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  • Notices

    • 2017

      • 17-40 FINRA Provides Guidance to Firms Regarding AntiMoney Laundering Program Requirements Under FINRA Rule 3310 Following Adoption of FinCEN's Final Rule to Enhance Customer Due Diligence Requirements for Financial Institutions Effective Date: *

        *November 21, 2017

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        FinCEN's Customer Due Diligence Requirements for Financial Institutions and FINRA Rule 3310

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        31 CFR 1023.210, Bank Secrecy Act
        FINRA Rule 3310
        Suggested Routing

        Compliance
        Legal
        Operations
        Senior Management
        Key Topics

        Anti-Money Laundering
        Compliance Programs

        Summary

        FINRA is issuing this Notice to provide guidance regarding member firms' obligations under FINRA Rule 3310 (Anti-Money Laundering Compliance Program) in light of the Financial Crimes Enforcement Network's (FinCEN) adoption of a final rule on Customer Due Diligence Requirements for Financial Institutions (CDD Rule).

        FinCEN's CDD Rule became effective July 11, 2016. Member firms must be in compliance with its provisions by May 11, 2018.

        Questions concerning this Notice should be directed to:

        •   Michael Rufino, Executive Vice President, Head of Member Regulation—Sales Practice, at (212) 858-4487 or by email at Michael.Rufino@finra.org;
        •   Victoria Crane, Associate General Counsel, Office of General Counsel, at (202) 728-8104 or by email at Victoria.Crane@finra.org; or
        •   Meredith Cordisco, Associate General Counsel, Office of General Counsel, at (202) 728-8018 or by email at Meredith.Cordisco@finra.org.

        Background & Discussion

        The Bank Secrecy Act1 (BSA), among other things, requires financial institutions,2 including broker-dealers, to develop and implement anti-money laundering (AML) programs that, at a minimum, meet the statutorily enumerated "four pillars."3 These four pillars require brokerdealers to have written AML programs that include, at a minimum:

        •   the establishment and implementation of policies, procedures and internal controls reasonably designed to achieve compliance with the applicable provisions of the BSA and implementing regulations;
        •   independent testing for compliance by broker-dealer personnel or a qualified outside party;
        •   designation of an individual or individuals responsible for implementing and monitoring the operations and internal controls of the AML program; and
        •   ongoing training for appropriate persons.4

        In addition to meeting the BSA's requirements with respect to AML programs, brokerdealers must also comply with FINRA Rule 3310, which incorporates the BSA's four pillars, including requiring broker-dealers' AML programs to establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of suspicious transactions.

        On May 11, 2016, FinCEN, the bureau of the Department of the Treasury responsible for administering the BSA and its implementing regulations, issued the CDD Rule5 to clarify and strengthen customer due diligence for covered financial institutions,6 including brokerdealers. In its CDD Rule, FinCEN identifies four components of customer due diligence: (1) customer identification and verification; (2) beneficial ownership identification and verification; (3) understanding the nature and purpose of customer relationships; and (4) ongoing monitoring for reporting suspicious transactions and, on a risk basis, maintaining and updating customer information.7 As the first component is already an AML program requirement, the CDD Rule focuses on the other three components.

        Specifically, the CDD Rule focuses particularly on the second component by adding a new requirement that covered financial institutions identify and verify the identity of the beneficial owners of all legal entity customers at the time a new account is opened, subject to certain exclusions and exemptions. The CDD Rule also addresses the third and fourth components, which FinCEN states "are already implicitly required for covered financial institutions to comply with their suspicious activity reporting requirements," by amending the existing AML program rules for covered financial institutions to explicitly require these components to be included in AML programs as a new "fifth pillar." As a result of the CDD Rule, member firms should ensure that their AML programs are updated, as necessary, to comply with the CDD Rule by May 11, 2018.

        This Notice provides guidance to member firms regarding their obligations under FINRA Rule 3310 in light of the adoption of FinCEN's CDD Rule. In addition, the Notice summarizes the CDD Rule's impact on member firms, including the addition of the new fifth pillar required for member firms' AML programs. Member firms should also consult the CDD Rule as well as FinCEN's related FAQs,8 which FinCEN indicates it will periodically update.

        FINRA Rule 3310 and Amendments to Minimum Requirements for Member Firms' AML Programs

        Section 352 of the USA PATRIOT Act of 20019 amended the BSA to require broker-dealers to develop and implement AML programs that include the four pillars mentioned above. Consistent with Section 352 of the PATRIOT Act, and incorporating the four pillars, FINRA Rule 3310 requires each member firm to develop and implement a written AML program reasonably designed to achieve and monitor the member firm's compliance with the BSA and implementing regulations. Among other requirements, FINRA Rule 3310 requires that each member firm, at a minimum: (1) establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of suspicious transactions; (2) establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with the BSA and implementing regulations; (3) provide for annual (on a calendar-year basis) independent testing for compliance to be conducted by member firm personnel or a qualified outside party;10 (4) designate and identify to FINRA an individual or individuals (i.e., AML compliance person(s)) who will be responsible for implementing and monitoring the day-to-day operations and internal controls of the AML program and provide prompt notification to FINRA of any changes to the designation; and (5) provide ongoing training for appropriate persons.

        FinCEN's CDD Rule does not change the requirements of FINRA Rule 3310, and member firms must continue to comply with its requirements.11 However, FinCEN's CDD Rule amends the minimum statutory requirements for member firms' AML programs by requiring such programs to include risk-based procedures for conducting ongoing customer due diligence.12 This ongoing customer due diligence element, or "fifth pillar" required for AML programs, includes: (1) understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile; and (2) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.13 As stated in the CDD Rule, these provisions are not new and merely codify existing expectations for firms to adequately identify and report suspicious transactions as required under the BSA and encapsulate practices generally undertaken already by securities firms to know and understand their customers.14 However, to the extent that these elements, which are briefly summarized below, are not already included in member firms' AML programs, the CDD Rule requires member firms to update their AML programs to explicitly incorporate them.

        FINRA is considering whether further rulemaking is necessary to more closely align FINRA Rule 3310 with FinCEN's CDD Rule in light of the now-codified fifth pillar requirement for firms' AML programs.

        Summary of Fifth Pillar's Requirements

        Understanding the Nature and Purpose of Customer Relationships

        FinCEN states in the CDD Rule that firms must necessarily have an understanding of the nature and purpose of the customer relationship in order to determine whether a transaction is potentially suspicious and, in turn, to fulfill their suspicious activity reporting obligations.15 To that end, the CDD Rule requires that firms understand the nature and purpose of the customer relationship in order to develop a customer risk profile. The customer risk profile refers to information gathered about a customer to form the baseline against which customer activity is assessed for suspicious transaction reporting.16 Information relevant to understanding the nature and purpose of the customer relationship may be self-evident and, depending on the facts and circumstances, may include such information as the type of customer, account or service offered, and the customer's income, net worth, domicile, or principal occupation or business, as well as, in the case of existing customers, the customer's history of activity.17 The CDD Rule also does not prescribe a particular form of the customer risk profile.18 Instead, the CDD Rule states that depending on the firm and the nature of its business, a customer risk profile may consist of individualized risk scoring, placement of customers into risk categories or another means of assessing customer risk that allows firms to understand the risk posed by the customer and to demonstrate that understanding.19

        The CDD Rule also addresses the interplay of understanding the nature and purpose of customer relationships with the ongoing monitoring obligation discussed below. The CDD Rule explains that firms are not necessarily required or expected to integrate customer information or the customer risk profile into existing transaction monitoring systems (for example, to serve as the baseline for identifying and assessing suspicious transactions on a contemporaneous basis).20 Rather, FinCEN expects firms to use the customer information and customer risk profile as appropriate during the course of complying with their obligations under the BSA in order to determine whether a particular flagged transaction is suspicious.21

        Conducting Ongoing Monitoring

        As with the requirement to understand the nature and purpose of the customer relationship, the requirement to conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information, including information regarding the beneficial ownership of legal entity customers, merely adopts existing supervisory and regulatory expectations as explicit minimum standards of customer due diligence required for firms' AML programs.22 If, in the course of its normal monitoring for suspicious activity, the member firm detects information that is relevant to assessing the customer's risk profile, the member firm must update the customer information, including the information regarding the beneficial owners of legal entity customers, as discussed below.23 However, there is no expectation that the member firm update customer information, including beneficial ownership information, on an ongoing or continuous basis.24

        Identifying and Verifying the Identity of Beneficial Owners of Legal Entity Customers

        In addition to requiring that member firms incorporate the fifth pillar into their AML programs, the CDD Rule also requires member firms to establish and maintain written procedures as part of their AML programs that are reasonably designed to identify and verify the identities of beneficial owners25 of legal entity customers.26 FinCEN states that this information can provide law enforcement with key details about suspected criminals who conceal illicit activity and assets through legal structures they own or control.27 In addition, FinCEN states the information will help financial institutions to assess and mitigate risk more effectively in connection with existing requirements, such as enhancing suspicious activity report filings.28

        Under the CDD Rule, member firms must obtain from the natural person opening the account29 on behalf of the legal entity customer, the identity of the beneficial owners of the entity.30 In addition, that individual must certify, to the best of his or her knowledge, as to the accuracy of the information. FinCEN intends that the legal entity customer identify its ultimate beneficial owner(s) and not "nominees" or "straw men."31 The CDD Rule does not prescribe the form in which member firms must collect the required information, which includes the name, date of birth, address and Social Security number or other government identification number of beneficial owners.32 Rather, member firms may choose to obtain the information by using FinCEN's standard certification form33 adopted as part of this rulemaking or by another means, provided that the chosen method satisfies the identification requirements in the CDD Rule.34 In any case, the CDD Rule requires that member firms maintain records of the beneficial ownership information they obtain.35

        Once member firms obtain the required beneficial ownership information, the CDD Rule requires that member firms verify the identity of the beneficial owner(s)—in other words, that they are who they say they are and not their status as beneficial owners—through riskbased procedures that include, at a minimum, the elements required for member firms' CIP procedures for verifying the identity of individual customers.36 Such verification must be completed within a reasonable time after account opening.37 Member firms may rely on the beneficial ownership information supplied by the individual opening the account, provided that they have no knowledge of facts that would reasonably call into question the reliability of that information.38

        To the same extent as permitted under the CIP rules, the CDD Rule permits member firms to rely on another financial institution for the performance of the CDD Rule's requirements.39

        The CDD Rule's requirements with respect to beneficial owners of legal entity customers applies on a prospective basis, that is, only with respect to legal entity customers that open new accounts from the date of the CDD Rule's implementation. However, a member firm should obtain beneficial ownership information for an existing legal entity customer if, during the course of normal monitoring, it receives information that is needed to assess or reevaluate the risk of the customer.40


        1. 31 U.S.C. 5311, et seq.

        2. See 31 U.S.C. 5312(a)(2) (defining "financial institution").

        3. 31 U.S.C. 5318(h)(1).

        4. 31 CFR 1023.210(b).

        5. FinCEN Customer Due Diligence Requirements for Financial Institutions; CDD Rule, 81 FR 29397 (May 11, 2016) (CDD Rule Release); 82 FR 45182 (September 28, 2017) (making technical correcting amendments to the final CDD Rule published on May 11, 2016). FinCEN is authorized to impose AML program requirements on financial institutions and to require financial institutions to maintain procedures to ensure compliance with the BSA and associated regulations. 31 U.S.C. 5318(h)(2) and (a)(2). The CDD Rule is the result of the rulemaking process FinCEN initiated in March 2012. See 77 FR 13046 (March 5, 2012) (Advance Notice of Proposed Rulemaking) and 79 FR 45151 (August 4, 2014) (Notice of Proposed Rulemaking).

        6. See 31 CFR. 1010.230(f) (defining "covered financial institution").

        7. See CDD Rule Release at 29398.

        8. On July 19, 2016, FinCEN published Frequently Asked Questions on the CDD Rule. See U.S. Department of the Treasury Financial Crimes Enforcement Network Guidance FIN-2016-G003, Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions (July 19, 2016) (FinCEN FAQs).

        9. Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Pub. L. No. 107-56, 115 Stat. 272 (2001).

        10. If a member firm does not execute transactions for customers or otherwise hold customer accounts or act as an introducing broker with respect to customer accounts (e.g., engages solely in proprietary trading or conducts business only with other broker-dealers), then "independent testing" is required every two years. See FINRA Rule 3310(c).

        11. In fact, FinCEN notes that broker-dealers must continue to comply with FINRA Rules, notwithstanding differences between the CDD Rule and FINRA Rule 3310. See CDD Rule Release 29421, n. 85.

        12. See CDD Rule Release at 29420; 31 CFR 1023.210.

        13. See id. at 29420-21.

        14. See id. at 29419.

        15. See id. at 29421.

        16. See id. at 29422.

        17. See id.

        18. See id.

        19. See id.

        20. See id.

        21. See id.

        22. See id. at 29402.

        23. See id. at 29420-21.

        24. See id.

        25. There are both ownership and control prongs of the definition of beneficial owner for purposes of the CDD Rule. A beneficial owner is: (1) each individual (if any) who directly or indirectly owns 25 percent of the equity interests of a legal entity customer; and (2) a single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager. See id. at 29409; FinCEN FAQs Question 9; 31 CFR 1010.230(d). Despite imposing a 25 percent threshold for the ownership prong, FinCEN's guidance suggests that financial institutions may find it appropriate to identify and verify beneficial owners at a lower ownership threshold if circumstances warrant. See CDD Rule Release at 29410. For guidance on the types of individuals that have "significant responsibility to control, manage, or direct a legal entity customer," see FinCEN FAQs, Question 13.

