Rule 15c3-1(c)(2)(vi)(J), thereby expanding the definition of "ready market" regarding foreign equity securities, and therefore the number of foreign securities eligible as foreign margin stock under Regulation T of the Board of Governors of the Federal Reserve System.3

        In the February 2016 letter, the SEC staff noted that they have been monitoring the operation of the November 2012 letter in the intervening period since it was issued and have learned that one of the conditions set forth in the November 2012 letter warrants modification. More specifically, the November 2012 letter required among other things that the median daily trading volume (calculated over the preceding 20 business day period) of the foreign equity security on the foreign securities exchange on which the security is traded is either at least 100,000 shares or $500,000. Footnote 5 in the November 2012 letter stated that the shares purchased by the computing broker-dealer during the preceding 20 business day period are to be excluded when determining the median trading volume. In the February 2016 letter, the SEC staff stated that footnote 5 is not necessary to ensuring the liquidity of foreign equity securities treated as having a "ready market" under the November 2012 letter. The SEC staff stated that they have learned that footnote 5 creates operational burdens on the computing broker-dealers.

        Accordingly, the SEC staff has withdrawn the November 2012 letter and has issued the February 2016 letter in its place. The SEC staff stated that the only change between the February 2016 letter and the November 2012 letter is to modify the text that appeared in footnote 5 of the November 2012 letter to read as follows:

        "Trading volume calculations must be based upon bona fide transactions."

        FINRA reminds member firms that the February 2016 letter, like the November 2012 letter that it replaces, addresses foreign equity securities. As FINRA noted in Regulatory Notice 12-58, member firms should be aware that options on such securities remain subject to the initial and maintenance margin requirements as set forth in FINRA Rule 4210(f)(2)(E)(iii).


        1. See letter from Michael A. Macchiaroli, Associate Director, Division of Trading and Markets, Securities and Exchange Commission, to William Wollman, Executive Vice President, Member Regulation, FINRA (February 9, 2016).

        2. See letter from Michael A. Macchiaroli, Associate Director, Division of Trading and Markets, Securities and Exchange Commission, to Grace B. Vogel, Executive Vice President, Member Regulation, FINRA (November 28, 2012). See also Regulatory Notice 12-58 (December 2012) (summarizing the November 2012 letter).

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

      • 16-12 FINRA Provides Guidance on Firm Responsibilities for Sales of Pension Income Stream Products

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        Pension Income Stream Products

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        FINRA Rule 3110
        FINRA Rule 3270
        FINRA Rule 3280
        Suggested Routing

        Compliance
        Legal
        Registered Representatives
        Senior Management
        Key Topics

        Pension Income Streams
        Principal Review
        Sales Practices
        Suitability
        Supervision

        Executive Summary

        This Notice addresses the responsibilities of firms to supervise the sale of pension income stream products by their associated persons.

        Questions regarding this Notice should be directed to:

        •  James S. Wrona, Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8270 or jim.wrona@finra.org;
        •  Afshin Atabaki, Associate General Counsel, OGC, at (202) 728-8902 or afshin.atabaki@finra.org; and
        •  Jeanette Wingler, Assistant General Counsel, OGC, at (202) 728-8013 or jeanette.wingler@finra.org.

        Background and Discussion

        Pension income stream products typically involve an up-front lump sum payment to a pensioner in exchange for the rights to the pensioner's future pension income payments.1 This Notice discusses the characteristics of and investor protection issues presented by pension income stream products, as well as the legal status of these products. In addition, this Notice addresses the responsibilities of firms in supervising the sale of pension income stream products.

        Pension Income Stream Products

        Contracts for pension income stream products involve at least three parties: the pensioner selling the rights to his or her future pension income payments, the investor who pays the up-front lump sum amount to acquire the rights to the pensioner's future payments, and a pension purchasing company, sometimes referred to as a factoring company or pension advance company, that facilitates the sale. Pension income stream products are marketed and advertised to the general public. Moreover, pension purchasing companies may use firms and their associated persons to sell these products to investors. In this event, the sales are subject to applicable FINRA rules.

        A typical transaction involves the pension purchasing company collecting information about and evaluating the pensioner and his or her pension. An associated person of a firm may be involved in soliciting investors for the products. The pension purchasing company estimates the lump sum amount that the pensioner will receive from the investor and the monthly amounts that the pensioner will pay to the investor in return.

        To facilitate the transfer of funds, the pension purchasing company may establish a bank account or escrow account from which the pensioner receives the lump sum amount and in which the pensioner deposits the future monthly payment amounts. In addition, the investor may deposit the lump sum amount into, and receive the monthly payments from, that same bank or escrow account. A pensioner may also be required to obtain a life insurance policy to cover the outstanding balance due on the contract in the event of the pensioner's death before full payment of the amount due to the investor under the contract.2 The pension purchasing company's fees, any life insurance policy premiums and any other applicable fees or commissions, including commissions received by an associated person, are deducted from the lump sum amount paid to the pensioner.

        Federal laws prohibit the assignment of particular pension benefits.3 As such, a pensioner does not typically directly assign future pension payments to an investor and instead is bound to make the future payments to the investor only by contract. Because a pensioner may stop making monthly payments at any time, leaving the investor with only a breach of contract claim, the pension purchasing company may also engage in post-sale efforts to ensure payment by the pensioner of the amounts due to the investor. Post-sale efforts by the company may include offering to advance payments to the investor until issues can be resolved, purchasing the product back from the investor, less any payments received by the investor, or engaging the services of a law firm to attempt remediation.

        Investor Protection Issues Presented by Pension Income Stream Products

        Pension income stream products are complex, and they potentially present a number of investor protection issues. While the expected yields for pension income stream products may initially seem like an attractive option for investors, investors may not fully understand the issues presented by the products. For example, investors may pay significant commissions (e.g., 7 percent or higher) to purchase the products. In addition, the products are generally illiquid, meaning an investor needing funds may not be able to sell the product or may be able to sell the product only at a loss. Furthermore, as noted above, because federal laws prohibit the assignment of particular pension benefits,4 a pensioner does not typically directly assign future pension payments to an investor and instead is bound to make the future payments to the investor only by contract. As a result, if a pensioner stops making monthly payments at any time, an investor may be left with only a breach of contract claim. Notwithstanding these and other risks, a U.S. Government Accountability Office (GAO) report indicates that some pension income stream products are marketed as "safe" investments that pay more than other fixed-rate investments without the "downside risks" of stocks, bonds and mutual funds, and use terms that incorrectly imply that the products are backed by the federal government.5

        The products also may be problematic for pensioners. For instance, pension purchasing companies may not clearly disclose the costs and terms of the product, including associated fees or the real difference between the lump sum that will be paid to the pensioner versus the value of the future income stream the pensioner is giving up (sometimes referred to as the pensioner's effective interest rate for the lump sum payment).6 Moreover, a company may present confusing offer terms thereby making it difficult to understand the product. For example, the GAO Report notes that one company provided a quote including 63 different offers with varying terms and monthly payment amounts to one fictitious pensioner.7 In addition, pensioners may not understand that they may be required to obtain a life insurance policy and that the payments for the policy are subtracted from the lump sum payment.

        The GAO Report highlights other investor-protection concerns involving this product. Pension purchasing companies may attempt to circumvent federal and state laws by asserting that the product is neither a security nor a loan.8 Companies may assert that the products are not securities so as to avoid the registration and disclosure requirements of federal and state securities laws. At the same time, companies may avoid calling the products loans so as to avoid making required truth-in-lending disclosures and to avoid complying with usury laws setting a legal limit on the interest rates and finance charges that may be imposed for some types of loans.9 While the companies may assert that a product is neither a security nor a loan, the companies do not offer any alternative legal status for the product thereby leaving pensioners and investors without a clear legal recourse.

        Furthermore, certain pension purchasing companies have changed their names or moved the location of their business operations in response to governmental investigations and litigation. Companies may also operate under more than one name.10 These activities result in associated persons, pensioners and investors having limited publicly available information when evaluating transactions with the companies.

        In addition to the GAO Report, FINRA and the SEC have previously issued alerts warning pensioners and investors of the risks associated with these products.11 For further discussion of investor protection issues, individuals are urged to consider these alerts prior to entering into transactions related to pension income stream products.

        Status of Pension Income Stream Products

        As noted above, pension purchasing companies may attempt to circumvent federal and state laws by asserting that a pension income stream product is not a security. However, FINRA reminds firms that they have an obligation to independently assess whether a product is a security, particularly when determining how to treat an associated person's participation in the sale of such a product away from the firm, discussed further below in the next section. This is critical regarding a product such as a pension income stream product, which is marketed and sold to the general public and exhibits many characteristics of a security under recent case law.

        Investors in pension income stream products enter into a contract that entitles them to a fixed return during the term of the contract in exchange for an up-front investment of money. The Securities Act of 1933 defines a "security" to include an investment contract.12 In its most recent decision on investment contracts, the U.S. Supreme Court held in SEC v. Edwards,13 among other things, that an investment scheme involving distinct contracts with a contractual entitlement to a fixed rate of return can be an investment contract, and thus a security, under the federal securities laws.14 In addition, in an administrative proceeding, the SEC held that a product similar to pension income stream products was a security.15 In that case, an online lending platform connected individuals who wished to borrow money with individuals or institutions that wished to purchase loans extended to borrowers. The online lending platform also performed certain pre- and post-sale functions.16 The SEC concluded that the notes offered by the online lending platform were securities. Finally, a number of states have determined that pension income stream products are securities under relevant state laws.17

        In the end, whether a particular pension income stream product is a security is dependent on the facts and circumstances specific to that product. However, a firm that treats a pension income stream product as a non-security product risks violating FINRA rules that impose specific obligations on securities activities if the pension income stream product is deemed a security.

        FINRA Reminds Firms of Their Obligations Regarding Pension Income Stream Products

        FINRA is aware that, in assessing an associated person's pension income stream activities away from the firm, some firms previously have not treated the products as securities for purposes of the applicability of FINRA Rule 3280 (Private Securities Transactions of an Associated Person) and have treated them instead as outside business activities under FINRA Rule 3270 (Outside Business Activities of Registered Persons). A firm is required to evaluate a proposed activity to determine whether it is properly characterized as an outside business activity under Rule 3270 or whether it should be treated as a private securities transaction under Rule 3280.

        FINRA Rule 3270 requires a registered person to provide written notice to his or her firm prior to participating in an outside business activity subject to the rule. The firm must consider whether the proposed outside business activity will interfere with or otherwise compromise the registered person's responsibilities to the firm or its customers or be viewed by customers or the public as part of the firm's business. The firm must then consider imposing specific conditions or limitations on the outside business activity, including, where circumstances warrant, prohibiting the activity. The rule, however, does not require that a firm supervise the outside business activity.

        In contrast, if a pension income stream product is a security and an associated person sells the product outside the regular scope of his or her employment with the firm, FINRA Rule 3280 requires that the firm treat the sale as a private securities transaction. The associated person must notify the firm in writing before participating in a private securities transaction. If the associated person will receive selling compensation, which is defined broadly, for his or her participation in the transaction, the firm must provide written approval or disapproval of the participation. If the firm approves the transaction, it must record the transaction on its books and records and supervise the associated person's participation in the transaction, including for compliance with suitability standards for recommended securities, as if the transaction were executed on behalf of the firm.18

        There are significant consequences if a firm incorrectly treats a pension income stream product as not being a security. For instance, the firm may incorrectly treat it as an outside business activity under FINRA Rule 3270, rather than a private securities transaction under FINRA Rule 3280, and thereby fail to supervise sales of the product as required by FINRA rules.19 The firm may also violate FINRA's qualification and registration requirements if associated persons engaged in the marketing and sale of pension income stream products are not appropriately qualified and registered (e.g., registered as a General Securities Representative) to engage in such activities.

        Supervisory Measures

        Due to potential investor protection issues and regulatory violations that may arise in the marketing and sale of pension income stream products, firms that permit their associated persons to participate in the sale of pension income stream products are well advised to adopt special procedures and training of associated persons with respect to the products.

