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  • Notices

    • 2017

      • 17-22 FINRA Adopts Rules on Disruptive Quoting and Trading Activity and Expedited Proceedings; Effective Date: December 15, 2016

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        Regulatory Notice
        Notice Type

        New Rule
        Referenced Rules & Notices

        Rule 2010
        Rule 2020
        Rule 4330
        Rule 5210
        Rule 8210
        Rule 9200 Series
        Rule 9550 Series
        Rule 9800 Series
        SEA Rule 10b-5
        SEA Rules 15g-1 through 15g-9
        Section 10 of the Securities Exchange Act of 1934
        Section 15A of the Securities Exchange Act of 1934
        Section 17(a) of the Securities Act of 1933
        Suggested Routing

        Compliance
        Institutional Legal
        Registered Representatives
        Senior Management
        Trading
        Key Topics

        Cease and Desist Orders
        Disruptive Quoting and Trading
        Expedited Proceedings

        Executive Summary

        In December 2016, FINRA implemented two new rule changes regarding disruptive quoting and trading activity. The first rule change adopts new Supplementary Material .03 to Rule 5210 (Publication of Transactions and Quotations) to explicitly define and specifically prohibit for purposes of Rule 5210 two types of quoting and trading activity that are deemed to be disruptive. The first type of activity involves a party entering multiple limit orders on one side of the market that changes the level of supply and demand for the security, entering one or more orders on the opposite side of the market that are subsequently executed, and, following the execution, canceling the original limit orders. The second type of activity consists of a party placing an order inside the national best bid and offer, and then submitting an order on the opposite side of the market to execute against another market participant that joined the new inside market.

        The second rule change amends the FINRA procedural rules regarding temporary cease and desist orders (TCDOs), found in the Rule 9800 Series, to create a process for FINRA to issue, on an expedited basis, a permanent cease and desist order against a respondent that engages in a frequent pattern or practice of the disruptive quoting and trading activity in Supplementary Material .03 to Rule 5210.

        Questions concerning this Notice should be directed to

        •   Robert A. Marchman, Executive Vice President, Market Regulation Legal, at (646) 430-7054 or robert.marchman@finra.org; or
        •   Brant K. Brown, Associate General Counsel, Office of General Counsel, at (202) 728-6927 or brant.brown@finra.org.

        Background & Discussion

        Section 15A of the Securities Exchange Act of 1934 (Act) requires FINRA to have the capacity to enforce compliance by its member firms and persons associated with its member firms with, among other things, the Act, the rules and regulations thereunder, and FINRA rules.1 FINRA's rules are required to be "designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade,… to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest."2

        In fulfilling these requirements, FINRA has developed a comprehensive regulatory program that includes automated surveillance of a substantial portion of trading activity in the U.S. securities markets.3 When FINRA identifies potentially disruptive, manipulative, or otherwise improper quoting and trading activity, FINRA conducts an investigation into the activity, which often includes requesting additional information from those involved.4 If FINRA identifies and confirms violations, FINRA will commence the enforcement process (either on its own behalf or on behalf of an RSA client exchange), which may result in, among other things, a censure, a requirement to take certain remedial actions, one or more restrictions on future business activities, a monetary fine, or a temporary or permanent ban from the securities industry.5

        The process from the initial identification of potentially disruptive, manipulative, or improper quoting and trading activity to a final resolution of the matter can often take up to several years. Although this lengthy time period may be necessary and appropriate in complex cases, there are certain clear cases of disruptive and manipulative behavior, or cases where the potential harm to investors or market integrity is so clear, that there is an immediate need to initiate an expedited proceeding to stop the behavior from continuing. FINRA rules already provide FINRA with the ability to initiate an expedited proceeding in a number of different contexts (including in this context when safety to investors or the markets are impaired)—for example, the issuance of TCDOs under the Rule 9800 Series and bringing expedited proceedings for a variety of violations under the Rule 9550 Series. The rule changes described in this Notice serve to supplement these existing expedited processes to provide a new, specific and additional expedited procedure for certain defined types of disruptive quoting and trading activity.

        Specifically, effective December 15, 2016, FINRA has implemented two new rule changes regarding disruptive quoting and trading activity. The first rule change adopts new Supplementary Material .03 to Rule 5210 to define and prohibit under this rule two types of specific conduct that are deemed disruptive quoting and trading activity. The second rule change amends the FINRA procedural rules regarding initiation of a TCDO process to create a process for FINRA to issue, on an expedited basis, a permanent cease and desist order against a respondent that engages in a frequent pattern or practice of the disruptive quoting and trading activity in Supplementary Material .03 to Rule 5210.6 Each of these rule changes is described in more detail below.

        Disruptive Quoting and Trading Activity

        FINRA has authority to prohibit and take action against manipulative trading activity, including disruptive quoting and trading activity, pursuant to federal securities laws and FINRA rules, including Rules 2010 and 2020, and in some instances, under pre-existing expedited proceeding rules.7 The new Supplementary Material .03 to Rule 5210 serves to define more specifically certain types of disruptive quoting and trading activity and, combined with the amendments to the procedural rules, provides that violations of the Supplementary Material can serve as the basis to apply the cease and desist proceeding described below. Specifically, the Supplementary Material prohibits firms from engaging in or facilitating disruptive quoting and trading activity as defined in the rule, including acting in concert with other persons to effect such activity.

        The Supplementary Material defines two types of prohibited activities and states that, for purposes of the rule, disruptive quoting and trading activity would include a "frequent pattern or practice" of these activities.

        •   Trading Scenario One: a frequent pattern in which the following facts are present: (1) a party enters multiple limit orders on one side of the market at various price levels; (2) following the entry of the limit orders, the level of supply and demand for the security changes; (3) the party enters one or more orders on the opposite side of the market that are subsequently executed; and (4) following the execution, the party cancels the original limit orders.
        •   Trading Scenario Two: a frequent pattern in which the following facts are present: (1) a party narrows the spread for a security by placing an order inside the national best bid and offer and (2) the party then submits an order on the opposite side of the market that executes against another market participant that joined the new inside market established by the party.

        Supplementary Material .03 to Rule 5210 does not include an express intent element and also makes clear that the order of the events indicating the pattern does not change the applicability of the rule. Moreover, these types of disruptive quoting and trading activity can occur regardless of the venue(s) on which the activity is conducted.

        Cease and Desist Proceeding

        In addition to the new Supplementary Material describing the prohibited quoting and trading activity, FINRA has amended its existing TCDO rules to establish a process for FINRA to issue, on an expedited basis, a permanent cease and desist order (PCDO) for violations of Supplementary Material .03 to FINRA Rule 5210.8

        Under the current TCDO rules, FINRA can initiate a TCDO proceeding when respondents are alleged to have violated certain specific rules.9 Under the amendments, FINRA can issue a PCDO under which a respondent to the proceeding would be (1) ordered to cease and desist from the violative activity under Supplementary Material .03 to Rule 5210 or (2) ordered to cease and desist from providing market access to a client engaged in the violative trading activity.10

        The process for issuing a PCDO for violations of Supplementary Material .03 to Rule 5210 closely follows the existing TCDO procedures. Specifically, like a TCDO, the following provisions apply to a PCDO proceeding for alleged violations of the new Supplementary Material:

        •   Only FINRA's chief executive officer (or such other senior officer as the CEO may designate) may initiate a PCDO proceeding under the rule;11
        •   The PCDO proceeding is initiated by service of a notice, effective upon service, stating whether FINRA is requesting that the respondent take action or refrain from certain action, and the notice must be accompanied by a declaration of facts, a memorandum of points and authorities, and a proposed order containing the required elements of an order;12
        •   A hearing is conducted by a hearing panel,13 and the rules include provisions regarding the conduct of the hearing and generally require that the hearing be held within 15 days of service of the notice initiating the proceeding;14
        •   The hearing panel must issue a written decision no later than ten days after receipt of the hearing transcript;15
        •   The PCDO must set forth the alleged violation and the significant market disruption or investor harm that is likely to result without the issuance of an order and describe in reasonable detail the act or acts the respondent is to take or refrain from taking;16
        •   The PCDO is effective upon service and remains effective and enforceable unless modified, set aside, limited, or revoked pursuant to the rule;17
        •   Any time after the respondent is served with a PCDO, a party to the proceeding may apply to the hearing panel to have the order modified, set aside, limited, or suspended, and the hearing panel must generally respond to any such request in writing within ten days after receipt of the request;18
        •   FINRA can initiate an expedited proceeding pursuant to FINRA Rules 9556 and 9559 for violations of a PCDO;19
        •   Sanctions issued under the rule constitute final and immediately effective disciplinary sanctions thus allowing the respondent to appeal the PCDO to the SEC; however, filing an application for review with the SEC does not stay the effectiveness of the PCDO unless the SEC otherwise orders;20 and
        •   The issuance of the PCDO does not alter FINRA's ability to further investigate the matter or later sanction the firm pursuant to its standard disciplinary process for violations of supervisory obligations or other violations of FINRA rules or the Act.

        FINRA anticipates that the issuance of a PCDO under the new rule amendments will be limited to those extreme circumstances where initial attempts to resolve the conduct with the firm are unsuccessful.


        1 See 15 U.S.C. 78o-3(b)(2).

        2 15 U.S.C. 78o-3(b)(6).

        3 FINRA conducts, on its own behalf, surveillance of its member firms' trading activity, as well as surveillance for numerous national securities exchanges pursuant to Regulatory Services Agreements (RSAs). FINRA currently has RSAs with 18 different exchanges to perform some degree of surveillance. FINRA also combines its own data with data received from those exchanges with which it has RSAs to conduct cross-market surveillance.

        4 See, e.g., Rule 8210.

        5 15 U.S.C. 78o-3(b)(7). See generally Rule 9200 Series.

        6 The new rules are similar to those recently adopted by other self-regulatory organizations such as Bats BZX Exchange, Inc., formerly known as BATS Exchange, Inc. (BATS), and The Nasdaq Stock Market LLC (Nasdaq) but, as noted above, build off FINRA's existing process for issuing TCDOs. See Securities Exchange Act Release No. 77171 (February 18, 2016), 81 FR 9017 (February 23, 2016); see also Securities Exchange Act Release No. 77913 (May 25, 2016), 81 FR 35081 (June 1, 2016).

        7 These rule changes are not meant to limit the types of manipulative or disruptive activity that can be pursued under pre-existing rules.

        8 FINRA has existing authority to issue PCDOs. See Rule 9291. In addition, FINRA has the existing ability to bring expedited proceedings in a number of circumstances, including, for example, if a member firm, associated person, or other person does not meet the prerequisites for access to services offered by FINRA or cannot be permitted to continue to have access to services offered by FINRA or a member thereof with safety to investors, creditors, members, or FINRA. See Rule 9555(a)(2); see also, e.g., Rules 9551- 9554. These rule changes are not meant to limit any other expedited procedures that could be taken pursuant to other rules.

        9 FINRA has the authority to initiate a TCDO for alleged violations of Section 10(b) of the Act and Rule 10b-5 thereunder; SEA Rules 15g-1 through 15g-9 concerning penny stocks; FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) if the alleged violation is unauthorized trading, or misuse or conversion of customer assets, or based on violations of Section 17(a) of the Securities Act of 1933; FINRA Rule 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices); or FINRA Rule 4330 (Customer Protection—Permissible Use of Customers' Securities) if the alleged violation is misuse or conversion of customer assets. See Rule 9810(a).

        10 Under the current TCDO rules, FINRA must file an underlying complaint at the same time it issues a TCDO notice if a complaint has not already been filed. See Rule 9810(d). A TCDO remains in effect only until the conclusion of the underlying disciplinary proceeding. See Rule 9840(c). Under the new PCDO provisions, a PCDO is permanent, and there is no required underlying disciplinary proceeding. The new provision, however, does not preclude FINRA from pursuing a separate disciplinary action for the underlying conduct.

        11 See Rule 9810(a).

        12 See Rule 9810(a), (b).

        13 See Rule 9820.

        14 See Rule 9830(a).

        15 See Rule 9840(a).

        16 See Rule 9840(a).

        17 See Rule 9840, 9850.

        18 See Rule 9850.

        19 See Rule 9860, 9556, 9559.

        20 See Rule 9870.

      • 17-21 FINRA Revises the Rule 4530 Filing Application Form and the Product and Problem Codes for Reporting Customer Complaints and for Filing Documents Online; Implementation Date for changes relating to DOL Fiduciary Rule: June 9, 2017;

        * Implementation Date for changes relating to MSRB Rules: October 1, 2017

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        Reporting Requirements

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        29 CFR 2510.3-21
        FINRA Rule 4530
        MSRB Rule G-8
        Suggested Routing

        Compliance
        Legal
        Operations
        Senior Management
        Systems
        Key Topics

        Customer Complaints
        DOL Fiduciary Rule
        Filing Requirements
        Municipal Advisors
        Online Filing
        Product and Problem Code Changes
        Reporting Requirements

        Summary

        FINRA is adding a new Rule 4530 Problem Code to address changes the United States Department of Labor (DOL) has made to its fiduciary rule. The DOL has stated that certain provisions of the fiduciary rule and the related exemptions will become applicable on June 9, 2017. FINRA is also adding new fields to the Rule 4530 Filing Application Form, amending the existing Rule 4530 Product and Problem Codes and adding a new Problem Code, to address changes made by the Municipal Securities Rulemaking Board (MSRB) to extend the MSRB customer complaint and related recordkeeping rules to municipal advisors. The changes to the MSRB rules will become effective on October 13, 2017.

        In addition, FINRA is making other non-substantive technical and stylistic changes to the Product and Problem Codes and modifying the Rule 4530 system to limit the period during which firms can amend their submissions.

        Starting on June 9, 2017, firms can use new Problem Code 69—DOL Fiduciary Rule, when applicable, to report customer complaint information and information relating to required documents filed under Rules 4530(f) and (g).1

        Starting on October 1, 2017, the Rule 4530 Filing Application Form will include two new fields ("Non-Registered Rep Associated Person" and "Municipal Advisory Services") in the "Related To" subsection of the form. Firms can use these new fields when submitting information relating to associated persons who are not registered or relating to municipal advisory services. In addition, also starting on October 1, 2017, firms can use the amended and new Rule 4530 Product and Problem Codes relating to municipal advisory activities, including new Problem Code 15—Municipal Advisor Conflict of Interest, when applicable, to report customer complaint information and information relating to required documents filed under Rules 4530(f) and (g).2

        The amended and new Rule 4530 Product and Problem Codes are provided in Attachment A. For ease of reference, a marked-up version showing the most significant revisions to the current Product and Problem Codes is provided in Attachment B.

        Questions concerning this Notice should be directed to Anthony Cavallaro, Central Review Group, at (646) 315-7319.

        Background & Discussion

        FINRA Rule 4530 (Reporting Requirements) requires firms to report, among other events, written customer complaints alleging theft or misappropriation of funds or securities, or forgery.3 The rule also requires firms to report quarterly statistical and summary information regarding written customer complaints.4 All customer complaint information must be electronically reported to FINRA via an application on the FINRA Firm Gateway. In addition, the rule requires firms to file with FINRA copies of specified criminal and civil actions,5 which firms may file online via the Firm Gateway.6 Firms are required to select the appropriate Rule 4530 Product and Problem Code when reporting customer complaint information and information relating to required documents filed under Rules 4530(f) and (g). In addition, firms must complete other fields on the Rule 4530 Filing Application Form, including the fields in the "Related To" subsection of the form.

        DOL Fiduciary Rule and Related Exemptions

        In 2016, the DOL issued a final rule to amend the definition of "fiduciary" in 29 CFR 2510.3-21 and issued two new related exemptions, the Best Interest Contract Exemption and the Principal Transactions Exemption.7 In complying with the DOL fiduciary rule and the new exemptions, firms may have to impose limitations on particular securities transactions in customers' accounts. For instance, under the Best Interest Contract Exemption, a firm that avails itself of the exception for pre-existing transactions may not be able to purchase a new security for an existing customer's individual retirement account. In such instances, a customer may submit a written complaint to the firm regarding the firm's actions or inactions. To address issues that may arise in connection with a firm's compliance with the DOL fiduciary rule and the related exemptions, FINRA is adding new Problem Code 69—DOL Fiduciary Rule to the current Rule 4530 Problem Codes. Starting on June 9, 2017, firms may use Problem Code 69 to properly identify information reported to FINRA.

        MSRB Rules Relating to Municipal Advisors

        Earlier this year, the SEC approved a proposed rule change by the MSRB that extended the MSRB customer complaint and related recordkeeping rules to municipal advisors.8 Among other changes, the MSRB amended Rule G-8 (Books and Records to be Made by Brokers, Dealers, and Municipal Securities Dealers and Municipal Advisors) to require MSRB regulated entities to retain an electronic complaint log of all written complaints of customers or municipal advisory clients and persons acting on behalf of such customers or municipal advisory clients.9 MSRB regulated entities must also code the log using a standard set of product and problem codes, which will be based on the Rule 4530 Product and Problem Codes and tailored to address municipal securities and municipal advisory activities.10

        FINRA, working with the MSRB, is making changes to the Rule 4530 Filing Application Form and the Rule 4530 Product and Problem Codes to facilitate firms' compliance with the requirements of MSRB Rule G-8. Specifically, in the "Related To" subsection of the form, FINRA is adding a field for "Non-Registered Rep Associated Person" and one for "Municipal Advisory Services." Firms should select these fields when a reportable matter relates to an associated person who is not registered with a firm or relates to municipal advisory services. FINRA also is amending several of the existing Problem and Product Codes, such as Problem Code 56—Proxy/Prospectus, to clarify or extend their application to municipal securities and municipal advisory activities. Finally, FINRA is adding new Problem Code 15—Municipal Advisor Conflict of Interest, which relates to a conflict of interest arising in a municipal advisory role, including a breach of fiduciary duty, a duty of care or a duty of loyalty. Starting on October 1, 2017, firms may use the new fields and the amended and new Rule 4530 Product and Problem Codes relating to municipal securities and municipal advisory activities for reporting purposes.

        Amendments to Submissions

        Currently, the Rule 4530 system provides firms an indefinite period to amend their submissions. The purpose of allowing amendments to submissions is to provide firms the ability to promptly correct any erroneous information submitted through the system. Consistent with this purpose, FINRA is modifying the system to provide firms 30 calendar days after the reporting of a disclosure event and 30 calendar days after the due date for filing quarterly complaint information to amend their submissions.

        Availability of the Amended and New Codes

        The amended and new Rule 4530 Product and Problem Codes are provided in Attachment A and are also available on FINRA's website.


        1. For purposes of reporting statistical and summary information regarding written customer complaints, firms may use new Problem Code 69 to report information regarding complaints received during the second calendar quarter (April 1, 2017, through June 30, 2017). The second calendar quarter report is due by July 17, 2017.

        2. While the changes to the MSRB rules become effective on October 13, 2017, firms may begin using the amended and new Product and Problem Codes, including new Problem Code 15, on October 1, 2017, which is the start of the fourth calendar quarter period (October 1, 2017, through December 31, 2017) for reporting statistical and summary information regarding written customer complaints. The fourth calendar quarter report is due by January 16, 2018.

        3. See FINRA Rule 4530(a)(1)(B).

        4. See FINRA Rule 4530(d). The statistics that firms report provide FINRA with important regulatory information that assists with the timely identification of potential sales practice and operational issues.

        5. See FINRA Rule 4530(f).

        6. See FINRA Rule 4530(g). Firms also have the option of filing the documents required under FINRA Rule 4530(f) via mail or email.

        7. See 81 FR 20946, 21002 and 21089 (April 8, 2016).

        8. See MSRB Regulatory Notice 2017-03 (January 18, 2017).

        9. See id.

        10. See id.


        Attachment A

        Product Codes

        Select the most prominent in the complaint from the following codes.

        Code Description of Product (Effective 10/01/2017)
        00 Miscellaneous
        01 Equity-Listed (common and preferred stock, closed-end funds)
        02 Debt-Corporate (not asset-backed, includes convertible, corporate and zeros)
        03 Debt-U.S. Government/U.S. Government Agency/U.S. Government Zeros and U.S. Zeros Receipts
        (e.g., Treasury Investors Growth Receipt (TIGR), Certificate of Accrual on Treasury Securities (CATS))
        04 Commodities/Futures (except commodity options and financial futures)
        05 Commodity Options
        06 Options (except Index)
        07 Index Options
        08 Insurance (not annuities)
        09 Mutual Funds (open-ended, includes money market funds)
        10 Certificate of Deposit (CD) (coupon and zero CDs)
        11 Unit Investment Trusts (UITs) (corporate, government and municipal defined asset funds)
        12 Direct Investments (limited partnerships, etc.)
        13 Financial Futures
        14 Equity-OTC (common and preferred stock, new issues)
        15 Debt-Municipal—Such products may include municipal securities with underlying bonds, notes, zeros, warrants, Variable Rate Demand Obligations, Alternative Minimum Tax bonds, certificates of participation, private placement or direct purchases. However, they should not include Municipal Investment Trusts (see Code 11), Auction Rates Securities (see Code 39), or Structured Products (see Code 42).
        16 Debt-Asset Backed (Collateralized Mortgage Obligations (CMOs), credit card receivables, etc.)
        17 Managed/Wrap Accounts (in-house money manager)**
        18 No Product
        19 Managed/Wrap Accounts (outside money manager)**
        20 Variable Annuities—A variable annuity is an insurance company contract that allows the owner to elect to receive immediate or future periodic payments. A variable annuity is purchased, either with a lump sum or over time, with premiums allocated among various, separate account funds offered in the annuity contract. During the accumulation phase, the rate of return and the contract fund value on a variable annuity fluctuates with the performance of the underlying investments in the separate account funds, sometimes called investment portfolios or subaccounts.
        21 Warrants/Rights
        22 Real Estate Investment Trusts (REITS)
        23 Employee/Employer Stock Option Plans (not listed options)**
        24 Equity-Foreign
        25 Debt-Foreign
        26 Exchange Traded Funds (ETFs)
        27 Single Stock Futures
        28 529 Plans/Municipal Fund Securities ** (e.g., College Savings Plans, ABLE Accounts, and Local Government Investment Pools)
        29 Hedge Funds
        30 Private Placements (e.g., Private Investments in Public Equity Securities (PIPES), etc.)
        31 Promissory Notes
        32 Mortgage (e.g., pledged assets, reverse mortgage)
        33 Closed End Funds
        34 Cash Management Accounts (e.g., debit/credit card)**
        35 Self-Directed Fee-Based Accounts (non-managed)**
        36 Contractual Plans/Systematic Investment Plans
        37 Tenant in Common (e.g., 1031 Exchanges)
        38 Money Markets (e.g., commercial paper, Banker's Acceptance (BA), not money market funds)—When the matter is primarily related to money markets.
        39 Auction Rate Securities—Municipal Debt
        40 Auction Rate Securities—Corporate Debt
        41 Auction Rate Securities—Closed-End Funds
        42 Structured Products—For the purpose of this reporting, structured products are investment instruments designed to facilitate a particular risk-return objective, the performance of which is based on one or more referenced asset, index, interest rate, or other market measure. They may include floater or inverse floater features. Some structured products offer full protection of the principal invested, whereas others offer limited or no protection of the principal. Structured products may be listed on a securities exchange or traded in the over-the-counter market.
        43 Fixed Annuities—A fixed annuity is an insurance contract that is purchased either in a lump sum or over time. A fixed annuity is credited with a fixed or set interest rate and allows the owner to elect to receive immediate or future periodic payments. The insurance company guarantees both earnings and principal.
        44 Equity-Indexed Annuities—An equity-indexed annuity is an insurance company product purchased either in a lump sum or with a series of payments. The insurance company credits the holder with a return that is based on performance of an equity index, such as the S&P 500 Composite Stock Price Index. The insurance company may guarantee a minimum return. After the accumulation period, the insurance company makes periodic payments under the terms of the contract or in a lump sum.
        45 Life Settlements—A life settlement is a financial transaction in which a policy owner sells an existing life insurance policy to a third party for more than the policy's cash surrender value, but less than the net death benefit.
        46 Viatical Settlement—The sale of a terminally ill policy owner's existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. Such a sale provides the policy owner with a lump sum. The third party becomes the new owner of the policy, pays the monthly premiums, and receives the full benefit of the policy when the insured dies.
        47 Private Securities—Securities that are not registered; not listed on an exchange; and otherwise not publicly available for trade.
        48 Non-Broker-Dealer Affiliate Product—Such as banking and insurance instruments or services related to non-broker-dealer affiliate activity and not otherwise characterized by another Product Code.
        49 Exchange-Traded Notes (ETNs)—Senior, unsecured, unsubordinated debt security issued by an underwriting bank designed to provide investors access to the returns of various market benchmarks. ETNs do not actually own anything they are tracking. The note is backed by the credit of the underwriting bank that is promising to pay the amount reflected in the index, minus fees upon maturity.

        ** These account types are to be used when the allegations relate specifically to the type of account and not to an underlying security within the account.

        Problem Codes

        Select the most egregious in the complaint from the following codes.