        26. A legal entity customer is a "corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction, that opens an account." 31 CFR 1010.230(e)(1). The requirements to identify and verify the identity of beneficial owners do not apply to, among others, financial institutions regulated by a Federal functional regulator or a bank regulated by a state bank regulator, investment advisers, as defined in the Investment Advisers Act of 1940, that are registered with the Securities and Exchange Commission (SEC), entities registered with the SEC under the Securities Exchange Act of 1934, state-regulated insurance companies and specified pooled investment vehicles. For a full list of entities excluded from the legal entity customer definition, see 31 CFR 1010.230(e)(2).

        In addition, in the FinCEN FAQs, FinCEN stated that the definition of legal entity customer does not include sole proprietorships, unincorporated associations, trusts (other than statutory trusts) or natural persons opening the account on their own behalf. See FinCEN FAQs, Question 20. Furthermore, the CDD Rule clarifies who is the legal entity customer in the context of intermediated account relationship. It explains that, to the extent that existing guidance provides that, for purposes of the customer identification program (CIP) rules, a financial institution shall treat an intermediary (and not the intermediary's customers) as its customer, the financial institution should treat the intermediary as its customer for the CDD Rule. See CDD Rule Release at 29416.

        27. See CDD Rule Release at 294000.

        28. See id.

        29. The CDD Rule incorporates the definition of "account" that is used in the CIP rules. See 31 CFR 1010.230(c). See also 31 CFR 1020.100(a)(2) (for banks); 1023.100(a)(2) (for brokers and dealers in securities); 1024.100(a)(2) (for mutual funds); and 1026.100(a)(2) (for futures commission merchants or introducing brokers in commodities). Covered financial institutions are not required to identify and verify the beneficial owners of certain entities that are excluded from the definition, and covered financial institutions that open certain types of accounts for legal entity customers do not have to verify the beneficial owners of those entities. See FinCEN FAQs, Questions 17, 20, 21 and 22.

        30. The natural person opening the account on behalf of the legal entity customer could be, though need not be, a beneficial owner of the legal entity customer. See FinCEN FAQs, Question 10.

        31. See FinCEN FAQs, Question 1.

        32. See FinCEN FAQs, Question 11.

        33. See Appendix A to 31 CFR 1010.230; CDD Rule Release at 29454.

        34. See 31 CFR 1010.230(b)(1); CDD Rule Release at 29405.

        35. See CDD Rule Release at 29405.

        36. See id. at 29407.

        37. See id. at 29408.

        38. See id. at 29407.

        39. See 31 CFR 1010.230(i) and (j). A financial institution must have procedures for maintaining a record of information obtained in connection with identifying and verifying beneficial owners for a period of five years after the date the account is closed. See also Letter from Emily Westerberg Russell, Senior Special Counsel, Division of Trading and Markets, SEC, to Aseel Rabie, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association (SIFMA), dated December 12, 2016 (SIFMA SEC No-Action Letter), availableat https://www.sec.gov/divisions/marketreg/mr-noaction/2016/securities-industry-financialmarkets-association-120916.pdf (extending no action relief when broker-dealers rely on investment advisers for identifying and verifying beneficial owners of legal entity customers, subject to enumerated conditions).

        40. See id. at 29404.

      • 17-39 SEC Approves the CAT Fee Dispute Resolution Process Rule Implementation Date: December 1, 2017 (Note: the CAT Fee Dispute Resolution Process will not be in effect until CAT fees are operative.)

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        Consolidated Audit Trail (CAT) Fee Dispute Resolution Process

        Regulatory Notice
        Notice Type

        New Rule
        Referenced Rules & Notices
        Rule 6800 Series
        Rule 6898
        Suggested Routing
        Accounts Payable
        Compliance
        Finance
        Internal Audit
        Legal
        Operations
        Senior Management
        Trading
        Key Topics
        Consolidated Audit Trail
        Fees
        Trade Reporting

        Summary

        The SEC approved Rule 6898 to establish the procedures for resolving potential disputes related to CAT fees charged to industry members.1 This rule will be implemented on December 1, 2017; however, the CAT Fee rules currently are pending and not yet operative. FINRA will provide additional information in a Regulatory Notice promptly following the adoption of the CAT fees.2

        Questions concerning this Notice should be directed to Julia Bogolin, Counsel, Office of General Counsel, at (202) 728-8111 or julia.bogolin@finra.org.

        Background & Discussion

        The National Market System Plan Governing the Consolidated Audit Trail (CAT NMS Plan) is designed to create, implement and maintain a consolidated audit trail that will capture customer and order event information for orders in NMS securities and OTC equity securities, across all markets, from the time of order inception through routing, cancellation, modification or execution in a single consolidated data source. Under the CAT NMS Plan, the Operating Committee of CAT NMS, LLC (Operating Committee) has discretion to establish funding to operate the CAT, including establishing fees that the participants will pay, and establishing fees for industry members that will be implemented by the participants (CAT fees), subject to any necessary filings with the SEC.3 FINRA has filed a rule change in conjunction with the other CAT NMS Plan participants to establish Rule 6897 imposing the CAT fees, but the rule has not yet been adopted.4 Rule 6898 adopts into the FINRA rulebook the procedures approved by CAT NMS, LLC for resolving potential disputes relating to CAT fees charged to industry members (Procedures).5

        On September 14, 2017, the SEC approved Rule 6898 (Consolidated Audit Trail – Fee Dispute Resolution) to establish the procedures for resolving potential disputes related to CAT fees charged to industry members under proposed Rule 6897. Rule 6898 incorporates the procedures adopted by the Operating Committee into the FINRA rulebook; the other CAT NMS Plan participants are also adopting this rule. This rule details the procedure for industry members that dispute CAT fees, including disputes related to the designated tier and the fee calculated pursuant to such tier,6 to apply for an opportunity to be heard and for review of the disputed CAT fees. The procedures are modeled after the adverse action procedures various exchanges adopted,7 and will be posted on the website for the CAT NMS Plan.8

        Under the procedures, an industry member that disputes CAT fees it is charged and that desires to have a hearing on the disputed fees must file a written application with the CAT NMS, LLC within 15 business days after being notified of the disputed fees. Please note this application would not be filed with FINRA or any of the other self-regulatory organizations of which the firm may be a member. The application must:

        •   identify the disputed CAT fees;
        •   state the specific reason(s) why the applicant takes exception to such CAT fees; and
        •   set forth the relief sought.

        In addition, if the applicant intends to submit any additional documents, statements, arguments or other material in support of the application, the same should be so stated and identified.9

        CAT NMS, LLC will refer applications for hearing and review promptly to a Fee Review Subcommittee.10 The Fee Review Subcommittee will hold hearings promptly and keep a record of the proceedings. The parties to the hearing will consist of the applicant and a representative of CAT NMS, LLC who shall present the reasons for the action taken by the company that allegedly aggrieved the applicant.11 The parties to the hearing shall furnish the Fee Review Subcommittee with all materials relevant to the proceedings at least 72 hours prior to the date of the hearing. Each party will have the right to inspect and copy the other party's materials prior to the hearing.12 The applicant is entitled to be represented by counsel at all stages of the proceedings.13

        The Fee Review Subcommittee will determine all questions concerning the admissibility of evidence and will otherwise conduct of the hearing. Each of the parties will be permitted to make an opening statement, present witnesses and documentary evidence, cross examine opposing witnesses and present closing arguments orally or in writing as determined by the Fee Review Subcommittee. The Fee Review Subcommittee also will have the right to question all parties and witnesses to the proceeding. The formal rules of evidence will not apply.14

        The Fee Review Subcommittee must set forth its decision in writing and send the written decision to the parties to the proceeding. Such decisions will contain the reasons supporting the conclusions of the Fee Review Subcommittee.15 The decision of the Fee Review Subcommittee will be subject to review by the Operating Committee either on its own motion within 20 business days after issuance of the decision or upon written request submitted by the applicant within 15 business days after issuance of the decision. The applicant's petition must be in writing and must specify the findings and conclusions to which the applicant objects, together with the reasons for such objections. Any objection to a decision not specified in writing will be considered to have been abandoned and may be disregarded. Parties may petition to submit a written argument to the Operating Committee and may request an opportunity to make an oral argument before the Operating Committee. The Operating Committee will have sole discretion to grant or deny either request.16

        If a review is granted, the Operating Committee will conduct the review. The review will be made upon the record and will be made after such further proceedings, if any, as the Operating Committee may order. Based upon such record, the Operating Committee may affirm, reverse or modify, in whole or in part, the decision of the Fee Review Subcommittee. The decision of the Operating Committee will be in writing, will be sent to the parties to the proceeding and will be final.17

        A final decision regarding the disputed CAT fees by the Operating Committee, or the Fee Review Subcommittee (if there is no review by the Operating Committee), must be provided within 90 days of the date on which the industry member filed a written application regarding disputed CAT fees with the CAT NMS, LLC. The Operating Committee may extend the 90-day time limit at its discretion.18

        The decisions on CAT fee disputes made pursuant to this rule will be binding on industry members, without prejudice to the rights of any industry member to seek redress from the SEC, or in any other appropriate forum.19 Finally, an industry member that files a written application with the CAT NMS, LLC regarding disputed CAT fees in accordance with this rule is not required to pay the disputed fees until the dispute is resolved in accordance with the procedures, including any review by the SEC, or in any other appropriate forum. For these purposes, the disputed CAT fees means the amount of the invoiced CAT fees that the industry member has asserted the industry member does not owe to the CAT NMS, LLC. The industry member must pay any invoiced CAT fees that are not disputed when due as set forth in the original invoice.20

        Once the dispute regarding CAT fees is resolved pursuant to these procedures, if it is determined that the industry member owes any of the disputed CAT fees, then the industry member must pay the disputed CAT fees that are owed, as well as interest on the disputed CAT fees from the original due date (that is, 30 days after receipt of the original invoice of such CAT fees) until such disputed CAT fees are paid at a per annum rate equal to the lesser of (i) the prime rate plus 300 basis points, or (ii) the maximum rate permitted by applicable law.21

        As noted above, Rule 6898 relating to the CAT Fee Dispute Resolution Process will be implemented on December 1, 2017; however, Rule 6897 imposing the CAT Fees currently is pending and is not yet operative. FINRA will provide additional information in a Regulatory Notice promptly following the adoption of the CAT Fees and Rule 6897.


        1. See Securities Exchange Act Release No. 81616 (September 14, 2017), 82 FR 44010 (September 20, 2017) (Order Approving File No. SR-FINRA-2017-020).

        2. On October 30, 2017, the participants filed Amendment No. 3 to the National Market System Plan Governing the Consolidated Audit Trail. The proposed amendment details the CAT fees and would add a fee schedule to a new Exhibit B of the Plan which sets forth the CAT fees to be paid by the participants.

        On May 8, 2017, FINRA filed a proposed rule change with the SEC to adopt CAT fees pursuant to new proposed Rule 6897 (Consolidated Audit Trail Funding Fees), which will require industry members that are FINRA members and have order or trading activity that would be reportable to the CAT to pay the CAT fees determined by the Operating Committee. See Securities Exchange Act Release No. 80710 (May 17, 2017), 82 FR 23629 (May 23, 2017) (SR-FINRA-2017-011). The SEC subsequently suspended FINRA's CAT fee filing proposing Rule 6897 on June 30, 2017. See Securities Exchange Act Release No. 81067 (June 30, 2017), 82 FR 31656 (July 7, 2017) (Suspension Order).

        3. Section 11.1(b) of the CAT NMS Plan.

        4. See supra note 2.

        5. Unless otherwise specified, capitalized terms used in this Notice are defined as set forth herein, or in the Rule 6800 Series (Consolidated Audit Trail Compliance Rule) or in the CAT NMS Plan.

        6. Under proposed Rule 6897, CAT fees will be assessed by placing CAT reporters into fixed tiers based on "message traffic" for industry members (other than Execution Venue ATSs) and on market share for Execution Venues (including Execution Venue ATSs). See Securities Exchange Act Release No. 80710 (May 17, 2017), 82 FR 23629 (May 23, 2017) (SR-FINRA-2017-011).

        7. See, e.g., Chapter X of BATS BZX Exchange, Inc. (Adverse Action); and Chapter X of NYSE National, Inc. (Adverse Action).

        8. The CAT NMS Plan website is available at http://www.catnmsplan.com/.

        9. See Rule 6898(c)(2).

        10. See Rule 6898(c)(3)(A). The members of the Fee Review Subcommittee will be subject to the provisions of Section 4.3(d) of the Plan regarding recusal and Conflicts of Interest.

        11. See Rule 6898(c)(4)(A).

        12. See Rule 6898(c)(3)(C).

        13. See Rule 6898(c)(4)(B).

        14. See Rule 6898(c)(4)(C).

        15. See Rule 6898(c)(4)(D).

        16. See Rule 6898(c)(5)(A).

        17. See Rule 6898(c)(5)(B).

        18. See Rule 6898(c)(6).

        19. See Rule 6898(c)(8).

        20. See Rule 6898(c)(9)(A).

        21. See Rule 6898(c)(9)(B).

      • 17-38 FINRA Requests Comment on a Proposal to Amend Rule 3110 (Supervision) to Provide Firms the Option to Conduct Remote Inspections of Offices and Locations That Meet Specified Criteria Comment Period Expires: January 12, 2018

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        Remote Branch Office Inspections

        Regulatory Notice
        Notice Type

        Request for Comment
        Referenced Rules & Notices

        FINRA Rule 3110
        Notice to Members 98-38
        Regulatory Notice 11-54
        Suggested Routing

        Compliance
        Internal Audit
        Legal
        Operations
        Registered Representatives
        Risk
        Senior Management
        Training
        Key Topics

        Branch Office Inspections
        Risk Management
        Supervision

        Summary

        This Notice seeks comment on a proposal to amend Rule 3110 to add new Supplementary Material .151 to provide firms with the flexibility to conduct remote inspections of "qualifying offices" that meet specified criteria, in lieu of physical, on-site inspections of such offices as currently required under the rule.2

        The proposed rule text is available in Attachment A.