        In developing any special procedures or training, it is important for associated persons to understand the features of these types of products and the extent to which a particular product meets the needs of a customer. Because these products are complex and offer terms vary, an associated person's general familiarity with these types of products may not adequately qualify him or her to understand the specific terms and features of a particular product. FINRA also notes that firms may elect to prohibit the sale of all pension income stream products or maintain a list of those that they find acceptable for their associated persons to market or sell.

        In addition, firms should ensure that their procedures comply with applicable state securities laws regarding pension income stream products. As emphasized above, a number of state securities regulators have found that pension income stream products are securities under state securities laws.

        As in all other areas, FINRA expects each associated person to comply with the procedures adopted by his or her firm regarding pension income stream products.


        1. These types of products may be referred to by one of several names, such as pension loans, pension advances, pension sales, pension income programs, mirrored pensions or annuity utilization contracts. Moreover, the pensioner may have a pension or defined benefit plan related to employment with a private company, the federal government or a state government. Retired members of the military and government employees are the most common pensioners approached for these types of products. For brevity, these types of products are referred to herein as "pension income stream products."

        2. See, e.g., GAO, Report to the Committee on Health, Education, Labor, and Pensions, U.S. Senate, Pension Advance Transactions: Questionable Business Practices Identified, at 6–7 (June 2014) (GAO Report).

        3. See, e.g., id. at 9.

        4. See, e.g., id.

        5. Id. at 22.

        6. See, e.g., John F. Wasik, Reading the Fine Print on Pension Advance Agreements, The New York Times (December 12, 2014) (noting that the profiled pensioner's cost for the product was the equivalent of an annual rate of 30.7 percent).

        7. See, e.g., GAO Report at 30.

        8. See, e.g., id. at 28–32.

        9. FINRA notes that in August 2015, the Consumer Financial Protection Bureau (CFPB) and the Superintendent of Financial Services for the State of New York filed a complaint in a California federal district court asserting that a pension income stream product was a loan and, therefore, was subject to the CFPB's jurisdiction. In February 2016, the parties stipulated and agreed to a preliminary injunction order without a finding by the federal district court of fact or law on the status of the pension income stream product. See CFPB v. Pension Funding, LLC, Compl. Filed Aug. 20, 2015, Case No. 8:15-cv-1329 (CD. Cal.).

        10. See, e.g., GAO Report at 15.

        11. See FINRA and SEC, Investor Alert: Pension or Settlement Income Streams—What You Need to Know Before Buying or Selling Them (May 2013). See also CFPB, Consumer Advisory: Protect Your Retirement Pension (March 2015); Federal Trade Commission, Consumer Information: Pension Advances: Not So Fast (June 2014).

        12. See Section 2(a)(1) of the Securities Act of 1933. See also SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946).

        13. 540 U.S. 389 (2004).

        14. Id. at 397. See also Dougherty v. VFC, LLC, 118 F. Supp. 3d 699 (E.D. Pa. 2015) (treating, without discussion, fixed-income pension stream products sold through a registered representative as securities).

        15. See In re Prosper Marketplace, Inc., Securities Act Release No. 8984 (November 24, 2008).

        16. See also SEC v. Mut. Benefits Corp., 408 F.3d 737, 743–44 (11th Cir. 2005) (stating that both pre-and post-purchase managerial activities should be taken into consideration in determining whether the Howey test is satisfied).

        17. See, e.g., In re Sobell Corp., Emergency Cease and Desist Order, Order No. ENF-16-CDO-1741, Texas State Securities Board (February 1, 2016); In re VFC, LLC f/k/a Voyager Financial Group, Cease and Desist Order and Notice of Intent to Impose Sanctions, Case No. 13-10-0013, State of New Mexico, Regulation and Licensing Department, Securities Division (December 10, 2013); and In re VFC, LLC f/k/a Voyager Financial Croup, LLC, Cease and Desist Order, Case No. S-12-0015, Arkansas Securities Commissioner (April 22, 2013). The definition of a "security" under federal and state securities laws may differ.

        18. See Notice to Members 96-33 (May 1996) (discussing the rule on private securities transactions and stating that "the records created and recordkeeping system used, together with relevant supervisory procedures, must enable the firm to properly supervise the [registered representatives who also are investment advisers (RR/IAs)] by aiding the firm's understanding of the nature of the service provided by an RR/IA, the scope of the RR/IA's authority, and the suitability of the transaction") (emphasis added); Notice to Members 85-84 (December 1985) ("First, the rationale/purpose behind the rule, as set forth when adopted in 1985, was to address concerns because "securities may be sold to public investors without the benefit of supervision or oversight by a firm and, perhaps, without adequate attention to such regulatory protections as due-diligence investigations and suitability determinations.") (emphasis added).

        19. Although the focus of this Notice is on activities away from an employing firm regarding pension income stream products, firms must consider their obligations under all applicable FINRA rules, including their supervisory obligations under FINRA Rule 3110 (Supervision), if the product is sold as part of the firm's business.

      • 16-11 SEC Approves Expanded Application of Supplemental Schedule for Derivatives and Other Off-Balance Sheet Items; Implementation Date: The supplemental schedule disclosing off-balance sheet information as of June 30, 2016, must be filed with FINRA on or before August 2, 2016

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        Supplemental FOCUS Information

        Regulatory Notice
        Notice Type

        Supplemental Schedule
        Referenced Rules & Notices

        FINRA Rule 4524
        SEA Rule 15c3-1
        Suggested Routing

        Compliance
        Finance
        Legal
        Operations
        Regulatory Reporting
        Senior Management
        Key Topics

        FOCUS Reporting

        Summary

        The SEC has approved FINRA's proposal to amend the instructions to the Derivatives and Other Off-Balance Sheet Items Schedule (OBS) to expand the application of the OBS to certain non-carrying/non-clearing firms that have significant amounts of off-balance sheet obligations. Subject to a de minimis exception, the OBS must be filed by (1) all FINRA member firms that selfclear their proprietary transactions or clear transactions for others or carry customer accounts; and (2) all other FINRA member firms that have, pursuant to Rule 15c3-1 under the Securities Exchange Act of 1934 (SEA),1 a minimum dollar net capital requirement equal to or greater than $100,000 and at least $10 million in reportable items pursuant to the OBS. Newly filing firms must file with FINRA their initial OBS disclosing off-balance sheet information as of June 30, 2016, on or before August 2, 2016. Carrying or clearing firms that were subject to the OBS's reporting requirements before the recently approved expansion shall continue to file on a quarterly basis, as required, without interruption.

        The OBS and its amended instructions are available at http://www.finra.org/ industry/notices/16-11.

        Questions concerning this Notice should be directed to:

        •    Kris Dailey, Vice President, Risk Oversight & Operational Regulation (ROOR), at (646) 315-8434 or by email at kris.dailey@finra.org;
        •    Peter Tennyson, Director, Broker-Dealer Operations and Financial Responsibility (BDOFR), at (646) 315-8403 or by email at peter.tennyson@finra.org; or
        •    Meredith Cordisco, Assistant General Counsel, Office of General Counsel, at (202) 728-8018 or by email at meredith.cordisco@finra.org.

        Background & Discussion

        FINRA Rule 4524 (Supplemental FOCUS Information) requires each firm, as FINRA shall designate, to file such additional financial or operational schedules or reports as FINRA may deem necessary or appropriate for the protection of investors or in the public interest as a supplement to the FOCUS Report. In February 2013, the SEC approved FINRA's adoption of the OBS,2 which requires all firms that carry customer accounts or self-clear or clear transactions for others (referred to, collectively, as "carrying or clearing firms") to file with FINRA the OBS within 22 business days of the end of each calendar quarter, unless the carrying or clearing firm meets the de minimis exception set forth in the instructions to the OBS.

        The OBS captures important information that is not otherwise reported on firms' balance sheets,3 and it enables FINRA to effectively monitor on an ongoing basis the potential impact that such off-balance sheet activities may have on carrying or clearing firms' net capital, leverage and liquidity, and their ability to fulfill their customer protection obligations. To ensure that all firms with significant derivative and off-balance sheet positions report these positions to FINRA on a consistent and regular basis, FINRA is expanding the application of the OBS beyond carrying or clearing firms to include non-clearing firms that have significant off-balance sheet obligations. As a result, unless a firm meets the de minimis exception for the reporting period, the OBS must be filed by (1) all FINRA members that self-clear their proprietary transactions or clear transactions for others or carry customer accounts; and (2) all other FINRA members that have, pursuant to SEA Rule 15c3-1, a minimum dollar net capital requirement equal to or greater than $100,000 and at least $10 million in reportable items pursuant to the OBS.

        The amended instructions to the OBS preserve the de minimis exception for any firm that conducts limited off-balance sheet activity during a reporting period. Accordingly, if the aggregate of all gross amounts of off-balance sheet items is less than 10 percent of the firm's excess net capital on the last day of the reporting period, the firm will not be required to file the OBS for the reporting period. A firm that claims the de minimis exception must affirmatively indicate through the eFOCUS system that no filing is required for the reporting period by using the "NOT FILE" option on the submission.

        Any firm that is required to file the OBS must do so as of the last day of a reporting period within 22 business days of the end of each calendar quarter by 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).4


        1 12 CFR 240.15c3-1 (Net Capital Requirements for Brokers or Dealers).

        2 See Securities Exchange Act Release No. 68832 (February 5, 2013), 78 FR 9754 (February 11, 2013) (Order Approving File No. SR-FINRA-2012-050).

        3 The OBS requires firms to report their gross exposures in financing transactions (e.g., reverse repos, repos and other transactions that are otherwise netted under generally accepted accounting principles, reverse repos and repos to maturity and collateral swap transactions), interests in and exposure to variable interest entities, non-regular way settlement transactions (including to-be-announced or TBA securities and delayed delivery/settlement transactions), underwriting and other financing commitments, and gross notional amounts in centrally cleared and non-centrally cleared derivative transactions.

        4 For more information about system entitlement and SAA, please visit FINRA's Entitlement Program page.

      • 16-10 Direct Purchases and Bank Loans as Alternatives to Public Financing in the Municipal Securities Market

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        Municipal Securities

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        17 C.F.R. §240.15Ba1-1(g)
        Exchange Act Section 3(a)(10)
        Exchange Act Section 15B(c)(1)
        Exchange Act Section 15B(e)(8)
        FINRA Rules 0150, 2010, 2210, 3110, 3310 and 4530
        MSRB Regulatory Notice 2011-37
        MSRB Regulatory Notice 2011-52
        MSRB Regulatory Notice 2015-03
        MSRB Regulatory Notice 2016-12
        MSRB Rules A-12, A-13, G-2, G-3, G-8, G-9, G-14, G-15, G-17, G-23, G-27, G-32, G-34, G-37 and G-42
        Suggested Routing

        Legal
        Compliance
        Public Finance
        Investment Banking
        Key Topics

        Municipal Bank Loans
        Municipal Direct Purchases
        Municipal Private Placements
        Municipal Securities
        Municipal Advisor

        Direct Purchases and Bank Loans as Alternatives to Public Financing in the Municipal Securities Market

        Summary

        The Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB)1 are providing guidance to remind firms of their obligations in connection with privately placing municipal securities directly with a single purchaser and of the use of bank loans in the municipal securities market.

        Questions concerning this Notice should be directed to:

        •  Cynthia Friedlander, Director, Fixed Income Regulation, Regulatory Operations, at (202) 728-8133; or
        •  Victoria Crane, Associate General Counsel, Office of General Counsel, at (202) 728-8104.

        Background

        FINRA and the MSRB are aware of the increasing practice of privately placing municipal securities directly with a single purchaser (sometimes referred to as "direct purchases") and of the use of bank loans2 as alternatives to traditional public offerings in the municipal securities market.3 Although it can be beneficial for potential issuers of municipal securities to consider such alternatives and the means of financing used is the issuer's choice, this development raises a number of concerns with respect to firms' conduct in connection with such alternative financings.

        First, FINRA has observed and the MSRB is aware that firms may not be conducting sufficient due diligence and analysis to determine whether the financing instruments are municipal securities or bank loans even where the financing instrument is described as a "loan." Second, firms may be engaging in placements of these instruments without fully understanding the nature of their roles in the transactions, such as whether the firm is engaging in conduct that makes it a broker-dealer or municipal advisor. Finally, some firms may not have fully considered the applicability of the federal securities laws and the rules and regulations thereunder, including FINRA and MSRB rules, to these transactions.