        Code Description of Problem (Effective 10/01/2017)**
        00 Miscellaneous (Sales Practice Only)—"Sales Practice" only ("Non-Sales Practice" Miscellaneous code is "99").
        01 Misrepresentation—Allegations concerning false or misleading statements, claims, comparisons or omissions of material fact. Includes, but is not limited to, assurances and guarantees that are part of either oral or written communications or correspondence from an associated person to a customer, municipal advisory client, or prospect (not research/trading/investment banker/issuer/sponsor material).
        02 Unauthorized Trading—Allegations concerning one or more transactions that were effected without the customer's specific knowledge and approval. (Note: Not margin liquidation or dividend reinvestment type problems.)
        03 Excessive Trading—Allegations concerning trading that was controlled by the firm or Registered Representative ("RR") and was excessive given the size, frequency, and character of the account in which trading was done solely to generate commissions or other compensation with disregard to the customer's investment objectives.
        04 Suitability—Allegations concerning an unsuitable recommended transaction or investment strategy involving a security or securities, including possible violations of, among others, the following main suitability obligations: reasonable-basis suitability (must perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards, and determine whether the recommendation is suitable for at least some investors based on that understanding); customer-specific suitability (must have a reasonable basis to believe that a recommendation of a security or investment strategy involving a security or securities is suitable for the particular customer based on the customer's investment profile); and quantitative suitability (must have a reasonable basis to believe that a series of recommended securities transactions are not excessive where there is control over the account).
        05 Failure to Follow Instructions—Allegations concerning the RR's or the municipal advisor's associated person's failure to follow specific instructions from the customer or the customer's proper power of attorney holder or authorized parties of corporate or other entity accounts.
        06 Documentation—Allegations concerning material inaccuracies, omissions, or failures to obtain or provide
        07 Solicitation—Allegations concerning improper solicitation of an account or a transaction.
        08 Misappropriation/Forgery—Allegations concerning theft or misappropriation of funds or securities or forgery. (Note: Not dividend reinvestment, customer checking/debit card activity or routine transfer instructions problems.)
        09 Communication with Public—Allegations concerning false or misleading statements, claims, comparisons, or material omissions in communications or correspondence to a customer or prospect (including flyers, retail communications, sales materials and advertisements prepared by an associated person).
        10 Disclosure of Fees—Allegations concerning the RR's or municipal advisor's associated person's failure to advise, or incorrect information, regarding back-end fees associated with the product or disclosure of municipal advisory fees. (Includes Contingent Deferred Sales Charges (CDSC), surrender penalties, but not commissions or managed account fees.)
        11 Failure to Supervise—Allegations where a customer makes a sales practice complaint against his or her RR or a municipal advisor's associated person, and also cites a failure to supervise on the part of the named supervisor, such as the branch office manager, at the time the activity occurred.
        12 Poor Recommendation/Poor Advice—Allegations that a recommendation to purchase, sell or exchange a
        13 Selling Away—Allegations concerning an associated person engaging in a securities transaction outside the
        14 Outside Business Activities—Allegations concerning the RR engaging in an undisclosed business activity (other than a securities transaction) outside the scope of his or her relationship with the firm (e.g., employment with another entity without the knowledge of the firm).
        15 Municipal Advisor Conflict of Interest—Allegations that relate to a conflict of interest in a Municipal Advisory role, including a breach of fiduciary duty, a duty of care, or a duty of loyalty.
        20 Research—Allegations concerning a transaction(s) that was made based upon a firm's research opinion that allegedly contained a material misstatement(s) or the omission of a material fact(s) communicated to the RR, customer or municipal advisory client. (This will usually be coded as a "Firm" vs. "RR" problem.)
        21 Product Origination/Investment Banking—Allegations concerning a transaction(s) that was based on disclosures(s) (e.g., investment banking/issuer/sponsor/obligated person) that allegedly lacked "due diligence" in that such disclosure(s) contained a material misstatement(s) or the omission of a material fact(s) communicated to the RR/customer. (This will usually be coded as a "Firm" vs. "RR" problem.)
        22 Trading—Allegations concerning a transaction(s) that was based on a Trading Department (or support staff) disclosure(s) that contained a material misstatement(s) or the omission of a material fact(s) relating to secondary market conditions or security feature communicated to the RR/customer. (This will usually be coded as a "Firm" vs. "RR" problem.)
        23 Poor Performance—Allegations concerning the poor performance of the customer's account, but does not allege any specific sale practice violations against the RR or attribute damages to a research analyst recommendation. (Not otherwise reportable under Sales Practice Codes 20, 21 or 22.)
        24 Managed Accounts—Allegations concerning the practice of an in-house or outside money manager. (Not to be used when the RR is the money manager and allegations are of a sales practice nature against the RR.)
        25 Marketing/Sales Literature—Allegations concerning false or misleading statements, claims, comparisons or material omissions found in retail communications, advertisements, sales literature and other written firm communications. (Not research trading/investment banking/issuer/sponsor materials.)
        26 Regulation B—Allegations concerning a denial of credit on the basis of race, color, religion, national origin, sex, marital status, age, receipt of income from public assistance programs or good faith exercise of any rights under the Consumer Credit Protection Act (CCPA) (Usually coded as a "firm vs. RR" problem.)
        27 Regulation E—Allegations concerning a failure by the firm to comply with Regulation E—the Electronic Transfer Act. (Usually coded as a "firm vs. RR" problem.)
        28 Regulation S-P—Allegations concerning a failure by the firm to comply with Regulation S-P, which was adopted to implement Title V of the Gramm-Leach-Bliley Act. Pursuant to Regulation S-P, a financial institution must:
        •   Disclose to customers—on an initial and annual basis—its policies for collecting and sharing a customer's non-public personal information with affiliated and non-affiliated third parties;
        •   Provide the Firm's customers with the ability to "opt out" of certain disclosures of their non-public personal information to non-affiliated third parties, with certain exceptions;
        •   State the financial institution's security standards to protect a customer's nonpublic personal information. (Usually coded as a "firm vs. RR" problem.)
        29 Third Party/Anonymous—Allegations received by an unauthorized third party or anonymous source. (Note: If the firm received authorization from the customer subsequent to the receipt of a third party/anonymous complaint, it is obligated to file an amendment via the Firm Gateway application within 45 days of receipt of the authorization to identify the true problem code.)
        30 Complaints Referred to Previous Employer—Allegations received by a firm against a current or previously employed associated person regarding activities that occurred at the associated person's former employer firm.
        31 Other Theft/Forgery—Allegations concerning theft or misappropriation of funds or securities or forgery against someone other than an associated person of the firm.
        32 Identity Theft—Allegations concerning improper use of a customer's social security number or other non-public personal identity information by unauthorized individuals or entities.
        33 Affiliate Activity (Non-Broker-Dealer or Non-Municipal Advisor)—Allegations concerning activity at an affiliate not otherwise characterized by another problem code.
        40 Miscellaneous—Firm related complaints only. Non sales practice miscellaneous code is 99. Sales practice miscellaneous code is 00.
        Non-Sales Practice Problem Codes
        50 Transfer of Accounts—Allegations concerning full or partial transfer of a customer's account between broker-dealers. Includes both ACATS and manual transfers and internal transfers between branches.
        51 Receipt or Delivery of Securities—Allegations concerning receipt or delivery of any type of security from broker-dealer to a customer or vice versa. Includes lost certificates, delayed securities transfers, non-transferable securities or securities not in transfer because of a fail.
        52 Receipt or Disbursement of Funds—Allegations concerning funds received from or disbursed to a
        53 Dividend and Interest Problems—Allegations concerning payments or charges of dividends or interest, including stock dividends. Does not include disbursement of automatic monthly dividend checks or margin interest dependencies.
        54 Margin Problems—Allegations concerning margin, including account liquidations, margin call notification and margin interest discrepancies.
        55 Reorganization/Redemption—Allegations concerning stock splits, tenders, mergers, bond/unit trust
        56 Proxy/Prospectus—Allegations by a customer concerning the delay or non-receipt of any of the foregoing, including an Official Statement prepared by or on behalf of a state or local government in connect with a new issue of municipal securities and shareholder mailings.
        57 Execution—Allegations concerning non-execution, price discrepancy, delay in entry or report and delay in mutual fund purchases and redemptions.
        58 Statement/Confirms—Allegations concerning physical characteristics and representation of statements/confirmations, failure to receive statement/confirmations and questions regarding the reported price, value of or failure to value, a security.
        59 Tax Reporting—Allegations concerning tax reporting to, or on behalf of, a customer. Includes 1099, TEFRA withholding, K-1, W2-p, 5498 and Year-to-Date information appearing on monthly statements as well as any other tax reporting forms.
        60 Fees and Commissions—Allegations concerning customary fees (custodial, administrative), service charges (bounced checks, lost certificate, replacement, etc.) and commissions/markups (markdowns) and wrap fees or fees for municipal advisory services.
        61 Account Administration and Processing—Allegations concerning daily activity in a customer's account (e.g., trade corrections, journal entries, un-invested credit balances, and erroneous or missing positions in account).
        62 On-Line Trading—Allegations concerning trading initiated by a client on-line, (including non-execution, price discrepancy, delays in execution and delays in trade confirmation).
        63 Service Issues—Allegations concerning inadequate or unsatisfactory service from the firm or any of its employees.
        64 PATRIOT Act Liquidation—Allegations concerning the liquidation of an account due to the firm's inability to confirm the customer's identity as per Section 326 of the PATRIOT Act or failure to obtain foreign bank
        65 Account Administration and Processing—Account Opening—Allegations concerning problems establishing a new account (e.g., delays in opening account, and issues with account type and
        66 Account Administration and Processing—Account Maintenance—Allegations concerning non-transaction-related problems with existing accounts (e.g., address changes, investment objective changes, title changes and account closing issues).
        67 On-Line Issues—Allegations concerning access and functionality of a firm's online system (connectivity and navigation).
        68 Firm Policy—Allegations concerning a customer's dissatisfaction with a firm policy or procedure (that is not otherwise better characterized by another Problem Code).
        69 DOL Fiduciary Rule—Allegations concerning the firm's actions resulting from compliance with the DOL fiduciary rule and the related exemptions (e.g., allegation that the firm failed to follow instructions with respect to an account subject to transactional restrictions based on the DOL fiduciary rule and the related exemptions).
        99 Miscellaneous (Non-Sales Practice Only)—"Non-Sales Practice" only ("Sales Practice" Miscellaneous code is "00").

        ** Problem Code 69 is effective 06/09/2017.


        Attachment B

        Product Codes

        Select the most prominent in the complaint from the following codes.

        Code Description of Product (Effective 10/01/20174)
        00 Miscellaneous
        01 Equity-Listed (common and preferred stock, closed-end funds)
        02 Debt-Corporate (not asset-backed, includes convertible, corporate and zeros)
        03 Debt-U.S. Government/U.S. Government Agency/U.S. Government Zeros and U.S. Zeros Receipts
        (e.g., Treasury Investors Growth Receipt (TIGR), Certificate of Accrual on Treasury Securities (CATS))
        04 Commodities/Futures (except commodity options and financial futures)
        05 Commodity Options
        06 Options (except Index)
        07 Index Options
        08 Insurance (not annuities)
        09 Mutual Funds (open-ended, includes money market funds)
        10 Certificate of Deposit (CD) (coupon and zero CDs)
        11 Unit Investment Trusts (UITs) (corporate, government and municipal defined asset funds)
        12 Direct Investments (limited partnerships, etc.)
        13 Financial Futures
        14 Equity-OTC (common and preferred stock, new issues)
        15 Debt-Municipal—Such products may include municipal securities with underlying bonds, notes and, zeros, warrants, Variable Rate Demand Obligations, Alternative Minimum Tax bonds, certificates of participation, private placement or direct purchases. However, they should not include Municipal Investment Trusts (MITs))see Code 11), Auction Rates Securities (see Code 39), or Structured Products
        (see Code 42).
        16 Debt-Asset Backed (Collateralized Mortgage Obligations (CMOs), credit card receivables, etc.)
        17 Managed/Wrap Accounts (in-house money manager)**
        18 No Product
        19 Managed/Wrap Accounts (outside money manager)**
        20 Variable Annuities—A variable annuity is an insurance company contract that allows the owner to elect to receive immediate or future periodic payments. A variable annuity is purchased, either with a lump sum or over time, with premiums allocated among various, separate account funds offered in the annuity contract. During the accumulation phase, the rate of return and the contract fund value on a variable annuity fluctuates with the performance of the underlying investments in the separate account funds, sometimes called investment portfolios or subaccounts.
        21 Warrants/Rights
        22 Real Estate Investment Trusts (REITS)
        23 Employee/Employer Stock Option Plans (not listed options)**
        24 Equity-Foreign
        25 Debt-Foreign
        26 Exchange Traded Funds (ETFs)
        27 Single Stock Futures
        28 529 Plans/Municipal Fund Securities ** (e.g., College Savings Plans, ABLE Accounts, and Local Government Investment Pools)
        29 Hedge Funds
        30 Private Placements (e.g., Private Investments in Public Equity Securities (PIPES), etc.)
        31 Promissory Notes
        32 Mortgage (e.g., pledged assets, reverse mortgage)
        33 Closed End Funds
        34 Cash Management Accounts (e.g., debit/credit card)**
        35

        Self-Directed Fee-Based Accounts (non-managed)**

        36 Contractual Plans/Systematic Investment Plans
        37 Tenant in Common (e.g., 1031 Exchanges)
        38 Money Markets (e.g., commercial paper, Banker's Acceptance (BA), not money market funds) if When the matter is primarily relateds to money markets.
        39 Auction Rate Securities—Municipal Debt
        40 Auction Rate Securities—Corporate Debt
        41 Auction Rate Securities—Closed-End Funds
        42 Structured Products—For the purpose of this reporting, structured products are investment instruments designed to facilitate a particular risk-return objective, the performance of which is based on one or more referenced asset, index, interest rate, or other market measure. They may include floater or inverse floater features. Some structured products offer full protection of the principal invested, whereas others offer limited or no protection of the principal. Structured products may be listed on a securities exchange or traded in the over-the-counter market.
        43 Fixed Annuities—A fixed annuity is an insurance contract that is purchased either in a lump sum or over time. A fixed annuity is credited with a fixed or set interest rate and allows the owner to elect to receive immediate or future periodic payments. The insurance company guarantees both earnings and principal.
        44 Equity-Indexed Annuities—An equity-indexed annuity is an insurance company product purchased either in a lump sum or with a series of payments. The insurance company credits the holder with a return that is based on performance of an equity index, such as the S&P 500 Composite Stock Price Index. The insurance company may guarantee a minimum return. After the accumulation period, the insurance company makes periodic payments under the terms of the contract or in a lump sum.
        45 Life Settlements—A life settlement is a financial transaction in which a policy owner sells an existing life insurance policy to a third party for more than the policy's cash surrender value, but less than the net death benefit.
        46 Viatical Settlement—The sale of a terminally ill policy owner's existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. Such a sale provides the policy owner with a lump sum. The third party becomes the new owner of the policy, pays the monthly premiums, and receives the full benefit of the policy when the insured dies.
        47 Private Securities—Securities that are not registered; not listed on an exchange; and otherwise not publicly available for trade.
        48 Non-Broker-Dealer Affiliate Product—Such as banking and insurance instruments or services related to non-broker-dealer affiliate activity and not otherwise characterized by another Product Code.
        49 Exchange-Traded Notes (ETNs)—Senior, unsecured, unsubordinated debt security issued by an underwriting bank designed to provide investors access to the returns of various market benchmarks. ETNs do not actually own anything they are tracking. The note is backed by the credit of the underwriting bank that is promising to pay the amount reflected in the index, minus fees upon maturity.

        ** These account types are to be used when the allegations relate specifically to the type of account and not to an underlying security within the account.

        Problem Codes

        Select the most egregious in the complaint from the following codes.

        Code Description of Problem (Effective 10/01/20174)**
        00 Miscellaneous (Sales Practice Only)—"Sales Practice" only ("Non-Sales Practice" Miscellaneous code is "99").
        01 Misrepresentation—Allegations concerning false or misleading statements, claims, comparisons or omissions of material fact. Includes, but is not limited to, assurances and guarantees that are part of either oral or written communications or correspondence from the Registered Representative (RR)an associated person to a customer, municipal advisory client, or prospect (not research/trading/investment banker/issuer/sponsor material).
        02 Unauthorized Trading—Allegations concerning one or more transactions that were effected without the customer's specific knowledge and approval. (Note: Not margin liquidation or dividend reinvestment type problems.)
        03 Excessive Trading—Allegations concerning trading that was controlled by the firm or Registered Representative (" RR") and was excessive given the size, frequency, and character of the account in which trading was done solely to generate commissions or other compensation with disregard to the customer's investment objectives.
        04 Suitability—Allegations concerning an unsuitable recommended transaction or investment strategy involving a security or securities, including possible violations of, among others, the following main suitability obligations: reasonable-basis suitability (must perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards, and determine whether the recommendation is suitable for at least some investors based on that understanding); customer-specific suitability (must have a reasonable basis to believe that a recommendation of a security or investment strategy involving a security or securities is suitable for the particular customer based on the customer's investment profile); and quantitative suitability (must have a reasonable basis to believe that a series of recommended securities transactions are not excessive where there is control over the account).
        05 Failure to Follow Instructions—Allegations concerning the RR's or the municipal advisor's associated person's failure to follow specific instructions from the customer or the customer's proper power of attorney holder or authorized parties of corporate or other entity accounts.
        06 Documentation—Allegations concerning material inaccuracies, omissions, or failures to obtain or provide required documents.
        07 Solicitation—Allegations concerning improper solicitation of an account or a transaction.
        08 Misappropriation/Forgery—Allegations concerning theft or misappropriation of funds or securities or forgery. (Note: Not dividend reinvestment, customer checking/debit card activity or routine transfer instructions problems.)
        09 Communication with Public—Allegations concerning false or misleading statements, claims, comparisons, or material omissions in communications or correspondence to a customer or prospect (including flyers, retail communications, sales materials and advertisements prepared by an associated personthe RR).
        10 Disclosure of Fees—Allegations concerning the RR's or municipal advisor's associated person's failure to advise, or the RR's incorrect advice ofinformation, regarding back-end fees associated with the product or disclosure of municipal advisory fees. (Includes Contingent Deferred Sales Charges (CDSC), surrender penalties, but not commissions or managed account fees.)
        11 Failure to Supervise—Allegations where a customer makes a sales practice complaint against his/ or her account or registered representative ( RR) or a municipal advisor's associated person, and also cites a failure to supervise on the part of the named supervisor, such as the branch office manager, at the time the activity occurred.
        12 Poor Recommendation/Poor Advice—Allegations that a recommendation to purchase, sell or exchange a security constituted poor advice.
        13 Selling Away—Allegations concerning an associated person the RR engaging in a securities transaction
        14 Outside Business Activities—Allegations concerning the RR engaging in an undisclosed business activity (other than a securities transaction) outside the scope of his or her relationship with the firm (e.g., employment with another entity without the knowledge of the firm).
        15 Municipal Advisor Conflict of InterestAllegations that relate to a conflict of interest in a Municipal Advisory role, including a breach of fiduciary duty, a duty of care, or a duty of loyalty.
        20 Research—Allegations concerning a transaction(s) that was made based upon a firm's research opinion that allegedly contained a material misstatement(s) or the omission of a material fact(s) communicated to the RR/, customer or municipal advisory client. (This will usually be coded as a "Firm" vs. "RR" problem.)
        21 Product Origination/Investment Banking—Allegations concerning a transaction(s) that was based on disclosures(s) (e.g., investment banking/issuer/sponsor/obligated person) disclosure(s) that allegedly lacked "due diligence" in that such disclosure(s) contained a material misstatement(s) or the omission of a material fact(s) communicated to the RR/customer. (This will usually be coded as a "Firm" vs. "RR" problem.)
        22 Trading—Allegations concerning a transaction(s) that was based on a Trading Department (or support staff) disclosure(s) that contained a material misstatement(s) or the omission of a material fact(s) relating to secondary market conditions or security feature communicated to the RR/customer. (This will usually be coded as a "Firm" vs. "RR" problem.)
        23 Poor Performance—Allegations concerning the poor performance of the customer's account, but does not allege any specific sale practice violations against the RR or attribute damages to a research analyst recommendation. (Not otherwise reportable under Sales Practice Codes 20, 21 or 22.)
        24 Managed Accounts—Allegations concerning the practice of an in-house or outside money manager. (Not to be used when the RR is the money manager and allegations are of a sales practice nature against the RR.)
        25 Marketing/Sales Literature—Allegations concerning false or misleading statements, claims, comparisons or material omissions found in retail communications, advertisements, sales literature and other written firm communications. (Not research trading/investment banking/issuer/sponsor materials.)
        26 Regulation B—Allegations concerning a denial of credit on the basis of race, color, religion, national origin, sex, marital status, age, receipt of income from public assistance programs or good faith exercise of any rights under the Consumer Credit
        27 Regulation E—Allegations concerning a failure by the firm to comply with Regulation E—the Electronic Transfer Act. (Usually coded as a "firm vs. RR" problem.)
        28 Regulation S-P—Allegations concerning a failure by the firm to comply with Regulation S-P, which was adopted to implement Title V of the Gramm-Leach-Bliley Act. Pursuant to Regulation S-P, a financial institution must:
        •   Disclose to customers—on an initial and annual basis—its policies for collecting and sharing a customer's non-public personal information with affiliated and non-affiliated third parties;
        •   Provide the Firm's customers with the ability to "opt out" of certain disclosures of their non-public personal information to non-affiliated third parties, with certain exceptions;
        •   State the financial institution's security standards to protect a customer's nonpublic personal information. (Usually coded as a "firm vs. RR" problem.)
        29 Third Party/Anonymous—Allegations received by an unauthorized third party or anonymous source. (Note: If the firm received authorization from the customer subsequent to the receipt of a third party/anonymous complaint, it is obligated to file an amendment via the Firm Gateway application within 45 days of receipt of the authorization to identify the true problem code.)
        30 Complaints Referred to Previous Employer—Allegations received by a firm against a current or previously employed associated person RR regarding activities that occurred at the associated person's RR's former employer firm.
        31 Other Theft/Forgery—Allegations concerning theft or misappropriation of funds or securities or forgery against someone other than an associated person a RR of the firm.
        32 Identity Theft—Allegations concerning improper use of a customer's social security number or other non-public personal identity information by unauthorized individuals or entities.
        33 Non-Broker-Dealer Affiliate Activity ( Non-Broker-Dealer or Non-Municipal Advisor)—Allegations concerning activity at an affiliate not otherwise characterized by another problem code.
        40 Miscellaneous—Firm related complaints only. Non sales practice miscellaneous code is 99. Sales practice miscellaneous code is 00.
        Non-Sales Practice Problem Codes
        50 Transfer of Accounts—Allegations concerning full or partial transfer of a customer's account between broker-dealers. Includes both ACATS and manual transfers and internal transfers between branches.
        51 Receipt or Delivery of Securities—Allegations concerning receipt or delivery of any type of security from broker-dealer to a customer or vice versa. Includes lost certificates, delayed securities transfers, non-transferable securities or securities not in transfer because of a fail.
        52 Receipt or Disbursement of Funds—Allegations concerning funds received from or disbursed to a customer. Includes checks generated automatically, such as monthly dividend checks, IRS distribution, etc.
        53 Dividend and Interest Problems—Allegations concerning payments or charges of dividends or interest, including stock dividends. Does not include disbursement of automatic monthly dividend checks or margin interest dependencies.
        54 Margin Problems—Allegations concerning margin, including account liquidations, margin call notification and margin interest discrepancies.
        55 Reorganization/Redemption—Allegations concerning stock splits, tenders, mergers, bond/unit trust redemption and called bonds.
        56 Proxy/Prospectus—Allegations by a customer concerning the delay or non-receipt of any of the foregoing, including an Official Statement prepared by or on behalf of a state or local government in connect with a new issue of municipal securities and a proxy, prospectus or shareholder mailings by a custome.
        57 Execution—Allegations concerning non-execution, price discrepancy, delay in entry or report and delay in mutual fund purchases and redemptions.
        58 Statement/Confirms—Allegations concerning physical characteristics and representation of statements/confirmations, failure to receive statement/confirmations and questions regarding the reported price, value of or failure to value, a security.
        59 Tax Reporting—Allegations concerning tax reporting to, or on behalf of, a customer. Includes 1099, TEFRA withholding, K-1, W2-p, 5498 and Year-to-Date information appearing on monthly statements as well as any other tax reporting forms.
        60 Fees and Commissions—Allegations concerning customary fees (custodial, administrative), service charges (bounced checks, lost certificate, replacement, etc.) and commissions/markups (markdowns) and wrap fees or fees for municipal advisory services.
        61 Account Administration and Processing—Allegations concerning daily activity in a customer's account (e.g., trade corrections, journal entries, un-invested credit balances, and erroneous or missing positions in account).
        62 On-Line Trading—Allegations concerning trading initiated by a client on-line, (including non-execution, price discrepancy, delays in execution and delays in trade confirmation).
        63 Service Issues—Allegations concerning inadequate or unsatisfactory service from the firm or any of its employees.
        64 PATRIOT Act Liquidation—Allegations concerning the liquidation of an account due to the firm's inability to confirm the customer's identity as per Section 326 of the PATRIOT Act or failure to obtain foreign bank certifications per Section 313 and 319(b)of the PATRIOT Act.
        65 Account Administration and Processing—Account Opening—Allegations concerning problems establishing a new account (e.g., delays in opening account, and issues with account type and documentation).
        66 Account Administration and Processing—Account Maintenance—Allegations concerning non-transaction-related problems with existing accounts (e.g., address changes, investment objective changes, title changes and account closing issues).
        67 On-Line Issues—Allegations concerning access and functionality of a firm's online system (connectivity and navigation).
        68 Firm Policy—Allegations concerning a customer's dissatisfaction with the RR or the firm as a result of a firm policy or procedure (that is not otherwise better characterized by another Problem Code).
        69 DOL Fiduciary RuleAllegations concerning the firm's actions resulting from compliance with the DOL fiduciary rule and the related exemptions (e.g., allegation that the firm failed to follow instructions with respect to an account subject to transactional restrictions based on the DOL fiduciary rule and the related exemptions).
        99 Miscellaneous (Non-Sales Practice Only)—"Non-Sales Practice" only ("Sales Practice" Miscellaneous code is "00").

        ** Problem Code 69 is effective 06/09/2017.

      • 17-20 FINRA Requests Comment on the Effectiveness and Efficiency of Its Rules on Outside Business Activities and Private Securities Transactions; Comment Period Expires: June 29, 2017

        View PDF

        Retrospective Rule Review

        Regulatory Notice
        Notice Type

        Request for Comment
        Referenced Rules & Notices

        FINRA Rule 3270
        FINRA Rule 3280
        Suggested Routing

        Compliance
        Legal
        Operations
        Registered Representatives
        Senior Management
        Systems
        Key Topics

        Outside Business Activities
        Private Securities Transactions

        Executive Summary

        FINRA is conducting a retrospective review of the rules governing outside business activities and private securities transactions to assess their effectiveness and efficiency. This Notice outlines the general retrospective rule review process and seeks responses to several questions related to firms' experiences with these specific rules.

        Questions regarding this Notice should be directed to:

        •   Philip Shaikun, Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-8451;
        •   James S. Wrona, Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-8270;
        •   Meredith Cordisco, Associate General Counsel, Office of General Counsel, at (202) 728-8018; or
        •   Lori Walsh, Deputy Chief Economist, Office of the Chief Economist, at (202) 728-8323.

        Action Requested

        FINRA encourages all interested parties to comment. Comments must be received by June 29, 2017.

        Comments must be submitted through one of the following methods:

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

        Jennifer Piorko Mitchell
        Office of the Corporate Secretary
        FINRA
        1735 K Street, NW
        Washington, DC 20006-1506

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

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

        Background & Discussion

        FINRA believes that it is appropriate, after a reasonable period of time, to look back at its significant rulemaking to determine whether a FINRA rule or rule set2 is meeting its intended investor-protection objectives by reasonably efficient means. FINRA further believes that a retrospective review should include a review not only of the substance and application of a rule or rule set, but also FINRA's processes to administer the rules. FINRA intends to select relevant rules and to conduct retrospective rule reviews on an ongoing basis to ensure that its rules remain relevant and appropriately designed to achieve their objectives, particularly in light of environmental, industry and market changes.

        In conducting the review, FINRA staff will follow a similar process to previous retrospective rule reviews. In general, the review process consists of an assessment and action phase. During the assessment phase, FINRA will evaluate the efficacy and efficiency of the rule or rule set as currently implemented, including FINRA's internal administrative processes. FINRA will seek input from affected parties and experts, including its advisory committees, subject-matter experts inside and outside of the organization, and other stakeholders, including industry members, investors, interested groups and the public. FINRA staff will assess issues including the existence of duplicative, inconsistent or ineffective regulatory obligations; whether market or other conditions have changed to suggest there are ways to improve the efficiency or effectiveness of a regulatory obligation without loss of investor protections; and potential gaps in the regulatory framework. Upon completion of this assessment, FINRA staff will consider appropriate next steps, which may include some or all of the following: modifications to the rule or rule set, updated or additional guidance, administrative changes or technology improvements, or additional research or information gathering.

        The action phase will then follow. If the assessment recommends modification of rules, FINRA will separately engage in its usual rulemaking process to propose amendments to the rules based on the findings. This process will include input from FINRA's advisory committees and an opportunity for comment on specific proposed revisions in a Regulatory Notice or rule filing with the SEC, or both.

        Request for Comment

        FINRA has identified Rules 3270 (Outside Business Activities of Registered Persons) and 3280 (Private Securities Transactions of an Associated Person) for review. The rules govern firm employees' business and securities activities carried out away from their firm- activities that are outside the regular course or scope of their employment with the firm. The ability of firm personnel to engage in such activities may benefit some investors, depending on the circumstances, but may also pose risks, including to both investors and the firm. The rules seek to protect the investing public from potentially problematic or risky activities that are unknown to the firm but could be perceived by the investing public as either part of the firm's business or having the firm's imprimatur. The rules seek to protect the firm from the concomitant reputational and litigation risks. In keeping with these purposes, the rules provide a regulatory framework for firms to be informed of such activities, implement a system to assess them, determine whether to limit or place conditions on the employee's participation in them and, in the case of private securities transactions for compensation, record and supervise the transactions.