        Questions concerning this Notice should be directed to:

        •   Philip Shaikun, Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8451; or
        •   Sarah Kwak, Counsel, OGC, at (202) 728-8471.

        Action Requested

        FINRA encourages all interested parties to comment on the proposal. Comments must be received by January 12, 2018.

        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.3

        Before becoming effective, a proposed rule change must be authorized for filing with the Securities and Exchange Commission (SEC or Commission) 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 (Exchange Act).4

        Background & Discussion

        The responsibility of firms to supervise their associated persons is a critical component of federal broker-dealer regulation.5 This obligation is derived from Sections 15(b)(4)(E)6 and 15(b)(6)(A)7 of the Exchange Act, which authorize the SEC to impose sanctions on a firm or any person that fails to reasonably supervise a person subject to their supervision that commits a violation of the federal securities laws. Firms must supervise all of their associated persons, regardless of their location, compensation or employment arrangement, or registration status, in accordance with FINRA By-Laws and rules.8

        FINRA's Supervision Rule, Rule 3110, requires each firm to establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. Rule 3110(c) requires each firm to review, at least annually (on a calendar-year basis), the businesses in which it engages. The review must be reasonably designed to assist the firm in detecting and preventing violations of, and achieving compliance with, applicable securities laws and regulations, and with applicable FINRA rules. The rule requires that a firm review the activities of each office and inspect each office on a specified cycle depending on the office classification.9 FINRA has interpreted the rule to require that inspections take place on-site, irrespective of the type of office.10

        Supplementary Material for the Supervision Rule, Rule 3110.12, elaborates on the inspection requirement and emphasizes the importance of supervising remote locations. That provision states that each member must establish and maintain supervisory procedures that take into consideration, among other things, the firm's size, organizational structure, scope of business activities, number and location of the firm's offices, the nature and complexity of the products and services offered by the firm, the volume of business done, the number of associated persons assigned to a location, the disciplinary history of registered representatives or associated persons, and any indicators of irregularities or misconduct (i.e., "red flags"). The provision further states that the procedures established and reviews conducted must provide that the quality of supervision at remote locations is sufficient to ensure compliance with applicable securities laws and regulations and with FINRA rules, and that members must be especially diligent with respect to a non-branch location where a registered representative engages in securities activities.

        This provision accords with the principles set out in SEC staff guidance on the elements of effective supervision of small, remote (or geographically dispersed) offices.11 The SEC guidance emphasizes the importance of inspections and encourages unannounced on-site inspections either on a random basis or where there are red flags about unusual activity in those offices.

        Over the last few years, firms have raised questions about the manner in which they must conduct the internal inspections, particularly for those offices or locations with a limited number of associated persons or where only operational or limited supervisory functions take place. These locations often include personal residences of an associated person, an office of convenience where an associated person may meet a customer occasionally and exclusively by appointment, an office used by "circuit riders," or other public places. Firms have noted that advances in communications technology and increased acceptance of flexible work arrangements have made remote locations more commonplace. They have further noted that most such locations do not hold themselves out to the public as a place where securities business takes place and engage in low-risk activity, with no books or records or funds or securities kept on the premises.

        In light of these factors, and in recognition of the fact that technology already plays a prominent role in how firms conduct office inspections, firms have questioned the practicality and efficiency of conducting on-site inspections of such locations in fulfilling their obligations under Rule 3110(c). Among other things, they note the travel and related expenses incurred in connection with on-site inspections of these low-risk locations and have suggested that those resources could be better allocated to higher risk activities. Accordingly, the proposal seeks to reduce the burden of on-site inspections in limited circumstances that would not result in a diminution in investor protection.

        Proposal

        FINRA is proposing to adopt new Supplementary Material .15 (Remote Inspections), which would give firms the option to fulfill their obligations under Rule 3110(c) by conducting a remote inspection of a "qualifying office," in lieu of a physical, on-site inspection of such office. Specifically, proposed Rule 3110.15(a) would require a firm that conducts remote inspections to have policies and procedures reasonably designed to determine whether a location is eligible for remote inspection as a "qualifying office" and to assess whether a remote inspection of any such office is reasonable.

        In making the latter assessment, the proposal would require a firm to consider the factors set forth in Rule 3110.12, as well as whether any associated person that conducts business at the designated office or location has an event that is disclosed, or is or was required to be disclosed, under Questions 14C through 14J of that person's Form U4. These questions include adjudicated matters by federal and state regulatory agencies, self-regulatory organizations and foreign financial regulatory agencies, and settlements of investment-related civil complaints and arbitration claims above specified thresholds. The questions also include some unadjudicated regulatory complaints, investigations and arbitration claims. Under the proposal, these disclosures would be treated as red flags in determining whether it is reasonable to conduct a remote inspection of such office or location. The proposal would further require that, if a firm determines to proceed with a remote inspection where there has been such a reportable disclosure event, the firm must document, in writing, the basis for that determination.

        Proposed Rule 3110.15(b) would define a "qualifying office" as an office or location that meets the following conditions:

        (1) not more than three associated persons that conduct business for the firm are designated to the location;
        (2) the location is not held out to the public as an office of the firm;
        (3) the associated person(s) at the location conducts business, including electronic communications, on behalf of the member at that location solely through the use of the firm's authorized electronic systems and platforms;
        (4) all books or records required to be made and preserved by the member under the federal securities laws or FINRA rules are maintained by the member other than at the location;
        (5) no customer funds or securities are handled at the location;
        (6) the location is either (i) not required to be inspected annually pursuant to Rule 3110(c)(1)(A); (ii) designated as an OSJ solely because of the supervisory activities described in Rule 3110(f)(1)(D) through (G);12 or (iii) designated as a branch office solely because of the supervisory activities described in Rule 3110(f)(2)(B);13 and
        (7) no registered person at the location has a disciplinary history (as defined in Rule 3170(a)(3))14 and no associated person at the location is subject to a statutory disqualification.

        Under the proposal, remote inspections would be subject to the same qualitative standard as on-site inspections in that they must be reasonably designed to assist in detecting and preventing violations of, and achieving compliance with, applicable securities laws and regulations, and with FINRA rules. As with on-site inspections, remote inspection reports would be required to be written and kept on file for the periods of time specified for the relevant inspection cycle.

        Preliminary Economic Impact Assessment

        Need for the Rule

        FINRA recognizes the prominent role that technology already plays in conducting office inspections. Technological advances have significantly reduced the costs of performing inspections. The resources firms expend to conduct on-site inspections of low-risk offices or locations could be better allocated to higher risk activities. As such, the proposal is intended to address the changes in the technological landscape and provide firms another effective way to perform inspections that is cost efficient without diminishing investor protection.

        Economic Baseline

        The economic baseline for the proposal is the current inspection requirement for supervision of offices and locations in Rule 3110. To comply with the existing inspection requirement, firms must perform on-site inspections of OSJs and supervising branch offices at least annually (on a calendar-year basis), non-supervisory branch offices at least every three years, and non-branch locations on a regular periodic schedule with a presumption of at least every three years. The inspection process requires sending an associated person to perform an on-site inspection, incurring both travel costs and travel-related lost work hours of the associated person conducting the inspection. The proposal provides for an alternative, cost efficient inspection framework for offices and locations that meet the proposed criteria.

        Based on data available as of October 2017, firms conduct approximately 86,500 on-site inspections annually, of which approximately 21,000 are for OSJs or supervisory branch offices and approximately 65,500 are for non-supervisory branch offices and non-branch locations.15

        Economic Impact

        FINRA does not believe that the proposal adds new burdens on firms. The use of remote inspections is optional. The proposal overall is expected to lend some practical relief to firms in fulfilling their obligations under Rule 3110(c) such as a reduction in travel costs, as well as lost productivity during travel. In addition, the proposal would foster the opportunity for firms to enhance their risk management programs by providing firms with the flexibility to conduct remote inspections on a more frequent cycle or to use the additional compliance resources on inspecting offices or locations at which associated persons engage in higher risk activities. Further, remote inspections allow firms to assign more firm personnel to conduct inspections without incurring undue additional costs. Giving firms the option to have more than one person conduct an inspection may create training opportunities that would help firms improve the inspection process, and also potentially enhance compliance practices.

        A firm would be required to implement the appropriate infrastructure to conduct remote inspections to the extent it does not already exist. Such infrastructure would need to address cybersecurity issues, such as unauthorized access to personally identifiable information, potentially exacerbated by the remote inspection process. A potential indirect cost of the proposed amendments is the increased risk that the inspection process does not properly identify ongoing misconduct, or the risk for future misconduct, by the associated persons at the office or location. Broker misconduct could remain unidentified for a longer period of time without a physical presence by oversight staff at the office or location. The stringent proposed criteria that members must apply to branch offices and non-branch locations to determine whether they are eligible for remote inspection are designed to largely mitigate these risks.

        FINRA recognizes that not all branch offices and non-branch locations will be able to benefit from the new option due to the conditions defining a "qualifying office." For example, the first condition of a "qualifying office" limits the location to no more than three associated persons designated to that location. To provide a sense of the scope of the population of offices or locations that may meet this criterion, of the approximately 138,500 nonsupervisory branch offices as of October 2017, approximately 11,500 have three registered persons designated to that office, approximately 27,000 have two registered persons designated to that office, and approximately 83,000 have one registered person designated to that office. The remaining 17,000 have more than three registered persons designated to that office. In addition to non-supervisory branch offices, of the approximately 21,000 OSJs or supervisory branch offices, approximately 2,100 have three registered persons designated to that office, approximately 2,800 have two registered persons designated to that office, and approximately 3,500 have one registered person designated to that office. The remaining 12,600 have more than three registered persons designated to that office. Finally, approximately 81,000 registered persons are located at the approximately 58,000 non-branch locations, averaging 1.4 registered persons per non-branch location. Branch offices and non-branch locations may also have non-registered associated persons located there. Moreover, a location that meets the threshold for the number of associated persons designated to such location would not necessarily meet the other criteria for a "qualifying office." Thus, these numbers put an upper bound on the number of locations that meet the definition of "qualifying office."

        Alternatives Considered

        FINRA considered a range of suggestions in developing the proposal. The alternatives to the proposed amendments included an alternative definition of the number of associated persons for the definition of a qualifying office, and alternative criteria and conditions regarding associated person misconduct as a prerequisite for eligibility for remote inspections. The proposal reflects the changes that FINRA believes strike the appropriate balance to address the concerns of firms while preserving the investor protection purposes of an inspection requirement.

        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. How does the firm currently fulfill its obligations under Rule 3110(c) for those offices or locations at which few associated persons reside and limited or low-risk activities occur? In what way(s) would the use of remote inspections impact the firm's current inspection process or practices?
        2. Should a firm with a disciplinary history of supervisory violations or other investmentrelated violations be able to avail itself of the option to conduct remote inspections?
        3. Are there other criteria for a "qualifying office" that should be considered? For example:
        a. The proposal requires a firm to determine whether a remote inspection of a qualifying office would be reasonable by considering the factors set forth under Rule 3110.12 including the volume of business. Should a threshold be imposed on the volume of business generated from the qualifying office, or should offices that are responsible for a significant proportion of a firm's business be excluded from the definition?
        b. Should there be a prerequisite that a firm must have conducted an on-site inspection of an office or location before such office or location could become a qualifying office?
        c. Should the firm be required to conduct an interview with the associated person(s) designated to the qualifying office by video conference or in-person at any mutually agreed upon office or location?
        d. Should there be a minimum distance between the qualifying office and the OSJ or supervisory branch office?
        Please provide specific thresholds and the underlying rationale for the thresholds.
        4. The proposal seeks to limit the number of associated persons designated to a qualifying office to three. Is this threshold reasonable? If not, why not? Is there a more appropriate threshold and why?
        Please provide a specific threshold and the underlying rationale for the threshold.
        5. Are there criteria for a qualifying office that should be excluded?
        6. Does the proposal have any potential negative impacts on a firm's ability to fulfill its obligations under Rule 3110(c)?
        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. To what extent would these economic impacts affect existing business models and existing organizational structures?
        d. What would be the magnitude of these impacts, including costs and benefits (e.g., travel, infrastructure, human resources)?
        e. How many and what percentage of your firm's branch offices and non-branch locations do you estimate would be able to take advantage of the remote inspection option?
        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. FINRA also proposes to delete existing Supplementary Material .15 (Temporary Program to Address Underreported Form U4 Information) as obsolete.

        2. Earlier this year, FINRA 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 received comments on the effectiveness and efficiency of its rules, operations and administrative processes governing brokerdealer activities. One concern raised by firms was about the manner in which they must conduct internal inspections of firm offices under Rule 3110, particularly for those offices or locations with a limited number of associated persons or where only operational or limited supervisory functions take place. See Special Notice 03/21/17, Engagement Initiative.

        3. Persons submitting comments are cautioned that FINRA does not redact or edit personal identifying information, such as names or email addresses, from comment 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.

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

        5. See SEC Division of Market Regulation, Staff Legal Bulletin No. 17: Remote Office Supervision (March 19, 2004) (SEC Staff Legal Bulletin No. 17), available at https://www.sec.gov/interps/legal/mrslb17.htm.