        The MSRB previously issued notices advising brokers, dealers and municipal securities dealers (collectively "dealers") that their obligations under certain MSRB rules are equally applicable to public offerings and private placements of municipal securities.4 In addition, the MSRB cautioned that a private placement of municipal debt with a single purchaser, including a bank, even if described as a "loan," could be a municipal securities transaction and, as a result, require the dealer to comply with the applicable MSRB rules.5 FINRA and the MSRB are issuing this Notice to remind firms of these prior Notices and firms' obligations under the applicable federal securities laws and rules and regulations thereunder, as well as FINRA and MSRB rules.

        Discussion

        Security or Loan Analysis

        A threshold analysis a firm must undertake is to determine whether the nature of the municipal entity's financing instrument is a security or a loan. Exchange Act Section 3(a)(10) includes "notes" within the definition of "security" and labeling an alternative financing for a municipal entity a "loan," which is often evidenced by a note, does not obviate the need to fully assess the particular facts and circumstances of the financing transaction.

        The principal legal authority on the distinction between a note that is a security from one that is not is the U.S. Supreme Court case of Reves v. Ernst & Young, Inc., which held that a note is presumed to be a security unless it is of a type specifically identified as a non-security.6 The types of non-security notes identified in Reves include notes delivered in a consumer financing transaction, notes secured by a mortgage on a home, short-term notes secured by a lien on a small business or its assets, short-term notes evidenced by accounts receivable, notes evidencing "character" loans to bank customers, notes formalizing open account debts incurred in the ordinary course of business, and notes evidencing loans from commercial banks for ordinary operations.7

        An instrument that is not among the list of non-security notes identified in Reves is deemed to be a security unless it bears a "strong family resemblance" to the non-security notes identified in the opinion.8 Reves established a four-part family resemblance test for determining whether a note is a security composed of the following factors: (i) the motivations of the buyer and seller; (ii) the plan of distribution; (iii) the reasonable expectations of the investing public; and (iv) the existence of an alternate regulatory regime. Under the Supreme Court's decision, if a note fails the family resemblance analysis, it is deemed to be a security.9

        Simply labeling a financing as a "loan" is not dispositive of whether it is a loan or a security. For example, firms should review the transaction documentation in considering whether a particular financing instrument is a municipal security or a loan. FINRA has found instances of financing arrangements that firms have concluded are loans even though the Reves factors indicated otherwise. In some instances, the transaction documentation described the instruments as "bonds," or contained language consistent with bond offerings, such as: (i) references to "purchasers" or "sellers"; (ii) the debt instruments were to be sold in separate denominations; (iii) the purchasers made representations regarding their knowledge and experience in investments and willingness to take on risk; and (iv) the debt instruments could have been resold. Contrary to the firms' views, in many instances the banks and municipal issuers involved in the transactions considered the instruments as municipal securities. FINRA has also found instances where firms failed to evaluate whether interim financing instruments (i.e., a two-tier financing arrangement) should have been treated as a municipal security or a loan. The consequences of failing to analyze such financings properly may be significant. Firms should also consider consulting with counsel on whether a particular financing instrument is a municipal security or a loan.

        Overview of Applicable FINRA and MSRB Rules

        FINRA member firms engaged in alternative financings that involve securities must consider their obligations under all applicable FINRA rules.10 Moreover, certain FINRA rules apply to member firms' conduct involving non-securities products, including FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade), 2210 (Communications with the Public), 3310 (Anti-Money Laundering Compliance Program) and 4530 (Reporting Requirements).11 In addition, firms have broad supervisory obligations under FINRA Rule 3110, including supervisory obligations with respect to compliance with such rules.

        MSRB rules that may be applicable to firms engaged in alternative financings that involve municipal securities include, but are not limited to, MSRB Rule A-12 (requiring registration), MSRB Rule A-13 (requiring broker-dealers to pay assessments on underwritings and placements of municipal securities), MSRB Rule G-2 (standards of professional qualification), MSRB Rule G-3 (professional qualification requirements), MSRB Rule G-8 (recordkeeping requirements), MSRB Rule G-9 (preservation of records), MSRB Rule G-14 (reports of sales or purchases of municipal securities, including agency trades), MSRB Rule G-15 (confirmation, clearance, settlement and other uniform practice requirements with respect to transactions with customers), MSRB Rule G-17 (fair dealing in the conduct of municipal securities activities), MSRB Rule G-23 (activities of financial advisors), MSRB Rule G-32 (disclosures in connection with primary offerings), MSRB Rule G-34 (CUSIP numbers, new issue and market information requirements) and MSRB Rule G-37 (political contributions and prohibitions on municipal securities business). Firms also have broad supervisory obligations under MSRB Rule G-27, including supervisory obligations with respect to compliance with these rules. In addition, if a firm is engaged in advising the municipal entity, the firm may be subject to a federal fiduciary duty under Exchange Act Section 15B(c)(1), and subject to SEC and MSRB rules applicable to municipal advisors. 12

        In addition, firms are reminded that timely disclosure by or on behalf of the municipal entity of additional debt or debt-like obligations that are outstanding is beneficial to foster market transparency and to ensure a fair and efficient municipal market. Municipal market participants are encouraged to voluntarily disclose the existence and terms of bank loans in a timely manner.13

        Conclusion

        The increasing use of direct purchases of municipal securities and bank loans as alternatives to publicly-offered municipal securities gives rise to a number of compliance risks for firms engaging in this activity and may erode market transparency that serves the interests of investors and promotes fair and efficient markets. This Notice reminds firms seeking to engage in these alternative financings with municipal entities of their obligations to conduct adequate due diligence to ascertain the nature of the transaction and financing instrument to ensure compliance with FINRA and MSRB rules, as well as the federal securities laws and other rules and regulations thereunder applicable to the activity.


        1. See MSRB Regulatory Notice 2016-12.

        2. A "bank loan" refers to a loan directly to a municipal entity evidenced by a loan agreement or other type of financing agreement between a bank and a municipal entity. A "municipal entity" is defined as "any State, political subdivision of a State or municipal corporate instrumentality of a State, including (A) any agency authority, or instrumentality of the State, political subdivision, or municipal corporate instrumentality; (B) any plan, program, or pool of assets sponsored or established by the State, political subdivision, or municipal corporate instrumentality or any agency, authority, or instrumentality thereof; and (C) any other issuer of municipal securities." Section 15B(e)(8) of the Securities Exchange Act of 1934 ("Exchange Act"). See also 17 C.F.R. §240.15Ba1-1(g) (defining "municipal entity" for purposes of municipal advisor registration with the Securities and Exchange Commission (SEC)).

        3. See e.g., "California Private Placement Market May be Pivoting," The Bond Buyer (November 5, 2015) reporting that, based on data provided by Thomson Reuters, the private placement of municipal securities totaled about $24 billion in 2014.

        4. See MSRB Regulatory Notice 2011-37 "Financial Advisors, Private Placements, and Bank Loans" (August 3, 2011) and MSRB Regulatory Notice 2011-52 "Potential Applicability of MSRB Rules to Certain 'Direct Purchases' and 'Bank Loans'" (September 12, 2011).

        5. Id.

        6. 494 U.S. 56 (1990). While the Reves case is the leading case on whether a note is a loan or a security, other court decisions and SEC guidance have also addressed the question.

        7. Id. at 65.

        8. Id. at 64–65.

        9. See MSRB Regulatory Notice 2011-52 for a more detailed review of Reves.

        10. We note that FINRA rules are not intended to be, and shall not be construed as, rules concerning transactions in municipal securities. See FINRA Rule 0150.

        11. See, e.g., lallegio v. SEC, No. 98-70854, 1999 U.S. App. LEXIS 10362, at *4–5 (9th Cir. May 20, 1999) (holding that Rule 2010 applies to all unethical business conduct, regardless of whether the conduct involves securities); Vail v. SEC, 101 F.3d 37, 39 (5th Cir. 1996) (same); In re Wallace, Admin. Proc. File No. 3-9549, 1998 SEC LEXIS 2437, at *13 (November 10, 1998) (emphasizing that Rule 2210 is "not limited to advertisements for securities, but provide[s] standards applicable to all [broker-dealer] communications with the public").

        12. For example, a firm that provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products, as defined in the Exchange Act, or the issuance of municipal securities, including advice with respect to the structure, timing, terms and other similar matters concerning such financial products or issues, may be engaged in municipal advisory activity and be required to register as a municipal advisor with the SEC and MSRB. See Registration of Municipal Advisors, Securities Exchange Act Release No. 70462 (Sept. 20, 2019), 78 FR 67467 (Nov. 12, 2013). See also MSRB Rules A-12 (Registration) and G-42 (Duties of Non-Solicitor Municipal Advisors) (effective June 23, 2016); and MSRB Regulatory Notice 2011-52 (discussing, among other things, the applicability of MSRB rules to a municipal advisor that advises a state or local government issuer on whether to enter into a bank loan that is, as a legal matter, a municipal security).

        13. See MSRB Regulatory Notice 2015-03 for guidance on best practices in order to facilitate the timely voluntary disclosure of bank loans and information related to bank loans that supports market transparency and enhances market efficiency.

      • 16-09 FINRA Requests Comment on Proposed Amendments to FINRA Rules to Support the Industry Initiative to Shorten the Settlement Cycle for Securities in the U.S. Secondary Market From T+3 to T+2; Comment Period Expires: April 4, 2016

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        Shortening the Settlement Cycle for Securities to T+2

        Regulatory Notice
        Notice Type

        Request for Comment
        Referenced Rules & Notices

        NASD Rule 2830
        FINRA Rule 11120
        FINRA Rule 11140
        FINRA Rule 11150
        FINRA Rule 11210
        FINRA Rule 11320
        FINRA Rule 11620
        FINRA Rule 11860
        SEA Rule 15c6-1
        Suggested Routing

        Compliance
        Government Securities
        Institutional
        Legal
        Municipal
        Mutual Fund
        Senior Management
        Systems
        Trading
        Key Topics

        Special Products
        Uniform Practice Code

        Comment Period Expires: April 4, 2016

        Summary

        Shortening the settlement cycle from trade date plus three business days (T+3) to trade date plus two business days (T+2) for U.S. secondary market transactions in equities, corporate and municipal bonds, unit investment trusts, and financial instruments composed of these products is an industry-led initiative. To support this industry-led initiative, FINRA seeks comment on proposed amendments to FINRA rules relating to the settlement cycle. FINRA proposes to adopt necessary rule changes in a manner and timeline that is consistent with the Securities and Exchange Commission (SEC) and other self-regulatory organizations (SROs) in an effort to provide the regulatory certainty necessary for an efficient transition.

        The proposed rule text of the impacted rules is in Attachment A.

        Questions concerning this Notice should be directed to:

        •  Kosha Dalal, Associate Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-6903; or
        •  Sarah Kwak, Counsel, OGC, at (202) 728-8471.

        Action Requested

        FINRA encourages all interested parties to comment. Comments must be received by April 4, 2016.

        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

        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

        In 1995, the standard U.S. trade settlement cycle for equities, municipal and corporate bonds, and unit investment trusts, and financial instruments composed of these products3 was shortened from five business days after the trade date to T+3.4 Since then, the SEC and the financial services industry have continued exploring the idea of shortening the settlement cycle even further.5

        In April 2014, The Depository Trust & Clearing Corporation (DTCC) published its formal recommendation to shorten the standard U.S. trade settlement cycle to T+2 and announced that it would partner with market participants and industry organizations to devise the necessary approach and timelines to achieve T+2.6 In February 2015, the SEC's Investor Advisory Committee strongly endorsed DTCC's recommendation.7 Market participants believe a shorter settlement cycle will yield important benefits to the industry by promoting financial stability and significantly mitigating risks to the financial system.