        FINRA seeks answers to the following questions with respect to these rules:

        1. Have the rules effectively addressed the problem(s) they were intended to mitigate? To what extent have the original purposes of and need for the rules been affected by subsequent changes to the markets, the delivery of financial services, the applicable regulatory framework, or other considerations? Are there alternative ways to achieve the goals of the rules that should be considered?
        2. What have been experiences with implementation of the rule set, including any ambiguities in the rules or challenges to comply with them?
        3. What have been the economic impacts, including costs and benefits, arising from FINRA's rules? Have the economic impacts been in line with expectations described in the rulemaking? To what extent would these economic impacts differ by business attributes, such as size of the firm or differences in business models?
        4. Can FINRA make the rules, interpretations or attendant administrative processes more efficient and effective?

        In addition to comments responsive to these questions, FINRA invites comment on any other aspects of the rules that commenters wish to address. FINRA further requests any data or evidence in support of comments. While the purpose of this Notice is to obtain input as to whether or not the current rules are effective and efficient, FINRA also welcomes specific suggestions as to how the rules should be changed. As discussed above, FINRA will separately consider during the action phase specific changes to the rules.


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

        2. A rule set is a group of rules identified by FINRA staff to contain a similar subject, characteristics or objectives.

      • 17-19 SEC Approves Amendments to FINRA Rules to Conform to the Shortened Standard Settlement Cycle for Most Broker-Dealer Transactions From Three Business Days (T+3) to Two Business Days After the Trade Date (T+2); Effective Date: September 5, 2017

        View PDF

        Shortening the Settlement Cycle for Securities to T+2

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 2341
        FINRA Rule 11140
        FINRA Rule 11150
        FINRA Rule 11210
        FINRA Rule 5122
        FINRA Rule 11320
        FINRA Rule 11620
        FINRA Rule 11810
        FINRA Rule 11860
        Regulatory Notice 16-09
        Regulatory Notice 17-12
        SEA Rule 15c6-1(a)
        Suggested Routing

        Compliance
        Government Securities
        Institutional
        Legal
        Municipal
        Mutual Fund
        Operations
        Senior Management
        Systems
        Trading
        Key Topics

        Special Products
        Uniform Practice Code

        Summary

        On February 9, 2017, the Securities and Exchange Commission (SEC) approved amendments to FINRA rules1 to conform to the SEC's amendment to Rule 15c6-1(a) under the Securities Exchange Act of 1934 (SEA) to shorten the standard settlement cycle for most broker-dealer transactions from three business days after the trade date (T+3) to two business days after the trade date (T+2) and the industry-led initiative to shorten the settlement cycle from T+3 to T+2.2 The amendments revise settlement-related provisions in the following FINRA rules:

        •   Rule 2341 (Investment Company Securities);
        •   Rule 11140 (Transactions in Securities "Ex-Dividend," "Ex-Rights" or "Ex-Warrants");
        •   Rule 11150 (Transactions "Ex-Interest" in Bonds Which Are Dealt in "Flat");
        •   Rule 11210 (Sent by Each Party);
        •   Rule 11320 (Dates of Delivery);
        •   Rule 11620 (Computation of Interest);
        •   Rule 11810 (Buy-In Procedures and Requirements); and
        •   Rule 11860 (COD Orders).

        The amendments to these rules become effective on September 5, 2017.

        The rule text is available 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 kosha.dalal@finra.org; or
        •   Sarah Kwak, Counsel, OGC, at (202) 728-8471 or sarah.kwak@finra.org.

        Background & Discussion

        Shortening the standard settlement cycle from T+3 to 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.3 To facilitate the industry efforts to shorten the standard settlement cycle, the SEC proposed amending SEA Rule 15c6-1(a) to shorten the standard settlement cycle to T+2 on the basis that a shorter settlement cycle will provide benefits across the financial system by, among other things, reducing credit, market and liquidity risk, and as a result reduce systemic risk for U.S. market participants.4

        On March 22, 2017, the SEC adopted an amendment to SEA Rule 15c6-1(a) to establish a standard settlement time frame of T+2, which provides the regulatory certainty to promote a coordinated industry transition to T+2.5 As amended, SEA Rule 15c6-1(a) will prohibit broker-dealers from effecting or entering 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 second business day after the date of the contract, unless otherwise expressly agreed to by the parties at the time of the transaction.6

        In support of the industry-led initiative and the SEC Proposing Release, FINRA proposed changes to its rules pertaining to securities settlement by, among other things, amending the definition of "regular way" settlement as occurring on T+2.7 On February 9, 2017, the SEC approved FINRA's amendments to the rules that establish or reference T+3 to conform to T+2.8

        Scope of Rule Amendments

        FINRA is adopting amendments to its rules pertaining to securities settlement by, among other things, shortening the time frames for delivery or settlement consistent with a T+2 settlement cycle. Specifically, FINRA is amending the following rules:

        •   Rule 2341 (Investment Company Securities);
        •   Rule 11140 (Transactions in Securities "Ex- Dividend," "Ex-Rights" or "Ex-Warrants");
        •   Rule 11150 (Transactions "Ex-Interest" in Bonds Which Are Dealt in "Flat");
        •   Rule 11210 (Sent by Each Party);
        •   Rule 11320 (Dates of Delivery);
        •   Rule 11620 (Computation of Interest);
        •   Rule 11810 (Buy-In Procedures and Requirements); and
        •   Rule 11860 (COD Orders).

        Rule 2341 (Investment Company Securities)

        Rule 2341(m) requires members, including underwriters, that engage in direct retail transactions for investment company shares to transmit payments received from customers for the purchase of investment company shares to the payee by the end of the third business day after receipt of a customer's order to purchase the shares, or by the end of one business day after receipt of a customer's payment for the shares, whichever is later. As amended, Rule 2341(m) adjusts the three-business day transmittal requirement to two business days while retaining the one-business day alternative.

        Rule 11140 (Transactions in Securities "Ex-Dividend," "Ex-Rights" or "Ex-Warrants")

        Rule 11140(b)(1) concerns the determination of normal ex-dividend and ex-warrants dates for certain types of dividends and distributions. As amended, Rule 11140(b)(1) provides that for cash dividends or distributions, or stock dividends, and the issuance or distribution of warrants, which are less than 25 percent 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 first business day preceding the record date if the record date falls on a business day, or the second business day preceding the record date if the record date falls on a day designated by FINRA's Uniform Practice Code Committee as a non-delivery date.

        Rule 11150 ("Ex-Interest" in Bonds Which Are Dealt in "Flat")

        Rule 11150(a) prescribes the manner for establishing normal ex-interest dates for all transactions, except "cash" transactions, in bonds or similar evidences of indebtedness which are traded "flat." As amended, Rule 11150(a) provides that such transactions are "ex-interest" on the first business day preceding the record date if the record date falls on a business day, on the second business day preceding the record date if the record date falls on a day other than a business day, and on the second business day preceding the date on which an interest payment is to be made if no record date has been fixed.

        Rule 11210 (Sent by Each Party)

        Rule 11210(c) and (d) set forth the "Don't Know" (DK) voluntary procedures for using "DK Notices" (FINRA Form No. 101) or other forms of notices, respectively. Depending upon the notice used, a confirming member may follow the "DK" procedures when it sends a comparison or confirmation of a trade (other than one that clears through the National Securities Clearing Corporation or other registered clearing agency), but does not receive a comparison or confirmation or a signed DK from the contra-member by the close of four business days following the trade date of the transaction. As amended, paragraphs (c) and (d) of Rule 11210 provide that the DK procedures may be used by the confirming member if it does not receive a comparison or confirmation or signed DK from the contra-member by the close of one business day following the trade date of the transaction. In addition, paragraphs (c)(2)(A), (c)(3), and (d)(5) of Rule 11210, as amended, adjust the time in which a contra-member has to respond to a "DK Notice" (or similar notice) from four business days to two business days after the contra-member's receipt of the notice.

        Rule 11320 (Dates of Delivery)

        Rule 11320 prescribes delivery dates for various types of transactions. As amended, Rule 11320(b) provides that for a "regular way" transaction, delivery shall be made at the office of the purchaser on, but not before, the second business day following the date of the transaction. In addition, Rule 11320(c), as amended, provides that 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 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 the purchaser, on a business day preceding the day of delivery, written notice of intention to deliver.

        Rule 11620 (Computation of Interest)

        Rule 11620 governs the computation of interest. As amended, Rule 11620(a) provides in part that, 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 second business day following the date of the transaction.

        Rule 11810 (Buy-in Procedures and Requirements)

        Rule 11810(j)(1)(A) sets forth the fail-to-deliver and liability notice procedures where a securities contract is for warrants, rights, convertible securities or other securities which have been called for redemption; are due to expire by their terms; are the subject of a tender or exchange offer; or are subject to other expiring events such as a record date for the underlying security and the last day on which the securities must be delivered or surrendered is the settlement date of the contract or later.

        Under Rule 11810(j)(1)(A), the receiving member delivers a liability notice to the owing counterparty. The liability notice sets a cutoff date for the delivery of the securities by the counterparty and provides notice to the counterparty of the liability attendant to its failure to deliver the securities in time. If the owing counterparty, or delivering member, delivers the securities in response to the liability notice, it has met its delivery obligation. If the delivering member fails to deliver the securities on the expiration date, it will be liable for any damages that may accrue thereby. Rule 11810(j)(1)(A) further provides that when parties to a contract are both participants in a registered clearing agency that has an automated liability notification service, transmission of the liability notice must be accomplished through such system. When the parties to a contract are not both participants in a registered clearing agency that has an automated liability notification service, such notice must be issued using written or comparable electronic media having immediate receipt capabilities no later than one business day prior to the latest time and the date of the offer or other event in order to obtain the protection provided by the Rule. As amended, Rule 11810(j)(1)(A) provides that in such cases, the receiving member must send the liability notice to the delivering member as soon as practicable but not later than two hours prior to the cutoff time set forth in the instructions on a specific offer or other event in order to obtain the protection provided by the rule.

        Rule 11860 (COD Orders)

        Rule 11860(a) directs members to follow various procedures before accepting collect on delivery (COD) or payment on delivery (POD) orders. As amended, Rule 11860(a)(4)(A) provides that the member shall have obtained an agreement from the customer that the customer will furnish instructions to the agent no later than the close of business on the first business day after the date of execution of the trade to which the confirmation relates in the case of a purchase by the customer where the agent is to receive the securities against payment, or COD.

        Additional Guidance

        In December 2016, FINRA published Information Notice 12/14/16 that sets forth the 2017 Holiday Trade Date, Settlement Date and Margin Extension Schedule to provide firms the filing due dates for extension requests to be made in 2017. The filing dates specified within that Notice consider the effects of the T+2 settlement cycle. Most recently, in April 2017, to assist firms with operational and systems-related issues, FINRA published Regulatory Notice 17-12 to provide information on how firms can apply for a Regulation T extension through the Regulatory Extension (REX) System after the transition to T+2, and a technical notice to provide information on the changes to the Over-the-Counter Reporting Facility (ORF) and Alternative Display Facility (ADF), and general testing information concerning trade reporting under T+2.

        In March 2017, FINRA published an Investor Highlight to provide guidance to investors. The Investor Highlight describes how T+2 will impact investors and provides a link to the SEC's Investor Bulletin on this topic. It also notifies investors of the SEC's rule amendment and September 5, 2017, as the date on which the shortened settlement cycle will take effect.

        Effective Date

        The effective date of FINRA's amendments to the rules that establish or reference T+3 to conform to T+2 is September 5, 2017, which coincides with the industry's targeted transition date to T+2.9


        1 See Securities Exchange Act Release No. 80004 (February 9, 2017), 82 FR 10835 (February 15, 2017) (Order Approving File No. SRFINRA- 2016-047) and Securities Exchange Act Release No. 80004A (March 6, 2017), 82 FR 13517 (March 13, 2017) (Correction to Order Approving File No. SR-FINRA-2016-047).

        2 See Securities Exchange Act Release No. 80295 (March 22, 2017), 82 FR 15564 (March 29, 2017) (Securities Transaction Settlement Cycle; Final Rule) (File No. S7-22-16) (SEC Final Rule).

        3 See Regulatory Notice 16-09 (March 2016) (requesting comment on proposed amendments to FINRA rules in connection with the industryled initiative to shorten the standard settlement cycle to T+2 and describing events pertaining to the initiative).

        4 See Securities Exchange Act Release No. 78962 (September 28, 2016), 81 FR 69240 (October 5, 2016) (Amendment to Securities Transaction Settlement Cycle; Proposed Rule) (File No. S7-22- 16) (SEC Proposing Release).

        5 See supra note 2.

        6 See supra note 2.

        7 See Securities Exchange Act Release No. 79648 (December 21, 2016), 81 FR 95705 (December 28, 2016) (Notice of Filing of File No. SRFINRA- 2016-047).

        8 See supra note 1.

        9 See SEC Final Rule, 82 FR 15564, 15582 (stating that September 5, 2017, is an appropriate compliance date by which the transition to a T+2 standard settlement cycle should be completed, and that such compliance date provides sufficient time for broker-dealers, clearing agencies, self-regulatory organizations and other market participants, including retail investors, to plan for, implement, promulgate new rules, and test changes to systems, operations, policies and procedures).


        Attachment A

        New language is underlined; deletions are in brackets

        *****

        Amendment to FINRA Rules

        *****

        2300. SPECIAL PRODUCTS

        *****

        2340. Investment Companies

        *****

        2341. 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) through (3) No Change.
        (c) through (e) 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) through (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) No Change.
        (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 [sub]paragraph[s] (c)(2)(B) or (c)(2)(C) of this Rule.
        (B) through (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) through (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 [four]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.

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

        .01 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

        *****

        11810. Buy-In Procedures and Requirements

        (a) through (i) No Change.
        (j) Failure to Deliver and Liability Notice Procedures
        (1)(A) If a contract is for warrants, rights, convertible securities or other securities which (i) have been called for redemption; (ii) are due to expire by their terms; (iii) are the subject of a tender or exchange offer; or (iv) are subject to other expiring events such as a record date for the underlying security and the last day on which the securities must be delivered or surrendered (the expiration date) is the settlement date of the contract or later, the receiving member may deliver a Liability Notice to the delivering member as an alternative to the close-out procedures set forth in paragraphs (b) through (h). When the parties to a contract are both participants in a registered clearing agency that has an automated service for notifying a failing party of the liability that will be attendant to a failure to deliver, the transmission of the liability notice must be accomplished through the use of said automated notification service. When the parties to a contract are not both participants in a registered clearing agency that has an automated service for notifying a failing party of the liability that will be attendant to a failure to deliver, such notice must be issued using written or comparable electronic media having immediate receipt capabilities [no later than one business day prior to the latest time and the date of the], and must be sent as soon as practicable but not later than two hours prior to the cutoff time set forth in the instructions on a specific offer or other event in order to obtain the protection provided by this Rule.
        (B) through (C) No Change.

        (2) through (4) No Change.
        (k) through (m) No Change.

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

        .01 through .03 No Change.

        *****

        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) through (3) No Change.
        (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.

        *****

      • 17-18 Guidance on Social Networking Websites and Business Communications

        View PDF

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        FINRA Rule 2210
        FINRA Rule 4511
        Regulatory Notice 10-06
        Regulatory Notice 11-39
        Regulatory Notice 15-50
        SEA Rules 17a-3 and 17a-4
        Suggested Routing

        Advertising
        Compliance
        Legal
        Marketing
        Operations
        Registered Representatives
        Senior Management
        Key Topics

        Business Communications
        Communications with the Public
        Digital Communications
        Native Advertising
        Recordkeeping
        Social Media
        Supervision

        Social Media and Digital Communications

        Summary

        This Notice provides guidance regarding the application of FINRA rules governing communications with the public to digital communications, in light of emerging technologies and communications innovations.

        Questions concerning this Notice may be directed to:

        •   Joseph E. Price, Senior Vice President, Advertising Regulation/Corporate Financing, at (240) 386-4623, Joseph.Price@finra.org;
        •   Thomas A. Pappas, Vice President, Advertising Regulation, at (240) 386-4553, Tom.Pappas@finra.org; or
        •   Amy C. Sochard, Senior Director, Advertising Regulation, at (240) 386-4508, Amy.Sochard@finra.org.

        Background

        Previously, FINRA issued Regulatory Notice 10-06 and Regulatory Notice 11-39 to provide guidance on the application of FINRA rules governing communications with the public to social media sites and the use of personal devices for business communications. The Notices also remind firms of the recordkeeping, suitability, supervision and content requirements for such communications. Effective February 4, 2013, FINRA adopted amendments to Rule 2210 that codify guidance provided in the Notices with respect to the supervision of interactive social media posts by member firms.1 In December 2014, FINRA published the Retrospective Rule Review Report: Communications with the Public, which recommended that FINRA consider more guidance. This Notice provides further guidance. It is not intended to alter the principles or the guidance provided in prior Regulatory Notices.

        An October 2015 study from the Pew Research Center indicates that 65 percent of adults use social networking sites as compared to 7 percent in 2005.2 Social media and other websites frequently enable the use of "native advertising," which has been defined as advertising content that matches the form and function of the platform on which it appears.3 Media articles have predicted that within the next five years revenue earned from native advertising in online publications such as periodicals and social media sites will outstrip other forms of online display advertising.4

        An April 2015 Pew Research Center report stated that based on a telephone survey of 2,002 adults conducted in December 2014, 64 percent of American adults own a smart phone of some kind.5 The same report indicated that based on a sampling survey of 1,635 respondents, 97 percent of smartphone owners used text messaging at least once during the 10-day study period in November 2014 making it the most widely used basic feature or application. In April 2016, Facebook Messenger reported 900 million monthly active users, and WeChat reported in March 2016 that it had added nearly 200 million monthly active users in the previous year. Consistent with these trends, firms have increasingly raised new questions regarding the application of FINRA rules to social media and digital communications.

        Past Guidance

        Recordkeeping

        Regulatory Notices 10-06 and 11-39 remind firms of their obligation to retain records of digital communications that relate to their "business as such" as required by Rule 17a-4(b) (4) under the Securities Exchange Act of 1934 (SEA).6 Regulatory Notice 11-39 notes that determining whether a communication must be retained depends on its content and not upon the type of device or technology used to transmit the communication. The Notice also reminds firms that they must train and educate their associated persons regarding the differences between business and non-business communications and the measures required to ensure any business communication made by associated persons is retained, retrievable and supervised.

        Third-Party Posts

        Regulatory Notice 10-06 states that, as a general matter, posts by customers or other third parties on social media sites established by a firm or its personnel do not constitute communications with the public by the firm or its associated persons under Rule 2210; therefore, the pre-use principal approval, content and filing requirements of the rule do not apply to these posts. The same principle is generally true of posts by customers or other third parties on any website established by a firm or its associated persons, regardless of whether the site is part of a social network.

        There are exceptions. Regulatory Notice 10-06 states that third-party posts on a firm or associated person's business website may constitute communications with the public by the firm or an associated person under Rule 2210 if the firm or an associated person has (1) paid for or been involved in the preparation of the content (which FINRA would deem to be "entanglement") or (2) explicitly or implicitly endorsed or approved the content (which FINRA would deem to be "adoption").7

        Hyperlinks to Third-party Sites

        Regulatory Notice 11-39 states that a firm may not establish a link to any third-party site that the firm knows or has reason to know contains false or misleading content and may not include a link on its website if there are any red flags that indicate the linked site contains false or misleading content. The Notice also advises firms that they are responsible under the communications rules for content on a linked third-party site if the firm has adopted or has become entangled with its content. For example, a firm may have "adopted" third-party content if the firm indicates that it endorses the content on the third-party site or may be "entangled" with a third-party site if, for example, it participates in the development of the content on the third-party site.

        Questions & Answers

        The following questions and answers provide guidance only with respect to FINRA rules and do not interpret the rules of the SEC or any other federal or state agency.

        Text Messaging

        Q1: Investors have sought to interact with registered representatives through text messaging applications ("apps") and chat services. Is a firm required to retain records of communications related to its business that are made through text messaging apps and chat services?

        A: Yes. As with social media, every firm that intends to communicate, or permit its associated persons to communicate, with regard to its business through a text messaging app or chat service must first ensure that it can retain records of those communications as required by SEA Rules 17a-3 and 17a-4 and FINRA Rule 4511. SEC and FINRA rules require that, for record retention purposes, the content of the communication determines what must be retained.8

        Personal Communications

        Q2: If an associated person of a firm in a personal communication shares or links to content that the firm makes available in its communications that does not concern the firm's products or services, would the associated person's communication be subject to Rule 2210? For example, if the associated person posts information about the firm's sponsorship of a charitable event, a human interest article, an employment opportunity, or employer information covered by state and federal fair employment laws, would the communication be subject to Rule 2210?

        A: No. Whether a communication by an associated person is subject to Rule 2210 depends on whether the content relates to the products or services of the firm.

        Hyperlinks and Sharing

        Q3: If a firm shares or links to specific content posted by an independent third-party such as an article or video, has the firm adopted the content?

        A: By sharing or linking to specific content, the firm has adopted the content and would be responsible for ensuring that, when read in context with the statements in the originating post, the content complies with the same standards as communications created by, or on behalf of, the firm.

        Q4: Based on the previous question and answer, if the shared or linked content itself contains links to other content, has the firm adopted the content available at these additional links?

        A: Solely by sharing or linking to content that contains links, a firm would not be responsible for the content available at such links. Additional facts and circumstances will determine whether the firm has adopted or become entangled with such content. In general, if a firm shares or links to content that in turn links to other content over which the firm has no influence or control, the firm would not have adopted the other content. In contrast, if a firm shares or links to content that in turn links to other content over which the firm has influence or control, the firm would then have adopted that other content.

        In addition, where the firm shares or links to content that itself serves primarily as a vehicle for links, or where content available through such links forms the entire basis of the article, the firm would have adopted the other content accessed through such links (e.g., a firm reposts a microblog post that promotes content through a link, or a firm links to a webpage made up largely of a link or links to other content).

        Q5: If a firm includes on its website a link to a section of an independent third-party website, has it adopted the content of the third-party website?

        A: Whether a firm has adopted the content of an independent third-party website or any section of the website through the use of a link is fact dependent. Two factors are critical to the analysis: (1) whether the link is "ongoing" and (2) whether the firm has influence or control over the content of the third-party site.

        The firm has not adopted the content if the link is "ongoing," meaning:

        •   the link is continuously available to investors who visit the firm's site;
        •   investors have access to the linked site whether or not it contains favorable material about the firm; and
        •   the linked site could be updated or changed by the independent third-party and investors would nonetheless be able to use the link.
        However, if the firm has any influence or control over the content of the thirdparty site, then the firm would be entangled with its content. Further, language introducing the ongoing link must conform to the content standards of the communications rules, including the prohibition of misleading or inaccurate statements or claims. Finally, as stated in Regulatory Notice 11-39, a firm may not establish a link to any third-party site that the firm knows or has reason to know contains false or misleading content.

        Native Advertising

        Q6: Native advertising has been defined as content that bears a similarity to the news, feature articles, product reviews, entertainment and other material that surrounds it online. For example, native advertising may be a video or article posted by an advertiser on an independent third party publisher's site that is presented alongside, and in a manner similar to, content posted by the publisher. Is native advertising inherently misleading under FINRA's communications rules?

        A: Firms may use native advertising that complies with the applicable provisions of FINRA Rule 2210, including the requirements that firms' communications be fair, balanced and not misleading. In particular, native advertising must prominently disclose the firm's name, reflect accurately any relationship between the firm and any other entity or individual who is also named, and reflect whether mentioned products or services are offered by the firm as required by Rule 2210(d)(3).9

        Q7: May firms arrange for comments or posts by an individual (an "influencer") that promote the firm's brand, products or services?

        A: Where a firm has arranged for a comment or post to be made, FINRA would regard the firm as entangled with the resulting communication. For example, Regulatory Notice 08-27 states, "If a firm or representative has paid for the publication, production or distribution of any communication that appears to be a magazine, article or interview, then the communication must be clearly identified as an advertisement. FINRA regards this information as material to ensuring that such communications are not misleading." Consistent with this guidance and the prohibition of misleading or false communications in Rule 2210, firms should clearly identify as advertisements any communications that take the form of comments or posts by influencers and include the broker-dealer's name as well as any other information required for compliance with Rule 2210.

        Testimonials and Endorsements

        Q8: Social networking websites may allow individuals who have connected to another user on the network to give an opinion of, or provide comments regarding, the user's professional capabilities. If the user is a registered representative who has established a business-related site on the social network that is supervised and retained by the broker-dealer, are these opinions or comments considered testimonials for purposes of FINRA's communications rule?

        A: FINRA does not regard unsolicited third-party opinions or comments posted on a social network to be communications of the broker-dealer or the representative for purposes of Rule 2210, including the requirements related to testimonials in paragraph (d)(6).

        Rule 2210(d)(6), Testimonials, states that:

        (A) If any testimonial in a communication concerns a technical aspect of investing, the person making the testimonial must have the knowledge and experience to form a valid opinion.
        (B) Retail communications or correspondence providing any testimonial concerning the investment advice or investment performance of a member or its products must prominently disclose the following:
        (i) The fact that the testimonial may not be representative of the experience of other customers.
        (ii) The fact that the testimonial is no guarantee of future performance or success.
        (iii) If more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial.

        Q9: A third party may post unsolicited favorable comments about a registered representative on the representative's business-use social media website. The representative may then like or share the comments. Under these circumstances, are the third-party comments deemed to be a communication of the representative and, therefore, subject to FINRA's communications rules?

        A: By liking or sharing the favorable comments, the representative has adopted them and they are subject to the communications rules, including the prohibition on misleading or incomplete statements or claims, the testimonial requirements noted above, and the supervision and recordkeeping rules.10

        Q10: How may a registered representative or firm include the disclosures required for a testimonial in an interactive electronic communication?

        A: The disclosures may be provided in the interactive electronic communication itself in close proximity to the testimonial or the disclosures may be made through a clearly marked hyperlink accompanying the testimonial using language such as "important testimonial information," provided of course that the testimonial is not false, misleading, exaggerated or promissory.

        Firms registered under the Investment Advisers Act of 1940 (Advisers Act) should be aware that Section 206(4) generally prohibits any investment adviser from engaging in any act, practice or course of business that the Commission, by rule, defines as fraudulent, deceptive or manipulative. In particular, Advisers Act Rule 206(4)-1(a)(1) states that "[i]t shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business . . . for any investment adviser registered or required to be registered under [the Advisers Act], directly or indirectly, to publish, circulate, or distribute any advertisement which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser."

        Correction of Third-party Content

        Q11: Suppose that an unaffiliated third-party publisher posts an online directory of businesses and includes information about registered representatives of a brokerdealer. Neither the firm nor the registered representatives requested, solicited or paid for the posting of these listings. If the firm or representative contacts the publisher to alert it to a factual error (e.g., a misspelled name; incorrect street, website or email address; incorrect phone numbers), would the corrected listings be considered a communication of the firm or the representative?

        A: When the correction pertains to factual information related to the directory listing alone, the fact that the firm or representative contacted the publisher would not mean that the corrected listing is a communication of the firm or the representative. Firms also may correct the error by posting a comment on the listing that includes the correct information without being deemed to have adopted the original, incorrect listing.