        6. Section 15(b)(4)(E) provides that the "Commission, by order, shall censure, place limitations on the activities, functions, or operations of, suspend for a period not exceeding twelve months, or revoke the registration of any broker or dealer if it finds, on the record after notice and opportunity for hearing, that such censure, placing of limitations, suspension, or revocation is in the public interest and that such broker or dealer . . . has willfully aided, abetted, counseled, commanded, induced, or procured the violation by any person of any provision of the Securities Act of 1933, the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Commodity Exchange Act, [the Exchange Act], the rules or regulations under any of such statutes, or the rules of the Municipal Securities Rulemaking Board, or has failed reasonably to supervise, with a view to preventing violations of the provisions of such statutes, rules, and regulations, another person who commits such a violation, if such other person is subject to his supervision." 15 U.S.C. § 78o(b)(4)(E).

        7. 15 U.S.C. § 78o(b)(6)(A) (authorizing the Commission to impose sanctions on any associated person of a broker-dealer that violates the federal securities laws).

        8. See Regulatory Notice 11-54 (November 2011) and Notice to Members 98-38 (May 1998).

        9. Firms must inspect offices of supervisory jurisdiction (OSJs) and supervising branch offices every year, non-supervisory branch offices at least every three years, and non-branch locations on a regular periodic schedule with a presumption of least every three years. See Rules 3110(c)(1) and 3110.13.

        10. See Regulatory Notice 11-54 (November 2011).

        11. See SEC Staff Legal Bulletin No. 17.

        12. These supervisory activities involve final acceptance (approval) of new accounts, review and endorsement of customer orders, final approval of retail communications other than research reports, or responsibility for supervising the activities of persons associated with the member at one or more other branch offices of the member. An office that is designated as an OSJ because of the supervisory activities described in Rule 3110(f)(1)(A) through (C)—order execution or market making, structuring of public offerings or private placements, or maintaining custody of customers' funds or securities—would not meet the conditions to become a "qualifying office."

        13. Rule 3110(f)(2)(B) provides that any location that is responsible for supervising the activities of persons associated with the member at one or more non-branch locations of the member is considered to be a branch office.

        14. Rule 3170(a)(3) defines "disciplinary history" as a finding of a violation by a registered person in the past five years by the SEC, a self-regulatory organization, or a foreign financial regulatory authority of a litany of specified rules.

        15. As of October 2017, there are 3,731 firms with approximately 21,000 OSJs or supervisory branch offices that are required to be inspected at least annually, approximately 138,500 non-supervisory branch offices that are required to be inspected at least every three years, and approximately 58,000 non-branch locations that are required to be inspected on a regular periodic schedule, presumed to be at least every three years.


        ATTACHMENT A

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

        * * * * *

        3000. SUPERVISION AND RESPONSIBILITIES RELATING TO ASSOCIATED PERSONS

        * * * * *

        3100. Supervisory Responsibilities

        * * * * *

        3110. Supervision

        (a) through (f) No Change.

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

        .01 through .14 No Change

        .15 Remote Inspections.

        (a) In fulfilling its obligations under Rule 3110(c), a member may determine to conduct a remote inspection of a "qualifying office" (as defined in this Supplementary Material) in lieu of a physical, on-site inspection of such office. A member that conducts remote inspections must have policies and procedures reasonably designed to determine whether a location is eligible for remote inspection as a "qualifying office" and to assess whether a remote inspection of any such office is reasonable. To determine whether a remote inspection is reasonable, a member must consider the factors set forth in Rule 3110.12, as well as whether any associated person that conducts business designated to the location has an event that is disclosed, or is or was required to be disclosed, under Questions 14C through 14J on the person's Form U4. If a member determines to conduct a remote inspection where there has been such a reportable disclosure event, the member must document in writing the basis for that determination.
        (b) A "qualifying office" is a location that meets the following conditions:
        (1) Not more than three associated persons that conduct business for the member are designated to the location;
        (2) The location is not held out to the public as an office of the member;
        (3) The associated person(s) at the location conducts business, including electronic communications, on behalf of the member at that location solely through the use of the member's authorized electronic systems and platforms;
        (4) All books or records required to be made and preserved by the member under the federal securities laws or FINRA rules are maintained by the member other than at the location;
        (5) No customer funds or securities are handled at the location;
        (6) The location is either (i) not required to be inspected annually pursuant to Rule 3110(c)(1)(A); (ii) designated as an OSJ solely because of the supervisory activities described in Rule 3110(f)(1)(D) through (G); or (iii) designated as a branch office solely because of the supervisory activities described in Rule 3110((f)((2)(B); and
        (7) No registered person at the location has a disciplinary history (as defined in Rule 3170(a)(3)) and no associated person at the location is subject to a statutory disqualification.
        [Temporary Program to Address Underreported Form U4 Information. FINRA is establishing a temporary program that will issue a refund to members of Late Disclosure Fees assessed for the late filing of responses to Form U4 Question 14M (unsatisfied judgments or liens) if the Form U4 amendment is filed between April 24, 2014 and December 1, 2015 and one of the following conditions is met: (1) the judgment or lien has been satisfied, and at the time it was unsatisfied, it was under $5,000 and the date the judgment or lien was filed with a court (as reported on Form U4 Judgment/Lien DRP, Question 4.A.) was on or before August 13, 2012; or (2) the unsatisfied judgment or lien was satisfied within 30 days after the individual learned of the judgment or lien (as reported on Form U4 Judgment/Lien DRP, Question 4.B.). This program has a retroactive effective date of April 24, 2014, and it will automatically sunset on December 1, 2015. Members will not be able to use the program after December 1, 2015.]

      • 17-37 SEC Approves “Pay-to-Play” and Related Rules for Capital Acquisition Brokers (CABs) Effective Date: December 6, 2017

        View PDF

        Capital Acquisition Brokers

        Regulatory Notice
        Notice Type

        New Rule
        Referenced Rules & Notices

        Advisers Act Rule 206(4)-5
        CAB Rule 203
        CAB Rule 458
        FINRA Rule 2030
        FINRA Rule 4580
        Suggested Routing

        Compliance
        Government Securities
        Legal
        Municipal
        Registered Representatives
        Senior Management
        Key Topics

        Capital Acquisition Brokers
        Political Contributions
        Recordkeeping

        Summary

        The Securities and Exchange Commission (SEC) approved1 Capital Acquisition Broker (CAB) Rule 203 (Engaging in Distribution and Solicitation Activities with Government Entities) and CAB Rule 458 (Books and Records Requirements for Government Distribution and Solicitation Activities). These rules apply established "pay-to-play" and related recordkeeping rules to the activities of member firms that have elected to be governed by the CAB Rules. The rules will allow CABs to engage in distribution or solicitation activities for compensation with government entities on behalf of registered investment advisers.

        The rules become effective on December 6, 2017.

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

        Questions concerning this Notice should be directed to:

        •   Joseph P. Savage, Vice President and Counsel, Office of Regulatory Analysis, at (240) 386-4534 or joe.savage@finra.org; or
        •   Victoria Crane, Associate General Counsel, Office of General Counsel, at (202) 728-8104 or victoria.crane@finra.org.

        Background and Discussion

        Pay-to-Play Rules

        In July 2010, the SEC adopted Rule 206(4)-5 under the Investment Advisers Act of 1940 addressing pay-to-play practices2 by investment advisers (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 A "regulated person" includes a member firm, provided that: (a) FINRA rules prohibit member firms from engaging in distribution or solicitation activities if political contributions have been made; and (b) the SEC finds, by order, 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, on August 25, 2016, the SEC approved FINRA Rules 2030 and 4580 to 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.6 On September 20, 2016, the SEC, by order, found that FINRA Rule 2030 imposes substantially equivalent or more stringent restrictions on member 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 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. Rules 2030 and 4580 do not expressly apply to CABs.

        In October 2016, FINRA published a Regulatory Notice8 announcing SEC approval of FINRA Rules 2030 and 4580, which became effective on August 20, 2017.

        FINRA Capital Acquisition Broker Rules

        FINRA adopted a separate set of FINRA rules for firms that meet the definition of a "capital acquisition broker" and that elect to be governed under this rule set. CABs are member 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. Member 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 became effective on April 14, 2017, after SEC approval.9 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, 2017.10

        Addition of FINRA Pay-to-Play Rules to CAB Rule Set

        The CAB Rules subject CABs to a number of FINRA Rules, but do not expressly provide that FINRA Rules 2030 and 4580 apply to CABs. As stated above, 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." The SEC Pay-to-Play Rule defines a "regulated person" to include a member firm subject to a FINRA pay-to-play rule.

        CAB Rules 203 and 458 make clear that CABs are subject to FINRA's pay-to-play and related recordkeeping rules and, therefore, that CABs, similarly to non-CAB member firms, are "regulated persons" that can engage in distribution and solicitation activities with government entities on behalf of investment advisers in accordance with the SEC's Pay-toPlay Rule, while at the same time deterring CABs from engaging in pay-to-play practices.11

        The rules become effective on December 6, 2017.


        1. See Securities Exchange Act Release No. 81781(September 29, 2017), 82 FR 46559 (October 5, 2017) (Order Approving File No. SR-FINRA-2017-027).

        2. "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. See Regulatory Notice 16-40 (October 2016) at 9, note 1.

        3. See Investment Advisers Act Release No. 3043 (July 1, 2010), 75 FR 41018 (July 14, 2010) (S7-18-09) (Political Contributions by Certain Investment Advisers). See also Investment Advisers Act Release No. 3221 (June 22, 2011), 76 FR 42950 (July 19, 2011) (S7-36-10) (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) (S7-18-09) (Political Contributions by Certain Investment Advisers; Ban on Third Party Solicitation; Extension of Compliance Date).

        4. See Investment Advisers Act Rule 206(4)-5(a)(2)(i)(A), 17 CFR 275.206(4)-5(a)(2)(i)(A).

        5. See Investment Advisers Act Rule 206(4)-5(f)(9), 17 CFR 275.206(4)-5f)(9). A "regulated person" also includes SEC-registered investment advisers and SEC-registered municipal advisors, subject to specified conditions.

        6. See Securities Exchange Act Release No. 78683 (August 25, 2016), 81 FR 60051 (August 31, 2016) (Order Approving File No. SR-FINRA-2015-056). 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).

        7. See Investment Advisers Act Release No. 4532 (September 20, 2016), 81 FR 66526 (September 28, 2016) (S7-16-16).

        8. See Regulatory Notice 16-40 (October 2016).

        9. See Securities Exchange Act Release No. 78617(August 18, 2016), 81 FR 57948 (August 24, 2016) (Order Approving File No. SR-FINRA-2015-054).

        10. See Regulatory Notice 16-37 (October 2016).

        11. CABs' distribution and solicitation activities with government entities on behalf of investment advisers must be consistent with the activities permitted for CABs under CAB Rule 016(c).

      • 17-36 SEC Approves Rule Amendment to Create a New TRACE Security Activity Report and End-of-Day TRACE Transaction File Effective Date: February 1, 2018

        Trade Reporting and Compliance Engine (TRACE)

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Regulatory Notices

        FINRA Rule 6710
        FINRA Rule 7730
        Suggested Routing

        Fixed Income
        Research
        Trading
        Key Topics

        Agency Bonds
        Corporate Bonds
        Fees
        TRACE-eligible Securities
        TRACE Transaction Data

        Summary

        A new End-of-Day TRACE Transaction File and TRACE Security Activity Report will be made available to subscribers, each for a fee, beginning on February 1, 2018. The rule text is available in the online FINRA Manual.

        Questions regarding this Notice should be directed to:

        •   Chris Stone, Vice President, Transparency Services (TS), at (202) 728-8457 or by email at chris.stone@finra.org;
        •   Alié Diagne, Director, TS, at (212) 858-4092 or by email at alie.diagne@finra.org; or
        •   for legal and interpretive questions, Cara Rosen, Counsel, Office of General Counsel, at (202) 728-8852 or by email at cara.rosen@finra.org.

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

        Background and Discussion

        On July 11, 2017, the SEC approved an amendment to FINRA Rule 7730 to create a new End-of-Day TRACE Transaction File,1 and on August 4, 2017, a new TRACE Security Activity Report.2 FINRA's TRACE data product offerings include both real-time as well as historic data for most TRACE-eligible securities. The new TRACE data products each will be made available to members and any others that choose to subscribe for a fee, as further discussed below.