        In collaboration with the financial services industry, DTCC formed an Industry Steering Committee (ISC) and an Industry Working Group and sub-working groups to facilitate the move to T+2.8 In June 2015, the ISC published a white paper titled "Shortening the Settlement Cycle: The Move to T+2," which outlined the activities and proposed timeframes that would be required to move to T+2 in the U.S.9 The proposed timeframes included regulators and SROs finalizing their rule amendments by the second quarter of 2016, and developing and testing market infrastructure in 2017 with final implementation of T+2 by the third quarter of 2017.

        Concurrently, in June 2015, the Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI) jointly submitted a letter to SEC Chair Mary Jo White, expressing support of the efforts by the financial services industry to shorten the settlement cycle and identifying several SEC and SRO rule changes that they believed would require amendment for an effective transition to T+2.10 The ICI/SIFMA letter categorized the rule changes as follows: (1) rules that specifically establish or reference a T+3 settlement cycle (e.g., SEA Rule 15c6-1)11; (2) rules that do not specifically reference T+3 as the standard settlement cycle, but establish timeframes based on the settlement date of a trade and require one or more parties to act prior to settlement taking place; and (3) rules that establish timeframes based on settlement date, but require action after settlement occurs (e.g., Regulation T, Regulation SHO, SEA Rule 15c3-3(m)).

        In September 2015, SEC Chair White responded to the ICI/SIFMA letter expressing her strong support for industry efforts to shorten the trade settlement cycle to T+2 and urging the industry to continue to pursue the necessary steps towards achieving T+2 by the third quarter of 2017. SEC Chair White also indicated that she instructed SEC staff to develop a proposal to amend SEA Rule 15c6-1(a) to require settlement no later than T+2.12

        Proposed Amendments

        SEA Rule 15c6-1 currently establishes "regular way" settlement as occurring no later than T+3 for all securities, except for government securities and municipal securities, commercial paper, bankers' acceptances, or commercial bills.13 In anticipation of the SEC's changes to SEA Rule 15c6-1 to facilitate settlement no later than T+2 and to ensure that FINRA acts in concert and conformity with the impending rule changes by other SROs,14 FINRA is proposing definitional changes to its rules pertaining to securities settlement by, among other things, amending the definition of "regular way" settlement as occurring on T+2. The proposed technical changes would implement the anticipated rule changes of the SEC and the other SROs. Accordingly, FINRA believes that the proposed rule changes will not impose any burdens on the industry in addition to those necessary to implement the industry-wide initiative.

        FINRA has preliminarily identified the following rules that establish or reference a T+3 settlement cycle that would need to be amended to reflect a T+2 settlement cycle:

        •  NASD Rule 2830 (Investment Company Securities);
        •  FINRA Rule 11140 (Transactions in Securities "Ex-Dividend," "Ex-Rights" or "Ex-Warrants");
        •  FINRA Rule 11150 (Transactions in "Ex-Interest" in Bonds Which are Dealt in "Flat");
        •  FINRA Rule 11210 (Sent by Each Party);
        •  FINRA Rule 11320 (Date of Delivery);
        •  FINRA Rule 11620 (Computation of Interest); and
        •  FINRA Rule 11860 (COD Orders)

        The attachment to this Notice sets forth a list of the rules and the affected rule text that would be amended to comport with the industry-led initiative to move to T+2. As part of the ongoing initiative, FINRA will continue to review its rules to verify that impacted rules for securities settlement are identified and considered for amendment as appropriate.

        Economic Impact Assessment

        The industry-led effort to shorten settlement cycle to T+2 was based, in part, on an in-depth cost-benefit study commissioned by DTCC.15 The study identified several anticipated benefits. It concluded that a shorter settlement cycle would benefit market participants by mitigating operational and systemic risks by, among other things:16

        •  aligning U.S. markets with other major global markets such as the European Union and markets in the Asia Pacific region (e.g., Hong Kong and South Korea) that have already moved to T+2 and other global markets that are examining a move to T+2 (e.g., Canada and Japan);
        •  lessening member firm capital and margin requirements at the clearing agency by reducing risk exposure;
        •  reducing the additional margin and liquidity needs that can happen during times of economic volatility; and
        •  decreasing counterparty risk by moving trades more quickly to settlement, enabling capital to be freed up faster for reinvestment and reducing credit and counterparty exposure.

        As part of the ongoing initiative to move to T+2, FINRA is assessing the changes that will be required to those FINRA systems and applications that base calculations on T+3. In addition, moving to a shortened settlement cycle would impose costs across various other segments of the industry. These costs would include technological and infrastructure investments, as well as costs associated with implementing various operational changes required to achieve a shorter settlement cycle.

        Some of these costs and benefits of the shortened settlement cycle may, directly or indirectly, impact the investing public. For example, public investors would likely benefit from reduced counter-party risk and reduced delays in settlement. Alternatively, costs associated with meeting the shortened settlement cycle may be passed on, in part or in whole, to investors. FINRA specifically seeks comment on any direct or indirect impacts that may accrue to investors.

        FINRA notes that the potential economic impacts to the industry and investors discussed here are associated with the industry-wide move to T+2 and the SEC's anticipated amendments to SEA Rule 15c6-1(a), and FINRA believes that its proposed technical rule changes would not impose any additional burdens on the market participants.

        Request for Comment

        In addition to generally requesting comments, FINRA specifically requests comment on the questions below.

        1. Would the proposed rule amendments have an effect on conduct that is required for compliance with any other FINRA rule?
        2. Are there any other FINRA rules that should be amended to support the move to T+2?
        3. Are there any economic impacts, including costs and benefits, to the industry that are associated specifically with FINRA's proposed rule changes and are they in addition to those arising from the industry-wide move to T+2 and the SEC's anticipated amendments to SEA Rule 15c6-1? If so,
        a. What are these economic impacts and what are their primary sources?
        b. To what extent would these economic impacts differ by business attributes, such as size of the firm or differences in business models?
        c. What would be the magnitude of these impacts, including costs and benefits?
        FINRA requests data and quantified comments where possible.
        4. What economic impacts, including costs and benefits, would accrue to investors as a result of FINRA's proposed rule changes? What would be the magnitude and primary sources of these costs and benefits to investors? What factors or attributes would contribute to the costs borne by different segments of the public?

        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 take effect upon filing with the SEC. See SEA Section 19(b)(3) and SEA Rule 19b-4.

        3. Examples of such financial instruments include mutual funds, exchange-traded funds, exchange-traded products, American depositary receipts, options (exercise and assignment), rights, and warrants.

        4. Effective in 1995, SEA Rule 15c6-l(a) provides, in relevant part, that "a broker or dealer shall not effect or enter into a contract for the purchase or sale of a security (other than an exempted security, government security, municipal security, commercial paper, bankers' acceptances, or commercial bills) that provides for payment of funds and delivery of securities later than the third business day after the date of the contract unless otherwise expressly agreed to by the parties at the time of the transaction." Although not covered by SEA Rule 15c6-l, in 1995, the SEC approved the Municipal Securities Rulemaking Board's rule change requiring transactions in municipal securities to settle by T+3. See Securities Exchange Act Release No. 35427 (Feb. 28,1995), 60 FR 12798 (Mar. 8,1995) (File No. SR-MSRB-94-10).

        5. See e.g., Securities Industry Association (SIA), "SIA T+1 Business Case Final Report" (Jul. 2000); Concept Release: Securities Transactions Settlement, Securities Exchange Act Release No. 49405 (Mar. 11, 2004); and Depository Trust & Clearing Corporation, "Proposal to Launch a New Cost-Benefit Analysis on Shortening the Settlement Cycle" (Dec. 2011).

        6. See Depository Trust & Clearing Corporation, "DTCC Recommends Shortening the U.S. Trade Settlement Cycle" (Apr. 2014).

        7. See "Recommendation of the Investor Advisory Committee: Shortening the Trade Settlement Cycle in U.S. Financial Markets" (Feb. 12, 2015).

        8. The ISC includes, among other participants, DTCC, the Securities Industry and Financial Markets Association and the Investment Company Institute.

        9. See "Shortening the Settlement Cycle: The Move to T+2" (Jun. 18, 2015) (White Paper).

        10. See letter from ICI and SIFMA to Mary Jo White, Chair, SEC (Jun. 18, 2015) (ICI/SIFMA letter) at 5–8.

        11. See supra note 4.

        12. See letter from Mary Jo White, Chair, SEC, to Kenneth E. Bentsen, Jr., President and CEO, SIFMA, and Paul Schott Stevens, President and CEO, ICI (Sep. 16, 2015) at 2.

        13. See also FINRA Rule 11320(b) which provides, in relevant part, that "[i]n connection with a transaction 'regular way,' delivery shall be made at the office of the purchaser on, but not before, the third business day following the date of the transaction."

        14. On November 10, 2015, the MSRB issued MSRB Regulatory Notice 2015-22 seeking comment on draft amendments to MSRB Rule G-12 (Uniform Practice) and MSRB G-15 (Confirmation, Clearance, Settlement and Other Uniform Practice Requirements with Respect to Transactions with Customers) to facilitate shortening the settlement cycle for transactions in municipal securities. The comment period expired on December 10, 2015.

        15. See supra note 6. See also The Boston Consulting Group, "Cost benefit analysis of shortening the settlement cycle," (Oct. 2012) (examining and evaluating the necessary investments and resulting benefits associated with a shortened settlement cycle).

        16. Id.


        ATTACHMENT A

        Below is the text of the proposed rule changes.1 Proposed new language is underlined; proposed deletions are in brackets.

        * * * * *

        2000. BUSINESS CONDUCT

        * * * * *

        2800. SPECIAL PRODUCTS
        2830. Investment Company Securities
        (a) through (l) No Change.
        (m) Prompt Payment for Investment Company Shares
        (1) Members (including underwriters) that engage in direct retail transactions for investment company shares shall transmit payments received from customers for such shares, which such members have sold to customers, to payees (i.e., underwriters, investment companies or their designated agents) by (A) the end of the [third]second business day following a receipt of a customer's order to purchase such shares or by (B) the end of one business day following receipt of a customer's payment for such shares, whichever is the later date.
        (2) No Change.
        (n) No Change.

        * * * * *

        11000. UNIFORM PRACTICE CODE

        * * * * *

        11100. SCOPE OF UNIFORM PRACTICE CODE

        * * * * *

        11140. Transactions in Securities "Ex-Dividend," "Ex-Rights" or "Ex-Warrants"
        (a) No Change.
        (b) Normal Ex-Dividend, Ex-Warrants Dates
        (1) In respect to cash dividends or distributions, or stock dividends, and the issuance or distribution of warrants, which are less than 25% of the value of the subject security, if the definitive information is received sufficiently in advance of the record date, the date designated as the "ex-dividend date" shall be the [second]first business day preceding the record date if the record date falls on a business day, or the [third]second business day preceding the record date if the record date falls on a day designated by the Committee as a non-delivery date.
        (2) and (3) No Change.

        * * * * *

        11150. Transactions "Ex-Interest" in Bonds Which Are Dealt in "Flat"
        (a) Normal Ex-Interest Dates

        All transactions, except "cash" transactions, in bonds or similar evidences of indebtedness which are traded "flat" shall be "ex-interest" as prescribed by the following provisions:
        (1) On the [second]first business day preceding the record date if the record date falls on a business day.
        (2) On the [third]second business day preceding the record date if the record date falls on a day other than a business day.
        (3) On the [third]second business day preceding the date on which an interest payment is to be made if no record date has been fixed.
        (b) No Change.