        BrokerCheck

        Q12: As announced in Regulatory Notice 15-50, effective June 6, 2016, FINRA amended Rule 2210 to require each of a firm's websites to include a readily apparent reference and hyperlink to BrokerCheck on (1) the initial web page that the firm intends to be viewed by retail investors, and (2) any other web page that includes a professional profile of one or more registered persons who conduct business with retail investors. To assist firms in complying with this new requirement, FINRA developed BrokerCheck-related icons and similar resources. Regulatory Notice 15-50 states that a firm need not include a readily apparent reference and hyperlink to BrokerCheck from communications appearing on a third-party website including social media sites or in email or text messages. Does the requirement to include a readily apparent reference and hyperlink to BrokerCheck apply to an app created by a firm?

        A: No. Because Rule 2210(d)(8) specifically references websites, there is no requirement to include a reference and hyperlink to BrokerCheck in an app. However, if an app accesses and displays a webpage on the firm's website that is required to include the BrokerCheck link under the rule, the firm must ensure that the link is readily apparent when the page is displayed through the app.


        1. Rule 2210(b)(1)(D) excepts from the prior-to-use principal approval requirement of Rule 2210(b) (1)(A) retail communications posted on an online interactive electronic forum that the firm supervises and reviews in the same manner as correspondence as set forth in Rule 3110(b) and 3110.06 through .09. Rule 2210(c)(7)(M) excludes from filing with FINRA's Advertising Regulation Department any retail communication that is posted on an online interactive electronic forum. FINRA provided additional guidance regarding these exceptions in a question and answer published in Regulatory Notice 15-17.

        2. See Andrew Perrin, Pew Research Center, Internet Science & Tech, Social Media Usage: 2005-2015 (October 8, 2015).

        3. In its Native Advertising: A Guide for Business, the Federal Trade Commission (FTC) describes native advertising as "content that bears a similarity to the news, feature articles, product reviews, entertainment, and other material that surrounds it online."

        4. See Business Insider, "Native ads will drive 74% of all ad revenue by 2021," (June 14, 2016) and The Huffington Post, "2016 Native Advertising Trends For Publishers" (June 21, 2016).

        5.See Aaron Smith, Pew Research Center, Internet, Science & Tech, U.S. Smartphone Use in 2015 (April 1, 2015).

        6. SEA Rule 17a-4(b) requires broker-dealers to preserve certain records for a period of not less than three years, the first two in an easily accessible place. Among these records, pursuant to SEA Rule 17a-4(b)(4), are "[o]riginals of all communications received and copies of all communications sent (and any approvals thereof) by the member, broker or dealer (including inter-office memoranda and communications) relating to its business as such, including all communications which are subject to rules of a self-regulatory organization of which the member, broker or dealer is a member regarding communications with the public." See also FINRA Rule 2210(b)(4)(A) (requiring retention of communications with the public) and FINRA Rule 4511 (requiring members to make and preserve books and records).

        7. The SEC first articulated these approaches as a basis for a company's responsibility for thirdparty information that is hyperlinked to its website. See Commission Guidance on the Use of Company Web Sites, SEC Rel. No. 34- 58288 (Aug. 1, 2008), 73 Fed. Reg. 45862, 45870 (Aug. 7, 2008); Use of Electronic Media, SEC Rel. No. 33-7856 (April 28, 2000), 65 Fed. Reg. 25843, 25848-25849 (May 4, 2000). FINRA applies a similar analysis to third-party posts on social media or other websites established by the firm or its personnel. See also IM Guidance Update No. 2014-04, Guidance on the Testimonial Rule and Social Media (March 2014) for more information.

        8. See SEC Rel. No. 34-37182 (May 9, 1996), 61 Fed. Reg. 24644 (May 15, 1996); SEC Rel. No. 34-38245 (Feb. 5, 1997), 62 Fed. Reg. 6469 (Feb. 12, 1997); Notice to Members 03-33 (July 2003); and SEC Office of Compliance Inspections and Examinations National Examination Risk Alert, Investment Adviser Use of Social Media, (January 4, 2012) .

        9. See also, the guidance provided in the FTC's Enforcement Policy Statement on Deceptively Formatted Advertisements, December 22, 2015.

        10. In Regulatory Notice 11-39, FINRA stated: "The fact that the firm has a policy of routinely blocking or deleting certain types of content in order to ensure the content is appropriate would not mean that the firm had adopted the content of the posts left on the site. For example, most firms using social media sites block or screen offensive material. Such a policy would not indicate that the firm has adopted the remaining third-party content."

      • 17-17 FINRA Updates Private Placement Filer Form Pursuant to FINRA Rules 5122 and 5123

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        Updated Private Placement Filer Form

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        FINRA Rule 5122
        FINRA Rule 5123
        Regulatory Notice 13-26
        Suggested Routing

        Compliance
        Corporate Finance
        Legal
        Operations
        Registered Representatives
        Senior Management
        Private Placement
        Underwriting
        Key Topics

        Private Placement
        Underwriting

        Executive Summary

        FINRA has updated the form that firms must use to file offering documents and information pursuant to FINRA Rules 5122 (Private Placements of Securities Issued by Members) and 5123 (Private Placements of Securities) (Filer Form). The updated Filer Form, which will be available in the FINRA Firm Gateway beginning May 22, 2017, includes new and updated questions that will facilitate review of the filed material and eliminates other questions.1 See Attachment A for a copy of the updated Filer Form.

        Questions regarding this Notice may be directed to:

        •  Minh Le, Director, Corporate Financing, at (240) 386-4638 or Minh.Le@finra.org; or
        •  Ryan Smith, Director, Corporate Financing, at (240) 386-4598 or Ryan.Smith@finra.org.

        Background and Discussion

        FINRA Rule 5122 establishes disclosure and filing requirements for firms that sell a private placement of an unregistered security issued by a broker-dealer or a control entity. Its companion rule, FINRA Rule 5123, requires firms that sell a private placement to file a copy of any offering documents with FINRA within 15 calendar days of the first sale, subject to various exemptions.2 FINRA requires firms to submit the Filer Form that contains information about the firm selling the private placement securities, the issuer and the offering terms as well as any offering documents, if applicable, electronically through the Firm Gateway.3 If more than one firm is selling, a firm can make the required filing on behalf of the others.

        The Filer Form has three main components. The "Participating Member Information" section seeks information about the firms that are selling the private placement. The "Issuer Information" section captures basic information about the issuer. The "Offering Information" section seeks information about the offering.

        On May 22, 2017, FINRA will begin using an updated Filer Form that adds, clarifies and eliminates questions or other information requested in each section. FINRA describes these changes below. Attachment A is a copy of the revised Filer Form.

        Participating Member Information

        FINRA will be adding questions to the Participating Member section of the Filer Form regarding whether the member making the filing (filing member) is the exclusive selling agent in the private placement and whether there is any affiliation between the issuer or sponsor of the private placement with any member participating in the offering upon whose behalf the filing member is submitting the Filer Form. This section will no longer require the title and email address for the contact person of the filing member or the contact name, title and telephone number for other members identified in the filing.

        Issuer Information

        FINRA is adding a question to the Issuer Information section of the Filer Form asking whether the issuer is a reporting company. This section will no longer require the filing member to enter the name, title and email address of the issuer's contact person.

        Offering Information

        FINRA is adding questions to the Offering Information section of the Filer Form regarding:

        •   the type of security the issuer is offering;
        •   whether the issuer raised capital within the preceding 12 months from any source (excluding loans or investments by affiliates);
        •   the minimum investment amount that the issuer will accept and whether the issuer can waive that minimum;
        •   whether the filing member sold or will sell the offering to any non-accredited investors;
        •   the exemption from the Securities Act of 1933 that the issuer is relying upon; and
        •   for contingency offerings, whether the contingency has been met as of the date of the filing.

        The Offering Information section also will request the date on which the filing member first offered or sold the private placement and allow the filing member to indicate that sales have yet to commence. The Offering Information section will no longer include the requirements to provide the aggregate amount of non-commission compensation and the offering's conclusion date. This section also will no longer include the questions asking whether the firm used a term sheet, whether the issuer has any independently audited financial statements, and whether the issuer's directors are independent. In addition, the Offering Information section will clarify that the requirement to provide the stated or target rate of return is relevant only if an offering document states that the investment will provide an actual or target rate of return to investors. Finally, this section also will clarify the question regarding general solicitation only seeks information regarding whether the filing member or the issuer has, in fact, engaged in general solicitation in connection with the private placement at or before the time of filing.


        1. See Securities Exchange Act Release No. 80321 (March 28, 2017); 82 FR 16245 (April 3, 2017) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2017-008).

        2. Rule 5123(a) requires broker-dealers to "provide FINRA with the required documents or notification and related information, if known, by filing an electronic form in a manner prescribed by FINRA."

        3. If a firm sells a private placement without using an offering document, the firm must state that fact.

      • 17-16 FINRA Requests Comment on Proposed Limited Safe Harbor From FINRA Equity and Debt Research Rules for Desk Commentary; Comment Period Expires: May 30, 2017*

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        *In response to requests for an extension, the comment period has been extended to July 14, 2017.

        Desk Commentary Safe Harbor

        Regulatory Notice
        Notice Type

        Request for Comment
        Referenced Rules & Notices

        FINRA Rule 2111
        FINRA Rule 2210
        FINRA Rule 2241
        FINRA Rule 2242
        FINRA Rule 4512(c)
        NASD Rule 1050
        Suggested Routing

        Compliance
        Investment Banking
        Legal
        Research
        Senior Management
        Trading
        Key Topics

        Conflicts of Interest
        Investment Banking
        Research
        Trading

        Executive Summary

        FINRA seeks comment on proposed amendments to FINRA Rule 2241 (Research Analysts and Research Reports) and FINRA Rule 2242 (Debt Research Analysts and Debt Research Reports) to create a limited safe harbor for specified brief, written analysis distributed to eligible institutional investors that comes from sales and trading or principal trading personnel but that may rise to the level of a research report (desk commentary). The proposed safe harbor would be subject to conditions, including compliance with a number of the Rule 2241 or Rule 2242 provisions to mitigate research-related conflicts. In addition, the proposed safe harbor would require firms to include a "health warning" on desk commentary and to obtain negative consent from eligible institutional investors to receive such commentary.

        In a separate Regulatory Notice, FINRA is also requesting comment generally on its rules and programs governing the capital raising process and their effects on capital formation. In response to that Notice or this one, commenters are welcome to suggest changes to Rules 2241 and 2242 beyond those proposed below.1

        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, Associate General Counsel, OGC, at (202) 728-8013 or Jeanette.Wingler@finra.org.

        Action Requested

        FINRA encourages all interested parties to comment on the proposal. Comments must be received by May 30, 2017.

        Comments must be submitted through one of the following methods:

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

        Jennifer Piorko Mitchell
        Office of the Corporate Secretary
        FINRA
        1735 K Street, NW
        Washington, DC 20006-1506

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

        Important Notes: All comments received in response to this Notice will be made available to the public on the FINRA website. In general, FINRA will post comments as they are received.2

        Before becoming effective, a proposed rule change must be authorized for filing with the Securities and Exchange Commission (SEC) by the FINRA Board of Governors, and then must be filed with the SEC pursuant to Section 19(b) of the Securities Exchange Act of 1934 (SEA).3

        Background & Discussion

        Many firms produce desk commentary, a type of sales material directed to institutional investors that is based on the observations of sales and trading or principal trading personnel. These communications are usually brief, focused on the near term, and prepared and disseminated quickly in response to trading events or news flashes.

        FINRA understands that many institutional investors value the timely flow of information and trade ideas from desk personnel but do not base their investment decisions on the commentary. Instead, these investors, which are capable of exercising independent judgment in evaluating recommendations and reaching investment decisions, selectively incorporate the information as a data point into their own analysis and trading process. FINRA further understands that oftentimes, the desk commentary never reaches the portfolio manager or others who make the investment decisions. Rather, it may inform buyside traders' timing in executing orders to carry out previously made investment decisions. Importantly, the recipients of desk commentary understand the types of potential conflicts that may exist between the trading ideas and recommendations generated by desk personnel and a member's trading interests.

        Depending on the content, desk commentary can sometimes constitute a "research report" or "debt research report" under Rules 2241 and 2242, FINRA's equity and debt research conflict of interest rules. In general, those terms are defined in the respective rules to cover any written (including electronic) communication that includes an analysis of "equity securities of individual companies or industries" (Rule 2241) or "debt security or an issuer of a debt security" (Rule 2242) and that provides information reasonably sufficient upon which to base an investment decision.4

        In some instances, FINRA has seen what effectively amounts to fundamental research coming off the trading desk. In those circumstances, there is no question that the communications meet the definition of a research report and should be subject to rigorous supervisory review to ensure compliance with all of the applicable provisions of either Rule 2241 or 2242.5 As discussed below, this type of research would not qualify as desk commentary eligible for the safe harbor.

        More commonly, FINRA has observed that desk commentary does not meet the definition of a research report due to either insufficient analysis or because the communication falls into a specified exception to the definition. However, in some cases, desk commentary may technically fall within the research report definition, even where it falls well short of the type of fundamental research that originally gave rise to the research conflict of interest rules. FINRA understands that discerning between those desk communications that fall just on either side of the line of being a research report can sometimes be difficult and that the supervisory scrutiny required to make those judgments can impede the timely receipt of the information by those institutional investors that value it.

        As such, the proposed safe harbor for desk commentary is intended to create a feasible and effective supervisory framework that will provide firms more compliance certainty in their review of these research communications, subject to a number of conditions, including compliance with key conflict management provisions of the rules. The proposal seeks to maintain the information flow from the desk that is valued by institutional investors, while continuing to provide safeguards commensurate with the context and scope of the communications and the experience and sophistication of its recipients. Significantly, the proposal would maintain the full protections of the research rules for any research distributed to retail investors. And firms must still establish, maintain and enforce written procedures reasonably designed to prevent the dissemination of material non-public research information.

        Safe Harbor Conditions

        The proposal would provide a non-exclusive safe harbor from some—but not all—of the research rule provisions for eligible desk commentary, subject to several conditions. The safe harbor would be available to desk commentary that meets the author, content and recipient conditions set out below. If the conditions are satisfied, the communication and its author would be exempt from all of the provisions of either Rule 2241 or 2242, as applicable, except for those provisions with which compliance is specified as a condition for the safe harbor. Desk commentary that meets the definition of research report but falls outside of these conditions—e.g., fundamental research or research distributed to retail investors—would be subject to the full scope of the applicable research rules.

        FINRA notes that the content limitation is not intended to define such communications as research reports for the purposes of the safe harbor or other contexts. In providing a nonexclusive safe harbor, FINRA would not preclude firms from making their own considered determination that desk commentary does not constitute a research report and therefore is not subject to the rules. However, a firm that produces desk commentary that rises to the level of a research report but fails to satisfy the conditions of the proposed safe harbor could be found to have violated the research rules.

        Author, Content and Recipient

        As a threshold matter, the proposed safe harbor would be available only for communications that meet the following conditions, which would be set forth in the rule text:

        1. Author: "must be produced by sales and trading and principal trading personnel who: (a) are not primarily engaged in the preparation of research reports that do not meet the safe harbor content limitation; (b) do not require registration as a research analyst pursuant to NASD Rule 1050 (Registration of Research Analysts) because their primary job function is something other than to provide investment research; and (c) do not report directly or indirectly to research department personnel";
        2. Content: "limited to brief observations (not including a rating, price target or earnings estimate)6 regarding recent, current, or near term expected trading activity, trading ideas or opportunities, market conditions, economic statistics or company results, or regarding a recent recommendation or research report"; and
        3. Recipient: "may only be distributed solely to consenting investors that meet the definition of "institutional account" under FINRA Rule 4512(c) (Customer Account Information) and have satisfied the FINRA Rule 2111 (Suitability) institutional suitability standard with respect to equity or debt transactions or trading strategies, as applicable."

        The recipient condition of the safe harbor would limit distribution of desk commentary to investors that satisfy the Rule 2111 institutional suitability standard and from which the firm has received negative consent to receive the communications. More specifically, recipients must be limited to investors that meet the definition of an "institutional account" in Rule 4512(c) (including natural persons), where, pursuant to Rule 2111(b): (1) the firm or associated person has a reasonable basis to believe that the institutional investor is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies involving equity or debt securities, as applicable; and (2) the institutional investor has affirmatively indicated that it is exercising independent judgment in evaluating the firm's recommendations pursuant to Rule 2111.

        The necessary consent may be obtained by written disclosure to the institutional investor that the firm may provide the investor desk commentary from sales and trading or principal trading personnel that may sometimes constitute research reports under FINRA rules that is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to research reports prepared for retail investors. If the institutional investor does not contact the firm and request to receive only research reports subject to the full protections of Rules 2241 or 2242, as applicable, the firm may reasonably conclude that the institutional investor has consented to receiving communications for the purpose of the safe harbor.

        To avoid a disruption in the receipt of desk commentary, the proposal would provide firms a transition period during which desk commentary eligible for the safe harbor could be sent to eligible institutional investors while firms obtain the necessary consents. Specifically, the proposal would allow a firm to send desk research to any account that meets the definition of an "institutional account" in Rule 4512(c) without negative consent for a period of up to 90 days after the effective dates of the proposed amendments.

        FINRA believes that allowing negative consent and the transition period would reduce operational and cost burdens for firms while preserving institutional investors' ability to opt-out of receiving less-protected desk commentary. Institutional investors would retain the option to receive only research reports that are subject to the full protections of Rules 2241 and 2242. Significantly, the proposal would not diminish protection for retail investors, who would retain the full protections of the research rules, irrespective of the author or department of origin. Moreover, FINRA believes that the author, content and recipient threshold conditions would effectively preclude firms from migrating the research function to the desk to avoid the requirements of Rule 2241 or Rule 2242.

        Conflict Management

        The proposed safe harbor under both Rules 2241 and 2242 would require compliance with several common provisions of those rules to mitigate the most serious research-related conflicts that can be present with desk commentary.7 In describing the existing provisions that must be complied with as conditions of the safe harbor, FINRA maintains the use of the term "research report" to mean the desk commentary that is eligible for the safe harbor and "research analyst" to mean the sales and trading or principal trading personnel who author such desk commentary. As set forth in more detail below, the proposed safe harbor for equity desk commentary would require compliance with additional provisions of Rule 2241 to mitigate the influences of investment banking.8

        The proposed safe harbor under both Rules 2241 and 2242 would require a firm to establish, maintain and enforce written policies and procedures reasonably designed to:

        •   prevent the use of research reports or research analysts to manipulate the market and prohibit prepublication review, clearance or approval of research reports by persons engaged in investment banking services activities;
        •   establish information barriers or other institutional safeguards reasonably designed to ensure that research analysts are insulated from pressure by persons engaged in investment banking services activities or other persons, including sales and trading personnel, who might be biased in their judgment or supervision;9
        •   prohibit direct or indirect retaliation or threats of retaliation against research analysts by persons engaged in investment banking services activities or other employees as the result of an adverse, negative, or otherwise unfavorable research report written by the research analyst that may adversely affect the firm's present or prospective business interests;
        •   prohibit explicit or implicit promises of favorable research, a particular research rating or recommendation or specific research content as inducement for the receipt of business or compensation
        •   restrict or limit activities by research analysts that can reasonably be expected to compromise their objectivity, including prohibiting: (1) participation in pitches and other solicitations of investment banking services transactions; and (2) participation in road shows10 and other marketing on behalf of an issuer related to an investment banking services transaction;11
        •   prohibit investment banking department personnel from directly or indirectly: (1) directing a research analyst to engage in sales or marketing efforts related to an investment banking services transaction; and (2) directing a research analyst to engage in any communication with a current or prospective customer about an investment banking services transaction;
        •   prohibit prepublication review of a research report by a subject company;12 and
        •   prohibit research analysts from engaging in any communication with a current or prospective customer in the presence of investment banking department personnel or company management about an investment banking services transaction.

        The safe harbor further would require firms to establish, maintain and enforce written policies and procedures reasonably designed to ensure that desk commentary subject to the safe harbor is made available only to eligible institutional investors. A firm could not rely on the proposed safe harbor with respect to such desk commentary that the firm has reason to believe will be redistributed to a retail investor. In addition, the proposed safe harbor would not relieve a firm of its obligations to comply with the anti-fraud provisions of the federal securities laws and FINRA rules.

        Importantly, the safe harbor would in no way impact a firm's obligation to establish, maintain and enforce written procedures reasonably designed to prevent the dissemination of material non-public research information (e.g., selective early disclosure of ratings, price targets and earnings estimates). Accordingly, firms would continue to be required to have written policies and procedures in place to prevent distributing desk commentary that incorporates internal material non-public information from the research department, such as changes in a research analyst's views on a company to be included in a subsequent research report. As a practical matter, desk commentary that includes material non-public research information inherently would not satisfy the content limitation to be considered eligible for the proposed safe harbor.

        Disclosure

        The proposed safe harbor would require desk commentary to carry a "health warning" similar to what is required for debt research distributed pursuant to the institutional debt research exemption in Rule 2242(j). The health warning would state:

        •   "This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to research reports prepared for retail investors"; and
        •   If applicable, "Clients should assume that this document is not independent of [Firm's] proprietary interests. [Firm] trades, and will continue to trade, the securities covered in this document for its own account and on a discretionary basis on behalf of certain clients. Such trading interests may be contrary to or entered into in advance of this document."13

        FINRA believes this general health warning in lieu of the specific conflict disclosures in the rules is appropriate for desk commentary's targeted audience of institutional investors that have indicated they are capable of evaluating risks and are exercising independent judgment with respect to recommendations. Moreover, FINRA believes that disclosure of specific conflicts with respect to desk commentary subject to the safe harbor would provide minimal value to those investors relative to the cost to track the conflicts and the likely negative impact on the timeliness of the analysis and trade ideas they wish to receive.

        Additional Requirements for Equity Desk Commentary Safe Harbor

        The safe harbor for equity desk commentary would require compliance with additional provisions of Rule 2241 to mitigate against the influences of investment banking. Specifically, a firm would also be required to have policies and procedures reasonably designed to:

        •   prohibit persons engaged in investment banking activities from supervision or control of research analysts, including influence or control over research analyst compensation evaluation and determination;
        •   limit determination of the research department budget to senior management, excluding senior management engaged in investment banking services activities; and
        •   prohibit compensation based upon specific investment banking services transactions or contributions to a firm's investment banking services activities.14

        FINRA believes these additional requirements on the equity side are justified by the history of improper influence by investment banking over equity research and the increased likelihood that equity research may affect stock prices.

        Safe Harboor Relief

        Compliance with the aforementioned safe harbor conditions would relieve a firm that produces and distributes desk commentary from compliance with several of the rules' conflicts management provisions—including, notably the separation requirements between research and sales and trading and principal trading personnel—and the specific disclosure requirements.

        The safe harbor also would exclude compliance with the registration and qualification requirements for equity research analysts. NASD Rule 1050, including its qualification requirements, applies to a research analyst who is primarily responsible for the preparation of the substance of an equity research report or whose name appears on an equity research report. The registration and qualification requirements were intended to ensure, among other things, that those individuals whose primary job function is to produce research have demonstrated a minimum level of competency in the analysis and valuation of securities. This requirement is particularly important where the research report is distributed to retail investors who may rely on the research to make an investment decision. Because desk commentary subject to the safe harbor may not be distributed to retail investors, it does not present the same retail investor protection issues as research subject to the NASD Rule 1050 requirement.

        Given the limitations on desk commentary that may rise to the level of a research report, the proposed safe harbor would not require that desk commentary authors register pursuant to NASD Rule 1050. And since desk commentary authors would not be subject to the registration requirements, the proposal also would exempt associated persons who review equity desk commentary from the requirement to register as a Research Principal. Notably, this relief would not be available to an associated person whose job function would otherwise require registration as a research analyst pursuant to NASD Rule 1050 (e.g., due to producing communications that are research reports but do not meet the author, content and recipient limitations of the proposed desk commentary safe harbor).

        Differences Between Proposed Debt Desk Commentary Safe Harbor and the Institutional Debt Research Exemption

        While the proposed desk commentary safe harbor is similar to the institutional debt research exemption in Rule 2242(j), there are some notable differences. Under the proposal, the institutional debt exemption would be retained and a separate debt desk research safe harbor would be added. A significant difference between the institutional debt exemption and the proposed debt desk commentary safe harbor is that the institutional debt research exemption applies more broadly to all debt research reports, not just debt research coming from sales and trading and principal personnel. In addition, the desk commentary safe harbor would carry a slightly different health warning.

        While the institutional debt exemption currently provides relief from the same provisions that would be captured by the proposed debt desk commentary safe harbor, the required consents for the former are more onerous. Specifically, the institutional debt exemption distinguishes between institutions in the manner in which the consent is obtained. In general, larger institutions are permitted to receive institutional debt research based on negative consent, while smaller institutions are required to affirmatively consent to receive that research. Given the limited scope of desk commentary eligible for the safe harbor and to preserve the information flow to both larger and smaller institutional investors, the proposed safe harbor would not distinguish between larger and smaller institutional investors.

        Rather, the proposed debt desk commentary safe harbor would require only negative consent by a Rule 4512(c) institutional account that also satisfies the Rule 2111 institutional suitability standards to receive debt desk commentary, which is consistent with the approach taken in the proposed safe harbor for equity desk commentary. Thus, it would be easier for firms to avail themselves of the debt commentary safe harbor if the conditions are met, but that safe harbor would be limited to a narrower set of communications. Like the institutional debt research exemption, the proposed debt desk commentary safe harbor would not permit retail investors to consent to receive that commentary that may rise to the level of a research report.

        Economic Impact Assessment

        The proposal would directly impact firms that regularly produce and distribute desk commentary. The exemption of desk commentary from many of the Rule 2241 and Rule 2242 provisions should provide firms with the flexibility to provide timely analysis that institutional investors would value. While the proposed safe harbor is non-exclusive, it may increase compliance costs for firms that may need to modify their current written policies and procedures or for some firms, establish new policies and procedures reasonably designed to ensure that the desk commentary subject to the safe harbor contains only brief, short-term observations about trading activity, trading opportunities, market conditions, economic statistics or company results, or regarding another recent recommendation or research; and is distributed only to institutional investors that have consented to receive the desk commentary.

        FINRA also considered the potential impacts of the proposed amendments on investors. Retail investors are not expected to be impacted by the proposed exemption, as, FINRA understands, they do not receive desk commentary in the current regulatory environment and firms may distribute desk commentary only to institutional investors pursuant to the safe harbor. FINRA believes that sophisticated institutional investors do not rely on desk commentary as the sole basis for decision making and are aware of the potential conflicts presented by those communications produced by sales and trading and principal trading departments.

        In addition, the proposed safe harbor in Rules 2241 and 2242 would be similar, but not congruent, to the exemption for debt research reports distributed to eligible institutional investors in Rule 2242. As such, FINRA believes the proposed desk commentary safe harbor would allow firms to leverage existing compliance efforts for the institutional debt research exemption.

        Request for Comment

        FINRA welcomes all comments on the proposal. We specifically request comments on whether other requirements of Rule 2241 or Rule 2242 should apply to desk commentary subject to the safe harbor, such as the requirement to disclose an analyst's personal holdings in a subject company? In addition, are there specific ordinary course activities engaged in by authors of desk commentary related to investment banking transactions that would be precluded by the conditions of the safe harbor?