        End-of-Day TRACE Transaction File

        The new End-of-Day TRACE Transaction File is a daily file that includes all transaction data disseminated as part of Real-Time TRACE transaction data on that day.4 The End-of-Day TRACE Transaction File will be provided to subscribers after the TRACE system closes at the end of each trading day, and will be separately available for each data set for which Real-Time TRACE transaction data is available (i.e., the Corporate Bond Data Set, the Agency Data Set, SP Data Set and Rule 144A Data Set).5 The new data product will include the same transaction data elements as those disseminated in Real-Time TRACE transaction data, such as the CUSIP, price, size and contra-party identifier.6

        The End-of-Day TRACE Transaction File will be available for a fee of $750 per month per data set, or $250 per month per data set if the subscriber is a qualifying tax-exempt organization. Subscribers to the Vendor Real-Time Data Feed may receive at no charge the End-of-Day TRACE Transaction File for the Vendor Real-Time data set(s) to which they have subscribed.7

        TRACE Security Activity Report

        The new TRACE Security Activity Report is a monthly report, provided on a 90-day delayed basis, that provides aggregated statistics by security for corporate and agency bonds ("CA Bonds").8 Specifically, the TRACE Security Activity Report will contain basic descriptive security elements for each CA Bond, such as the issuer's name and the security's coupon and maturity date, and the following volume and transaction related information for each security:
        •   total par value traded (reflecting actual volume of capped transactions (if six or more) and uncapped volume);
        •   par value traded of customer buys;
        •   par value traded of customer sells;
        •   par value traded of inter-dealer transactions;
        •   aggregate par value volume of transactions with sizes up to the dissemination cap (i.e., "uncapped transactions");
        •   if six or more capped transactions9 were disseminated during the calendar month, the aggregate par value volume of capped transactions will reflect the actual trade size of each underlying transaction within size categories of up to and including $10 million, and over $10 million;10
        •   number of unique reporting market participant identifiers (MPIDs) for trades of any size (displaying the actual number of unique MPIDs where there are six or more unique MPIDs or "1 to 5," as applicable);
        •   number of unique MPIDs for disseminated capped transactions (displaying the actual number of unique reporting MPIDs where there are six or more unique MPIDs, "0" or "1 to 5," as applicable);
        •   total number of transactions;
        •   number of customer buys;
        •   number of customer sells;
        •   number of inter-dealer transactions;
        •   total number of transactions with sizes over the dissemination cap;
        •   total number of transactions with sizes up to the dissemination cap (i.e., "uncapped transactions"); and
        •   if six or more capped transactions, the number of capped transactions within size categories of up to and including $10 million and over $10 million—displayed within incremental ranges of less than or equal to 5, less than or equal to 10, less or equal to 25, less than or equal to 50, or over 50, as applicable.

        The report also includes a "top five" snapshot for each CA Bond showing the percentage of the total number of transactions that is represented by the activity of the top five MPIDs for each CUSIP, and the percentage of total par value traded by the top five MPIDs for each CUSIP. The percentage of the total number of transactions and total par value traded for the top 5 MPIDs will be provided, irrespective of the number of capped transactions (e.g., where there is only one MPID, the number of unique MPIDs will be displayed as "1 to 5" and both the number of transactions and par value percentages will be displayed as 100 percent). The market participants that engaged in the transactions will not be identified.

        The TRACE Security Activity Report will be made available for a fee of $750 per month, or $250 per month for qualifying tax-exempt organizations.

        Effective Date

        FINRA will make both the End-of-Day TRACE Transaction File and the TRACE Security Activity Report available to subscribers beginning February 1, 2018. Thus, on February 1, 2018, the End-of-Day TRACE Transaction File will be available daily after the TRACE system closes. The TRACE Security Activity Report available on February 1, 2018, will cover statistics for the month of October 2017 due to the 90-day delay.

        File layouts for the End-of-Day TRACE Transaction File and the TRACE Security Activity Report will be made available on the FINRA website by January 2, 2018.


        1. See Securities Exchange Act Release No. 81114 (July 11, 2017), 82 FR 32728 (July 17, 2017) (Order Approving File No. SR-FINRA-2017-015).

        2. See Securities Exchange Act Release No. 81318 (August 4, 2017), 82 FR 37484 (August 10, 2017) (Order Approving File No. SR-FINRA-2017-021).

        3. Rule 6710 (Definitions) provides that a "TRACEEligible Security" is a debt security that is United States (U.S.) dollar-denominated and issued by a U.S. or foreign private issuer, and, if a "restricted security" as defined in Securities Act Rule 144(a)(3), sold pursuant to Securities Act Rule 144A; or is a debt security that is U.S. dollar-denominated and issued or guaranteed by an Agency as defined in paragraph (k) or a Government-Sponsored Enterprise as defined in paragraph (n); or a U.S. Treasury Security as defined in paragraph (p). "TRACE-Eligible Security" does not include a debt security that is issued by a foreign sovereign or a Money Market Instrument as defined in paragraph (o).

        4. FINRA currently makes available a Real-Time TRACE transaction data product, which provides subscribers with access to all disseminated transactions as they are reported throughout the trading day.

        5. Transaction data for U.S. Treasury securities, as defined in Rule 6710, is not disseminated as part of Real-Time TRACE transaction data, and thus, is not included in the End-of-Day TRACE Transaction File data product.

        6. The data elements disseminated in Real-Time TRACE transaction data are described in the technical specifications, available at: http:// www.finra.org/industry/trace-vendor-subscriberagreement-information.

        7. See Securities Exchange Act Release No. 81995 (November 1, 2017) (Notice of Filing and Immediate Effectiveness of File No. SR-FINRA-2017-033).

        8. CA Bonds do not include U.S. Treasury securities and thus, are not included in the TRACE Security Activity Report.

        9. Due to transaction confidentiality concerns, FINRA has applied "dissemination caps" and does not disseminate in its real-time TRACE transaction data the actual size (volume) of transactions over a certain par value. Specifically, for transactions in investment grade corporate bonds and in agency bonds over a 5 million dollar par value, TRACE disseminates the size as "5MM+." For transactions in non-investment grade corporate bonds over a 1 million dollar par value, TRACE disseminates the size as "1MM+." For capped transactions, actual volumes for CA Bonds are not made available today until 6 months after the transaction in the Historic TRACE Data Product.

        10. These incremental ranges and size categories may be adjusted in the future based on FINRA's experience with the data product.

      • 17-35 Broker-Dealer, Investment Adviser Firm, Agent and Investment Adviser Representative, and Branch Renewals for 2018 Payment Deadline: December 18, 2017

        View PDF

        BD and IA Renewals for 2018

        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®

        Executive Summary

        The 2018 Renewal Program begins on November 13, 2017, when FINRA makes the Preliminary Statements available to all firms in E-Bill. Preliminary Statements are not mailed to firms.

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

        October 23, 2017 Firms may begin submitting post-dated Form U5 and BR Closing/Withdrawal filings via Web CRD/IARD.
        November 1, 2017 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 10, 2017, do not appear on the firm's Preliminary Statement. The only allowed date for post-dated filings is December 31, 2017.
        November 13, 2017 Preliminary Statements are available in E-Bill.
        December 18, 2017 Full payment of Preliminary Statements is due.
        January 2, 2018 Final Statements are available in E-Bill.
        January 22, 2018 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 18, 2017, may cause the firm to become ineligible to do business in the jurisdictions where it is registered, effective January 1, 2018. FINRA-registered firms will also be subject to a late fee if payment is not received by December 18, 2017.

        In addition to this Notice, firms should review the renewal instructions [http://www.finra.org/industry/renewal], the IARD Renewal Program Bulletin (if applicable) on the Investment Adviser Registration Depository [https://www.iard.com/renewal-program] (IARD) website, and any information mailed to ensure continued eligibility to do business in 2018.

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

        Background & Discussion

        Preliminary Statements

        Beginning November 13, 2017, Preliminary Statements are available for viewing and printing in E-Bill [https://ews.finra.org/auth/ews_logon.jsp?CTAuthMode=BASIC&login_form_location_basic&aa_param=user ]. 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. Additionally, FINRA assesses each firm a FINRA branch system processing renewal fee of $20 per branch. FINRA waives one branch registration renewal and 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 Roster.

        Web CRD/IARD assesses renewal fees for participating state regulators, exchanges, and SelfRegulatory Organizations (SROs). Renewal statements reflect any applicable renewal fees assessed for BD and IA firms, branches, and individuals 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 18, 2017.

        If payment is not received by December 18, 2017, 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 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, it is highly recommended that funds be remitted via E-Bill. Firms are encouraged to check their Renewal Statements to confirm FINRA has received payment and that the firm's Preliminary Statement 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 entitle users to use E-Bill.

        Fund Transfers (Flex-Funding to Renewal Account)

        Wire transfer and check payments are initially deposited into a firm's Flex-Funding Account in E-Bill. E-Bill users with the proper entitlement may transfer funds from their Flex-Funding Account directly to their Renewal Account (or to an affiliated firm) at any time to ensure their firm's renewal payment is processed prior to the December 18 payment deadline. Beginning December 18, FINRA will systematically transfer funds from Flex-Funding Accounts to Renewal Accounts if the entire outstanding renewal amount is available in the firm's Flex-Funding Account. This automatic transfer process will occur daily for firms that still owe fees on their Preliminary Statements until the system shuts down for renewal processing on December 26.

        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, 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 following renewal reports are 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. Firmsshould 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 23, 2017, and Form BDW and ADV-W filings on November 1, 2017. Post-dated filings are filings that have a termination date of December 31, 2017. 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, 2017, 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 10, 2017, 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 12, 2017, 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 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 26, 2017. Firms should exercise care when submitting all post-dated filings. Web CRD/IARD processes these forms when they are submitted and FINRA cannot withdraw a post-dated termination filing. A firm that submits a post-dated termination filing in error will have to file a new Form U4, BD, Form BR or Form ADV when Web CRD/IARD resumes normal processing on January 2, 2018, and Web CRD/IARD will assess new registration fees.

        Filing Form BDW

        The deadline for electronic filing of a Form BDW for any firm that wants to terminate a registration before year-end is 6 p.m., ET, December 26, 2017.

        Filing Form ADV to Cancel Notice Filings or Form 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 10, 2017, 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 26, 2017.

        Renewals Mass Transfer Moratorium

        A mass transfer is used to systematically transfer individuals and branch offices from one firm to another firm as a result of a merger, acquisition, succession or consolidation. December 9, 2017, is the last day firms will be able to request that a mass transfer occur in 2017. There will be a moratorium on mass transfer processing from December 26, 2017, through January 2, 2018.

        Final Statements

        On January 2, 2018, FINRA makes available all Final Statements in E-Bill. These statements reflect the status of BD, AG, IA firm and RA registrations, exempt reporting, or notice filings as of December 31, 2017. 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 amount owed if a firm has more individuals, branch offices or jurisdictions registered and/or notice filed at year-end than it did when the Preliminary Statement was generated.
        •   If a firm has fewer individuals, branch offices or jurisdictions registered or notice filed at year-end than it did on the Preliminary Statement, FINRA transfers any overpayments to firms' Flex-Funding Accounts on January 2, 2018.

        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 roster. "Pending" and "deficient" registrations at year's end are not included in the Renewal Program. Firms will also be able to request the Branches Renewal Report that lists all branches for which they have been assessed renewal fees. Versions of these reports will also be available for download.

        Firms have until January 22, 2018, 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 2018 Regulatory Notice.

      • 17-34 FINRA Requests Comment on the Efficacy of Allowing Compensated Non-Attorneys to Represent Parties in Arbitration Effective Date: October 18, 2017

        Non-Attorney Representatives in Arbitration

        Regulatory Notice
        Notice Type

        Request for Comment
        Referenced Rules & Notices

        FINRA Rule 12208
        FINRA Rule 13208
        FINRA Rule 14106
        Suggested Routing

        Compliance
        Legal
        Registered Representatives
        Senior Management
        Key Topics

        Arbitration
        Associated Person
        Code of Arbitration Procedure
        Code of Mediation Procedure
        Dispute Resolution
        Mediation

        Summary

        The FINRA Codes of Arbitration and Mediation Procedure permit compensated non-attorneys to represent clients in securities arbitration and mediation subject to certain exceptions. FINRA is conducting a review of the efficacy of continuing to allow such representation. The Notice outlines FINRA's review of compensated non-attorney representatives' (NAR firms) activities at the forum and seeks responses to questions related to forum users' experiences with NAR firms.

        Questions concerning this Notice should be directed to:

        •   Kenneth L. Andrichik, Senior Vice President and Chief Counsel, Office of Dispute Resolution, at (212) 858-3915; or
        •   Kristine Vo, Assistant Chief Counsel, Office of Dispute Resolution, at (212) 858-4106.

        Action Requested

        FINRA encourages all interested parties to comment on the proposal. Comments must be received by December 18, 2017.

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

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

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

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

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

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

        Background & Discussion

        The FINRA Codes of Arbitration and Mediation Procedure (Codes) permit non-attorneys to represent clients in securities arbitration and mediation subject to certain exceptions.3 Some parties are represented by relatives or friends who assist with case preparation or presentation. Typically, NAR firms provide public investors an alternative to representation by attorneys in disputes between investors and broker-dealers.

        The Dispute Resolution Task Force in its Final Report and Recommendations4 recommended that FINRA conduct a study to determine, among other matters, whether NAR firms are performing competently. FINRA's review revealed that there are a small number of NAR firms regularly practicing in the forum. Forum users have reported that the following NAR firm activities have taken place at the forum:

        •   using the forum as a vehicle to employ inappropriate business practices;
        •   requiring retainer agreements that reflect a non-refundable fee of $25,000;
        •   representing parties in hearing locations where state law prohibits such representation or, in the alternative, handling only small claims (decided on written submissions) to avoid hearing locations in which the unauthorized practice of law would become an issue;
        •   signing required arbitration submission agreements with the name of the NAR firm to avoid naming an individual representative who could be engaging in the unauthorized practice of law;
        •   pursuing frivolous or stale claims to attempt to elicit settlements; or
        •   breaching confidentiality provisions in settlement agreements by posting a picture of the settlement check to market the NAR firm's services.

        FINRA permits parties to represent themselves in the forum. Investors with small claims (claims of $100,000 or less) who want to be represented in the forum have limited access to attorneys because some attorneys may not be willing to offer services given the small dollar value of a dispute. In recent filings, approximately one-fifth of customer claims with specified damages have relief amounts of less than $100,000.5 Some of these investors are served by law school arbitration clinics,6 and others are served by NAR firms.

        While NAR firms provide service to public investors with small claims, among others, the allegations reported to FINRA raise serious concerns. There are no rules of professional conduct applicable to NAR firms' activities. Moreover, NAR firms are not subject to malpractice insurance requirements. Any recovery against a NAR firm for negligence is generally limited to the assets of the corporation. Therefore, investors have little recourse if a NAR firm negligently represents or defrauds them. In addition, NAR firms are not subject to licensing boards and there is no supervisory body with authority to police their activities. Therefore, FINRA is considering whether it would be prudent to further restrict representation of parties by NAR firms.