        * * * * *

        11200. COMPARISONS OR CONFIRMATIONS AND "DON'T KNOW NOTICES"
        11210. Sent by Each Party
        (a) Comparisons or Confirmations
        (1) Each party to a transaction, other than a cash transaction, shall send a Uniform Comparison or Confirmation of same on [or before the first business day following the date of]the day of the [transaction]trade.
        (2) through (4) No Change.
        (b) No Change.
        (c) "DK" Procedures Using "Don't Know Notices" (FINRA Form No. 101)

        When a party to a transaction sends a comparison or confirmation of a trade, but does not receive a comparison or confirmation or a signed DK, from the contra-member by the close of [four]one business day[s] following the trade date of the transaction, the following procedure may be utilized.
        (1) The confirming member shall send by certified mail, return receipt requested, or messenger, a "Don't Know Notice" on the form prescribed by FINRA to the contra-member in accordance with the directions contained thereon. If the notice is sent by certified mail the returned, signed receipt therefor must be retained by the confirming member and attached to the fourth copy of the "Don't Know Notice." If delivered by messenger, the fourth copy must immediately be dated and manually receipted by, and imprinted with the firm stamp of, the contra-member pursuant to the provisions of paragraph (c)(4) of this Rule, returned to the messenger and thereafter be retained by the confirming member.
        (2)
        (A) After receipt of the "Don't Know Notice" as specified in paragraph (c) (1) of this Rule, the contra-member shall have [four]two business days after the notice is received to either confirm or DK the transaction in accordance with the provisions of subparagraphs (B) or (C) of this Rule.
        (B) and (C) No Change.
        (3) If the confirming member does not receive a response from the contra-member by the close of [four]two business days after receipt by the confirming member of the fourth copy of the "Don't Know Notice" if delivered by messenger, or the post office receipt if delivered by mail, as specified in paragraph (c)(1) of this Rule, such shall constitute a DK and the confirming member shall have no further liability for the trade.
        (4) and (5) No Change.
        (d) "DK" Procedure Using Other Forms of Notice

        When a party to a transaction sends comparison or confirmation of a trade, but does not receive a comparison or confirmation or a signed DK, from the contra-member by the close of one business day[s] following the date of the transaction, the following procedure may be utilized in place of that provided in the preceding paragraph (c) of this Rule.
        (1) through (4) No Change.
        (5) If the confirming member does not receive a response in the form of a notice from the contra-member by the close of [four]two business days after receipt of the confirming member's notice, such shall constitute a DK and the confirming member shall have no further liability.
        (6) through (8) No Change.

        * * * * *

        11300. DELIVERY OF SECURITIES
        11320. Dates of Delivery
        (a) No Change.
        (b) "Regular Way"

        In connection with a transaction "regular way," delivery shall be made at the office of the purchaser on, but not before, the [third]second business day following the date of the transaction.
        (c) "Seller's Option"

        In connection with a transaction "seller's option," delivery shall be made at the office of the purchaser on the date on which the option expires; except that delivery may be made by the seller on any business day after the [third]second business day following the date of the transaction and prior to the expiration of the option, provided the seller delivers at the office of purchaser, on a business day preceding the day of delivery, written notice of intention to deliver.
        (d) through (h) No Change.

        * * * * *

        11600. DELIVERY OF BONDS AND OTHER EVIDENCES OF INDEBTEDNESS
        11620. Computation of Interest
        (a) Interest [T]to [B]be Added to the Dollar Price

        In the settlement of contracts in interest-paying securities other than for "cash," there shall be added to the dollar price interest at the rate specified in the security, which shall be computed up to but not including the [third]second business day following the date of the transaction. In transactions for "cash," interest shall be added to the dollar price at the rate specified in the security up to but not including the date of transaction.
        (b) through (f) No Change.

        * * * * *

        11800. CLOSE-OUT PROCEDURES
        11860. COD Orders
        (a) No member shall accept an order from a customer, including foreign customers and/or broker-dealers trading with or through the member, for eligible transactions of such customers that settle in the United States, pursuant to an arrangement whereby payment for securities purchased or delivery of securities sold is to be made to or by an agent of the customer unless all of the following procedures are followed:
        (1) and (2) No Change.
        (3) The member shall deliver to the customer a confirmation, or all relevant data customarily contained in a confirmation with respect to the execution of the order, in whole or in part, not later than the close of business on the [next business day after] date of any such execution of the transaction.
        (4) The member shall have obtained an agreement from the customer that the customer will furnish its agent instructions with respect to the receipt or delivery of the securities involved in the transaction promptly upon receipt by the customer of each confirmation, or the relevant data as to each execution, relating to such order (even though such execution represents the purchase or sale of only a part of the order), and that in any event the customer will assure that such instructions are delivered to its agent no later than:
        (A) in the case of a purchase by the customer where the agent is to receive the securities against payment (COD), the close of business on the [second]first business day after the date of execution of the trade as to which the particular confirmation relates; or
        (B) No Change.
        (5) No Change.
        (b) No Change.

        1. In anticipation of the SEC's changes to SEA Rule 15c6-l to facilitate settlement no later than T+2, and to act in concert and conformity therewith, FINRA may change the rule text of its impacted rules to reference SEA Rule 15c6-l.

      • 16-08 Private Placements and Public Offerings Subject to a Contingency

        View PDF

        Contingency Offerings

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        FINRA Rule 2010
        Notice to Members 84-7
        Notice to Members 84-64
        Notice to Members 87-61
        Notice to Members 98-4
        Regulatory Notice 10-22
        SEA Rule 10b-9
        SEA Rule 15c2-4
        SEA Rule 15c3-1
        SEA Section 3(a)(6)
        Securities Act Section 17
        Suggested Routing

        Compliance
        Corporate Finance
        Legal
        Registered Representatives
        Senior Management
        Syndicate
        Underwriting
        Key Topics

        Bona Fide Purchases
        Contingency Offerings
        Escrow
        Net Capital
        Underwriting

        Executive Summary

        FINRA's review of securities offering documents has revealed instances in which broker-dealers have not complied with the contingency offering requirements of Rules 10b-9 and 15c2-4 under the Securities Exchange Act of 1934 (SEA). FINRA is publishing this Notice to provide guidance regarding the requirements of SEA Rules 10b-9 and 15c2-4 and to remind broker-dealers of their responsibility to have procedures reasonably designed to achieve compliance with these rules. 1

        Questions regarding this Notice should be directed to:

        •    Joseph E. Price, Senior Vice President, Corporate Financing/Advertising Regulation, at (240) 386-4623 or Joseph.Price@finra.org;
        •    Paul Mathews, Vice President, Corporate Financing, at (240) 386-4639 or Paul.Mathews@finra.org; or
        •    Josh Bandes, Senior Investigator, Corporate Financing, at (240) 386-5431 or Josh.Bandes@finra.org.

        Background & Discussion

        Broker-dealers that participate in best efforts public and private securities offerings that have a contingency (i.e., an underlying condition or qualification that must take place by a specified date prior to the issuer taking possession of the offering proceeds) must safeguard investors' funds they receive until the contingency is satisfied. If the contingency is not met, broker-dealers must ensure that investors' funds are promptly refunded. FINRA's reviews of these offerings and subsequent investigations have revealed instances in which broker-dealers have not complied with the requirements of SEA Rules 10b-9 and 15c2-4. Part I of this Notice provides an overview and explanation of best efforts contingency offerings. Part II describes a broker-dealer's responsibilities in best efforts contingency offerings. Part III describes the requirements for handling investor funds until the contingency is met.

        I. Best Efforts Contingency Offerings

        In a best efforts offering, a broker-dealer does not commit to purchase any securities from the issuer or guarantee that the issuer will receive any amount of money from the offering.2 Furthermore, a best efforts offering subject to satisfaction of an underlying condition is deemed to be a "contingency offering." The most common contingency offerings reviewed by FINRA are either "all-or-none" or "part-or-none" offerings that require all or a certain amount of the securities to be sold for the offering to close.3 Under SEA Rule 10b-9, a best efforts offering subject to either an "all-or-none" or "part-or-none" contingency must provide for the prompt return of investor funds in the event the requisite contingency fails to be met by a specific date.
        II. Broker-Dealer Responsibilities in a Best Efforts Contingency Offering.

        As discussed in Regulatory Notice 10-22, a broker-dealer that participates in an offering and recommends a security must, among other requirements, conduct a reasonable investigation of the security and the issuer's representations about it.4 If the security is offered as part of a contingency offering, the broker-dealer's reasonable investigation must include a review of the terms of the contingency, including any agreement and disclosure by the issuer regarding the contingency.5

        FINRA has reviewed several offerings in which the broker-dealer conducting the offering failed to identify inconsistencies between the escrow agreement and the offering document as it relates to the requirements of the contingency. Such inconsistencies should be "red flags" to a broker-dealer performing a reasonable investigation.

        Furthermore, FINRA has found that broker-dealers violated SEA Rule 10b-9 by failing to return subscriber funds after the issuer changed the contingency by reducing the offering minimum.6 FINRA has also found that broker-dealers violated SEA Rule 10b-9 by failing to take the proper steps in response to an issuer's extension of the offering period.7

        Broker-dealers must be aware of any attempt by the issuer to use non-bona fide sales in order to declare an offering sold for the purposes of an "all-or-none" or "part-or-none" offering.8 In general, "non-bona fide sales" are sales of undisclosed purchases by the issuer or broker-dealer, their affiliates or associated persons, or any entities through nominee accounts that are designed to create the appearance of a successful completion of an offering.9 The use of non-bona fide sales in "all-or-none" and "part-or-none" contingency offerings could violate the antifraud provisions of the federal securities laws.10 In one matter, FINRA found that a broker-dealer violated SEA Rules 10b-9 and 15c2-4 when it participated in an offering in which the issuer declared a contingency offering sold by counting non-bona fide sales made to the issuer's employees.11 Similarly, FINRA found that a broker-dealer violated SEA Rules 10b-9 and 15c2-4 when an issuer used the proceeds from a loan to purchase securities in the offering in order to meet the minimum offering amount. 12
        III. Requirements Concerning Manner of Handling Investor Funds

        SEA Rule 15c2-4 requires that upon receiving money or other consideration from an investor in a contingency offering, a broker-dealer must promptly:
        •    deposit those funds into "a separate bank account" for which the broker-dealer is the account holder and is designated as agent or trustee "for the persons who have the beneficial interests therein";13 or
        •    transmit those funds to a bank that has agreed in writing to act as the escrow agent for the offering.14
        The manner in which a broker-dealer must handle investor funds generally will be determined by two factors. First, pursuant to SEA Rule 15c3-1, only a broker-dealer that maintains at least $250,000 in net capital is allowed to carry customer accounts and receive or hold funds or securities for those persons. Therefore, while not a requirement of SEA Rule 15c2-4, a broker-dealer that maintains less than $250,000 in net capital and deposits investors' funds into a separate bank account rather than transmitting those funds to an independent bank escrow agent would violate SEA Rule 15c3-1.15 Second, when a participating broker-dealer is an affiliate of the issuer, investors' funds must be transmitted to an independent bank escrow agent.16
        a. Escrow Agreements

        In contingent offerings that require an escrow agent, the escrow agreement must be executed with a bank that is unaffiliated with the broker-dealer and the issuer.17 The escrow account should be established before the broker-dealer receives any investor funds. The escrow account may not be controlled by the issuer,18 the broker-dealer19 or an attorney.20 As a general matter, the escrow agent must be a financial institution that meets the definition of a "bank" under SEA Section 3(a)(6),21 although the SEC staff has provided no-action relief to permit certain other entities to act as escrow agents.22
        b. Prompt Transmittal of Funds

        SEA Rule 15c2-4(b) requires that a broker-dealer promptly transmit funds to either an escrow agent or a separate bank account. SEC staff has interpreted "promptly" to mean by noon of the next business day.23 Failure to promptly transmit funds to either the escrow agent or a separate bank account has resulted in sanctions.24 However, in certain offerings, such as direct participation programs that require suitability determinations by the issuer, the SEC staff has provided procedural guidance under which a broker-dealer can still comply with the "promptly" component of SEA Rule 15c2-4 even if the funds are not transmitted by noon the next business day after they are received.25

        A broker-dealer's responsibility does not end when it promptly transmits investor funds to an escrow agent or separate bank account. A broker-dealer must also promptly refund investors' funds if the contingency is not met.26 FINRA has identified a number of instances in which investors did not receive their money back in a prompt manner, if at all, when the contingency did not occur. For example, FINRA found that a broker-dealer violated SEA Rule 10b-9 after it failed to return two investors' funds, even after the investors demanded their money back.27 In fact, the broker-dealer only returned a portion of one of the investor's funds after the investor sued the broker-dealer, nearly two years later.
        c. Disbursal to the Issuer

        Broker-dealers must segregate investor funds they receive at least until the contingency is met. FINRA has found that some broker-dealers improperly disbursed investor funds to issuers before the contingency was satisfied.28
        d. Issuer's Direct Receipt of Investor Funds

        FINRA has observed in some contingency offerings that broker-dealers have instructed investors to transmit their funds directly to the issuer. Since SEA Rule 15c2-4 governs the broker-dealer's receipt of investor funds, funds that are not received by the broker-dealer (absent the circumstance in which there is an affiliation between the broker-dealer and the issuer) are outside the purview of this rule.29 Nevertheless, FINRA reminds brokerdealers that even if SEA Rule 15c2-4 does not apply, the anti-fraud and anti-manipulation provisions of the securities laws as well as FINRA Rule 2010 apply to all of their securities transactions.30 Broker-dealers that participate in contingency offerings in which the issuer does not escrow or otherwise segregate investor funds may violate the securities laws even in the absence of a violation of SEA Rule 15c2-4.