        We also request comments on the economic impact and expected beneficial results of the proposal:

        1. What economic impacts, including costs and benefits, would be associated with the proposal? To what extent would these economic impacts differ by business attributes, such as size of the firm or differences in business models?
        2. Is the proposal well designed to maintain the information flow from the trading desk to institutional customers while managing the most serious conflicts of interest that may arise in the preparation of desk commentary? Are the proposed conditions appropriate given the context and scope of the communications and the experience and sophistication of the institutional customers receiving the desk commentary?
        3. How would the proposal change business practices and competition among firms producing desk commentary? What second order impacts could result?

        We request data and other quantitative measures in support of comments where possible.


        1. See Regulatory Notice 17-14 (April 2017).

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

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

        4. For ease of reference, the Notice will use the term "research report" to refer to both a "research report" under Rule 2241 and a "debt research report" under Rule 2242.

        5. Rule 2242(j) provides an exemption from many of the rule's provisions for debt research distributed solely to eligible institutional investors. While similar to the proposed safe harbor, the institutional debt research exemption includes research not only from the desk but also from the research department. See infra at page 9 for a discussion of the differences.

        6. While the proposal would prohibit eligible desk commentary from including the author's own rating, price target or earnings estimate, it would not preclude referencing a rating, price target or earnings estimate in other published research, including from the firm's own research department, or discussing the directional effect of an event on an issuer's rating, price target or earnings.

        7. FINRA notes that all desk commentary, whether or not eligible for the limited safe harbor, remains subject to the applicable provisions of FINRA Rule 2210 (Communications with the Public).

        8. Compliance with a specified provision as a condition for the safe harbor would not be required of a firm that is already exempt from the provision pursuant to the exemptions for members with limited investment banking or limited principal trading activity.

        9. As with the institutional debt exemption, compliance with this safe harbor condition would not require physical separation between persons who produce eligible desk commentary and sales and trading and principal trading department personnel, but absent such physical barriers, firms must implement and document other policies and procedures to achieve compliance with this condition. See Research Rules FAQs, Separation Requirements FAQ 1, available at http://www.finra.org/industry/ faq-research-rules-frequently-asked-questionsfaq# separation.

        In the context of desk commentary, FINRA does not interpret "pressure" by sales and trading or principal trading personnel to exist merely because a firm produces desk commentary on securities in which it trades or the authors of desk commentary report to such personnel (or investment banking personnel to the extent not otherwise prohibited). Although FINRA does not interpret this requirement to require altering a firm's internal reporting lines, a firm must put in place policies and procedures reasonably designed to ensure that investment banking personnel or sales and trading and principal trading personnel do not overtly pressure a person who produces desk commentary to express a particular view.

        10. FINRA understands that sales and trading and principal trading personnel have an important role to play in educating other firm personnel and investors. Consistent with existing guidance for research analysts, sales and trading and principal trading personnel who publish desk commentary pursuant to the safe harbor may listen to or view a live webcast of a transaction-related road show or other widely attended presentation by investment banking to investors or the sales force from a remote location, or another room if they are in the same location. See NASD Notice to Members 07-04 (January 2007). See also Securities Exchange Act Release No. 73622 (November 18, 2014), 79 FR 69939 (November 24, 2014) (Notice of Filing File No. SR-FINRA-2014-047); SEA Release No. 73623 (November 18, 2014), 79 FR 69905 (November 24, 2014) (Notice of Filing File No. SR-FINRA-2014-048).

        11. This condition would not prohibit a person in the sales and trading or principal trading department from engaging in ordinary course communications related to the distribution of securities in an offering, including, for example, forwarding written materials from the syndication desk to customers, provided that the person was not concurrently publishing desk commentary related to the issuer or the investment banking services transaction. The fact that a person may have previously published desk commentary related to the issuer does not prohibit that person from engaging in the ordinary course communications related to the offering, provided that such commentary ceases during the offering.

        12. This prohibition modifies the provisions in Rules 2241(b)(2)(N) and .05 and 2242(b)(2)(N) and .05, which permit prepublication review by subject companies of draft sections of research reports for verification of facts. FINRA believes it would be inconsistent with the scope and temporal nature of desk commentary to permit such review.

        13. This disclosure would be required only if the firm maintains a proprietary trading desk or trades on a discretionary basis on behalf of some customers and those interests sometimes are contrary to the recommendations in desk commentary.

        14. This requirement would not prohibit a firm from compensating a person in the sales and trading or principal trading department in the form of sales credits in connection with the distribution of securities in an offering, provided that the person had not published desk commentary related to those investment banking services transactions.

        15. FINRA believes this approach is consistent with the institutional debt research exemption, where the corresponding investment banking conflict management provisions in Rule 2242 do not apply.

      • 17-15 FINRA Requests Comment on Proposed Amendments to the FINRA Corporate Financing Rule; Comment Period Expires: May 30, 2017*

        View PDF

        *In response to requests for an extension, the comment period has been extended to July 14, 2017. In addition, Attachments A and B related to this Notice were updated on 5/24/17 to make a technical correction to subsection (g) of the rule text.

        Corporate Financing

        Regulatory Notice
        Notice Type

        Request for Comment
        Referenced Rules

        FINRA Rule 2341
        FINRA Rule 5110
        FINRA Rule 5121
        Regulation S
        Regulation S-K
        SEC Registration Forms S-3, F-3 and F-10
        Securities Act Rule 144A
        Suggested Routing

        Compliance
        Corporate Finance
        Legal
        Registered Representatives
        Senior Management
        Syndicate
        Underwriting
        Key Topics

        Capital Raising
        Convertible Securities
        Distribution of Securities
        Electronic Filing
        Initial Public Offerings
        Investment Banking
        Public Offerings
        Underwriting Compensation
        Venture Capital

        Executive Summary

        FINRA seeks comment on proposed amendments to FINRA Rule 5110 (Corporate Financing Rule—Underwriting Terms and Arrangements) to make substantive, organizational and terminology changes to the rule. The proposal is intended to modernize Rule 5110 and to simplify and clarify its provisions. The proposal would retain the primary principle of the rule that no member firm or person associated with a member firm may participate in a public offering for which the terms and conditions, including the aggregate amount of underwriting compensation, are unfair, unreasonable or inconsistent with any FINRA rule.

        The proposed rule text is available in Attachment A. The proposed rule text marked to show changes from the current rule text is available in Attachment B.

        In a separate Regulatory Notice, FINRA is also requesting comment generally on its rules and programs governing the capital raising process and their effects on capital formation. In response to that Notice or this one, commenters are welcome to suggest changes to Rule 5110 beyond those proposed below.1

        Questions regarding this Notice should be directed to:

        •   Joseph Price, Senior Vice President and Counsel, Corporate Financing/ Advertising Regulation, at (240) 386-4642 or joseph.price@finra.org;
        •   Kathryn M. Moore, Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8200 or kathryn.moore@finra.org; or
        •   Jeanette Wingler, Associate General Counsel, OGC, at (202) 728-8013 or jeanette.wingler@finra.org.

        Action Requested

        FINRA encourages all interested parties to comment on the proposal. Comments must be received by May 30, 2017.

        Comments must be submitted through one of the following methods:

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

        Jennifer Piorko Mitchell
        Office of the Corporate Secretary
        FINRA
        1735 K Street, NW
        Washington, DC 20006-1506

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

        Important Notes: All comments received in response to this Notice will be made available to the public on the FINRA website. In general, FINRA will post comments as they are received.2

        Before becoming effective, a proposed rule change must be authorized for filing with the Securities and Exchange Commission (SEC) by the FINRA Board of Governors, and then must be filed with the SEC pursuant to Section 19(b) of the Securities Exchange Act of 1934 (SEA).3

        Background & Discussion

        Rule 5110 prohibits unfair underwriting arrangements in connection with the public offering of securities. This rule was adopted in 1992 in response to persistent problems with underwriters dealing unfairly with issuers. The rule requires a member that participates in a public offering to file information with FINRA about the underwriting terms and arrangements.4 FINRA's Corporate Financing Department reviews this information prior to the commencement of the offering to determine whether the underwriting compensation and other terms and arrangements meet the requirements of the applicable FINRA rules.5

        Rule 5110 was last modernized in 2004 to better reflect the various financial activities of multi-service firms. After years of experience with those amendments and subsequent, narrower amendments that addressed industry practices regarding particular underwriting terms and arrangements, FINRA recently conducted the equivalent of a retrospective review of the rule6 to further modernize it by, among other things, significantly improving the administration of the rule and simplifying its provisions without lessening important protections for market participants, including investors and issuers participating in offerings. FINRA is proposing a range of changes to Rule 5110, including to the following areas:7

        •   filing requirements;
        •   filing exemptions;
        •   disclosure requirements;
        •   underwriting compensation;
        •   lock-up restrictions;
        •   valuation of securities;
        •   prohibited terms and arrangements; and
        •   defined terms.

        Filing Requirements

        FINRA is proposing changes to the filing requirements to create a process that is both more flexible and more efficient.8 For example, FINRA is proposing to allow members more time to make the required filings with FINRA (from one business day after filing with the SEC or state equivalent to three business days),9 clarify that a member participating in a filing is not required to file with FINRA if the filing is made by another member participating in the offering, and clarify and further reduce the types of documents and information that must be filed.10 In addition, rather than providing a non-exhaustive list of types of public offerings that are required to be filed, the proposed amendments would instead state that a public offering in which a member participates must be filed for review unless exempted by the rule. Providing firms with more time within which to file relevant documents and reducing the filing of duplicative or otherwise unnecessary documents would lessen firms' filing burdens while maintaining important protections for market participants.

        Filing Exemptions

        Rule 5110 contains a list of offerings that are exempt from filing, but remain subject to the rule's prohibition on unreasonable underwriting terms and arrangements. FINRA proposes to add to the list of offerings that are exempt from filing follow-on offerings of closed-end "tender offer" funds that routinely make self-tender offers and need to be in continuous distribution to offset net redemptions. Compensation for distribution of tender offer funds will become subject to the limitations in FINRA Rule 2341 (Investment Company Securities). FINRA also proposes to clarify that banks that have unsecured investment grade debt outstanding with a term of issue of at least four years meet an exemption from the filing requirements that is available to corporate issuers.

        The proposal would also expand the current list of offerings that are exempt from both the rule's filing requirements and substantive regulation of underwriting terms and arrangements to include public offerings of insurance contracts and unit investment trusts. The proposed changes to the filing exemptions are appropriate because they relate to highly regulated offerings or offerings whose terms are subject to Rule 2341 and the Investment Company Act of 1940. Furthermore, the proposed changes may reduce costs to firms by reducing filing burdens and clarifying the scope of the exemptions.

        For purposes of clarity, the proposal would also add an explicit exemption from both the filing requirements and substantive provisions of Rule 5110 for offerings made pursuant to the SEC's Regulation S and Rule 144A under the Securities Act of 1933. These offerings are currently exempt from Rule 5110 because they do not fit within the scope of public offerings covered by the rule but the lack of an explicit exemption has raised questions from firms.

        Disclosure Requirements

        The SEC's Regulation S-K requires fees and expenses identified by FINRA as underwriting compensation to be disclosed in the prospectus. FINRA is proposing to modify the underwriting compensation disclosure requirements. Although the proposal would continue to require that a description of each item of underwriting compensation be disclosed, it would no longer require the disclosure to include the dollar amount ascribed to each individual item of compensation. FINRA is proposing to permit a firm to disclose the maximum aggregate amount of all underwriting compensation, except the discount or commission that must be disclosed on the cover page of the prospectus. The proposal would also clarify in the Supplementary Material that the rule requires disclosure of any right of first refusal granted to a participating member and its duration, any securities acquired by a participating member, and the material terms and arrangements of the acquisition (e.g., exercise terms, demand rights, piggyback registration rights, lock-up periods). The proposed Supplementary Material also details when finder fees, legal fees and expenses of the participating member may be aggregated with other underwriting expenses in the distribution arrangements section of the offering document. The proposal would strike an appropriate balance by requiring disclosure of material terms and arrangements for the benefit of investors in the public offering, while reducing burdens on firms by not requiring disclosure of the dollar amount ascribed to each item of compensation.

        Underwriting Compensation

        FINRA is proposing to clarify what is considered underwriting compensation for purposes of Rule 5110. As an initial matter, FINRA is proposing to consolidate the various provisions of the current rule that address what constitutes underwriting compensation into a single, new definition of "underwriting compensation." The proposal would define "underwriting compensation" to mean "any payment, right, interest, or benefit received or to be received by a participating member from any source for underwriting, allocation, distribution, advisory and other investment banking services in connection with a public offering." Underwriting compensation would also include "finder fees and underwriter's counsel fees, including expense reimbursements and securities."11

        The proposal, moreover, would introduce the defined term "review period" and make clear that the applicable period would vary based on the type of offering. FINRA would consider payments and benefits received during the applicable review period in evaluating underwriting compensation.

        In the Supplementary Material, the proposal would continue to provide two non-exhaustive lists of examples of payments or benefits that would be and would not be considered underwriting compensation. The proposed examples of payments or benefits that would be underwriting compensation reflect our current interpretations with some clarifying changes (e.g., fees and expenses paid or reimbursed to, or paid on behalf of, the participating members, including road show fees and expenses and due diligence expenses).

        The proposed examples of payments or benefits that would not be underwriting compensation include current items12 and several new examples to provide greater clarity and to address questions raised by firms. For example, in response to questions from firms, FINRA is proposing to clarify that payments for management and advisory services received by members in connection with bank and insurance company corporate reorganizations would not be considered underwriting compensation. Similarly, FINRA is proposing to clarify that the payment or reimbursement of legal costs resulting from a contractual breach or misrepresentation by the issuer would not be considered underwriting compensation. These payments are beyond the traditional scope of underwriting services and, therefore, are appropriately excluded from the rule's coverage.

        The proposal would also modify and clarify exceptions from the term "underwriting compensation." Currently, the rule provides five exceptions from that definition. FINRA proposes to no longer treat as underwriting compensation securities acquisitions covered by two of the exceptions (1) securities acquisitions and conversions to prevent dilution and (2) purchases based on a prior investment history. This treatment is conditioned on prior investments in the issuer occurring before the review period. When subsequent securities acquisitions take place (e.g., as a result of a stock split, a right of preemption, a securities conversion, or when additional securities are acquired to prevent dilution of a longstanding interest in the issuer), the acquisition of the additional securities should not be treated as underwriting compensation. The proposal would add these acquisitions to the list of payments that are not underwriting compensation because they are based on a prior investment history and are subject to the terms of the original securities that were acquired before the review period.

        The three remaining exceptions address securities that were acquired prior to the required filing date as a result of bona fide investments and loans and that meet specified conditions. The proposal would broaden two of the exceptions regarding purchases and loans by certain affiliates, and investments in and loans to certain issuers by removing a limitation on acquiring more than 25 percent of the issuer's total equity securities. The exceptions are designed to distinguish securities acquired in bona fide venture capital transactions from those acquired as underwriting compensation.

        The 25 percent threshold limits each member and its affiliates from acquiring more than 25 percent of the issuer's total equity securities, which typically establishes a control relationship. The threshold, which was codified in 2004, provided protection from overreaching by firms at a time when FINRA was concerned with limiting the aggregate amount of equity acquired in pre-offering transactions. Subsequent regulatory changes in other areas, such as the modernization of the rule regulating public offerings with a conflict of interest in 2009,13 have added protections and are more appropriate to address acquisitions that create control relationships.

        The final remaining exception governs private placements with institutional investors. Under this exception syndicate members in the aggregate may acquire no more than 20 percent of the securities sold in the private placement. FINRA is proposing to change this threshold from 20 percent to 40 percent. Such private placements typically occur before the syndicate is formed and, therefore, firms do not know at the time whether their participation in the private placement would impact the issuer's future public offering by triggering the threshold. Because exceeding the threshold would subject firms that purchased on the same terms as the other investors to the compensation limits, disclosure and lock-up provisions of the rule, the 20 percent threshold reduces the number of firms available for the syndicate. Increasing the threshold would allow more firms to participate in the private placement and any subsequent public offering. An increase in the threshold is appropriate and raising it to 40 percent: (1) would not materially change the operation of the exception, as the securities acquired in the private placement would remain subject to the other conditions in the exception; and (2) would benefit issuers that are in the process of assembling a syndicate.

        Lock-Up Restrictions

        Subject to some exceptions, Rule 5110 requires a 180-day lock-up restriction on securities that are considered underwriting compensation.14 Because a prospectus may become effective long before the commencement of sales, FINRA proposes that the lock-up period begin on the date of commencement of sales (rather than the date of effectiveness of the prospectus).

        FINRA is also proposing to modify the exceptions from the lock-up restriction (e.g., by adding exceptions for securities of an issuer that meets the registration requirements of SEC Registration Forms S-3, F-3 or F-10 due to the existing public market for securities of these issuers and for acquired securities that are subject to an underwriting compensation exemption or do not meet the definition of underwriting compensation). In addition, FINRA is proposing that the lock-up restriction not prohibit: (1) the transfer of any security to the member's registered persons or affiliates if all transferred securities remain subject to the restriction for the remainder of the lock-up period; or (2) the transfer or sale of the security back to the issuer in a transaction exempt from registration with the SEC,15 because these transfers or sales do not involve the types of underwriting services covered by Rule 5110.

        Valuation of Securities

        Rule 5110 currently prescribes specific calculations for valuing convertible and non-convertible securities received as underwriting compensation. However, applying these calculations can be time and resource intensive for both firms and FINRA. Rather than the specific calculations currently in the rule, FINRA is proposing in the Supplementary Material to instead allow valuing options, warrants and other convertible securities received as underwriting compensation based on a securities valuation method that is commercially available and appropriate for the type of securities to be valued (e.g., the Black-Scholes model for options).16 The proposed change for valuing convertible securities would ensure a commercially reasonable valuation of underwriting compensation for the benefit of issuers and the public while easing administrative and operational burdens for firms and FINRA.

        Prohibited Terms and Arrangements

        FINRA is proposing to clarify the list of prohibited terms and arrangements in connection with a public offering of securities and eliminate from the list the prohibition of a non-accountable expense reimbursement in excess of 3 percent of the offering proceeds. Non-accountable expense reimbursements are subject to the overall cap, and it is unnecessary to have a 3 percent "cap within a cap." Its elimination will remove the need for firms to monitor separately the receipt of this particular type of compensation.

        Defined Terms

        In addition to consolidating the defined terms in one location, FINRA is proposing to simplify and clarify the defined terms. Most notably, the proposal would make the terminology more consistent throughout the rule's various provisions. For example, as discussed above, the proposal would introduce a single definition of "underwriting compensation." In addition, the proposal would add consistency to the scope of persons covered by the rule. Rule 5110 currently alternates between using the defined term "underwriter and related persons" (which includes underwriter's counsel, financial consultants and advisors, finders, any participating member, and any other persons related to any participating member) and the defined term "participating member" (which includes any FINRA member that is participating in a public offering, any affiliate or associated person of the member and any immediate family). To provide greater clarity and consistency on the scope of persons covered by a provision, FINRA is proposing to delete the term "underwriter and related persons" and instead use the defined term "participating member." The proposed definition of underwriting compensation would ensure that the rule continues to address fees and expenses paid to persons previously covered by the term "underwriter and related persons" (e.g., underwriter's counsel fees and expenses, financial consulting and advisory fees and finder fees ).17

        In addition, the proposal would modernize the rule language (e.g., by replacing references to specific securities exchanges to instead reference the definition of "national securities exchange" in the SEA). Further, FINRA is proposing new definitions to provide greater predictability (e.g., "associated person," "experienced issuer,"18 "equity-linked securities," "public offering," "review period" and "overallotment option"). In addition, the proposal would conform the definition in FINRA Rule 5121 (Public Offerings of Securities With Conflicts of Interest) by deleting the definition of "public offering" in that rule and instead incorporating the definition in Rule 5110 by reference.

        Economic Impact Assessment

        Need for the Rule

        The Corporate Financing Rule was approved by the SEC in 1992.19 Over the years, it has been amended a number of times to better reflect the evolving market conditions and financial activities of firms. Based on FINRA's recent review of the rule and feedback from firms, the rule and FINRA's administration of it may benefit from major revisions including organizational, terminology and substantive changes. The proposal is intended to modernize the rule, simplify its provisions, make the rule more comprehensible, and improve its administration. The increased regulatory efficiency is expected to enhance compliance with the rule and the protection of issuers, investors and public interest.

        Economic Baseline

        The economic baseline for the proposal is the current rule and FINRA's current interpretation of it. As further discussed below, the proposal is expected to affect firms that provide underwriting services, issuers seeking to access the public capital markets and investors in public offerings.

        In 2015, FINRA received 1,399 public offerings (covering both equity and debt securities), representing 280 firms and 1,030 issuers. While on average each firm participated in 14 filings, the median number of filings in which a firm participated was only three, indicating that the most active firms were involved in many more filings than the remaining firms. The total proceeds of the 1,399 filings were over $144 billion, with a median of approximately $18 million per filing. These figures are substantially reduced from prior years because of reduced public capital raising.

        Economic Impact Assessment

        The proposal overall is expected to significantly improve the clarity, consistency and organization of FINRA Rule 5110. This would reduce the administrative and operational burdens for firms and FINRA, promote regulatory efficiency, enhance market functioning, and strengthen issuer and investor protection.

        The proposal includes organizational and terminology changes to simplify the rule and substantive changes to better reflect current market conditions, practices and standards. Given the large number of proposed changes, FINRA has identified the changes that are likely to have potentially material impacts on market participants for the purposes of this discussion.

        Valuation of Securities

        FINRA is proposing to require firms to use commercially available and appropriate methods for valuation of convertible securities instead of the specific calculations prescribed by the current rule. To the extent that the methods adopted by members are reasonable and fair, the change may modernize and improve the valuation of convertible securities, contribute to the integrity of the public capital markets and heighten investor protection. Moreover, firms and FINRA would no longer need to ensure compliance with the specific calculations prescribed by the current rule. This may reduce administrative and operational burdens for firms and FINRA as the current process is time and resource intensive.

        The proposal would also impose new initial costs on firms and FINRA. Firms would have to select and acquire an appropriate methodology, file with FINRA a description of the methodology, and document and monitor the application of the methodology to ensure compliance with the proposal. Similarly, FINRA would need to establish policies and procedures to evaluate various valuation methods and ensure consistency in the evaluation.

        Underwriting Compensation

        The proposed changes related to exceptions from underwriting compensation may also have potentially significant impacts. The changes generally would make the exceptions more available to firms.

        For example, FINRA is proposing to broaden two exceptions by removing the limitation on acquiring more than 25 percent of the issuer's total equity securities. Similarly, for the exception related to private placements with institutional investors, FINRA is proposing to change the threshold in the requirement that the participating members did not acquire more than a certain percentage of the total offering from the current 20 percent to 40 percent of the total offering.

        Making the exceptions more available would provide firms with greater operational and financial flexibility. As noted above, increasing the 20 percent threshold to 40 percent would likely benefit issuers by increasing the number of firms available to participate in private placements and subsequent public offerings. However, more exceptions may also have negative impacts on issuer and investor protection if more financial activities that are potentially related to underwriting compensation would not be governed by the rule. FINRA does not expect the proposed changes to have significant negative impacts. The current thresholds of 25 percent of the issuer's total equity securities and 20 percent of the total offering were designed to distinguish securities acquired in bona fide investments from underwriting compensation. Because subsequent regulatory changes have added protections and are more appropriate to address control relationships, the negative impact of removing the threshold of 25 percent, if any, should be minimal. Increasing the 20 percent threshold to 40 percent would have limited impact on issuer and investor protection as the exception has other meaningful provisions acting as safeguards.

        Filing Exemptions

        The proposal would modify the list of offerings that are exempt from filing, but remain subject to the substantive provisions of Rule 5110, to include public offerings of closed-end "tender offer" funds that meet certain conditions. The compensation paid for these funds would be governed instead by Rule 2341. The exemption may materially reduce costs to firms as the number of such offerings is expected to be large. It would have minimal impact on issuer and investor protection as the current practice already exempts most of these offerings from the underwriting compensation requirements of Rule 5110.

        Disclosure Requirements

        FINRA is proposing to clarify the underwriting compensation disclosure requirements in Rule 5110. Under the proposal, the prospectus would no longer need to include the dollar amount ascribed to each individual item, but would need to include the maximum aggregate amount of all underwriting compensation. The proposed change would reduce compliance costs for members. FINRA does not believe that the dollar amounts associated with individual components add additional disclosure value, given that individual components will be described and the aggregate dollar amount of compensation will be disclosed to issuers and investors.

        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.

        1. What are the alternative approaches, other than the proposal, that FINRA should consider?
        2. Are there any ways in which FINRA administers Rule 5110, including the operations and processes it uses to receive or review filings that should be modified? If so, how?
        3. In 2015, the SEC approved final rules to facilitate smaller companies' access to capital that are commonly referred to as Regulation A+. What is the impact of Rule 5110 on underwriting services currently being provided in offerings pursuant to Regulation A+? Would the proposal impact the scope of underwriting services currently being provided in these offerings? What if any improvements could FINRA adopt to its treatment of Regulation A+ offerings?
        4. With respect to the exception from underwriting compensation related to private placements with institutional investors, the proposal would increase the threshold from 20 percent to 40 percent in the condition that limits members of the syndicate in the aggregate to acquiring no more than 20 percent of the securities sold in the private placement. Is this change in the threshold appropriate? Should the threshold be higher or lower? Similarly, does the proposal to remove the limitation on acquiring more than 25 percent of the issuer's total equity securities as underwriting compensation have any potential negative impact on issuer and investor protection?
        5. Prior to 2004, Rule 5110 contained a "stock numerical limit" that prohibited underwriters and related persons from receiving securities that constitute underwriting compensation in an aggregate amount greater than ten percent of the number or dollar amount of securities being offered to the public.20 FINRA eliminated this requirement as unnecessary as the required warrant formula results in a de facto stock numerical limit. If Rule 5110 is amended to eliminate the warrant formula, should a new stock numerical limit be included?
        6. The proposal would allow the value of options, warrants and other convertible securities received as underwriting compensation to be based on a securities valuation method that is commercially available and appropriate for the type of securities to be valued, such as, for example, the Black-Scholes model for options. Is this change appropriate? Should the valuation model be limited to one that is commercially available?
        7. Are there any material economic impacts, including costs and benefits, to investors, issuers and firms that are associated specifically with the proposal? 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?
        8. Are there any expected economic impacts associated with the proposal not discussed in this Notice? What are they and what are the estimates of those impacts?

        1. See Regulatory Notice 17-14 (April 2017).

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

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

        4. Filings of public offerings are made electronically with FINRA through FINRA's public offering filing system accessible at https://www.finra.org/industry/public-offerings. The filing and review process are described on the "Public Offerings" page available on the FINRA.org website. The following are some examples of public offerings that are routinely filed: (1) initial public offerings; (2) follow-on offerings; (3) shelf offerings; (4) rights offerings; (5) offerings by direct participation programs as defined in FINRA Rule 2310(a)(4); (6) offerings by real estate investment trusts; (7) offerings by a bank or savings and loan association; (8) exchange offerings; (9) offerings pursuant to SEC Regulation A; and (10) offerings by closed-end funds.

        5. FINRA does not approve or disapprove of an offering; rather, the review relates solely to the FINRA rules governing underwriting terms and arrangements and does not purport to express any determination of compliance with any federal or state laws, or other regulatory or self-regulatory requirements regarding the offering. A firm may only proceed with a public offering if FINRA has provided an opinion that it has no objection to the proposed underwriting terms and arrangements.