        Preliminary Economic Impact Assessment

        In considering whether to further restrict representation of parties by NAR firms, FINRA will evaluate the economic effects of further restrictions with respect to the current rules under the Codes that permit non-attorneys to represent clients in securities arbitration and mediation.7 Further restrictions on NAR firms are likely to affect investors, brokerdealers, NAR firms and other entities that offer services to investors in arbitration including attorneys.

        As described previously, investors typically retain representation by attorneys, NAR firms, relatives and friends, and law school arbitration clinics. Investors can benefit from their representative's experience and expertise to prepare and present a case, and to decide when to settle or arbitrate a claim. The benefits of representation are likely to increase with the competency and experience of the representation and the difficulty for investors to make informed decisions, such as when the legal issues are more complex. Investors can also incur costs from retaining representation in arbitration. For example, investors incur fees to retain attorneys and NAR firms. Other types of representation, including law school arbitration clinics, typically charge no fee.

        Economically rational investors will likely retain the representation that provides the most benefits relative to its costs, including retaining no representation if that is the most beneficial option. However, not all options may be available to all investors. Attorneys with the relevant competency are often not willing to offer services to smaller claims, and law school arbitration clinics may not be locally available. Law school arbitration clinics may also impose other restrictions, such as not handling claims above a set amount or offering services to high income investors.

        Although NAR firms are an alternative to representation by attorneys, NAR firms are not subject to the same professional rules or guidelines, nor are they subject to malpractice insurance requirements. As a result, relative to representation by attorneys, investors who retain representation by NAR firms may be more likely to experience harm at the hand of their representative and have less legal recourse to receive compensation for that harm. Investors may also not be aware of the absence of these protections, and therefore may not properly evaluate the benefits and costs of representation by NAR firms.

        Further restricting the representation of parties by NAR firms could benefit investors by reducing their exposure to firms that provide fewer client protections or redress options for malpractice. The absence of similar rules and requirements could result in a higher incidence of harmful practices, and thereby impose additional costs on investors when retaining representation. To the extent that harmful activities hinder the dispute resolution process, then broker-dealers would also incur additional legal expense and time to resolve disputes. Further restrictions on NAR firms would thereby also benefit broker-dealers through the reduction of these potential costs.

        Alternatively, further restricting the representation of parties by NAR firms could also impose additional costs. A primary cost could be a decrease in the ability of some investors, including investors with smaller claims, to find other beneficial sources of representation. The available alternatives to NAR firms may not be as beneficial as representation by NAR firms, even if there is a higher risk of negligent representation or fraud, and therefore impose costs on investors. The loss of representation could result in worse arbitration outcomes. Also, to the extent that NAR firms market their services to investors, and in particular investors with smaller claims, then further restrictions could also reduce the number of investors who are aware of the potential need to seek recourse in arbitration.

        Further restricting representation of parties by NAR firms would also have other economic effects. An inability by some investors to find other beneficial sources of representation in arbitration could impact the outcome of an arbitration hearing by affecting the quality and completeness of the information presented. Attorneys could also experience an increase in business from investors who would otherwise retain representation by NAR firms, which would then experience a loss of business. Holding the likely outcome of the arbitration constant, these impacts represent an economic transfer and not a new cost or benefit imposed.

        The magnitude of the benefits and costs depends on the restriction on NAR firms that may be imposed. The magnitude of the benefits and costs would also depend on the exposure of these investors to harmful activities and their ability to retain other representation. For example, investors with higher exposure to harmful activities by NAR firms or better access to beneficial sources of alternative representation would likely experience greater benefits, while those with lower exposure or less access to other beneficial sources of alternative representation could experience higher costs. The magnitude of the benefits and costs to investors and other affected parties would depend on the nature and severity of the potential changes to the Codes. The magnitude of the benefits and costs does not depend on the investors that would not otherwise retain representation by NAR firms.

        Request for Comment

        FINRA seeks answers to the following questions with respect to the efficacy of allowing NAR firms to continue to represent clients in the forum.

        1. What experiences have you had with a NAR firm in the forum? Do you believe the party received competent representation by the NAR firm? What was the economic impact to you or your firm of the experience?
        2. What other types of representation or assistance do investors retain in arbitration? What experiences have you had with other types of representation or assistance in the forum? Do you believe the party received competent representation or assistance? What was the economic impact to you or your firm of the experience?
        3. How does the expense to retain representation or assistance differ between NAR firms, law firms and other entities that offer services?
        4. Have you been unsuccessful at obtaining attorney representation in arbitration, and if so, what factors drove this? If a small claim size was a factor, how much was the claim that you were seeking? What factors limit investors' access to attorney representation in arbitration other than the size of the claim?
        5. Do you believe that FINRA should amend the Codes to restrict NAR firm activities in some way, or to prohibit entirely NAR firms from representing clients at the forum? If so, what are the appropriate restrictions?
        6. If you believe that FINRA should continue to allow NAR firms to represent clients at the forum, do you believe it would be helpful to forum users if FINRA published a checklist of questions on the FINRA website that investors could review before hiring a NAR firm? What questions would you suggest that FINRA include? What other alternatives should FINRA consider to reduce the incidence of harmful activities by NAR firms but ensure investors are able to retain representation?
        7. Are there other relevant benefits and costs associated with the further restriction on NAR firms that were not discussed in the economic impact analysis? What are the effects of these benefits and costs, and what are the magnitudes of the effects?

        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 (Online Availability of Comments) (November 2003) for more information.

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

        3. Under Rule 12208 of the Code of Arbitration Procedure for Customer Disputes, Rule 13208 of the Code of Arbitration Procedure for Industry Disputes, and Rule 14106 of the Code of Mediation Procedure, parties may be represented in an arbitration or mediation by a person who is not an attorney, unless: (1) state law prohibits such representation; (2) the person is currently suspended or barred from the securities industry in any capacity; or (3) the person is currently suspended from the practice of law or disbarred.

        4. In October 2014, FINRA formed the Dispute Resolution Task Force (Task Force) to consider possible enhancements to its arbitration and mediation forum. On December 16, 2015, the Task Force issued its Final Report, available at http://www.finra.org/sites/default/files/Final-DRtask-force-report.pdf.

        5. FINRA staff is able to identify over 6,300 customer claims filed from 2014 to 2016 with specified compensatory, punitive or other damages.

        6. See How to Find an Attorney on FINRA's website.

        7. We request comment below for information that would improve FINRA's ability to evaluate the benefits and costs of further restricting the representation of parties by NAR firms. The benefits and costs of representation are dependent on the competency of the representation, the fees, as well as the incidence and degree of harmful activities. Whether these factors systematically differ across representatives would impact the economic effects of further restricting representation by NAR firms.

      • 17-33 Amendments to the Code of Arbitration Procedure for Customer Disputes to Expand the Options Available to Customers if a Firm or Associated Person Is or Becomes Inactive Effective Date: October 18, 2017

        View PDF

        Arbitration

        Regulatory Notice
        Notice Type

        Request for Comment
        Referenced Rules & Notices

        Code of Arbitration Procedure for Customer Disputes, Rule 12000 Series
        FINRA Rule 12100
        FINRA Rule 12202
        FINRA Rule 12214
        FINRA Rule 12309
        FINRA Rule 12400
        FINRA Rule 12601
        FINRA Rule 12702
        FINRA Rule 12801
        FINRA Rule 12900
        Suggested Routing

        Compliance
        Legal
        Operations
        Registered Representatives
        Senior Management
        Key Topics

        Arbitration
        Associated Person
        Code of Arbitration Procedure
        Dispute Resolution

        Comment Period Expires: December 18, 2017

        Summary

        When respondents are no longer in business, recovery of arbitration awards against them often is unavailing. Accordingly, FINRA is proposing to amend the Code of Arbitration Procedure for Customer Disputes (Code) to expand a customer's options to withdraw an arbitration claim if a firm or an associated person becomes inactive before a claim is filed or during a pending arbitration. In addition, the proposed amendments would allow customers to amend pleadings, postpone hearings and receive a refund of filing fees under these situations.

        The text of the proposed amendments can be found at www.finra.org/notices/17-33.

        Questions concerning this Notice should be directed to:

        •   Kenneth L. Andrichik, Senior Vice President and Chief Counsel, Office of Dispute Resolution, at (212) 858-3915;
        •   Victoria Crane, Associate General Counsel, Office of General Counsel, at (202) 728-8104; or
        •   Mignon McLemore, Assistant Chief Counsel, Office of Dispute Resolution, at (202) 728-8151.

        Action Requested

        FINRA encourages all interested parties to comment on the proposal. Comments must be received by December 18, 2017.

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

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

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

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

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

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

        Background & Discussion

        FINRA has implemented a number of changes to its arbitration program that expand the options available to a customer when dealing with those member firms or associated persons who are responsible for most unpaid awards—firms and associated persons who are no longer in business either at the time the claim is filed or at the time of the award.3

        When a customer claimant first files an arbitration claim, FINRA staff alerts, by letter, the customer claimant when the respondent firm or broker is no longer in business. FINRA also informs the customer that awards against such firms or brokers have a much higher incidence of non-payment and that FINRA has limited disciplinary authority over inactive firms or associated persons that fail to pay arbitration awards. Thus, the customer knows before pursuing the claim in arbitration that collection of an award may be more difficult. In addition, upon learning that the respondent firm or associated person is inactive, a customer may determine to amend his or her claim to add other respondents from whom the customer may be able to collect should the claim go to award.

        As discussed in more detail below, FINRA is proposing to amend the Code to expand further the options available to customers in situations where a firm becomes inactive during a pending arbitration, or where an associated person becomes inactive either before a claim is filed or during a pending arbitration. FINRA is also proposing to amend the Code to allow customers to amend pleadings, postpone hearings, and receive a refund of filing fees under these situations.4

        A. Arbitrating Claims Against Inactive Members and Associated Persons

        Currently, under FINRA Rule 12202 (Claims Against Inactive Members), a customer's claim against a firm whose membership is terminated, suspended, cancelled or revoked, or that has been expelled from FINRA, or that is otherwise defunct, is ineligible for arbitration unless the customer agrees in writing to arbitrate after the claim arises. In these situations, the customer is able to evaluate the likelihood of collecting on an award and make an informed decision whether to proceed in arbitration, to file the claim in court or to amend his or her claim to add other respondents from whom the customer may be able to collect should the claim go to award, regardless of whether the customer signed a predispute arbitration agreement.5 Accordingly, claims against inactive firms proceed in arbitration only at the customer's option.6

        The Code does not address situations, however, where a member firm becomes inactive during a pending arbitration. In addition, the Code does not provide specific procedures for a customer to withdraw, and file in court, a claim against an associated person whose registration FINRA has terminated, revoked or suspended either before the customer files a claim or during a pending arbitration.

        Accordingly, FINRA is proposing to amend FINRA Rule 12202 to expand a customer's option to withdraw a claim to situations where a member becomes inactive during a pending arbitration, or where an associated person becomes inactive either before a claim is filed or during a pending arbitration. Under the proposal, FINRA Rule 12202 would specify that a customer's claim against an inactive associated person, as defined, is ineligible for arbitration unless the customer agrees in writing to arbitrate after the claim arises. In addition, FINRA Rule 12202 would specify that if a member or an associated person becomes inactive during a pending arbitration, FINRA would notify the customer of the status change, and provide the customer with 60 days to withdraw the claim(s) with or without prejudice.7

        Similar to the current rules and procedures relating to claims filed against inactive members, the proposed amendments would allow the customer to evaluate the likelihood of collecting on an award and make an informed decision whether to proceed in arbitration, to file the claim in court or to amend his or her claim to add other respondents from whom the customer may be able to collect should the claim go to award, regardless of whether the customer signed a predispute arbitration agreement.

        In addition, FINRA is proposing to amend FINRA Rule 12100 (Definitions) to add definitions of "inactive member" and "inactive associated person." Consistent with Rule 12202 today, FINRA is proposing to define an "inactive member" as a member whose membership is terminated, suspended, cancelled or revoked; that has been expelled from FINRA; or that is otherwise defunct.

        An "inactive associated person" would be defined as a person associated with a member whose registration is revoked8 or suspended,9 or whose registration has been terminated for a minimum of 365 days.10 Thus, if an associated person's registration is not revoked or suspended and the individual re-registers within a year, the individual would not be classified as terminated and, therefore, would not be deemed inactive.
        B. Amending Pleadings

        FINRA Rule 12309 (Amending Pleadings) limits a party's ability to amend a statement of claim, among other pleadings, after FINRA has appointed a panel to the case. Specifically, once FINRA appoints a panel to a case, a party can amend a pleading only if the arbitrators grant a party's motion to do so. FINRA Rule 12309 also provides that a party cannot add a new party to the case after arbitrator ranking lists are due to the Director of Arbitration until FINRA appoints the panel and the arbitrators grant a party's motion to add the new party.