        1 Although this Notice focuses on SEA Rules 10b-9 and 15c2-4, other rules are potentially applicable to contingency offerings, including rules governing suitability and communications with the public. See Regulatory Notice 10-22 (Apr. 2010).

        2 Unlike in a best efforts offering, an underwriter in a firm commitment offering is obligated to purchase all securities offered before distributing them to the public.

        3 While the majority of contingency offerings are all-or-none or part-or-none, other underlying conditions upon which the offering is contingent may exist, such as the completion of a merger or acquisition.

        4 See Regulatory Notice 10-22 (Apr. 2010).

        5 See Regulatory Notice 10-22 at 3 ("The Securities and Exchange Commission (SEC) and federal courts have long held that a BD that recommends a security is under a duty to conduct a reasonable investigation concerning that security and the issuer's representations about it.").

        6 Security Research Associates, Inc., FINRA AWC No. 201303630601 (Apr. 3, 2014); Isaac Schinazi, FINRA AWC No. 2005000777001 (Dec. 21, 2007). See also Tucson Hotel Associates, 1985 SEC No-Act. LEXIS 2922 (Mar. 12, 1985) (investors must be refunded upon an issuer reducing the minimum number of units to be sold in a best efforts contingency offering); FOLIOfn Investments, Inc., SEC No-Action Letter, footnote 7 of incoming letter (July 15, 2015) (providing that "if an issuer were to reduce the minimum number of units to be sold in an offering on the Platform, Folio would cancel all the outstanding Conditional Offers for that offering and require the issuer to terminate that offering on the Platform.").

        7 Janco Partners, Inc., FINRA AWC No. 2011025505901 (Nov. 5, 2012); CP Capital Securities, Inc., FINRA AWC No. 2007007145101 (Aug. 25, 2009); European American Equities, Inc.; FINRA AWC No. 2009020941102 (Feb. 28, 2012). See also Interpretative Release on Regulation D, SEC Rel. No. 33-6455 at Question 80 (Mar. 3, 1983) (an extension of an offering period in a best efforts contingency offering requires investors to affirmatively reconfirm their investments).

        8 SEC v. Coven, 581 F.2d 1020, 1028, n.16 (2d Cir. 1978), cert. denied, 434 U.S. 950 (1979). See also SEC Rel. No. 33-11532 (July 11, 1975).

        9 SEC Rel. No. 33-11532 (July 11, 1975).

        10 SEC v. Blinder, Robinson & Co., et al., 1983 U.S. App. LEXIS 16806 (10th Cir. 1983). See also A.J. White & Co. v. SEC, 556 F.2d 619 (1st Cir. 1977).

        11 Northland Securities, Inc., NASD AWC No. E042005007801 (Dec. 21, 2006).

        12 Commonwealth Church Finance, Inc., FINRA AWC No. 2008011619001 (Aug. 10, 2010).

        13 SEA Rule 15c2-4(b)(1). Cf. FOLIOfn Investments, Inc., SEC No-Action Letter (July 15, 2015) (providing that the Division of Trading and Markets will not recommend enforcement action to the SEC if, subject to certain conditions and in light of certain representations, Folio accepts money received for certain best efforts contingent offerings from its customers through its electronic platform that services privately placed and/or unlisted securities).

        14 SEA Rule 15c2-4(b)(2).

        15 See Traiger Energy Investments, SEC Rel. No. 34- 25306 (Feb. 3, 1988) (a "$5,000 broker-dealer," or a non-carrying broker-dealer that uses a separate bank account as agent or trustee would not violate SEA Rule 15c2-4).

        16 Notice to Members 98-4 (Jan. 1998) ("…a broker/ dealer affiliated with the issuer may only deposit investors' funds in an escrow account with a bank independent of the issuer and the broker/ dealer."); Notice to Members 87-61 at 4 (Sep. 1987) (a "broker-dealer affiliated with the issuer must forward checks to an escrow account and may not act as agent or trustee for a separate bank account."); Notice to Members 84-7 at 5 (Jan. 1984) (if the broker-dealer and the issuer are affiliated "the broker-dealer should not act as agent or trustee for the funds [and] instead, an escrow agent should be used."). See also FOLIOfn Investments, Inc., No-Action Letter (July 15, 2015) (providing that the Division of Trading and Markets will not recommend enforcement action to the SEC based upon Folio's representation, among other representations and conditions, that each issuer is unaffiliated with Folio).

        17 Notice to Members 87-61 at 3 (Sept. 1987) ("[Rule 15c2-4] requires that when an escrow account is used for distributions conducted on a contingency basis (e.g., best-efforts all-or-none or part-or-none offerings), the escrow agent must be a commercial bank that is unaffiliated with either the issuer or the underwriter.").

        18 Richard Manchester, FINRA AWC No. 2009020397101 (Aug. 29, 2013) (in multiple and separate offerings, FINRA found that the broker-dealer violated Rule 15c2-4 by depositing investor funds into bank accounts in the name of the respective issuers rather than escrow accounts). See also Provident Asset Management, FINRA AWC No. 2009017497201 (Feb. 19, 2010).

        19 Carl E. Lindros, NASD AWC No. E022004004502 (Mar. 22, 2006); Paulson Investment Company, Inc., FINRA AWC No. 2007007406901 (Jan. 28, 2009); Philadelphia Brokerage Corporation, NASD AWC No. E9A2003016102 (Feb. 14, 2006); G.C. Andersen Partners Capital, LLC, FINRA AWC No. 2007007256802 (Nov. 20, 2008) (FINRA found that broker-dealer violated SEA Rule 15c2-4 by holding investor funds in an account in which the broker-dealer's employee acted as escrow agent); Northland Securities, Inc., NASD AWC No. E042005007801 (Dec. 21, 2006) (FINRA found that broker-dealer violated SEA Rule 15c2-4 by using an affiliate of the broker-dealer as the escrow agent).

        20 Grant Bettingen, NASD AWC No. E022005007302 (Mar. 7, 2007); Accelerated Capital Grp., FINRA AWC No. 2011025769301 (Jan. 7, 2014); EDI Financial, Inc., FINRA AWC No. 2009016266601 (Apr. 21, 2010).

        21 Notice to Members 84-7 at 7 (Jan. 1984) (a "bank" as used in Exchange Act Rule 15c2-4 refers to the definition contained in Section 3(a)(6) of the [Exchange] Act).

        22 Notice to Members 87-61 at 3 (Sept. 1987). See also Continental Stock Transfer & Trust Company, 1989 SEC No-Act. LEXIS 662 (May 10, 1989); Reliance Trust Co., 2005 SEC No-Act LEXIS 531 (Mar. 29, 2005).

        23 Notice to Members 84-7 at 4, 5 (Jan. 1984) (noting SEC staff's statement that "[i]n contingent offerings not requiring suitability determinations by the issuer or the general partner, funds should be deposited or transmitted by noon of the next business day."). See also J.V. Ace & Co., Inc., 50 SEC at 465 n.13 ("[investor] funds should normally be deposited or transmitted by noon of the business day following their receipt.") (citation omitted).

        24 Lowell H. Listrom & Co., Inc., 48 S.E.C. 360, 362 (1985) (broker-dealer violated SEA Rule 15c2-4 by retaining customers' funds for multiple days before transmitting the funds to the escrow agent). See also Brookville Capital Partners LLC, FINRA AWC No. 2008011678303 (June 7, 2010).

        25 Notice to Members 84-64 (Nov. 1984) (NASD published interpretive letter dated October 16, 1984, from the SEC to Linda A. Wertheimer, Chairman, Subcommittee on Partnerships, Trusts and Unincorporated Associations, Federal Regulation of Securities Committee, American Bar Association, defining "prompt transmittal" as applied to contingency offerings of interests in direct participation programs requiring an escrow account).

        26 See, e.g., Reid S. Johnson, FINRA AWC No. 2011025504301 (Oct. 21, 2013).

        27 Dept. of Enforcement v. Kaweske, NASD Discip. Proceeding No. C07040042 (Feb. 10, 2006).

        28 Richard Manchester, FINRA AWC No. 2009020397101 (Aug. 29, 2013); Woodrock Securities, L.P., FINRA AWC No. 2009016279401 (Jan. 28, 2011); Janco Partners, Inc., FINRA AWC No. 2011025505901 (Nov. 5, 2012).

        29 See Notice to Members 84-7 at 2, 5 (Jan. 1984) ("Direct receipt of an investor's funds by an issuer…is not a circumstance addressed by the Rule"…"[however] [w]here an investor sends his check directly to an issuer that is affiliated with a participating broker-dealer, 'receipt' of the funds is considered to be made by the broker-dealer when the issuer receives the check. Therefore, the Rule applies and the broker-dealer is responsible for ensuring that the issuer promptly transmits the funds to an independent escrow agent."). 30. See, e.g., SEA Rule 10b-5; Section 17 of the Securities Act of 1933.

        30 See, e.g., SEA Rule 10b-5; Section 17 of the Securities Act of 1933.

      • 16-07 SEC Approval of FINRA Rule 4518 (Notification to FINRA in Connection with the JOBS Act); Effective Date of FINRA Rule 4518 Notification Provisions: January 29, 2016; Effective Date for SEC Regulation Crowdfunding (Other than Registration Requirements): May 16, 2016

        View PDF

        Jumpstart Our Business Startups (JOBS) Act

        Regulatory Notice
        Notice Type

        New Rule
        Referenced Rules & Notices

        FINRA Rule 4518
        NASD Rule 1017
        Regulation Crowdfunding
        SEA Section 3(a)(80)
        Securities Act Section 4(a)(6)
        Suggested Routing

        Compliance
        Legal
        Senior Management
        Key Topics

        Crowdfunding
        JOBS Act

        Executive Summary

        The SEC approved new FINRA Rule 4518 as part of FINRA's proposal to establish the new Funding Portal Rules and related forms.1 This Notice provides further guidance on new Rule 4518, which applies to registered broker-dealer members of FINRA that contemplate acting as intermediaries in transactions involving the offer or sale of securities pursuant to the crowdfunding provisions of Title III of the JOBS Act2 and the SEC's Regulation Crowdfunding.3 Under the new rule, registered broker-dealer members must provide notification to FINRA, as specified in the rule and as discussed further in this Notice, prior to engaging in such activities. FINRA Rule 4518 will become effective on January 29, 2016.4

        The text of new FINRA Rule 4518 is available in Appendix A. (As discussed further in this Notice, members of FINRA that plan to notify FINRA pursuant to the rule must do so through the FINRA Firm Gateway.)

        Questions regarding this Notice should be directed to:

        •    Alissa Robinson, Director, Membership Application Program, at (212) 858-4764 or alissa.robinson@finra.org;
        •    Sandra Clarke, Associate Director, Membership Application Program, at (212) 858-4251 or sandra.clarke@finra.org; or
        •    Adam Arkel, Associate General Counsel, Office of General Counsel, at (202) 728-6961 or adam.arkel@finra.org.

        Background & Discussion

        The JOBS Act, enacted in 2012 with the goal of increasing American job creation and economic growth, contains provisions relating to securities offered or sold through crowdfunding. An intermediary that engages in transactions involving the offer or sale of securities pursuant to the "crowdfunding exemption"5 must register with the SEC as a funding portal or broker and become a member of a national securities association.6 As such, the JOBS Act contemplates activity by registered broker-dealers pursuant to Title III of the JOBS Act, subject to specified conditions.