        6. Because the review began before April 2014, it did not follow the specific retrospective review procedures used in subsequent retrospective reviews.

        7. The proposal does not include any changes to current Rule 5110(h) (Non-Cash Compensation). These provisions are the subject of a separate consolidated approach to non-cash compensation. See Regulatory Notice 16-29 (August 2016).

        8. Participating members are responsible for filing public offerings with FINRA. While an issuer may file an offering with FINRA if a participating member has not yet been engaged, a participating member must assume filing responsibilities once it has been engaged. In the case of a shelf offering, an issuer may file a base shelf registration statement in anticipation of retaining a member to participate in a takedown, but a participating member must file documents and information regarding the takedown once it has been engaged.

        Participating members currently have access to summary information concerning their filings through the Public Offering Dashboard, a tool available to participating members through the Firm Gateway that shows the status of each filing made on behalf of the participating member. Each participating member's Super Account Administrator is responsible for granting employees access to the Dashboard.

        9. Filers must provide a link to documents filed with the SEC (e.g., registration statements) through the documents' SEC accession number. Documents filed confidentially with the SEC and other documents that do not have an SEC accession number must be filed as separate attachments in the "Non-SEC Filed Documents" section of the filing system.

        10. For example, FINRA is requiring filing of: (1) industry-standard master forms of agreement only if specifically requested to do so by FINRA; (2) amendments to previously filed documents only if there have been changes to the offering and underwriting terms and arrangements in those documents; and (3) a representation, among other things, as to whether any associated person or affiliate of a participating member is a beneficial owner of 5 percent or more of only equity and equity-linked securities.

        11. In considering whether the aggregate underwriting compensation that participating members receive in connection with a public offering is fair and reasonable, FINRA takes into account the following factors: (1) the anticipated maximum amount of offering proceeds; (2) whether the offering is being distributed on a firm commitment or best efforts basis; and (3) whether the offering is an initial or follow-on offering.

        The amount of permissible underwriting compensation for an offering is typically expressed as a percentage of the proposed maximum offering proceeds, and this percentage generally increases as the offering size decreases. The maximum permissible compensation percentage is typically higher for a firm commitment offering than a best efforts offering of the same size, which recognizes the risks and expenses of committing capital to an offering. The maximum permissible compensation also is typically higher for an IPO than a follow-on offering of the same size, which recognizes the higher cost of underwriting an offering for an issuer without an established market for its securities.

        12. For example, non-convertible or non-exchangeable debt securities and derivatives instruments acquired in a transaction that is unrelated to the public offering are not deemed to be underwriting compensation. Consistent with the requirements of the rule today, the proposal in the Supplementary Material clarifies that if the securities are acquired in connection with the public offering and at a fair price the securities will be considered underwriting compensation but will have no compensation value. Securities acquired in a transaction that is related to the public offering but not at a fair price will be considered underwriting compensation and subject to the valuation requirements of the rule and related disclosure of the valuation methodology.

        13. Rule 5121 governing conflicts of interest requires prominent disclosure of conflicts and, for certain types of conflicts, the participation of a qualified independent underwriter in the preparation of the registration statement.

        14. During the lock-up period, securities are restricted from sale or transfer and may not be pledged as collateral or made subject to any derivative contract or other transaction that provides the effective economic benefit of sale or other prohibited disposition. Securities acquired by a member that are not considered underwriting compensation are not subject to the lock-up provisions of Rule 5110.

        15. The proposal would retain the current exception to the lock-up for the exercise or conversion of any security, if all such securities received remain subject to the lock-up restriction for the remainder of the 180-day lock-up period.

        16. The proposal would require members to file with FINRA a description of the methodology used to value any security received or to be received as underwriting compensation.

        17. Substantively consistent with the current rule, the proposal would define "participating member" to include any FINRA member that is participating in a public offering, any affiliate or associated person of the member, and any immediate family other than the issuer. While not included in the "participating member" definition, the broad definition of underwriting compensation would include underwriter's counsel fees and expenses, financial consulting and advisory fees and finder fees. As such, the definition of underwriting compensation would ensure that the rule addresses fees and expenses paid to persons previously covered by the term "underwriter and related persons."

        18.The proposal would delete references to the pre-1992 standards for Form S-3 and standards approved in 1991 for Form F-10 and instead codify the requirement that the issuer have a 36-month reporting history and at least $150 million aggregate market value of voting stock held by non-affiliates (alternatively, $100 million aggregate market value of voting stock held by non-affiliates and an annual trading volume of at least three million shares). Issuers meeting this standard would be defined as "experienced issuers" and their public offerings would be exempt from filing, but subject to the substantive provisions of Rule 5110.

        19. See SEA Release No. 30587 (April 15, 1992), 57 FR 14597 (April 21, 1992) (Order Approving File No. SR-NASD-91-19).

        20. The number or dollar amount of securities subject to the limit was calculated to exclude: (1) any securities deemed to be underwriting compensation; (2) any securities issued pursuant to an overallotment option; (3) in the case of a best efforts offering, any securities not actually sold; and (4) any securities underlying warrants, options or convertible securities that are part of the proposed offering.

      • 17-14 FINRA Requests Comment on FINRA Rules Impacting Capital Formation; Comment Period Expires: May 30, 2017*

        View PDF

        *In response to requests for an extension, the comment period has been extended to July 14, 2017.

        Capital Formation

        Regulatory Notice
        Notice Type

        Request for Comment
        Referenced Rules

        Capital Acquisition Broker Rules
        FINRA Rules 1060, 2241, 2242, 2310, 4518, 5100 Series, 5250 and 6432
        Funding Portal Rules
        JOBS Act
        Regulation Crowdfunding
        Regulation M
        SEA Rule 15c2-11
        Suggested Routing

        Compliance
        Investment Banking
        Legal
        Research
        Senior Management
        Trading
        Key Topics

        Capital Acquisition Brokers
        Crowdfunding
        Direct Participation Programs
        Funding Portals
        Investment Banking
        JOBS Act
        Market Making
        Research
        Trading
        Unlisted REITS

        Executive Summary

        The ability of small and large businesses to raise capital efficiently is critical to job creation and economic growth. Broker-dealers play a vital role in helping businesses raise capital through the securities markets, and as a self-regulatory organization (SRO) for broker-dealers, FINRA has a variety of rules, operations and administrative processes that address their capital-raising activities.

        FINRA recently announced a new initiative—called FINRA360—to evaluate various aspects of its operations and programs to identify opportunities to more effectively further its mission. As part of this initiative, FINRA is requesting comment on the effectiveness and efficiency of its rules, operations and administrative processes governing broker-dealer activities related to the capital-raising process and their impact on capital formation.

        Questions regarding this Notice should be directed to:

        •   Joseph Price, Senior Vice President and Counsel, Corporate Financing/ Advertising Regulation, at (240) 386-4642 or joseph.price@finra.org;
        •   James S. Wrona, Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8270 or jim.wrona@finra.org; or
        •   Jeanette Wingler, Associate General Counsel, OGC, at (202) 728-8013 or jeanette.wingler@finra.org.

        Action Requested

        FINRA encourages all interested parties to comment on this Notice. Comments must be received by May 30, 2017.

        •   Comments must be submitted through one of the following methods:
        •   Emailing comments to pubcom@finra.org; or

        Mailing comments in hard copy to:

        Jennifer Piorko Mitchell
        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 this Notice.

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

        Background & Discussion

        FINRA is an SRO for the broker-dealer industry and is dedicated to investor protection and market integrity through effective and efficient regulation that facilitates vibrant capital markets—including markets that support efficient capital formation.

        Well-functioning securities markets can enable businesses of all sizes to access the capital necessary to fund and grow their operations, which can in turn create new jobs and promote economic growth and opportunity. Today, trillions of dollars in capital are raised by companies each year in both registered and unregistered U.S. securities offerings.3 And in recent years, particular attention has been paid to capital raising by small businesses, which represent more than 99 percent of employers in the United States and which create significant numbers of new jobs.4

        FINRA members play a critical role in facilitating virtually every stage of the capital-raising process in these markets, such as by underwriting public offerings, advising companies on capital raising and corporate restructuring, acting as placement agents for sales of unregistered securities, operating funding portals, and publishing research reports to educate and inform investors. For its part, FINRA promotes the capital-raising process through appropriately tailored rules applicable to its members that are designed to promote transparency and to establish important standards of conduct for the benefit of all market participants, including investors and issuers participating in offerings.

        There have also been significant developments recently in the mechanisms companies use to raise capital through securities offerings. In response to directives from the Jumpstart Our Business Startups (JOBS) Act, for example, the SEC has adopted new rules to permit securities-based crowdfunding, updated the rules for exempt offerings under Regulation A and altered the requirements for private offerings under Regulation D. There have also been changes in the statutes and rules governing registered offerings, including initial public offerings (IPOs).

        FINRA has taken a number of steps in recent years to modernize its regulation of members' participation in capital-raising activities. For instance, FINRA recently created the Capital Acquisition Broker (CAB) rule set, which allows members engaged in a limited range of corporate-financing activities—such as advising companies and private equity funds on capital raising and corporate restructuring—to elect to be governed by a targeted set of rules. In response to crowdfunding provisions of the JOBS Act,5 FINRA also created the Funding Portal Rules, which are a set of streamlined rules that are tailored to the limited scope of activities in which funding portals are permitted to engage under the JOBS Act and the SEC's Regulation Crowdfunding.6 In addition, FINRA amended FINRA Rule 5131, covering new issue allocations and distributions, to create an important exception to facilitate firm compliance when allocating shares of a new issue to the accounts of unaffiliated private funds.7 In FINRA Rule 5141, FINRA consolidated a number of rules regarding the sale of securities in fixed price offerings, creating a simplified rule that removed numerous outdated and redundant requirements, while at the same time maintaining core protections for investors and for the integrity of such offerings.8 Concurrent with the release of this Notice, moreover, FINRA is proposing amendments to FINRA Rule 5110, which prohibits unfair underwriting arrangements, to clarify and streamline its provisions.9

        While these changes will increase efficiency and reduce unnecessary burdens on the capital-raising process without compromising important protections for issuers and investors, FINRA is interested in whether additional changes to these or other FINRA rules, operations or administrative processes would further enhance the capital-raising process while ensuring investor protections. Therefore, FINRA is requesting comment on the functioning of its rules that most directly apply to the capital-raising process and their effects on capital formation. An overview of these FINRA rules is set forth below. FINRA recognizes that other FINRA rules not listed here also could have an impact on capital formation and FINRA welcomes comment on them as well.10

        FINRA notes, moreover, that its rules and programs are only part of a broader framework of securities laws, rules and regulations that govern or affect capital formation—such as the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), the JOBS Act, SEC rules, and rules of other SROs (e.g., securities exchanges). Making changes to this broader regulatory framework is beyond FINRA's control, and in certain cases FINRA rules are mandated by, or must conform to, specific statutory requirements or SEC rules. Nevertheless, FINRA welcomes comment on how its rules and programs relate to this broader regulatory framework and whether there are opportunities for FINRA to more closely align its rules and programs with the work of other regulators in a manner that promotes capital formation and preserves important investor protections.

        CAB Rules

        The recently approved CAB rules provide members engaged in a limited range of activities with flexibility in structuring their businesses while providing appropriate protections for investors and other market participants.11 New applicants as well as existing members that meet the definition of a CAB may elect to be governed under the CAB rules. 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.

        Because CABs do not engage in many of the types of activities typically associated with traditional broker-dealers, FINRA determined that many of its rules should not apply to these firms, or should be modified to reflect their limited business activities. The CAB rule set is a separate, narrower set of rules to govern these members. Members that elect to be governed under the CAB rules 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.

        Funding Portal Rules

        The JOBS Act contains provisions that permit businesses to offer and sell securities through crowdfunding.12 Funding portals that engage in crowdfunding on behalf of issuers must become a member of a national securities association.13 Under the JOBS Act and the SEC's 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) handle investor funds or securities; or (5) engage in such other activities as the SEC, by rule, determines appropriate.

        FINRA's Funding Portal Rules are streamlined specifically for funding portals and to reflect the limited scope of activity permitted by funding portals while also maintaining investor protection. In addition, the notice requirements of FINRA Rule 4518 enable FINRA to keep track as to which of its members are engaging in crowdfunding activity.

        FINRA Rule 2241 (Research Analysts and Research Reports) and Rule 2242 (Debt Research Analysts and Debt Research Reports)

        FINRA's rules on research analysts and research reports on both the equity and debt sides are intended to foster objectivity and transparency in research and to provide investors with more reliable and useful information to make investment decisions.14 Certain requirements under these rules are derived from applicable statutory mandates and SEC interpretations of those mandates. In addition, in reviewing or modifying its research rules, FINRA seeks to ensure consistency and coordination with applicable SEC research rules (e.g., Regulation AC).

        In a companion Regulatory Notice, FINRA is proposing amendments to Rule 2241 and Rule 2242 to create a limited safe harbor for eligible desk commentary prepared by sales and trading or principal trading personnel that may rise to the level of a research report. 15 The proposed safe harbor would be subject to conditions, including compliance with a number of the Rule 2241 or Rule 2242 provisions, to mitigate the most serious research-related conflicts.

        Rule 2241

        Rule 2241 covers equity research reports.16 The rule implements provisions of Sarbanes-Oxley, which mandates separation between research and investment banking, proscribes conduct that could compromise a research analyst's objectivity, and requires specific disclosures in research reports and public appearances.17 The rule also applies some requirements imposed on members subject to the "Global Settlement"18 more broadly to all members.19

        Rule 2241 requires disclosure of conflicts of interest in research reports and public appearances by research analysts, and limits conflicted conduct—investment banking personnel involvement in the content of research reports and determination of analyst compensation, for example—where the conflicts are too pronounced to be cured by disclosure.20 The rule provides members flexibility in complying with its overarching requirement to establish, maintain and enforce written policies and procedures reasonably designed to identify and effectively manage conflicts of interest without diminishing investor protection. Rule 2241 also exempts members with limited investment banking activity from the review, supervision, budget and compensation provisions in the rule.

        Rule 2242

        Rule 2242's requirements with respect to debt research are similar to the Rule 2241 framework with differences to reflect the operation of the debt markets. Rule 2242 adopts a tiered approach that provides retail debt investors with protections similar to those provided to equity investors under Rule 2241, with modifications to reflect differences in the trading of debt securities. At the same time, the rule provides broad exemptions for debt research distributed solely to institutional investors.

        Rule 2242 differs from the equity research rule in three key respects. First, it sets out prohibited and permissible communications between debt research analysts and principal trading and sales and trading personnel, taking into account the need to ration a debt research analyst's resources among the multitude of debt securities, the limitations on price discovery in the debt markets, and the need for trading personnel to perform credit risk analyses with respect to current and prospective inventory. Second, the rule exempts debt research provided solely to institutional investors from many of the structural protections and prescriptive disclosure requirements that apply to research reports distributed to retail investors, but adds a "health warning" requirement. Third, in addition to the exemption for limited investment banking activity found in Rule 2241, Rule 2242 also contains an exemption for limited principal trading activity from the review, supervision, budget and compensation provisions in the rule related to principal trading activity.

        FINRA Rule 2310 (Direct Participation Programs)

        Rule 2310 addresses underwriting terms and arrangements in public offerings of direct participation programs (DPPs) and unlisted real estate investment trusts (REITs) (collectively, Investment Programs).21 A DPP is a business venture designed to let investors participate directly in the cash flow and tax benefits of an underlying investment (e.g., oil and gas programs and equipment leasing programs). REITs are investment vehicles for income-generating real estate that benefit from the tax advantages of a trust if they satisfy certain criteria in the Internal Revenue Code.

        Due to the complexity of and risks associated with Investment Programs, Rule 2310 includes several provisions to promote investor protection. The rule also promotes fairness by prohibiting unfair and unreasonable compensation. Specifically, Rule 2310 requires that members participating in a public offering of an Investment Program meet certain requirements regarding underwriting compensation, fees and expenses, perform due diligence on the Investment Program, follow specific guidelines on suitability, and adhere to limits on non-cash compensation. The rule also prohibits members from participating in an Investment Program unless the issuer has agreed to disclose valuation-related information to investors.22

        FINRA Rule 5100 Series

        The FINRA Rule 5100 series governs underwriting and related compensation received by FINRA members in securities offerings. Rules in this series are intended to ensure the integrity of the capital markets and to protect market participants, including investors and issuers participating in offerings.

        Rule 5110 (Corporate Financing Rule—Underwriting Terms and Arrangements)

        Rule 5110 prohibits unfair underwriting arrangements in connection with the public offering of securities. The rule was originally developed in 1991 in response to persistent problems with underwriters dealing unfairly with issuers. The rule provides for FINRA staff review of the underwriting terms and arrangements of a member that participates in a public offering. The staff reviews this information prior to the commencement of the offering to determine whether the underwriting compensation and other terms and arrangements meet the requirements of the applicable FINRA rules.

        In a companion Regulatory Notice, FINRA is proposing amendments to Rule 5110 to make substantive, organizational and terminology changes to the rule. These changes—which are intended to modernize the rule—should improve the administration of the rule and simplify its provisions. The proposal would retain the primary principle of the rule that a member or person associated with a member should not participate in a public offering in which the terms and conditions, including underwriting compensation, are unfair or unreasonable.

        FINRA Rule 5121 (Public Offerings of Securities With Conflicts of Interest)

        Rule 5121 prohibits a member from participating in a public offering of its own securities unless the conflicts of interest are disclosed, and in certain circumstances, a qualified independent underwriter participates. Members also must comply with certain net capital, discretionary accounts and filing requirements.

        FINRA Rule 5122 (Private Placement of Securities Issued by Members) and FINRA Rule 5123 (Private Placements of Securities)

        FINRA also reviews offering documents and information members use in selling their own and other issuers' private placements.23 Rule 5123 requires members to file with FINRA, within 15 calendar days of the date of first sale of a private placement, a private placement memorandum, term sheet or other offering document, or indicate that no such offerings documents were used. Rule 5122 requires members that offer or sell their own securities to file the private placement memorandum, term sheet or other offering document at or prior to the first time the documents are provided to any prospective investor. Rule 5122 also establishes standards on disclosure and the use of private placement proceeds.

        FINRA Rule 5130 (Restrictions on the Purchase and Sale of Initial Public Equity Offerings)

        Rule 5130 is intended to promote investor confidence in the capital-raising process by ensuring that: (1) members make bona fide public offerings of securities at the offering price; (2) members do not withhold securities in a public offering for their own benefit or use such securities to reward persons who are in a position to direct future business to members; and (3) industry insiders, including members and their associated persons, do not take advantage of their insider position to purchase new issues24 for their own benefit to the exclusion of public customers.

        FINRA Rule 5131 (New Issue Allocations and Distributions)

        Rule 5131 is intended to support public confidence in the IPO process by establishing requirements with respect to the allocation, pricing and trading of new issues. Among other things, the rule prohibits quid pro quo allocations and "spinning,"25 and addresses the conduct of members and associated persons in the areas of book-building, new issue pricing, penalty bids, trading and waivers of lock-up agreements.

        FINRA Rule 5141 (Sale of Securities in a Fixed Price Offering)

        Rule 5141 protects the integrity of fixed price offerings26 by ensuring that securities in such offerings are sold to the public at the stated public offering price or prices. The rule prohibits the grant of certain preferences (e.g., selling concessions, discounts, other allowances, various economic equivalents) in connection with fixed price offerings of securities.

        FINRA Rule 5150 (Fairness Opinions)

        Rule 5150 requires specific disclosures and procedures addressing the potential conflicts of interest that may arise when a broker-dealer provides a fairness opinion in a change of control transaction, such as a merger or sale or purchase of assets. The disclosures required by the rule are aimed at informing investor shareholders of potential conflicts, such as whether a member has acted as a financial advisor to any party to the transaction that is the subject of the fairness opinion, and if so, whether it will receive compensation contingent on the successful completion of the transaction.

        FINRA Rule 5160 (Disclosure of Price and Concessions in Selling Agreements)

        Rule 5160 requires that selling syndicate agreements or selling group27 agreements: (1) set forth the price at which securities are to be sold to the public or the formula by which such price can be ascertained; and (2) state clearly to whom and under what circumstances concessions, if any, may be allowed.

        FINRA Rule 5190 (Notification Requirements for Offering Participants)

        Rule 5190 sets forth the notice requirements applicable to all members participating in offerings of securities for purposes of monitoring compliance with the provisions of the SEC's Regulation M. The rule is intended to ensure that FINRA receives pertinent distribution-related information from its members in a timely fashion.

        FINRA Rule 5250 (Payments for Market Making)

        Although Rule 5250 does not apply specifically to the capital-raising process, some members have indicated that it may unnecessarily limit certain arrangements that could create greater liquidity in some stocks and thus help facilitate capital formation.

        Subject to enumerated exceptions, Rule 5250 prohibits members and their associated persons from accepting any payment or other consideration, directly or indirectly, from an issuer of a security, or any affiliate or promoter thereof, for publishing a quotation or acting as a market maker in a security.28 Exceptions include payment for bona fide services, including, but not limited to, payment for investment banking services such as underwriting compensation and fees. Rule 5250 is intended to ensure that a member acts in an independent capacity when publishing a quotation or making a market in an issuer's securities.

        FINRA Rule 6432 (Compliance with the Information Requirements of SEA Rule 15c2-11)

        Although Rule 6432 does not apply specifically to the capital-raising process, some members have indicated that the requirements it imposes on market makers may unintentionally create burdens on the quoting of stocks of smaller companies and thus impede capital formation.

        Rule 6432 generally requires that, prior to initiating or resuming quotations in a non-exchange-listed security in a quotation medium, a member must demonstrate compliance with Rule 6432 and the applicable requirements for information maintenance under SEA Rule 15c2-11. Under Rule 6432, a member demonstrates compliance by filing a FINRA Form 211 at least three business days before the member's quotation is published or displayed in the quotation medium. FINRA processes a member's Form 211 submission once the required SEA Rule 15c2-11 documentation and related information has been submitted.

        Form 211 largely requires members to provide, or reference, if electronic copies are available on EDGAR, the items of information listed in SEA Rule 15c2-11 applicable to the member's submission. In addition to the SEA Rule 15c2-11 items of information, a member is required to provide the price at which it intends to initiate quotations along with the basis upon which such price was determined. If a member's initial quotation does not include a priced entry, the member must supplement its prior filing with FINRA before initiating a priced entry. Rule 6432 also contains exceptions that parallel SEA Rule 15c2-11. A FINRA Form 211 filing is not required where a member is relying on an exception to or exemption from SEA Rule 15c2-11. However, under Rule 6432, if relying on the unsolicited customer order exception of SEA Rule 15c2-11(f)(2), a member must comply with the recordkeeping requirements of Rule 6432.01.

        Trading Activity Fee (TAF)

        Although the TAF does not apply specifically to the capital-raising process, some members have raised the question of whether the TAF may unintentionally impose disparate burdens on the trading of stocks of smaller companies.

        The TAF is the one member regulatory fee FINRA charges that is based on trading activity29 and generally applies to all sales of a covered security, including both sales for the member's own account and sales on behalf of a customer, regardless of where the trade is executed.30 The revenue from these fees is designed to recover the costs to FINRA of the supervision and regulation of members, including performing examinations, financial monitoring, and FINRA's policymaking, rulemaking, interpretive and enforcement activities.

        Section 1(b) of Schedule A to the FINRA By-Laws includes several exemptions from the TAF, including exemptions for:

        •   Transactions in securities offered pursuant to an effective registration statement under the Securities Act of 1933 (Securities Act) (except transactions in put or call options issued by the Options Clearing Corporation) or offered in accordance with an exemption from registration afforded by Section 3(a) or 3(b) thereof, or a rule thereunder;
        •   Transactions by an issuer not involving any public offering within the meaning of Section 4(2) of the Securities Act (except any "Reportable TRACE Transaction"); and
        •   The purchase or sale of securities pursuant to and in consummation of a tender or exchange offer.

        If no exemption applies, then a TAF is assessed on the transaction (e.g., a TAF may be assessed on both equity and TRACE-reportable debt transactions effected in the secondary market).

        Although the TAF is calculated on a per share basis, there are transaction-based caps on fees for certain transactions, including a maximum charge of $5.95 per trade for transactions in covered equity securities. If the execution price for a covered security is less than the TAF rate on a per share, per contract, or round turn transaction basis, then no TAF is assessed on that transaction.

        Request for Comment

        FINRA requests comment on its rules and practices that affect the capital-raising process, including any that are not discussed in this Notice. FINRA requests that commenters provide empirical data or other factual support for their comments wherever possible.

        In particular, we request comment on the following questions:

        1. Have FINRA's rules covering the capital-raising process effectively responded to the problem(s) they were intended to address?
        2. What have been the economic impacts, including costs and benefits, arising from FINRA's rules on the capital-raising process? To what extent would these economic impacts differ by business attributes, such as size of the firm or differences in business models?
        3. Where have FINRA rules around the capital-raising process been designed particularly effectively? Are there other rules or applications where this approach might enhance capital formation while maintaining investor protections?
        4. What, if any, unintended consequences have arisen from FINRA's rules related to the capital-raising process? How have firms limited or amended their business models and practices in ways unintended by FINRA with a consequence to capital formation or investor protection in order to comply with FINRA's rules in these areas?
        5. Are there other FINRA rules not identified above that impact the capital-raising process? If so, what has been your experience with these rules?
        6. Are there any ambiguities in the rules that FINRA should address to aid firms' compliance and enhance the capital-raising process while ensuring investor protection concerns are addressed?
        7. Can FINRA make any of its administrative processes or interpretations related to the capital-raising process more efficient and effective? If so, which ones and how?
        8. As currently designed, are the eligibility requirements for the CAB rules over- or under-inclusive in any respect? What changes, if any, to these requirements should be considered? Are the requirements applicable to CABs appropriately tailored to their business activities? Should any changes to these requirements be considered?
        9. As currently designed, do FINRA's funding portal rules appropriately address the requirements and objectives of the JOBS Act and the SEC's Regulation Crowdfunding? What changes, if any, should be made to FINRA's rules, and why?

        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. In 2014, for example, registered offerings accounted for $1.35 trillion of new capital and an estimated $2.1 trillion was raised through all private offering channels. Scott Bauguess, et al., Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009–2014 (October 2015), available at https://www.sec.gov/files/unreqistered-offerinql0-2015.pdf.

        4. As noted by the Congressional Research Service, for example, "Congressional interest in the [Small Business Administration's (SBA)] access to capital programs has increased in recent years, primarily because assisting small business in accessing capital is viewed as a means to enhance job creation and economic growth." Robert Jay Dilger, U.S. Cong. Research Serv., R40985, Small Business: Access to Capital and Job Creation, at 1 (Aug. 26, 2016) (citations omitted), available at https://fas.org/sqp/crs/misc/R40985.pdf Moreover, SBA data show that small businesses accounted for approximately 60 percent of net new jobs from 2009 to mid-2013. See SBA Office of Advocacy, Frequently Asked Questions about Small Business, at*l (June 2016), available at https://www.sba.gov/sites/default/files/advocacy/SB-FAQ-2016 WEB.pdf Small businesses also have been credited with helping America recover from the recession following the 2008 financial crisis. See SBA, Cabinet Exit Memo, SBA: Smart, Bold, Accessible, at *2 (January 5, 2017), available at https://obamawhitehouse. archives.gov/sites/whitehouse.gov/files/documents/SBA%20Exit%20 Memo.pdf

        5. Pub. L 112-106,126 Stat. 306 (2012).

        6. The SEC adopted Regulation Crowdfunding on October 30, 2015. See SEA Release No. 76324 (October 30, 2015), 80 FR 71388 (November 16, 2015) (Final Rule: Crowdfunding).