        FINRA believes that a customer should be able to change his or her litigation strategy during a pending case once the customer learns that a firm or an associated person has become inactive. Accordingly, FINRA is proposing to amend FINRA Rule 12309 to provide that if FINRA notifies a customer that a firm or an associated person has become inactive during a pending arbitration, the customer may amend a pleading, including adding a new party, within 60 days of receiving such notice.
        C. Postponing Hearings

        FINRA Rule 12601 (Postponement of Hearings) addresses when a scheduled hearing date can be postponed. The parties can agree to postpone a hearing. Absent an agreed upon postponement, a hearing can be postponed by the FINRA staff in extraordinary circumstances, by the arbitrators at their discretion, or by the arbitrators upon a party's motion. FINRA is proposing to amend FINRA Rule 12601 to provide that if FINRA notifies a customer that a firm or an associated person has become inactive and the scheduled hearing date is within 60 days of the date the customer receives the notice from FINRA, the customer may postpone the hearing date. Since the proposed amendment would provide a customer with 60 days to determine how to proceed after FINRA notifies the customer of the status change to inactive, it would be appropriate, FINRA believes, to allow the customer to postpone a scheduled hearing that falls within that time period.

        In addition, FINRA assesses postponement fees against the parties for each postponement agreed to by the parties, or granted upon the request of one or more parties. FINRA also charges an additional fee of $600 per arbitrator if a postponement takes place within 10 days of a scheduled hearing date. The additional $600 per arbitrator fee is paid to the arbitrators to compensate them for the late adjournment.11 FINRA is proposing to amend FINRA Rule 12601 to provide that if FINRA notifies a customer that a firm or an associated person has become inactive and the scheduled hearing date is within 60 days of the date the customer receives the notice from FINRA, then FINRA would not charge the customer a postponement fee or an additional fee of $600 per arbitrator if a customer chooses to postpone a scheduled hearing.

        FINRA is also proposing to amend FINRA Rule 12214 to make it clear that it would continue to pay the $600 honoraria to the arbitrators to compensate them for their time if a customer chooses to postpone a scheduled hearing within 10 days before a scheduled hearing session because the customer learns that the firm or associated person has become inactive.
        D. Default Proceedings

        FINRA Rule 12801 (Default Proceedings) permits a claimant to request default proceedings against any associated person respondent whose registration is terminated, revoked or suspended, and who failed to file an answer to a claim within the time provided in the Code. A single arbitrator will decide the case based on the claimant's pleadings and other documentation.12 The claimants must present a sufficient basis to support the making of an award.13 The arbitrator may not issue an award based solely on the nonappearance of a party.14

        As noted, the proposed amendments would define an inactive associated person as a person associated with a member whose registration is revoked or suspended, or whose registration has been terminated for a minimum of 365 days.15 In the context of a default proceeding, FINRA believes that it would be appropriate to continue to allow a customer to request default proceedings against any terminated associated person who fails to answer a claim regardless of how long the associated person has been terminated, consistent with the existing rule.

        Accordingly, FINRA is proposing to amend FINRA Rule 12801(a) to specify that a claimant may request a default proceeding against a terminated associated person who fails to file an answer within the time provided in the Code regardless of the number of days since termination. For example, the proposed amendment would make clear that a customer could initiate a default proceeding against an associated person who left a firm, joined a new firm one week later and failed to answer a claim relating to activities at the former firm.
        E. Refunding Filing Fees

        FINRA Rule 12900 (Fees Due When a Claim is Filed) specifies that if a claim is settled or withdrawn more than 10 days before the date that the hearing is scheduled to begin, a party paying a filing fee will receive a partial refund of the filing fee. The rule also provides that FINRA will not refund any portion of the filing fee if a claim is settled or withdrawn within 10 days of the date that the hearing is scheduled to begin.

        FINRA is proposing to amend FINRA Rule 12900 to provide that FINRA will refund a customer's full filing fee if FINRA notifies a customer that a firm or an associated person has become inactive during a pending arbitration, and the customer withdraws the case against all parties within 60 days of the notification. FINRA would refund the filing fee even if the customer withdraws the case within 10 days of the date that the hearing is scheduled to begin.

        Preliminary Economic Impact Assessment

        A. Regulatory Need

        FINRA has adopted rules and procedures that expand the options available to a customer when dealing with those member firms or associated persons that are responsible for most unpaid awards—firms and associated persons who are no longer in business either at the time the claim is filed or at the time of the award. Despite these measures, the rules do not always enable customers to collect awards. Ultimately, it is difficult for customers to collect from firms or associated persons who are no longer in business, whether the customer has an arbitration award or a court judgment.

        The proposed amendments are intended to help further address the issue of unpaid customer arbitration awards by expanding the options available to customers when filing a claim in arbitration against an inactive firm or associated person, or if the firm or associated person becomes inactive during a pending arbitration.
        B. Economic Baseline

        The economic baseline for the proposed amendments is the current rules under the Code that address customer disputes in arbitration. The proposal is expected to affect parties in an arbitration including customers, member firms and associated persons.

        The Code currently provides that a customer's claim against a firm whose membership is terminated, suspended, cancelled or revoked, or that has been expelled from FINRA, or that is otherwise defunct, is ineligible for arbitration unless the customer agrees in writing to arbitrate after the claim arises. The Code does not address situations where a firm becomes inactive during a pending arbitration. In addition, the Code does not currently provide specific procedures for a customer to withdraw, and file in court, a claim against an associated person whose registration FINRA has terminated, revoked, or suspended either before the customer files a claim or during a pending arbitration. The Code also does not currently provide specific procedures for a customer to amend pleadings, postpone hearings, and receive a refund of filing fees where a firm or an associated person becomes inactive during a pending arbitration.

        FINRA staff is able to identify 1,328 customer cases closed by hearing or by papers (or by stipulated awards) from 2014 to 2016. Among these cases, FINRA staff is able to identify 278 cases (21 percent) where a firm or an associated person would have been identified as inactive under the proposed amendments either before or during a pending arbitration.
        C. Economic Impacts

        The benefit of the proposed amendments arises from the expansion of a customer's options under the Code where a member firm becomes inactive during a pending arbitration, or where an associated person becomes inactive either before a claim is filed or during a pending arbitration. The proposed amendments would enable customers to determine whether to proceed in arbitration or to file a claim in court, regardless of whether the customer signed a predispute arbitration agreement. Customers who withdraw claims would also benefit from the refund of the filing fee. Upon learning that the respondent firm or associated person is inactive, a customer may determine to amend his or her claim to add other respondents from whom the customer may be able to collect should the claim go to award. Customers would also have the ability to postpone hearings without penalty and thereby have additional time to prepare.16 More generally, the proposed amendments would increase the ability of customers to alter their litigation strategy if they remain in arbitration.

        The proposal may impose costs on customers, firms and associated persons. For customers who withdraw their claims in arbitration and file in court, they could incur additional legal expense and time to resolve the dispute. The proposal could also impose costs on firms and associated persons. If customers withdraw their claims and then file them in court, inactive firms and associated persons could incur additional costs to resolve the dispute. If customers remain in arbitration and amend their pleadings, firms and associated persons who remain parties to the arbitration could incur legal expense to alter their litigation strategy.

        The magnitude of the aggregate benefits and costs of the proposal depends upon whether customers would exercise the options under the proposed amendments and the resulting outcomes. FINRA believes that few customers would withdraw claims from arbitration in the presence of the proposed rules. In FINRA's experience, customers typically proceed with arbitration even when notified that a firm is inactive at the time of filing and remain in arbitration in the event that a firm or an associated person leaves the industry while the arbitration is pending.

        One reason customers remain in arbitration when the named party is inactive may be the additional costs of restarting a case in another venue. Another reason may be the expectation that another venue would not result in a higher likelihood of redress. As discussed above, customers can today confirm an arbitration award in court in order to avail themselves of its judicial authority. Based on this experience, FINRA believes that customers would continue to remain in arbitration and exercise the newly provided options under the proposed amendments relating to amending pleadings and postponing hearings.

        The proposed amendments would provide no significant benefits and impose no material costs on customers who would not change their behavior in the presence of the rule, nor on the firms and associated persons who are party to their claims. In the event that a panel would otherwise grant the requests provided under the proposal (e.g., amended pleadings), the benefits to the proposed amendments would be limited to the streamlining of the arbitrators' decisions. In general, however, the use of the options in a limited number of circumstances suggests that the magnitude of the benefits and costs of the proposal are likely to be small.
        D. Alternatives Considered

        FINRA exercised discretion in setting the requirement for associated persons to be considered inactive if their registrations have been terminated for a minimum of 365 days. FINRA also exercised discretion by not including a similar requirement for associated persons whose registrations have been revoked or suspended. The 365 minimum day requirement would typically delay the ability of customers to use the options under the proposed amendments. If access to the options under the proposed amendments is beneficial to customers and increases the likelihood of redress, then the requirement could reduce these benefits.17 FINRA considered the loss of customer benefits in addition to the costs to customers of withdrawing claims or amending pleadings when associated persons only temporarily leave the industry.18 FINRA also considered the costs to associated persons from the loss of FINRA arbitration as the agreed upon forum for dispute resolution. The 365 minimum day requirement is one alternative. FINRA requests comment below regarding the length of the minimum-day requirement or other alternatives that would provide customers the most benefits while minimizing their costs.

        Lastly, FINRA exercised discretion in setting the amount of time from when customers receive notification of the inactive status of a firm or an associated person to when they could exercise their options under the proposed amendments. After 60 days, customers would lose the benefits under the proposed amendments. However, the 60-day timeframe would limit the effect of an inactive firm or associated person on a pending arbitration, and provide certainty that the arbitration would continue in regular order after the time period had elapsed. FINRA believes that 60 days is sufficient for a customer to decide on the proper course of action.

        Request for Comment

        FINRA is interested in receiving comments on all aspects of the proposed amendments, including the economic impact of the proposed amendments. FINRA requests data and other quantitative measures in support of comments where possible.

        •   Under what scenarios would customers withdraw their claims without prejudice under the proposed amendments? How likely are these scenarios?
        •   Does the 365 minimum day requirement properly balance the benefits to customers from the ability to exercise the options under the proposed amendments to the potential costs to customers from exercising the options and having the inactive associated person return to the industry? Should the minimum number of days be more or less than 365? Why?
        •   In proposing the 365 minimum day requirement, FINRA considered that approximately 75 percent of individuals who leave the industry return within one year. Are there other factors FINRA should consider in determining whether to include a 365 minimum day requirement for terminated associated persons to be considered inactive?
        •   Are there other relevant benefits and costs associated with the proposal that were not discussed in the economic impact analysis? What are the consequences of the benefits and costs, and what are the magnitudes of its effects?
        •   Would the proposed amendments impact the incentives of firms and associated persons? If so, how?

        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 (Online Availability of Comments) (November 2003) for more information.

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

        3. Unpaid awards occur in customer cases, those involving an investor, as well as intra-industry cases, those involving industry members only. The proposed amendments relate to unpaid customer arbitration awards only.

        4. FINRA is also proposing to amend the Code to update cross-references and make other non-substantive, technical changes to rules impacted by the proposal.

        5. If the customer notifies FINRA in writing that he or she does not want to proceed against the inactive firm in FINRA's forum, the staff deems the customer's agreement to submit to arbitration rescinded and sends the customer a full refund of any filing fee remitted.

        6. In FINRA's experience, customer claimants almost always decide to pursue arbitration claims. Claimants' counsel has indicated to FINRA staff that they continue to pursue claims against inactive firms and associated persons due to the possibility of collection from various parties, sources and entities not named in the arbitration case, including: (1) bankruptcy trustees; (2) commercial insurance policies; (3) successor firms; (4) fidelity bonds; and (5) control persons.

        7. FINRA Rule 12702 (Withdrawal of Claims) provides that before a party answers a statement of claim, the claimant can withdraw the claim with or without prejudice. However, after a party submits an answer, the claimant can only withdraw the claim with prejudice unless the panel or the parties agree otherwise. FINRA is proposing to make a conforming change to Rule 12702 to provide that a customer can withdraw a claim without prejudice if the party that submitted an answer is an inactive member or inactive associated person. Withdrawal without prejudice would a How the customer to re-file the arbitration at a later date.

        8. In the Central Registration Depository (CRD®), a "revoked" status of an individual's registration reflects revocation of an individual's license.

        9. A "suspended" status in CRD indicates that an individual's registration has been suspended.

        10. An associated person's registration may be terminated either fully or partially. A full termination means the termination of registration with all self-regulatory organizations (SROs) and all jurisdictions. A partial termination means the termination of registration or registration category with one or more, but not all, SROs and jurisdictions. For purposes of the proposal, the associated person's registration must be a full termination for at least 365 days.

        11. See FINRA Rule 12214 (Payment of Arbitrators).

        12. See FINRA Rule 12801(b)(2)(B). No hearings are held in default proceedings unless the customer requests one. See FINRA Rule 12801(c).

        13. See FINRA Rule 12801(e)(1).

        14. Id. If the defaulting respondent files an answer before an award has been issued, the proceedings against this respondent will be terminated and the claim will proceed under the regular provisions of the Code. See FINRA Rule 12801(f).

        15. See supra note 10.

        16. Among the 1,328 customer cases closed by hearing or by papers (or by stipulated awards) from 2014 to 2016, FINRA staff is able to identify 145 cases where a firm or an associated person would have been identified as inactive after arbitrator ranking lists were due or FINRA appointed a panel. FINRA staff is also able to identify 63 cases where a firm or an associated person would have been identified as inactive within 60 days of a scheduled hearing.

        17. For example, among the 1,328 customer cases closed by hearing or by papers (or by stipulated awards) from 2014 to 2016, FINRA staff is able to identify 84 cases where an associated person had left the industry fewer than 365 days before the arbitration close date. These associated persons may or may not have returned to the industry after the arbitration close date. The customers to these cases would not have been able to avail themselves of the benefits of the new options under the proposed amendments, as a result of the 365 day requirement. The number of such cases decreases to 42 cases if instead a 180-day window is used and 20 cases if instead a 90-day window is used.