        In anticipation that registered broker-dealer members of FINRA may intend to act as intermediaries for transactions in connection with the crowdfunding exemption, FINRA has adopted new FINRA Rule 4518. As noted above, the rule applies to registered broker-dealer members. The rule provides that a FINRA member shall notify FINRA, in a manner prescribed by FINRA:

        •    prior to engaging, for the first time, in a transaction involving the offer or sale of securities in reliance on the crowdfunding exemption; or
        •    within 30 days of directly or indirectly controlling, or being controlled by or under common control with, a funding portal as defined pursuant to Rule 300(c)(2) of SEC Regulation Crowdfunding.

        Members must provide the required notification to FINRA by visiting the FINRA Firm Gateway and updating their profile information, as indicated on the "Additional Business Types" section of the "Business Activities" page.

        Members should note that, in addition to providing the required notification to FINRA, depending on the facts and circumstances, they may also need to apply for approval of a material change in business operations pursuant to NASD Rule 1017 by filing a continuing membership application (CMA) using Form CMA, and paying related fees, unless they are already approved by FINRA to engage in private placements or underwriting.7 FINRA is of the view that members that are already approved by FINRA to engage in private placements or underwriting and that intend to engage in a transaction involving the offer or sale of securities in reliance on the crowdfunding exemption do not need to file a CMA as a material change in business operations.8 Members may seek guidance from FINRA staff as to whether a change in business operations will require a CMA application through the materiality consultation process. Please see Overview of Materiality Consultation Process for additional information.

        If you have questions about entitlement to FINRA's Firm Gateway, please contact the Gateway Call Center at (301) 590-6500.


        1 See Securities Exchange Act Release No. 76970 (January 22, 2016), 81 FR 4931 (January 28, 2016) (Notice of Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change; File No. SR-FINRA-2015-040); see also Securities Exchange Act Release No. 76239 (October 22, 2015), 80 FR 66348 (October 28, 2015) (Notice of Filing of Proposed Rule Change To Adopt the Funding Portal Rules and Related Forms and FINRA Rule 4518; File No. SR-FINRA-2015-040).

        2 See Pub. L. No. 112-106, 126 Stat. 306 (2012). Crowdfunding generally refers to the use of the Internet by small businesses to raise capital through limited investments from a large number of investors.

        3 The SEC adopted Regulation Crowdfunding on October 30, 2015. See Securities Exchange Act Release No. 76324 (October 30, 2015), 80 FR 71388 (November 16, 2015) (Final Rule: Crowdfunding).

        4 Broker-dealer members should note that the effective date for Regulation Crowdfunding, other than the registration requirements set forth in that regulation, is May 16, 2016. As such, though members may begin to notify FINRA effective January 29, 2016, it is a violation of the federal securities laws to engage in transactions involving the offer or sale of securities pursuant to the crowdfunding provisions of Title III of the JOBS Act prior to May 16, 2016.

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

        6 The term "funding portal" is defined under Section 3(a)(80) of the Securities Exchange Act of 1934 (SEA), as revised by the JOBS Act, and Rule 300(c)(2) under Regulation Crowdfunding. As noted above, the SEC has approved the Funding Portal Rules and related forms that FINRA proposed for funding portals that intend to become FINRA members pursuant to the JOBS Act and Regulation Crowdfunding. See Regulatory Notice 16-06 for more information.

        7 Form CMA must be filed through FINRA Firm Gateway.

        8 A firm may, however, need to file a CMA to the extent it otherwise is undergoing a change in ownership or control. See NASD Rule 1017.


        Appendix A: FINRA Rule 4518

        4500. BOOKS, RECORDS AND REPORTS

        * * * * *

        4518. Notification to FINRA in Connection with the JOBS Act

        A member shall notify FINRA, in a manner prescribed by FINRA:

        (a) prior to engaging, for the first time, in a transaction involving the offer or sale of securities in reliance on Section 4(a)(6) of the Securities Act; or
        (b) within 30 days of directly or indirectly controlling, or being controlled by or under common control with, a funding portal as defined pursuant to Rule 300(c)(2) of SEC Regulation Crowdfunding.

        * * * * *

      • 16-06 SEC Approval of FINRA Funding Portal Rules and Related Forms; Effective Date: January 29, 2016

        View PDF

        Jumpstart Our Business Startups (JOBS) Act

        Regulatory Notice
          Referenced Rules & Notices

        FINRA By-Laws
        FINRA Rule 0100 Series
        FINRA Rules 2010, 2020, 2210, 2268, 3110, 4517, 4518, 4530, 8210, 8312 and 9520
        FINRA Rule 8000 Series
        FINRA Rule 9000 Series
        FINRA Rule 12000 Series
        FINRA Rule 13000 Series
        FINRA Rule 14000 Series
        Funding Portal Rules 100, 110, 200, 300, 800, 900 and 1200
        NASD Rule 1010 Series
        Regulation Crowdfunding
        SEA Rule 17a-3
        SEA Section 3(a)(39) and 3(a)(80)
        Securities Act Section 4(a)(6)
        Suggested Routing

        Compliance
        Legal
        Senior Management
        Key Topics

        Crowdfunding
        Funding Portals
        JOBS Act

        Executive Summary

        The SEC approved1 FINRA's proposed Funding Portal Rules and related forms for SEC-registered funding portals that become FINRA members pursuant to the crowdfunding provisions of Title III of the JOBS Act2 and the SEC's Regulation Crowdfunding.3 FINRA's Funding Portal Rules will become effective on January 29, 2016, which aligns with the effective date of the SEC's registration rules under Regulation Crowdfunding.4 This Notice provides a brief overview of the new Funding Portal Rules and provides information for prospective funding portals that plan to apply for FINRA membership.

        The text of the Funding Portal Rules is available on FINRA's website. The related forms are available for reference in the Appendices. (As discussed further in this Notice, prospective funding portals must file all forms electronically through FINRA's Firm Gateway. The forms will be accessible on Firm Gateway effective January 29, 2016.)

        Questions regarding this Notice should be directed to:

        •  Alissa Robinson, Director, Membership Application Program, at (212) 858-4764 or alissa.robinson@finra.org; or
        •  Adam Arkel, Associate General Counsel, Office of General Counsel, at (202) 728-6961 or adam.arkel@finra.org.

        Background & Discussion

        The JOBS Act, enacted in 2012, contains provisions relating to securities offered or sold through crowdfunding. Funding portals that engage in crowdfunding on behalf of issuers relying on the JOBS Act's "crowdfunding exemption"5 must register with the SEC and become a member of a national securities association.6 Under the JOBS Act and Regulation Crowdfunding, a funding portal may not: (1) offer investment advice or recommendations; (2) solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal; (3) compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal; (4) hold, manage, possess, or otherwise handle investor funds or securities; or (5) engage in such other activities as the SEC, by rule, determines appropriate.7

        The Funding Portal Rules consist of a set of seven rules (Funding Portal Rules 100, 110, 200, 300, 800, 900 and 1200) and related forms (Form FP-NMA, Form FP-CMA, Funding Portal Rule 300(c) Form, and Form FP-Statement of Revenue).8 As FINRA has noted, the rules have been written specifically for funding portals and have been streamlined to reflect the limited scope of activity permitted by funding portals while also maintaining investor protection.9 Following is a brief overview of the rules.

        Funding Portal Rule 100 (General Standards)

        Funding Portal Rule 100, similar to the FINRA Rule 0100 Series, sets forth basic standards and definitions for purposes of the Funding Portal Rules. Paragraph (a) of the rule provides in part that all funding portal members and persons associated with funding portal members shall be subject to the FINRA By-Laws and FINRA Regulation By-Laws, unless the context requires otherwise, and the Funding Portal Rules. The rule provides that persons associated with a funding portal member shall have the same duties and obligations as a funding portal member under the Funding Portal Rules. Paragraph (b) defines such terms as "funding portal member"10 and "associated person of a funding portal member."11

        Funding Portal Rule 110 (Funding Portal Application)

        Funding Portal Rule 110 addresses the membership application process (MAP) for funding portals. The MAP will enable FINRA to assess whether funding portals are capable of complying with applicable federal securities laws, the rules and regulations thereunder, and the Funding Portal Rules. The rule is based on the current NASD Rule 1010 Series membership rules that apply to broker-dealers. However, FINRA has simplified the MAP for funding portals to reflect the limited nature of their business. Following are some of the rule's key provisions:

        •  Definitions that apply specifically for MAP purposes are set forth in Funding Portal Rule 110(a)(1).
        •  Funding portals will apply for membership using Form FP-NMA.12 The rule provides among other things that, at the time an applicant (referred to as the "FP Applicant") submits its application, the FP Applicant must submit information indicating whether the FP Applicant or any associated person (as defined in Funding Portal Rule 100(b)(1)) of the FP Applicant is subject to a statutory disqualification as described in SEA Section 3(a)(39). The FP Applicant must keep this information current and must update such information promptly, but in any event not later than 10 days following any change in such information. Each FP Applicant will be assessed an application fee of $2,700 at the time the applicant files Form FP-NMA.13
        • Funding portals will apply for changes in ownership and control using Form FP-CMA.14 Each FP Applicant for approval of a change in ownership or control shall be assessed an application fee of $500 at the time Form FP-CMA is filed.15
        •  Funding Portal Rule 110(a)(9) addresses the membership interview. The rule provides among other things that the membership interview may be conducted by video conference.
        •  The standards for granting or denying an application are set forth in Funding Portal Rule 110(a)(10).
        •  Funding Portal Rule 110(a)(12) provides that the Department of Member Regulation shall serve a written decision on an application filed pursuant to the rule within 60 days after the filing of the application or such later date as FINRA and the FP Applicant have agreed in writing.
        •  Funding Portal Rule 110(a)(13) addresses an appeal of a decision by FINRA.

        Funding Portal Rule 200 (Funding Portal Conduct)

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

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

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

        Funding Portal Rule 300 (Funding Portal Compliance)

        Funding Portal Rule 300(a) requires each funding portal member to establish and maintain a system to supervise the activities of each associated person of the funding portal member that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Funding Portal Rules. A funding portal member's supervisory system must provide, at a minimum, for (1) the establishment and maintenance of written procedures to supervise the activities of the funding portal member and its associated persons; (2) the designation of a person with authority to carry out the supervisory responsibilities of the funding portal member; and (3) reasonable efforts to determine that all supervisory personnel are qualified by virtue of experience or training to carry out their assigned responsibilities. The rule is a streamlined version of FINRA Rule 3110 (Supervision).

        Funding Portal Rule 300(b) requires each funding portal member to designate to FINRA, for purposes of Article IV, Section 3 of the FINRA By-Laws,16 an executive representative. Funding portal members must update this information as specified by the rule.

        Funding Portal Rule 300(c) requires funding portal members to report to FINRA (and sets forth the obligations of such members' associated persons to report to the member) regulatory proceedings, disciplinary and other events. The rule is largely based on FINRA Rule 4530 (Reporting Requirements). Funding portal members must use the Funding Portal Rule 300(c) Form for their reporting requirements pursuant to the rule.17

        Funding Portal Rule 300(d), based in large part on the contact information requirements set forth in FINRA Rule 4517(c), requires funding portal members to report to FINRA all contact information required by FINRA through such means as FINRA may specify and to promptly update their required contact information. In addition, funding portal members must review and, if necessary, update their required contact information, through such means as FINRA may specify, within 17 business days after the end of each calendar year.

        Funding Portal Rule 300(e) requires each funding portal member each year to report to FINRA, in the manner prescribed by FINRA, the member's gross revenue on Form FP-Statement of Revenue no later than 60 days following each calendar year-end.18

        Funding Portal Rule 300(f) is based in large part on SEA Rule 17a-3(a)(12)(ii) and requires each funding portal member to make and keep current a record listing every associated person of the funding portal member that shows, for each such associated person, every office of the funding portal member where the associated person regularly conducts any business for the funding portal member, and any registration number, if any, to be prescribed by FINRA, and every identification number or code assigned to the associated person by the funding portal member. The rule requires each funding portal member to preserve all records made pursuant to the rule for five years, the first two in an easily accessible place, which aligns with the retention period that the SEC has prescribed for records that funding portals must make and preserve pursuant to Rule 404 under Regulation Crowdfunding.