        7. See SEA Release No. 70957 (November 27, 2013), 78 FR 72946 (December 4, 2013) (Order Approving SR-FINRA-2013-037). See a/so Regulatory Notice 13-43 (December 2013).

        8. See SEA Release No. 62539 (July 21, 2010), 75 FR 44033 (July 27, 2010) (Order Approving Proposed Rule Change; File No. SR-FINRA-2010-029). See also Regulatory Notice 10-47 (October 2010).

        9. See Regulatory Notice 17-15 (April 2017) for details of the proposed amendments to Rule 5110.

        10. While some FINRA rules also may impact FINRA members that are small businesses, FINRA is separately considering what rule amendments or other steps FINRA can take to ease regulatory burdens and facilitate the growth of its smaller members.

        11. The SEC approved the CAB rule set in August 2016. See SEA 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). 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 became effective on January 3, 2017. FINRA began accepting applications for entities that are not currently registered as broker-dealers but wish to so register and be subject to FINRA's CAB rules, for existing members requesting to elect CAB status, and for CAB associated person registration and qualification, on January 3, 2017. See Regulatory Notice 16-37 (October 2016).

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

        13. FINRA is the only national securities association registered under SEA Section 15A.

        14. Some members have raised concern regarding whether certain of FINRA's Letters of Acceptance, Waiver and Consent (AWCs) with other firms impose new requirements for compliance with the research rules. AWCs are based on existing law as applied to the specific facts and circumstances at issue and are not intended to create new policies or requirements on members. As with compliance with any FINRA rule, a member should consider its unique facts and circumstances and tailor its supervisory system specifically to its business.

        15. See Regulatory Notice 17-16 (April 2017) for details of the proposed amendments to Rule 2241 and Rule 2242.

        16. Rule 2241's predecessor—NASD Rule 2711 (Research Analysts and Research Reports)—was approved by the SEC in 2002. Rule 2711 and the NYSE's rules governing research reports were intended to restore public confidence in the validity of research and the veracity of research analysts. The trustworthiness of research had eroded due to the influences of investment banking and other conflicts that had manifest themselves during the market boom of the late 1990s. See Joint Report by NASD and the NYSE on the Operation and Effectiveness of the Research Analyst Conflict of Interest Rules (December 2005), available at http://www.finra.org/web/groups/industry/@ip/@issues/@rar/documents/industry/p015803.pdf.

        17. See 15 U.S.C. 78o-6. For example, Sarbanes-Oxley mandates specific rules to prohibit or restrict conduct related to the preparation, approval and distribution of research reports and the determination of research analyst compensation. Sarbanes-Oxley also mandates specific rules to define periods during which brokers or dealers who have participated, or are to participate, in a public offering of securities as underwriters or dealers should not publish or otherwise distribute research reports relating to such securities or to the issuer of such securities.

        18. In 2003, federal and state authorities and self-regulatory organizations reached a settlement with 10 of the nation's largest broker-dealers to resolve allegations of misconduct involving conflicts of interest between their research analysts and investment bankers. See SEC Litigation Release No. 18438 (October 31, 2003). In 2004, two additional firms settled substantively under the same terms, which included provisions to effectively separate research from investment banking. See SEC Litigation Release Nos. 18854 and 18855 (August 26, 2004).

        19. For example, Rule 2241 eliminated the exception in NASD Rule 2711 permitting pre-publication review of research by investment banking to verify the factual accuracy of information in a research report. Factual review by investment banking personnel is not permitted under the terms of the Global Settlement. However, some provisions of the Global Settlement continue to apply only to members subject to the settlement (e.g., the Global Settlement requirements with respect to chaperoning communications between research and investment banking personnel are not incorporated into FINRA rules and apply only to Global Settlement firms).

        20. Consistent with the JOBS Act amendments to the SEA related to emerging growth companies (EGC), Rule 2241's quiet period-related requirements do not apply following the IPO or secondary offering of an EGC. Section 3(a) (80) of the SEA defines an EGC as "an issuer that had total annual gross revenues of less than $1,000,000,000 (as such amount is indexed for inflation every 5 years by the Commission to reflect the change in the Consumer Price Index for All Urban Consumers published bythe Bureau of Labor Statistics, setting the threshold to the nearest 1,000,000) during its most recently completed fiscal year."

        Moreover, pursuant to the SEA amendments implementing the JOBS Act, Rule 2241's prohibition on participation in pitch meetings does not apply to a research analyst that attends a pitch meeting in connection with an IPO of an EGC that is also attended by investment banking personnel. However, research analysts still are prohibited from soliciting an investment banking services transaction or promising favorable research during permissible attendance at those pitch meetings. See SEC, JOBS Act, Frequently Asked Questions About Research Analysts and Underwriters, available at http:// www.sec.gov/divisions/marketreg/tmjobsact-researchanalystsfaq.htm. See also FINRA, Research Rules Frequently Asked Questions, available at http://www.finra.org/industry/faq-research-rules-frequently-asked-questions-faq.

        21. Rule 2310's predecessor—NASD Rule 2810—was adopted in 1980to address issues arising from members' participation in oil and gas programs and real estate syndications in the 1970s. See SEA Release No. 16967 (July 8,1980), 45 FR 47294 (July 14,1980). The rule has been amended periodically to include additional programs and procedures to address new developments regarding members' participation in Investment Programs. For example, some significant amendments to Rule 2810 in elude the foilowing: in 1982, amendmentsto include suitability, due diligence and disclosure requirements; see SEA Release No. 19054 (September 16,1982), 47 FR 42226 (September 24, 1982); in 1984, to require that sales incentives be in cash; see SEA Release No. 20844 (April 11,1984), 49 FR 15041 (April 16,1984); in 1986, to exempt certain secondary offerings; see SEA Release No. 23619 (September 15,1986), 51 FR 33968 (September 24,1986); in 1994, to apply to limited partnership rollup transactions; see SEA Release No. 34533 (August 15,1994), 59 FR 43147 (August 22, 1994); and in 2003, to modify the non-cash compensation provisions; see SEA Release No. 47697 (April 18, 2003), 68 FR 20191 (April 24, 2003).

        22. The SEC recently approved FINRA's proposed amendments to Rule 2340 and Rule 2310 that require general securities members to provide more accurate per share estimated values on customer account statements, shorten the time period before a valuation is determined based on an appraisal and provide various important disclosures. See SEA Release No. 73339 (October 10, 2014), 79 FR 62489 (October 17, 2014) (Order Approving SR-FINRA-2014-006, as Modified by Amendment No. 1). See also FINRA Regulatory Notice 15-02 (January 2015).

        23. Filings under Rules 5122 and 5123 are notice filings. Accordingly, FINRA will not respond to a filing or issue a no objections letter. All filings under Rules 5122 and 5123 are afforded confidential treatment.

        24. "New issue" means any IPO of an equity security as defined in Section 3(a)(ll) of the SEA made pursuant to a registration statement or offering circular, subject to some exceptions. See FINRA Rules 5130(i)(9) and 5131(e)(7).

        25. Specifically, Rule 5131(a) (Quid Pro Quo Allocations) prohibits a member from using an allocation of a new issue as a means of obtaining a "kick back" from the recipient in the form of excessive compensation for other services offered by the member. Rule 5131(b) (Spinning) prohibits allocations of new issues to executive officers and directors of current, and certain former or prospective, investment banking clients.

        26. Rule 5141.04 defines "fixed price offering" to mean the offering of securities at a stated public offering price or prices, all or part of which securities are publicly offered in the United States or any territory thereof, whether or not registered under the Securities Act, except that the term does not include offerings of "exempted securities" or "municipal securities" as those terms are defined in SEA Sections 3(a)(12) and 3(a)(29), respectively, or offerings of redeemable securities of investment companies registered pursuant to the Investment Company Act which are offered at prices determined by the net asset value of the securities.

        27. FINRA Rule 1060(b)(15) defines "selling group" to mean any group formed in connection with a public offering, to distribute all or part of an issue of securities by sales made directly to the public by or through members of such selling group, under an agreement which imposes no financial commitment on the members of such group to purchase any such securities except as they may elect to do so. FINRA Rule 1060(b)(16) defines "selling syndicate" to mean any syndicate formed in connection with a public offering, to distribute all or part of an issue of securities by sales made directly to the public by orthrough participants in such syndicate under an agreement which imposes a financial commitment upon participants in such syndicate to purchase any such securities.

        28. The Rule 5250 prohibition on receiving payments for market making includes within its scope the receipt of payments for submitting a Form 211 to FINRA pursuant to Rule 6432, which sets forth the standards applicable to members for demonstrating compliance with SEA Rule 15c2-ll.

        29. See FINRA By-Laws, Schedule A, Section 1(a). FINRA has three "Member Regulatory Fees" set forth in Section 1 of Schedule A to the FINRA By-Laws: the TAF, the Gross Income Assessment, and the Personnel Assessment.

        30. "Covered securities" for purposes of the TAF include exchange-registered securities, over-the-counter equity securities, security futures, TRACE-Eligible Securities (as defined in FINRA Rule 6710) other than U.S. Treasury Securities, and municipal securities subjectto the reporting requirements of the Municipal Securities Rulemaking Board. See FINRA By-Laws, Schedule A, Section 1(b)(1).

      • 17-13 FINRA's NAC Revises the Sanction Guidelines; Effective Immediately

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        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        FINRA By-Laws, Article V
        FINRA Rules 1122, 2010, 2111, 2121, 3110, 3240, 3270, 4511, 4560, 5310, 7230A and 7330
        MSRB Notice 2004-3
        MSRB Rules G-7, G-8, G-9, G-17, G-18, G-27 and G-30
        NASD Rules 2150 and 3010
        Regulation SHO
        Securities Act of 1933, Section 5
        Securities Exchange Act of 1934, Section 17, and SEA Rules 17a-3 and 17a-4
        Suggested Routing

        Legal
        Registered Representatives
        Senior Management
        Key Topics

        FINRA Sanction Guidelines

        Executive Summary

        This Notice advises FINRA firms of revisions to FINRA's Sanction Guidelines. FINRA initiated a periodic review of the Sanction Guidelines through the National Adjudicatory Council (NAC) to ensure that the guidelines reflect recent developments in the disciplinary process, comport with changes in FINRA's rules, and accurately reflect the levels of sanctions imposed in FINRA disciplinary proceedings. These revisions:

        •   establish a new factor requiring that the exercise of undue influence over a customer be considered for all violations addressed by the Sanction Guidelines;
        •   introduce three new Sanction Guidelines: Systemic Supervisory Failures, Short Interest Reporting, and Borrowing From or Lending to Customers;
        •   present a new factor related to the mitigative effect of regulator or firm-imposed sanctions and corrective action;
        •   amend 12 sections of the Sanction Guidelines to revise sanctions for more serious FINRA rule violations; and
        •   harmonize the Sanction Guidelines to the relevant precedent, prior amendments to the Sanction Guidelines and FINRA's rulebook consolidation process.

        The revised Sanction Guidelines are effective immediately and available on FINRA's website at www.finra.org/Industry/Enforcement/SanctionGuidelines.

        Questions concerning this Notice may be directed to:

        •   Alan Lawhead, Office of General Counsel, at (202) 728-8853; and
        •   Jante Turner, Office of General Counsel, at (202) 728-8317.

        Background

        FINRA's Sanction Guidelines familiarize firms with some of the typical securities-industry rule violations that occur, and the range of disciplinary sanctions that may result from those rule violations. The goal of the Sanction Guidelines is to assist FINRA's adjudicators in determining the appropriate sanctions in disciplinary proceedings. The Sanction Guidelines do not provide predetermined or fixed sanctions for particular violations. Rather, the central idea contained in the Sanction Guidelines is that adjudicators start with a range of appropriate sanctions for a particular violation and consider aggravating and mitigating factors in order to arrive at an appropriate sanction for the particular circumstances. FINRA initiates periodic reviews of the Sanction Guidelines through the NAC to ensure that the Sanction Guidelines reflect recent developments in the disciplinary process, comport with changes in FINRA's rules and accurately reflect the levels of sanctions imposed in FINRA disciplinary proceedings. The revisions discussed in this Notice are the result of FINRA's most recent review of the Sanction Guidelines. Further review is underway of changes to make the Sanction Guidelines more effective.

        New Guidance

        FINRA has introduced one new principal consideration that analyzes whether a respondent has exercised undue influence over a customer, three new Sanction Guidelines (Supervision—Systemic Supervisory Failures, Borrowing From or Lending to Customers, and Short Interest Reporting), and one new general principle that examines the mitigative effect of regulator or firm-imposed sanctions and corrective action.

        1. Consideration for Vulnerable Customers. FINRA has introduced a new principal consideration that examines whether a respondent has exercised undue influence over a customer. This new consideration reaffirms that financial exploitation of senior and other vulnerable customers should result in strong sanctions. While FINRA's decisions have acknowledged that exercising undue influence is an aggravating circumstance on a case-by-case basis, the new principal consideration makes clear that the Sanction Guidelines contemplate coverage for vulnerable individuals or individuals with diminished capacity, which may include senior investors.
        2. Supervision—Systemic Supervisory Failures. The current Sanction Guidelines related to supervision violations focus on limited supervisory failures, such as those involving an individual or a small number of associated persons. The new guideline applies to violations related to systemic supervisory failures and firm wide supervisory problems. The introduction of the guideline for Supervision—Systemic Supervisory Failures results in related changes to the guideline for Supervision—Failure to Supervise.
        3. Short Interest Reporting. Currently, sanctions for violations involving short interest reporting are determined in accordance with the guideline related to Short Sale Violations. The use of this analogous guideline, however, fails to account for the unique set of factors that short interest reporting violations typically present. Accordingly, the introduction of the guideline for Short Interest Reporting sets forth principal considerations unique to short interest reporting cases. The introduction of the guideline for Short Interest Reporting results in related changes to the guideline for Short Sale Violations.
        4. Borrowing From or Lending to Customers. There are large numbers of litigated and settled cases involving borrowing and lending arrangements between registered representatives and customers, but the current iteration of the Sanction Guidelines has no guideline related to these types of violations. The introduction of a guideline related to borrowing and lending arrangements between representatives and customers provides adjudicators with guidance on the assessment of sanctions in these cases.
        5. Consideration of Regulator or Firm-Imposed Sanctions. FINRA also has established a new general principle, General Principle No. 7, which addresses the potential mitigative effect of regulator or firm-imposed sanctions and corrective action. The new general principle provides FINRA adjudicators with more detailed guidance for sanctions imposed by another regulator or corrective action imposed by a member firm. General Principle No. 7 will replace the guidance provided in Principal Consideration in Determining Sanctions, No. 14. Principal Consideration No. 14 has been deleted.

        Revisions to Existing Sanction Guidelines

        FINRA modified the non-monetary (suspension) and monetary (fine) range of sanctions for several guidelines that involve more serious violations of FINRA rules. For example, the guideline for Sales of Unregistered Securities, as amended, raises the sanctions for unregistered securities sales that involve a high volume of "penny stock" transactions.1 The amended guideline adds principal considerations that focus on a respondent's penny stock activities and advises adjudicators to consider lengthier suspensions and higher fine ranges if an individual respondent's conduct involves a high volume of penny stock transactions or recurring penny stock transactions.

        FINRA implemented similar changes to violations that involve churning or unauthorized transactions. The low-end of the suspension range for an individual respondent who engages in churning or unauthorized transactions increased from 10 business days to one month. The high-end suspension range for churning and unauthorized transactions for an individual respondent has increased from one year to two years and the revised guidelines for Churning or Unauthorized Transactions recommend that FINRA adjudicators strongly consider barring an individual respondent when the respondent acted recklessly or intentionally.


        1 FINRA adopted the use of the term "penny stock," as it is defined in Section 3(a)(51) of the Securities Exchange Act of 1934 (SEA) and SEA Rule 3a51-1.

      • 17-12 Regulation T and SEA Rule 15c3-3 Extension of Time Requests Under a T+2 Settlement Cycle

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        Regulatory Extension (REX) System Update

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        FINRA Rule 4230
        Regulation T Sections 220.4 and 220.8
        SEA Rule 15c3-3
        SEA Rule 15c6-1(a)
        Suggested Routing

        Compliance
        Institutional
        Legal
        Operations
        Registered Representatives
        Senior Management
        Systems
        Key Topics

        Extension Processing
        Trade Settlement Cycle

        Summary

        FINRA is updating the Regulatory Extension (REX) system1 to enable firms to file extension of time requests under a shortened settlement cycle. The Securities and Exchange Commission (SEC) has amended Rule 15c6-1(a) under the Securities Exchange Act of 1934 (SEA or Exchange Act) to shorten the standard settlement cycle for most broker-dealer transactions from T+3 to T+2.2 Firms may file such requests beginning September 11, 2017, via the batch file process and by completing the currently available online request form that is accessible by logging in to the REX system via the FINRA Firm Gateway.

        Questions concerning this Notice should be directed to:

        •   Adam Rodriguez, Director, Credit Regulation, at (646) 315-8572 or adam.rodriguez@finra.org;
        •   Peter Grassi, Project Manager, Credit Regulation, at (212) 416-1786 or peter.grassi@finra.org; or
        •   Theresa Reynolds, Senior Credit Specialist, Credit Regulation, at (646) 315-8567 or theresa.reynolds@finra.org.

        Background & Discussion

        The SEC has amended SEA Rule 15c6-1(a) to shorten the standard settlement cycle for most broker-dealer transactions from T+3 to T+2. The implementation date for the transition to a T+2 settlement cycle is September 5, 2017. This Notice provides guidance to firms on how to apply for Reg T extensions after that date.

        Regulation T, issued by the Federal Reserve Board pursuant to the Exchange Act, governs, among other things, the extension of credit by broker-dealers to customers to pay for the purchase of securities. As specified in Sections 220.4(d) and 220.8(b)(4) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a margin account or cash account if payment is not received within one payment period3 from the date of purchase or, pursuant to Section 220.4(c)(3) and 220.8(d)(1), apply to extend the time period specified. Under a T+2 settlement cycle, the payment period will be shortened from T+5 to T+4.

        SEA Rule 15c3-3(m) requires firms to take prompt steps to obtain possession or control of securities sold through a buy-in procedure or otherwise, if securities are not received within ten business days from the settlement date of the sale. Firms may apply for an extension of time under SEA Rule 15c3-3(n)4 to extend the ten business day period, allowed under the rule.

        REX System Update

        The implementation date, September 5, 2017, will be the first trade date under a T+2 settlement cycle. FINRA anticipates that between September 5 and September 8, 2017, firms will continue to apply for extension requests through the REX system for trades executed under a T+3 settlement cycle. Beginning September 11, 2017, firms will file Reg T extension requests under a T+2 settlement cycle. The REX system extension validations for Reg T have been updated to accommodate the new settlement cycle (T+2). The transition to a T+2 settlement cycle will not have an effect on the REX system extension validations under SEA Rule 15c3-3. Attachment A to this Notice includes a list of all new and modified REG T extension request validations.

        Testing

        Because the REX system changes will require firms to make modifications to their systems, FINRA has created a REX Customer Test Environment (CTE) for both batch and online request form filings.5 FINRA encourages firms to begin testing as soon as possible to ensure extension requests are submitted accurately beginning on September 11, 2017. Based on industry feedback, FINRA has attempted to align testing with the DTCC testing cycles 8–14.6 Connectivity testing will be available at https://gateway1.firms.qa.finra.org/ beginning May 8, 2017, and testing of extension submissions will be available beginning May 22 through August 24, 2017. In order to accurately simulate the extension request process under a T+2 environment, FINRA has divided testing into two periods. Each period includes a holiday (May 29, 2017 (Memorial Day) and July 4, 2017) and a double settlement date (June 1, 2017 and July 6, 2017). For purposes of this testing, firms' current entitlements will remain unchanged, and firms will continue to use their existing FINRA CTE user ID and password for this testing.

        For ease of reference to the time frames available for testing, FINRA has provided detailed information in Attachment B to this Notice.

        FINRA will begin accepting test data files transmitted through its test environment on May 22, 2017. Firms that transmit testing files via SFTP should send files to their current Reg T SFTP test server and place those files into the /rex/in subdirectory. Firms will have access via FINRA Firm Gateway to reports FINRA makes available that will include information on all the extension of time requests a firm submitted and their associated data elements. Firms will also be able to query the REX test environment for information on all extension of time requests that are granted, denied or rejected. The reports showing the test results will be posted the next business day to the same test server, in the firm's /rex/out subdirectory.

        Firms that encounter technical problems, or need to request a FINRA user ID and password, should contact the FINRA Help Desk at (800) 321-6273.

        2017 Margin extension schedule Post T+2

        In December 2016, FINRA published Information Notice 12/14/16, 2017 Holiday Trade Date, Settlement Date and Margin Extension Schedule,7 to provide firms the filing due dates for extension requests to be made in 2017. The filing dates specified within that Notice consider the effects of the T+2 settlement cycle. FINRA reminds firms to review the Information Notice, and any questions in regards to due dates can be directed to Theresa Reynolds, Senior Credit Specialist, Credit Regulation, at (646) 315-8567 or theresa.reynolds@finra.org.


        1. FINRA introduced the REX system in August 2010. See Regulatory Notice 10-28 (June 2010) (Extension of Time Requests). Clearing firms for which FINRA is the designated examining authority must submit requests for extensions of time with FINRA for approval pursuant to FINRA Rule 4230.

        2. See Securities Exchange Act Release No. 80295 (March 22, 2017), 82 FR 15564 (March 29, 2017) (Amendment to Securities Transaction Settlement Cycle) (File No. S7-22-16). See also Securities Exchange Act Release No. 80004 (February 9, 2017), 82 FR 10835 (February 15, 2017) (Approval Order of SR-FINRA-2016-47 Proposed Rule Change to Amend FINRA Rules To Conform to the Commission's Proposed Amendmentto Commission Rule 15c6-1(a) and the Industry-Lead Initiative to Shorten the Standard Settlement Cycle for Most Broker-Dealer Transactions From T+3 toT+2).

        3. Section 220.2 of Regulation T defines a "payment period" as the number of business days in the standard securities settlement cycle in the United States, as defined in paragraph (a) of SEA Rule 15c6-1 (17 CFR 240.15c6-1(a)), plus two business days.

        4. The provision continues to provide that a self-regulatory organization (SRO) may extend certain time periods for one or more limited periods commensurate with the circumstances, where the SRO is satisfied that the broker or dealer is acting in good faith in making the application; and exceptional circumstances warrant such extension.

        5. File Format Layout for the REX system and Reg T file format layouts are available at www.finra.org/rex/technicalinforrnation.

        6. See the DTCC T+2 Testing Approach: Detailed Testing Framework.

        7. See Information Notice 12/14/16.


        Attachment A

        New and Modified REG T Extension Request Validations

        Extension Type Validation Identifier Current Rex Message Disposition/ Status Rex Message under T+2 environment
        RegT BR3500 For New Issues that are NOT reason code 021, 008, 012, 014, 015, the system will require settlement date to be exactly 5 business days before the request date. Denied For Reg T extension requests on New Issue Securities filed under all reason codes except 008, 012, 014, 015, 021 the request shall be made on S+4 business days.
        RegT BR3520 For New Issues that ARE reason code 008, 012, 014, the system will require the settlement date to be at most 34 calendar days before the request date and at least 5 business days before the request date. Denied For Reg T extension requests on New Issue Securities filed under codes 012, 014, the request shall be made between S+4 business days and S+34 calendar days.
        RegT BR3530* Denied For Reg T extension requests on New Issue Securities filed under code 008, the request shall be made between S+6 business days and S+34 calendar days.
        RegT BR3600 For Filings that are not for New Issues, and for reason codes that are not 021, 008, 012, 014, 015, the system will require the trade date to be exactly 5 business days before the request date. Denied For Reg T extension requests other than New Issue Securities filed under all reason codes except 008, 012, 014, 015, 021, the request shall be made on T+4 business days.
        RegT BR3615 For Filings with reason code 015, the system will require the request date to be T+35 calendar days. Denied For Reg T extension requests other than New Issue Securities filed under code 015, the request shall be made between T+4 business days and T+35 calendar days.
        RegT BR3540* Denied For Reg T extension requests on New Issue Securities filed under code 015 the request shall be made between S+4 business days and S+35 calendar days.
        RegT BR3620 For Filings that are not for New Issues, and for reason codes 012, 014, the system will require the request date to be between T+5 business days and T+34 calendar days. Denied For Reg T requests other than New Issue Securities filed under codes 012, 014, the request shall be made between T+4 business days and T+34 calendar days.
        RegT BR3630 For Filings that are not for New Issues, and for reason code 008, the system will require the request date to be between T+6 business days and T+34 calendar days. Denied For Reg T requests other than New Issue Securities filed under code 008, the request shall be made between T+6 business days and T+34 calendar days.
        RegT BR3000 Reason code 021 goes to pending. Pending Reason code 021 goes to pending, requiring FINRA approval.

        Attachment B

        REX Customer Test Environment Timeframes

        Note: All dates noted below are for testing purposes only to ensure proper operation upon implementation. The implementation date for the transition to T+2 settlement cycle is September 5, 2017.

        TEST CYCLE 1—May 22–June 29, 2017
        Week T+2 Action T+3 Action
        New Issues Non-New Issues New Issues Non-New Issues
        May 22–26, 2017 T+2 settlement cycle has not begun, no action required. The Rex System will accept Reg T extension requests on all securities, under all codes.

        May 26, 2017 will be the last trade day under T+3 settlement cycle for testing purposes.
        May 29, 2017—Memorial Day (Holiday) Holiday—No extension requests required to be filed
        May 30–June 2, 2017 T+2 settlement cycle for testing begins on May 30, 2017. No Reg T extension requests required since payment period has not reached T+4 and/or Settlement (S)+4. Reg T extension requests can be filed, on all securities, under all codes.
        Monday, June 5, 2017 Reg T extension requests with a settlement date of May 30, 2017 for testing, can be filed on all securities, under all codes except code 008.

        The payment period will be four business days (T+4 and/or S+4).
        Reg T extension requests with a trade date of May 30, 2017 for testing, can be filed on all securities, under all codes except code 008.

        The payment period will be four business days (T+4 and/or S+4).
        Reg T extension requests can be filed, on all securities, under all codes.
        Tuesday, June 6, 2017 Reg T extension requests with a settlement date of May 31, 2017 for testing, can be filed on all securities, under all codes except code 008. Reg T extension requests with a trade date of May 31, 2017 for testing, can be filed on all securities, under all codes except code 008. Reg T extension requests can be filed, on all securities, under all codes.
        June 7–29, 2017 Reg T extension requests can be filed, on all securities, under all codes. End of test cycle one— June 29, 2017.
        Friday, June 30, 2017 Preparing for Test Cycle 2
        Monday, July 3, 2017 T+2 settlement cycle for testing begins. No Reg T extension requests required since payment period has not reached T+4 and/or S+4. Reg T extension requests can be filed, on all securities, under all codes.
        July 4th–Fourth of July (Holiday) Holiday—No extension requests required to be filed
        July 5–7, 2017 T+2 settlement cycle for testing began. No Reg T extension requests required since payment period has not reached T+4 and/or S+4. Reg T extension requests can be filed, on all securities, under all codes.
        Monday, July 10, 2017 Reg T extension requests with a settlement date of July 3, 2017 for testing, can be filed on all securities, under all codes except code 008.

        The payment period will be four business days
        Reg T extension requests with a trade date of July 3, 2017 for testing, can be filed on all securities, under all codes except code 008.

        The payment period will be four business days (T+4 and/or S+4).
        Reg T extension requests can be filed, on all securities, under all codes.
        Tuesday, July 11, 2017 Reg T extension requests with a settlement date of July 5, 2017 for testing, can be filed on all securities, under all codes except code 008. Reg T extension requests with a trade date of July 5, 2017 for testing, can be filed on all securities, under all codes except code 008. Reg T extension requests can be filed, on all securities, under all codes.
        July 12–August 8, 2017 Reg T extension requests can be filed, on all securities, under all codes.
        Sunday, August 6, 2017 For Reg T extension requests with a settlement date of July 3 for testing, under codes 008, 012, and 014, August 6, 2017, is S+34 calendar days. For Reg T extension requests with a trade date of July 3 for testing, under codes 008, 012, and 014, August 6, 2017, is T+34 calendar days. Reg T extension requests can be filed, on all securities, under all codes.
        Monday, August 7, 2017 For Reg T extension requests with a settlement date of July 3 for testing, under code 015, August 7, 2017, is S+35 calendar days.

        All other Reg T extension requests can be filed, on all securities, under all codes.
        For Reg T extension requests with a trade date of July 3 for testing, under code 015, August 7, 2017, is T+35 calendar days.

        All other Reg T extension requests can be filed, on all securities, under all codes.
        Reg T extension requests can be filed, on all securities, under all codes.
        August 11–24, 2017 Reg T extension requests can be filed, on all securities, under all codes. End of test cycle two—August 24, 2017.

      • 17-11 SEC Approves Rules Relating to Financial Exploitation of Seniors

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        Financial Exploitation of Seniors

        Regulatory Notice
        Notice Type

        Rule Amendment and New Rule
        Referenced Rules & Notices

        FINRA Rule 2010
        FINRA Rule 2140
        FINRA Rule 2150
        FINRA Rule 2165
        FINRA Rule 3310
        FINRA Rule 4521
        FINRA Rule 11870
        Regulation S-P
        SEA Rule 17a-3
        Suggested Routing

        Compliance
        Legal
        Operations
        Registered Representatives
        Senior Management
        Key Topics

        Customer Accounts
        Financial Exploitation
        Senior Investors
        Temporary Holds on Disbursements
        Trusted Contact Persons

        Summary

        The SEC approved: (1) the adoption of new FINRA Rule 2165 (Financial Exploitation of Specified Adults) to permit members to place temporary holds on disbursements of funds or securities from the accounts of specified customers where there is a reasonable belief of financial exploitation of these customers; and (2) amendments to FINRA Rule 4512 (Customer Account Information) to require members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a customer's account.1 New Rule 2165 and the amendments to Rule 4512 become effective February 5, 2018.

        The rule text is available in Attachment A.

        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; or
        •   Jeanette Wingler, Associate General Counsel, OGC, at (202) 728-8013 or jeanette.wingler@finra.org.

        Background and Discussion

        With the aging of the U.S. population, financial exploitation of seniors is a serious and growing problem.2 FINRA's Securities Helpline for Seniors® has highlighted issues relating to financial exploitation of this group of investors, including the need for members to be able to more quickly and effectively address suspected financial exploitation of seniors and other specified adults.3 The amendments to Rule 4512 and new Rule 2165 provide members with a way under FINRA rules to respond to situations in which they have a reasonable basis to believe that financial exploitation has occurred, is occurring, has been attempted or will be attempted. Members can better protect their customers from financial exploitation if they have the ability to contact a customer's designated trusted contact person and, when appropriate, place a temporary hold on a disbursement of funds or securities from a customer's account.

        Scope of Amendments and New Rule

        Trusted Contact Person—Amendments to Rule 4512

        The amendments to Rule 4512 require members to make reasonable efforts to obtain the name of and contact information4 for a trusted contact person5 upon the opening of a non-institutional customer's account or when updating account information for a non-institutional account in existence prior to the effective date of the amendments (existing account).6 The amendments do not prohibit members from opening and maintaining an account if a customer fails to identify a trusted contact person as long as the member makes reasonable efforts to obtain the information.7 Asking a customer to provide the name and contact information for a trusted contact person ordinarily would constitute reasonable efforts to obtain the information and would satisfy the rule's requirements.

        The amendments also require that, at the time of account opening, a member disclose in writing (which may be electronic) to the customer that the member or an associated person is authorized to contact the trusted contact person and disclose information about the customer's account to address possible financial exploitation, to confirm the specifics of the customer's current contact information, health status, or the identity of any legal guardian, executor, trustee or holder of a power of attorney, or as otherwise permitted by Rule 2165.8 In addition, a member is required to provide this disclosure when it attempts to obtain the name of and contact information for a trusted contact person when updating information for currently existing accounts either in the course of the member's routine and customary business or as otherwise required by applicable laws or rules.9 Members are required to provide this disclosure even if a customer fails to identify a trusted contact.10

        The trusted contact person is intended to be a resource for the member in administering the customer's account, protecting assets and responding to possible financial exploitation. A member may use its discretion in relying on any information provided by the trusted contact person. A member may elect to notify an individual that he or she was named as a trusted contact person; however, the rule does not require such notification.

        Members and customers may benefit from the trusted contact information in many different settings. For example, consistent with the disclosure, if a member has been unable to contact a customer after multiple attempts, a member could contact a trusted contact person to inquire about the customer's current contact information. Or if a customer is known to be ill or infirm and the member has been unable to contact the customer after multiple attempts, the member could contact a trusted contact person to inquire about the customer's health status. A member also could reach out to a trusted contact person if it suspects that the customer may be suffering from Alzheimer's disease, dementia or other forms of diminished capacity. A member could contact a trusted contact person to address possible financial exploitation of the customer before placing a temporary hold on a disbursement. In addition, as discussed below, pursuant to Rule 2165, when information about a trusted contact person is available, a member must notify the trusted contact person orally or in writing, which may be electronic, if the member has placed a temporary hold on a disbursement of funds or securities from a customer's account, unless the member reasonably believes that the trusted contact person is engaged in the financial exploitation.

        Temporary Hold on Disbursement of Funds or Securities—New Rule 2165

        Rule 2165 permits, under FINRA rules, a member that reasonably believes that financial exploitation has occurred, is occurring, has been attempted or will be attempted to place a temporary hold on the disbursement of funds or securities from the account of a "specified adult" customer.11 The rule creates no obligation to withhold a disbursement of funds or securities in such circumstances. In this regard, Supplementary Material to Rule 2165 explicitly states that the rule provides members and their associated persons with a safe harbor from FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade), 2150 (Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts) and 11870 (Customer Account Transfer Contracts) when members exercise discretion in placing temporary holds on disbursements of funds or securities from the accounts of specified adults consistent with the requirements of the rule. The Supplementary Material further states that the rule does not require members to place temporary holds on disbursements of funds or securities from the account of a specified adult.12

        The definition of "specified adult" in Rule 2165 covers those investors who are particularly susceptible to financial exploitation.13 A "specified adult" is (A) a natural person age 65 and older or (B) a natural person age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests. Supplementary Material to Rule 2165 provides that a member's reasonable belief that a natural person age 18 and older has a mental or physical impairment that renders the individual unable to protect his or her own interests may be based on the facts and circumstances observed in the member's business relationship with the person.14 The rule defines the term "account" to include any account of a member for which a specified adult has the authority to transact business.15

        The rule has a broad definition of "financial exploitation." Specifically, financial exploitation would include: (A) the wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult's funds or securities; or (B) any act or omission taken by a person, including through the use of a power of attorney, guardianship, or any other authority, regarding a specified adult, to: (i) obtain control, through deception, intimidation or undue influence, over the specified adult's money, assets or property; or (ii) convert the specified adult's money, assets or property.

        Rule 2165 permits, under FINRA rules, a member to place a temporary hold on a disbursement of funds or securities from the account of a specified adult if the member reasonably believes that financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted.16 A temporary hold pursuant to the rule may be placed on a particular suspicious disbursement(s) but not on other, non-suspicious disbursements.17 Rule 2165 does not apply to transactions in securities. For example, Rule 2165 would not apply to a customer's order to sell his shares of a stock. However, if a customer requested that the proceeds of a sale of shares of a stock be disbursed out of his account at the member, then the rule could apply to the disbursement of the proceeds where the customer is a "specified adult" and there is reasonable belief of financial exploitation.18

        If a member places a temporary hold, Rule 2165 requires that the member immediately initiate an internal review of the facts and circumstances that caused the member to reasonably believe that financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted.19 In addition, the rule requires the member to provide notification of the hold and the reason for the hold to the trusted contact person and all parties authorized to transact business on the account, including, but not limited to, the customer, no later than two business days after the date that the member first placed the hold.20 A member is not required to provide notification to the trusted contact person or a party authorized to transact business on an account, respectively, if the trusted contact person or party is unavailable or the member reasonably believes that the trusted contact person or party has engaged, is engaged, or will engage in the financial exploitation of the specified adult.21 While oral or written (including electronic) notification is permitted under the rule, a member would be required to retain records evidencing the notification.22

        Unless a member reasonably believes that doing so would cause further harm to a specified adult, FINRA encourages the member to attempt to resolve a matter with a customer before placing a temporary hold. If a temporary hold is not placed, the rule does not require notifying the trusted contact person. However, once a member places a temporary hold on a disbursement, the rule requires the member to notify the trusted contact person unless the trusted contact person is unavailable or the member reasonably believes that the trusted contact person has engaged, is engaged, or will engage in the financial exploitation of the specified adult. Furthermore, Rule 2165 does not preclude a member from terminating a temporary hold after communicating with either the customer or trusted contact person. A customer's objection to a temporary hold or information obtained during an exchange with the customer or trusted contact person may be used in determining whether a hold should be placed or lifted. While not dispositive, members should weigh a customer's or trusted contact person's objection against other information in determining whether a hold should be placed or lifted.

        While the rule does not require notifying the customer's registered representative of suspected financial exploitation, a customer's registered representative may be the first person to detect potential financial exploitation. If the detection occurs in another way, a member may choose to notify and discuss the suspected financial exploitation with the customer's registered representative, unless the member suspects that the registered representative is involved in the financial exploitation.

        The temporary hold authorized by Rule 2165 would expire not later than 15 business days after the date that the member first placed the temporary hold on the disbursement of funds or securities, unless otherwise terminated or extended by an order of a state regulator or agency or court of competent jurisdiction.23 In addition, provided that the member's internal review of the facts and circumstances supports its reasonable belief that the financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted, the rule permits the member to extend the temporary hold for an additional 10 business days, unless otherwise terminated or extended by an order of a state regulator or agency or court of competent jurisdiction.24

        Rule 2165 requires members to retain records related to compliance with the rule, which shall be readily available to FINRA upon request. Retained records required by the rule are records of: (1) requests for disbursement that may constitute financial exploitation of a specified adult and the resulting temporary hold; (2) the finding of a reasonable belief that financial exploitation has occurred, is occurring, has been attempted or will be attempted underlying the decision to place a temporary hold on a disbursement; (3) the name and title of the associated person that authorized the temporary hold on a disbursement; (4) notification(s) to the relevant parties pursuant to the rule; and (5) the internal review of the facts and circumstances supporting the member's reasonable belief that the financial exploitation of the specified adult has occurred, is occurring, has been attempted or will be attempted.25

        In addition, Rule 2165 requires a member that anticipates using a temporary hold to establish and maintain written supervisory procedures reasonably designed to achieve compliance with the rule, including procedures on the identification, escalation and reporting of matters related to financial exploitation of specified adults.26 The rule requires that the member's written supervisory procedures identify the title of each person authorized to place, terminate or extend a temporary hold on behalf of the member pursuant to the rule and that any such person be an associated person of the member who serves in a supervisory, compliance or legal capacity for the member.27 The rule also requires a member that anticipates placing a temporary hold pursuant to the rule to develop and document training policies or programs reasonably designed to ensure that associated persons comply with the requirements of the rule.28


        1. See Securities Exchange Act Release No. 79964 (Feb. 3, 2017), 82 FR 10059 (Feb. 9, 2017) (Notice of Filing of Partial Amendment No. 1 and Order Granting Accelerated Approval of File No. SR-FINRA-2016-039) (Approval Order).

        2. See FINRA Investor Education Foundation, Financial Fraud and Fraud Susceptibility in the United States: Research Report from a 2012 National Survey (2013) (which found that U.S. adults age 65 and older are more likely to be targeted for financial fraud, including investment scams, and more likely to lose money once targeted); The MetLife Study of Elder Financial Abuse: Crimes of Occasion, Desperation, and Predation Against America's Elders (June 2011) (discussing the increasing prevalence of elder financial abuse and noting the many forms of vulnerability that "make elders more susceptible to [financial] abuse," including, among others, poor physical or mental health, lack of mobility, and isolation). See also National Senior Investor Initiative: A Coordinated Series of Examinations, SEC's Office of Compliance Inspections and Examinations and FINRA (Apr. 15, 2015) (noting the increase in persons aged 65 and older living in the United States and the concentration of wealth in those persons during a time of downward yield pressure on conservative income-producing investments); Protecting Elderly Investors from Financial Exploitation: Questions to Consider (Feb. 5, 2015) (noting that one of the greatest risk factors for diminished capacity is age).

        3. See FINRA Launches Toil-Free FINRA Securities Helpline for Seniors (Apr. 20, 2015) and Report on the FINRA Securities Helpline for Seniors (Dec. 2015).

        4. While the amendments do not specify what contact information should be obtained, FINRA believes that a mailing address, phone number and email address for the trusted contact person may be the most useful to members.

        5. The trusted contact person must be age 18 or older. See Rule 4512(a)(1)(F).

        6. Consistent with the current requirements of Rule 4512, a member would not need to attempt to obtain the name of and contact information for a trusted contact person for accounts in existence prior to the effective date of the amendments (existing accounts) until such time as the member updates the information for the account either in the course of the member's routine and customary business or as otherwise required by applicable laws or rules. See Rule 4512(b). With respect to any account subject to the requirements of Securities Exchange Act (SEA) Rule 17a-3(a)(17) to periodically update customer records, a member is required to make reasonable efforts to obtain or, if previously obtained, to update where appropriate the name of and contact information for a trusted contact person consistent with the requirements in SEA Rule 17a-3(a)(17). See Supplementary Material .06(c) to Rule 4512. See also SEA Rule 17a-3(a)(17)(i)(A) and (i)(D).

        With regard to updating the contact information once provided for other accounts that are not subject to the requirements in SEA Rule 17a-3, a member should consider asking the customer to review and update the name of and contact information for a trusted contact person on a periodic basis or when there is a reason to believe that there has been a change in the customer's situation.

        Members should note as well that a customer's request to change his or her trusted contact person may be a possible red flag of financial exploitation. For example, a senior customer instructing his registered representative to change his trusted contact person from an immediate family member to a previously unknown third party may be a red flag of financial exploitation.

        7. See Supplementary Material .06(b) to Rule 4512.

        8. As the SEC's Approval Order confirms, members' disclosures to trusted contact persons pursuant to Rules 4512(a)(1)(F) and 2165 would be consistent with Regulation S-P because such disclosures would be made with customers' consent or authorization, to protect against fraud or unauthorized transactions, or to comply with federal, state, or local laws, rules and other applicable legal requirements. See Approval Order, supra note 1, at 10068 and n.159.

        9. See Supplementary Material .06(a) to Rule 4512.

        10. Among other things, such disclosure may assist a customer in making an informed decision about whether to provide the trusted contact person information.

        11. See Rule 2165(b)(1). Members also must consider any obligations under FINRA Rule 3310 (Anti-Money Laundering Compliance Program) and the reporting of suspicious transactions required under 31 U.S.C. 5318(g) and the implementing regulations thereunder.

        In addition, during the rulemaking process some commenters asked whether Rule 2165 complied with the requirements of Section 22(e) of the Investment Company Act of 1940. FINRA noted that most mutual fund customer accounts are serviced and record-kept by intermediaries. In the small proportion of circumstances where mutual fund customers purchase shares directly from the mutual fund, the customer's account may be maintained by a mutual fund's principal underwriter. The SEC's Approval Order confirms that, in general, a broker-dealer's delay of a disbursement of mutual fund redemption proceeds to its customers in reliance on Rule 2165 and based on a reasonable belief of financial exploitation of the customer would not be imputed to the mutual fund, including where the broker-dealer is the fund's principal underwriter. See Approval Order, supra note 1, at 10066. However, this conclusion is limited to situations where the mutual fund does not have a role in the disbursement of redemption proceeds from the customer's account held by the broker-dealer, including any role in the decision to delay the disbursement of funds in reliance on Rule 2165. Id.

        12. See Supplementary Material .01 to Rule 2165.

        13. See supra note 2.

        14. See Supplementary Material .03 to Rule 2165. FINRA notes that a member may not ignore contrary evidence in making a determination based on the facts and circumstances observed in the member's business relationship with the natural person (e.g., a court order).

        15. More than one financial institution may be providing services in some arrangements and business models. In such arrangements, the financial institution that has a reasonable belief that financial exploitation is occurring may not hold the assets that are subject to the disbursement request. For example, with respect to introducing and clearing firm arrangements, an introducing firm may make the determination that placing a temporary hold pursuant to the proposed rule change is appropriate. The clearing firm may then place the temporary hold at the direction of and in reasonable reliance on the information provided by the introducing firm. FINRA recognizes that members making a determination or recommendation to place a hold on a disbursement may not be in the position to place the actual hold on the funds or securities.

        16. See Rule 2165(b)(1)(A).

        17. FINRA recognizes that a single disbursement could involve all of the assets in an account. For purposes of Rule 2165, moreover, FINRA would consider disbursements to include ACATS transfers but, as with any temporary hold, a member would need to have a reasonable belief of financial exploitation in order to place a temporary hold on the processing of an ACATS transfer request pursuant to the rule. FINRA reminds members of the application of FINRA Rule 2140 (Interfering With the Transfer of Customer Accounts in the Context of Employment Disputes) to the extent that there is not a reasonable belief of financial exploitation. Furthermore, in the case of a temporary hold on an ACATS transfer request, the member must permit disbursements from the account where there is not a reasonable belief of financial exploitation regarding such disbursements (e.g., a customer's regular bill payments). FINRA also re-emphasizes that where a questionable disbursement involves less than all assets in an account, a member may not place a blanket hold on the entire account. Each disbursement must be analyzed separately. In addition, taking into account a member's size and business, FINRA would closely examine a member that places an outsized number of holds on customer accounts to determine whether there was any wrongdoing on the part of the member.

        18. While Rule 2165 does not apply to transactions, FINRA may consider extending the safe harbor to transactions in securities in future rulemaking.

        19. See Rule 2165(b)(1)(C).

        20. See Rule 2165(b)(1)(B). FINRA understands that a member may not necessarily be able to speak with or otherwise get a response from such persons within the two-business-day period. FINRA would consider, for example, a member's mailing a letter, sending an email, or placing a telephone call and leaving a message with appropriate person(s) within the two-business-day period to constitute notification for purposes of Rule 2165.

        21. FINRA would consider the lack of an identified trusted contact person, the inability to contact the trusted contact person, or a person's refusal to act as a trusted contact person to mean that the trusted contact person was not available. Furthermore, FINRA would consider the inability to contact a party authorized to transact business on an account to mean that the party was not available.

        22. See Rule 2165(d).

        23. See Rule 2165(b)(2).

        24. See Rule 2165(b)(3).

        25. See Rule 2165(d).

        26. See Rule 2165(c)(1).

        27. See Rule 2165(c)(2). This provision is intended to ensure that a member's decision to place a temporary hold is elevated to an associated person with appropriate authority.

        28. See Supplementary Material .02 to Rule 2165.


        Attachment A

        New and Amended Rule Text

        New language is underlined; deletions are in brackets.

        * * * * *

        Text of New FINRA Rule

        * * * * *

        2100. TRANSACTIONS WITH CUSTOMERS

        2165. Financial Exploitation of Specified Adults

        (a) Definitions
        (1) For purposes of this Rule, the term "Specified Adult" shall mean: (A) a natural person age 65 and older; or (B) a natural person age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.
        (2) For purposes of this Rule, the term "Account" shall mean any account of a member for which a Specified Adult has the authority to transact business.
        (3) For purposes of this Rule, the term "Trusted Contact Person" shall mean the person who may be contacted about the Specified Adult's Account in accordance with Rule 4512.
        (4) For purposes of this Rule, the term "financial exploitation" means:
        (A) the wrongful or unauthorized taking, withholding, appropriation, or use of a Specified Adult's funds or securities; or
        (B) any act or omission by a person, including through the use of a power of attorney, guardianship, or any other authority regarding a Specified Adult, to:
        (i) obtain control, through deception, intimidation or undue influence, over the Specified Adult's money, assets or property; or
        (ii) convert the Specified Adult's money, assets or property.
        (b) Temporary Hold on Disbursements
        (1) A member may place a temporary hold on a disbursement of funds or securities from the Account of a Specified Adult if:
        (A) The member reasonably believes that financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted; and
        (B) The member, not later than two business days after the date that the member first placed the temporary hold on the disbursement of funds or securities, provides notification orally or in writing, which may be electronic, of the temporary hold and the reason for the temporary hold to:
        (i) all parties authorized to transact business on the Account, unless a party is unavailable or the member reasonably believes that the party has engaged, is engaged, or will engage in the financial exploitation of the Specified Adult; and
        (ii) the Trusted Contact Person(s), unless the Trusted Contact Person is unavailable or the member reasonably believes that the Trusted Contact Person(s) has engaged, is engaged, or will engage in the financial exploitation of the Specified Adult; and
        (C) The member immediately initiates an internal review of the facts and circumstances that caused the member to reasonably believe that the financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted.
        (2) The temporary hold authorized by this Rule will expire not later than 15 business days after the date that the member first placed the temporary hold on the disbursement of funds or securities, unless otherwise terminated or extended by a state regulator or agency of competent jurisdiction or a court of competent jurisdiction, or extended pursuant to paragraph (b)(3) of this Rule.
        (3) Provided that the member's internal review of the facts and circumstances under paragraph (b)(1)(C) of this Rule supports the member's reasonable belief that the financial exploitation of the Specified Adult has occurred, is occurring, has been attempted, or will be attempted, the temporary hold authorized by this Rule may be extended by the member for no longer than 10 business days following the date authorized by paragraph (b)(2) of this Rule, unless otherwise terminated or extended by a state regulator or agency of competent jurisdiction or a court of competent jurisdiction.
        (c) Supervision
        (1) In addition to the general supervisory and recordkeeping requirements of Rules 3110, 3120, 3130, 3150, and Rule 4510 Series, a member relying on this Rule shall establish and maintain written supervisory procedures reasonably designed to achieve compliance with this Rule, including, but not limited to, procedures related to the identification, escalation and reporting of matters related to the financial exploitation of Specified Adults.
        (2) A member's written supervisory procedures also shall identify the title of each person authorized to place, terminate or extend a temporary hold on behalf of the member pursuant to this Rule. Any such person shall be an associated person of the member who serves in a supervisory, compliance or legal capacity for the member.
        (d) Record Retention

        Members shall retain records related to compliance with this Rule, which shall be readily available to FINRA, upon request. The retained records shall include records of: (1) request(s) for disbursement that may constitute financial exploitation of a Specified Adult and the resulting temporary hold; (2) the finding of a reasonable belief that financial exploitation has occurred, is occurring, has been attempted, or will be attempted underlying the decision to place a temporary hold on a disbursement; (3) the name and title of the associated person that authorized the temporary hold on a disbursement; (4) notification(s) to the relevant parties pursuant to paragraph (b)(1)(B) of this Rule; and (5) the internal review of the facts and circumstances pursuant to paragraph (b)(1)(C) of this Rule.

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

        .01 Applicability of Rule. This Rule provides members and their associated persons with a safe harbor from FINRA Rules 2010, 2150 and 11870 when members exercise discretion in placing temporary holds on disbursements of funds or securities from the Accounts of Specified Adults consistent with the requirements of this Rule. This Rule does not require members to place temporary holds on disbursements of funds or securities from the Accounts of Specified Adults.
        .02 Training. A member relying on this Rule must develop and document training policies or programs reasonably designed to ensure that associated persons comply with the requirements of this Rule.
        .03 Reasonable Belief of Mental or Physical Impairment. A member's reasonable belief that a natural person age 18 and older has a mental or physical impairment that renders the individual unable to protect his or her own interests may be based on the facts and circumstances observed in the member's business relationship with the natural person.

        * * * * *

        Amendment to FINRA Rule

        * * * * *

        4500. BOOKS, RECORDS AND REPORTS

        * * * * *

        4512. Customer Account Information

        (a) Each member shall maintain the following information:
        (1) for each account:
        (A) through (C) No Change.
        (D) signature of the partner, officer or manager denoting that the account has been accepted in accordance with the member's policies and procedures for acceptance of accounts; [and]
        (E) if the customer is a corporation, partnership or other legal entity, the names of any persons authorized to transact business on behalf of the entity; and
        (F) subject to Supplementary Material .06, name of and contact information for a trusted contact person age 18 or older who may be contacted about the customer's account; provided, however, that this requirement shall not apply to an institutional account.
        (2)through (3) No Change.
        (b)through (c) No Change.

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

        .01 through .05 No Change.
        .06 Trusted Contact Person
        (a) With respect to paragraph (a)(1)(F) of this Rule, at the time of account opening a member shall disclose in writing, which may be electronic, to the customer that the member or an associated person of the member is authorized to contact the trusted contact person and disclose information about the customer's account to address possible financial exploitation, to confirm the specifics of the customer's current contact information, health status, or the identity of any legal guardian, executor, trustee or holder of a power of attorney, or as otherwise permitted by Rule 2165. With respect to any account that was opened pursuant to a prior FINRA rule, a member shall provide this disclosure in writing, which may be electronic, when updating the information for the account pursuant to paragraph (b) of this Rule either in the course of the member's routine and customary business or as otherwise required by applicable laws or rules.
        (b) The absence of the name of or contact information for a trusted contact person shall not prevent a member from opening or maintaining an account for a customer, provided that the member makes reasonable efforts to obtain the name of and contact information for a trusted contact person.
        (c) With respect to any account subject to the requirements of SEA Rule 17a-3(a)(17) to periodically update customer records, a member shall make reasonable efforts to obtain or, if previously obtained, to update where appropriate the name of and contact information for a trusted contact person consistent with the requirements of SEA Rule 17a-3(a)(17).

        * * * * *

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

        View PDF.

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & 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
        Regulatory Notice 16-16
        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 $8,309,000 to adequately fund the GASB's annual budget by collecting $2,077,250 from its member firms each calendar quarter beginning in April 2017.

        Questions concerning this Notice should be directed to:

        •   Finance Department at (240) 386-5910; 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 2017, GASB's annual budget expenses of $10,406,600 will be partially funded from $2,097,600 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 $8,309,0003 therefore, FINRA will collect $2,077,250 from its members each quarter beginning in April 2017.4

        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 2016 and the 2017 GASB budget, FINRA estimates that the GASB Accounting Support Fee for 2017 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 16-16 (May 2016); 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 2017 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 2017 covers the fourth quarter of GASB's 2016 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)(1), (3). Section 19(g)(4) of the Securities Act prohibits FINRA from collecting GASB Accounting Support Fees for a fiscal year in excess of GASB's recoverable annual budgeted expenses. See 15 U.S.C. 77s(g)(4).

      • 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

        View PDF.

        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

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        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

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        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

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        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

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        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

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        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

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        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)

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        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

        View PDF

        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

        View PDF

        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