        Funding Portal Rule 800 (Investigations and Sanctions)

        Under Funding Portal Rule 800(a), funding portal members are subject to the FINRA Rule 8000 Series (Investigations and Sanctions), unless the context requires otherwise.

        Paragraph (b) of Funding Portal Rule 800 is a streamlined version of FINRA Rule 8312 (FINRA BrokerCheck Disclosure). The rule provides in part that FINRA may provide access to the public, via an appropriate link on the FINRA website, to a funding portal member's current SEC Form Funding Portal, including amendments and registration withdrawal requests, as filed with the SEC pursuant to Regulation Crowdfunding, in the form made publicly available by the SEC. The rule provides that, with respect to a former funding portal member, FINRA may provide similar access to the public to the former funding portal member's most recent SEC Form Funding Portal, and any amendments and registration withdrawal requests, as filed with the SEC. Under the rule, FINRA will make available to the public information filed by a funding portal member, in a format to be prescribed by FINRA, indicating whether the funding portal member or any associated person of the funding portal member is subject to a statutory disqualification as described in SEA Section 3(a)(39). Under the rule, the funding portal member must keep this information current and must update such information promptly, but in any event not later than 10 days following any change in such information.

        Code of Procedure (Funding Portal Rule 900)

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

        Arbitration and Mediation (Funding Portal Rule 1200)

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

        Information for Prospective Funding Portals; Filing of Forms

        As discussed above, the Funding Portal Rules become effective on January 29, 2016. Prospective funding portals should visit http://www.finra.org/industry/funding-portals to get more information about how to begin the application process, including how to gain entitlement to FINRA's Firm Gateway. All forms discussed in this Notice—Form FP-NMA, Form FP-CMA, Funding Portal Rule 300(c) Form and Form FP-Statement of Revenue-must be filed electronically through FINRA's Firm Gateway. If you have questions about entitlement to FINRA's Firm Gateway, please contact the Gateway Call Center at (301) 590-6500.


        1 See Securities Exchange Act Release No. 76970 (January 22, 2016), 81 FR4931 (January 28, 2016) (Notice of Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change; File No. SR-FINRA-2015-040); see also Securities Exchange Act Release No. 76239 (October 22, 2015), 80 FR 66348 (October 28, 2015) (Notice of Filing of Proposed Rule Change To Adopt the Funding Portal Rules and Related Forms and FINRA Rule 4518; File No. SR-FINRA-2015-040). FINRA separately filed, for immediate effectiveness, rules establishing fees for funding portals. See Securities Exchange Act Release No. 76238 (October 22, 2015), 80 FR 66342 (October 28, 2015) (Notice of Filing and Immediate Effectiveness of Proposed Rule To Establish Fees for Funding Portals; File No. SR-FINRA-2015-041). The fees applicable to funding portal members are set forth in Section 15 of Schedule A to the FINRA By-Laws.

        2 See Pub. L No. 112-106,126 Stat. 306 (2012). Crowdfunding generally refers to the use of the Internet by small businesses to raise capita through limited investments from a large number of investors.

        3 The SEC adopted Regulation Crowdfunding on October 30, 2015. See Securities Exchange Act Release No. 76324 (October 30, 2015), 80 FR 71388 (November 16, 2015) (Final Rule: Crowdfunding). The term "funding portal" is defined under Section 3(a)(80) of the Securities Exchange Act of 1934 (SEA), as revised by the JOBS Act, and Rule 300(c)(2) under Regulation Crowdfunding.

        4 Prospective funding portal applicants should note that the effective date for Regulation Crowdfunding, other than the registration requirements, is May 16, 2016. As such, though applicants may begin to register effective January 29, 2016, it is a violation of the federal securities laws to engage in funding portal business prior to May 16, 2016.

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

        6 The SEC's Rule 400(a) under Regulation Crowdfunding requires in part that a funding portal must register with the SEC, as specified in the rule, and become a member of a national securities association registered under SEA Section 15A. FINRA is the only registered national securities association.

        7 See SEA Section 3(a)(80) and Rule 300(c)(2) under Regulation Crowdfunding.

        8 In addition, FINRA has adopted new FINRA Rule 4518 (Notification to FINRA in Connection with the JOBS Act). Rule 4518 applies to registered broker-dealer members of FINRA that intend to act as intermediaries in transactions involving the offer or sale of securities pursuant to the crowdfunding exemption. FINRA is providing guidance as to Rule 4518 in a separate Notice. See Regulatory Notice 16-07.

        9 See 80 FR 66348, 66349.

        10 The term "funding portal member" means any funding portal admitted to membership in FINRA. See Funding Portal Rule 100(b)(6).

        11 The term "associated person of a funding portal member" or "person associated with a funding portal member" means any sole proprietor, partner, officer, director or manager of a funding portal, or other natural person occupying a similar status or performing similar functions, or any natural person directly or indirectly controlling or controlled by a funding portal member, or any employee of a funding portal member, and, for purposes of FINRA Rule 8210, any other person listed in Schedule A of SEC Form Funding Portal. See Funding Portal Rule 100(b)(1). Under Funding Portal Rule 800, funding portal members are subject to FINRA Rule 8210, which requires, in part, that a member must provide information and testimony and must permit an inspection and copying of books, records or accounts pursuant to the rule.

        12 See Funding Portal Rule 110(a)(3). Form FP-NMA is available in Appendix A.

        13 See Section 15 of Schedule A to the FINRA By-Laws.

        14 See Funding Portal Rule 110(a)(4). Form FP-CMA is available in Appendix B.

        15 See Section 15 of Schedule A to the FINRA By-Laws.

        16 Article IV, Section 3 of the FINRA By-Laws requires, in brief, that each FINRA member appoint and certify to FINRA an executive representative to represent, vote and act for the member in FINRA affairs.

        17 The Funding Portal Rule 300(c) Form is available in Appendix C.

        18 Form FP-Statement of Revenue is available in Appendix D. Each funding portal member is required to pay an annual gross income assessment in accordance with Section 1(c) of Schedule A to the FINRA By-Laws. See Section 15 of Schedule A to the FINRA By-Laws.


        Appendix A: Form FP-NMA

        Form FP-NMA

        Application Contact Information

        Provide the following information for the person who will be the primary contact for the Funding Portal ("FP") Applicant during FINRA's review of the Funding Portal - New Member Application ("FP-NMA"). Note that this is the person to whom FINRA will direct application-related questions and correspondence.

        Contact person

        First name  
        Last name  
        Email address  
        Phone number  


        I. General Information

        Provide the following business information regarding the FP Applicant:
        a. Full Name of FP Applicant: _________________________________________________
        b. SEC File No. : _________________________________________________
        c. Any Other Name(s) Under Which Business Is or Will Be Conducted: _________________________________________________
        d. Business Address: _________________________________________________
        e. All Website Addresses Where Business Is or Will Be Conducted: _________________________________________________
        f. Legal Status of FP Applicant (e.g., Corporation, Limited Liability Company ("LLC"), Partnership, Sole Proprietorship, or Other): _________________________________________________
        g. State/Country of Formation: _________________________________________________
        h. Date of Formation: _________________________________________________
        i. Attach corporate or analogous formation documents of the FP Applicant, and any amendments thereto.
        II. Ownership
        a. Is the FP Applicant's completed SEC Form Funding Portal accurate?
        Yes No

        Provide a detailed explanation of any changes. (The FP Applicant is also reminded to file an updated SEC Form Funding Portal with the SEC and to provide a copy of such to FINRA.)
        __________________________________________________________________________________________________
        b. Attach an organizational chart depicting: (i) the direct and indirect ownership structure and percentage interests in the FP Applicant held by entities and individuals; and (ii) any subsidiaries of the FP Applicant.
        III. Associated Persons
        a. Executive Officers

        Provide the names and CRD Numbers of the individuals performing the following roles or their functional equivalents:

          Full Name CRD Number (if applicable) Officer's Email Address
        i. Chief Executive Officer:
             
        ii. Chief Financial Officer:
             
        iii. Chief Operations Officer:
             
        iv. Chief Compliance Officer:
             
        v. Executive Representative:
             
        b. Supervisory Personnel

        Attach an organizational chart depicting the FP Applicant's supervisory personnel and reporting lines.
        IV. Activities, Procedures, and Controls
        a. Business Model and Activities

        Provide a detailed written description of the FP Applicant's business model. Include, at a minimum, a description of:
        i. the forms of compensation that will be paid to the FP or its associated persons;
        ii. any referral fees or transaction based compensation that the FP or associated persons will pay to others;
        iii. the types of securities to be presented to investors;
        iv. any limitations on the types of issuers that will be presented;
        v. how issuers will be presented to investors (e.g., website, social media platform); and
        vi. the type and scope of any other business activities the FP Applicant intends to conduct.

        __________________________________________________________________________________________________
        b. Recordkeeping

        Describe in detail the recordkeeping policies, procedures and systems to be used by the FP Applicant.

        _________________________________________________
        c. Attach the FP Applicant's written procedures. The written procedures must address, at a minimum, the following subjects:
        i. Communications with the public;
        ii. Collection, retention, protection and review of investors' information;
        iii. Criteria for limiting, highlighting and sorting offerings on the FP Applicant's platform;
        iv. Disclosure requirements;
        v. Due diligence;
        vi. Investor education and affirmation; and
        vii. Supervision.
        Please ensure that the written procedures clearly state:
        i. Who: the identification of the person responsible for conducting the subject procedure;
        ii. What: a description of the specific procedure that is to be conducted by the person responsible;
        iii. When: a statement as to when or how often the specific procedure is to be conducted; and
        iv. How evidenced: a statement as to how the FP Applicant will evidence the fact that the procedure has been conducted.
        d. Restricted or Prohibited Activities

        The federal securities laws prohibit FPs from certain conduct, including: offering investment advice or recommendations; soliciting purchases, sales, or offers to buy the securities offered or displayed on its website or portal; compensating employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal; holding, managing, possessing, or otherwise handling investor funds or securities; and any other activities prohibited by the SEC.
        i. Attach a signed statement, executed by an FP Applicant's officer (or functional equivalent) that procedures are in place to adhere to such prohibitions and that the FP Applicant's officers (or functional equivalents) are responsible for and maintain a system of controls and supervision to ensure compliance.
        ii. Attach written procedures addressing how the FP Applicant will comply with the prohibitions. (The written procedures must clearly provide the information outlined above regarding who, what, when, and how evidenced.)
        V. Systems, Facilities, and Contractual Relationships
        a. Systems
        i. Describe the operational systems the FP Applicant will use to conduct its business and the controls (e.g., change management, limitations on access to underlying data) to be utilized for such systems.

        __________________________________________________________________________________________________
        ii. Provide the address and log-in credentials for the FP Applicant's site for use by staff in evaluating the operational readiness of the funding portal platform.

        Address (URL):  
        User Name:  
        Password:  
        b. Business and Contractual Relationships

        Describe the business and contractual relationships the FP Applicant will maintain to conduct its business activities. This should include, without limitation and as applicable, descriptions of the following relationships:
        i. Banks;
        ii. Broker-Dealers;
        iii. Clearing corporations;
        iv. Service bureaus;
        v. Escrow agents;
        vi. Transfer agents; and
        vii. Technology service providers.

        __________________________________________________________________________________________________
        c. Attach copies of any contracts or agreements relating to the relationships described above.
        d. Attach copies of any other contracts or agreements entered into by the FP Applicant for the performance by another party of any functions identified as prohibited activities in the SEA definition of "funding portal" as enumerated in SEA Section 3(a)(80)(A) through (E) (e.g., offering investment advice or recommendations; soliciting purchases, sales or offers to buy the securities offered or displayed on the FP Applicant's website or portal; holding, managing, possessing, or otherwise handling investor funds or securities).
        e. Will the FP Applicant use pre-dispute arbitration agreements?
        Yes No
        VI. Funding
        a. Source of Funding
        i. Use the spreadsheet below to identify all persons or entities that have contributed equity capital or debt financing to the FP Applicant's business and provide information regarding the type of capital or financing.

        Date Name of Funding Source Funding Type (e.g., debt, equity)