        18. Among the 1,328 customer cases closed by hearing or by papers (or by stipulated awards) from 2014 to 2016, FINRA staff is ableto identify 67 cases where an associated person had left during a pending arbitration but returned to the industry in fewer than 365 days before the arbitration close date. The 365-day window prevents customers from exercising the new options under the proposed amendments and potentially reduces the additional costs to the parties to resolve disputes when the associated person has only temporarily left the industry. The number of such cases decreases to 57 cases if instead a 180-day window is used and 51 cases if instead a 90-day window is used.

      • 17-32 FINRA Reminds Firms of Sales Practice Obligations for Volatility-Linked Exchange-Traded Products Effective Date: October 16, 2017

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        Volatility-Linked Exchange-Traded Products

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        FINRA Rule 2111
        FINRA Rule 2210
        FINRA Rule 3110
        Regulatory Notice 10-51
        Regulatory Notice 12-03
        Suggested Routing

        Advertising
        Compliance
        Legal
        Senior Management
        Key Topics

        Communications with the Public
        Exchange-Traded Products
        Suitability
        Supervision
        Training
        Volatility-Linked Exchange-Traded Products

        Summary

        Volatility-linked exchange-traded products (ETPs)1 are designed to track Chicago Board Options Exchange Volatility Index (VIX) futures, rather than the VIX itself. For the reasons explained further below, many volatility-linked ETPs are highly likely to lose value over time. Accordingly, volatility-linked ETPs may be unsuitable for certain retail investors, particularly those who plan to use them as traditional buy-and-hold investments.

        This Notice reminds firms of their sales practice obligations in connection with volatility-linked ETPs as discussed more generally in Regulatory Notice , including, without limitation, that recommendations to customers must be based on a full understanding of the terms, features and risks of the product recommended, sales materials must be fair and accurate, and firms must have reasonable supervisory procedures in place to ensure that these obligations are met.

        Questions concerning this Notice should be directed to:

        •   Thomas M. Selman, Executive Vice President, Regulatory Policy, at (202) 728-6977 or by email at Thomas.Selman@finra.org;
        •   James S. Wrona, Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8270 or by email at Jim.Wrona@finra.org; or
        •   Kathryn Moore, Associate General Counsel, OGC, at (202) 728-8200 or by email at Kathryn.Moore@finra.org.

        Background and Discussion

        The VIX is frequently cited as a measure of investor fear, which historically tends to be elevated in periods of market distress and lower under normal market conditions.2 The VIX often moves sharply higher when stock indices decline significantly. As such, the VIX has the desirable attribute that it is negatively correlated with the broader stock market.

        Volatility-linked ETPs generally provide exposure to volatility by tracking short- and mid-term VIX futures indices.3 Volatility-linked ETPs that seek to maintain a continuous, targeted maturity exposure to VIX futures will either track or hold VIX futures contracts on a rolling basis, meaning that they will sell shorter-term contracts or contracts about to expire with contracts that have more distant or deferred maturity dates in order to maintain the desired exposure. Historically, the prices for VIX futures have tended to increase as the futures contract dates go out farther into the future, so the strategy of maintaining a targeted maturity exposure to VIX futures can often involve selling a contract with a lower price than the one bought to replace it. This rolling of contracts can result in a loss on the trade or a negative roll yield.4

        Because of the negative roll yield, many volatility-linked ETPs that seek to maintain a continuous, targeted maturity exposure to VIX futures, particularly to shorter maturities, have lost a significant amount of value over time; some have lost more than 90 percent of their value since they launched. And, such products will likely continue to lose value over longer periods of time. Moreover, the performance of VIX futures can diverge from that of the VIX, and in general, movements in the futures are smaller in magnitude than those of the VIX. For these reasons, the performance of volatility-linked ETPs that seek to maintain a continuous, targeted maturity exposure to VIX futures may also be less correlated to that of the VIX than investors might expect.5

        The risks of volatility-linked ETPs have been highlighted by both academic and financial publications6 and firms, registered representatives, their supervisors and investors should understand the risks of these products. Without understanding the key features of these volatility-linked ETPs, some investors and registered representatives could mistakenly believe that these products are likely to exhibit behavior similar to that of the VIX over short as well as long time horizons and thus provide protection against market losses over a variety of time periods. In fact, these products have not exhibited, and likely will not exhibit, behavior similar to the VIX over longer periods and exhibit imperfect correlation even over shorter periods.7

        Sales Practice Obligations Relating to Volatility-Linked ETPs

        As detailed in Regulatory Notice , products that offer retail investors exposure to stock market volatility, such as volatility-linked ETPs, are "complex" products. Firms should review that Notice and consider whether to use the type of heightened scrutiny and supervision suggested therein for these complex products.8 Firms are similarly reminded that they must comply with the obligations discussed below when offering volatility-linked ETPs.

        Suitability

        FINRA Rule 2111 requires member firms and associated persons to have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer's investment profile. Two of the main suitability obligations delineated in Rule 2111 that are particularly relevant to volatility-linked ETPs are customer-specific and reasonable-basis suitability. The former requires a reasonable basis to believe that a recommendation is suitable for a particular customer based on the customer's investment profile, including the customer's investment experience, risk tolerance, liquidity needs, investment objectives, and financial situation and needs.9 The latter requires that the member or associated person perform reasonable diligence to understand the nature of a recommended security or strategy, as well as potential risks, and then determine whether there is a reasonable basis to believe, based on the reasonable diligence, that the recommendation is suitable for at least some investors. The level of reasonable diligence that is required will rise with the complexity and risks associated with the security or strategy. With regard to a complex product such as a volatility-linked ETP, an associated person should be capable of explaining, at a minimum, the product's main features and associated risks.10

        Communications with the Public

        FINRA Rule 2210 requires, among other things, that all communications with the public be based on principles of fair dealing and good faith, be fair and balanced, and provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry or service.

        Supervision

        FINRA Rule 3110 requires that member firms establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. A reasonably designed system must be specifically tailored to a member's business, taking into account, among other things, the nature and complexity of the products offered and the customer base. Firms also must train registered representatives and supervisors about the terms, features and risks of the products they recommend, as well as the factors that would make such products either suitable or unsuitable for certain investors.

        Volatility-linked ETPs are complex products that could be easily misunderstood and improperly sold by registered representatives. As discussed in Regulatory Notice and noted above, firms should consider whether to use heightened scrutiny and supervision of ETPs.11 Firms must act reasonably to ensure that their registered representatives and supervisors understand the risks presented by such products and that their systems and training are reasonably designed to avoid unsuitable sales or improper communications.12

        Conclusion

        Volatility-linked ETPs are complex products that are not suitable for all investors. Firms are reminded of their obligation to vet complex products, to put reasonable supervisory controls in place, and to train their registered representatives and supervisors to ensure that suitability and other obligations under FINRA rules are met.


        1 An exchange-traded product (ETP) is a security listed on an exchange that seeks to provide exposure to the performance of an index, benchmark, or actively-managed strategy. The most common type of ETP is the exchangetraded fund (ETF). Other ETPs include commodity pools, which invest in futures, and exchangetraded notes (ETNs), which track an index or benchmark but are debt obligations of an issuer and hold no underlying portfolio. Volatility-linked ETPs include ETPs that provide exposure to volatility as an asset, as represented by the VIX or other analogous index. These products typically track derivatives such as futures to achieve volatility exposure and have been structured as commodity pools, ETFs or ETNs.

        2 The VIX is calculated using one month put and call options on the S&P 500 Index and is designed to measure the market's expectations of volatility in large cap U.S. stocks over the next 30-day period. While the VIX is perhaps the best known and most widely cited, there are numerous other indices that are similar to the VIX but measure volatility in other markets, such as the markets for non-U.S. stocks, as well as for interest rates, currencies and commodities.

        3 Current U.S.-listed volatility ETPs include VIX futures trackers, inverse versions of the VIX futures trackers and two-times leveraged VIX futures trackers, as well as more sophisticated strategies providing exposure to different combinations of long and short positions in VIX futures of varying maturities.

        4 "Roll yield" is measured by the percentage difference between the price of the futures contract sold and the new one purchased. A futures market in which the roll yield is negative—because the prices of futures contracts increase as the contract expiration dates go further out into the future—is said to be in "contango." Conversely, for a market in "backwardation," the prices of futures contracts decrease as the contract expiration dates go farther out into the future. Rolling a position in a market in backwardation results in a positive roll yield, as the contract that is sold has a higher price than the one with which it is replaced. See FINRA Regulatory Notice (discussing sales practice obligations for commodity futureslinked securities).

        5 For example, over a recent 12-month period, while the VIX was down around six percent, one volatility ETP tracking the short-term VIX futures index lost more than 70 percent of its value.

        6 For example, according to the academic researcher who developed the VIX:

        "Unlike other securities traded on stock exchanges, however, [volatility-linked ETPs] are not suitable buy-and-hold investments and are virtually guaranteed to lose money through time…. The nature and performance of [volatilitylinked ETPs] suggest that a significant proportion of holders are either irrational and/or unaware of how these products are structured and perform through time. Among the finding is that [volatility-linked ETPs] benchmarked to the VIX Short-Term Futures indices are virtually certain to lose money through time.... Over their three-year history, the holders of ETPs bench-marked to the VIX Short-Term Futures indices have lost nearly $4 billion."

        See Robert E. Whaley, "Trading Volatility: At What Cost?" Journal of Portfolio Management, Fall 2013, pp. 95-108. See also Brendan Conway, "No, Your ETF Doesn't Track the VIX Volatility Index – and Here are the Numbers," Barron's (June 17, 2014); Chris Dieterich, "The Fear Gauge: Investors Should Avoid VIX ETFs," Barron's, (March 26, 2016).

        7 In a FINRA enforcement action being issued contemporaneously with this Notice, for example, FINRA found that certain brokers were making unsuitable recommendations of volatility-linked ETPs to customers with the mistaken belief that such products could be used as a long-term hedge on their customers' equity positions in the event of a market downturn. See Wells Fargo Clearing Services, LLC (AWC No. 2014042465601) (October 16, 2017).

        8 See FINRA Regulatory Notice (discussing heightened scrutiny and supervision of complex products).

        9 A customer's investment profile also includes the customer's age, other investments, tax status, investment time horizon, and any other information the customer may disclose to the member or associated person in connection with such recommendation.

        10 FINRA notes, as well, the importance of a firm's vetting of new products, particularly new products that are complex or have potentially high levels of risk associated with them. See, e.g., FINRA Regulatory Notices (April 2005) (highlighting best practices for vetting new products); and (June 2009) (reminding firms of their obligation to vet new complex and non-traditional exchange-traded funds).

        11 See FINRA Regulatory Notice (discussing heightened scrutiny and supervision of complex products).

        12 In this regard, firms are also encouraged to consider adopting effective conflict-review practices for the introduction of complex new products, such as those highlighted in FINRA's October 2013 Report on Conflicts of Interest.

      • 17-31 FINRA Amends Section 13 of Schedule A to the FINRA By-Laws to Establish Charges for New Option to File Websites and Web Pages in Native Format Implementation Date: October 5, 2017

        Advertising Fees

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 2210
        FINRA Rule 2220
        Section 13 of Schedule A to the FINRA By-Laws
        Suggested Routing

        Advertising
        Compliance
        Legal
        Senior Management
        Key Topics

        Advertising Review Charges
        Communications with the Public

        Summary

        FINRA has filed for immediate effectiveness amendments to Section 13 of Schedule A to the FINRA By-Laws governing the review charge for communications filed with or submitted to FINRA's Advertising Regulation Department.1 The amendments do not increase the filing fees for the review of communications. The amendments establish charges for a new option to submit websites and web pages in their native format in anticipation of the impending upgrade to the Advertising Regulation Electronic Files (AREF) System. The amendments do not change the current filing requirements under FINRA Rules 2210 (Communications with the Public) or 2220 (Options Communications).

        Included with this Notice is Attachment A, the text of amended Section 13.

        Questions concerning this Notice should be directed to:

        •   Amy C. Sochard, Senior Director, Advertising Regulation, at (240) 386-4508 or Amy.Sochard@finra.org; or
        •   Pramit K. Das, Associate Director, Advertising Regulation Technology, at (240) 386-4544 or Pramit.Das@finra.org.

        Background & Discussion

        In April 2014, FINRA launched a retrospective review of its communications with the public rules to assess their effectiveness and efficiency. One of the actions arising from this retrospective review has been an effort to upgrade FINRA's AREF System, a web-based application available through the FINRA Firm Gateway2 that enables firms to electronically submit communications with the public for review by the FINRA.3

        Currently, the AREF System accepts such submissions in a variety of file formats for print (e.g., .doc, .rtf, .txt), video (e.g., .mov, .mp4, .wmv), audio (e.g., .aif, .mp3, .wav) or other form (e.g., .pdf), but not for website or web page communications in their native format (e.g., .html). Consequently, firms submitting website or web page communications through the AREF System must convert them from native format to a format such as Portable Document Format (PDF). This conversion process can be burdensome, sometimes resulting in voluminous PDF pages. The impending upgrades to the AREF System will make the submission of website or web page communications more efficient by including the capability to accept such communications in their native format. Firms that choose to use the new capability will package websites or web pages in a compressed file format and submit them through the AREF System for review by FINRA. Firms will include in their submissions a manifest that lists each unique web page address (Uniform Resource Locator or URL) submitted for review.

        Amendments

        Rules 2210 and 2220 require members to file with FINRA specified retail communications at least 10 business or calendar days prior to use, within 10 business days of first use, or within such shorter period as FINRA may allow, as applicable. For example, new members, for a period of one year beginning on the date their FINRA membership becomes effective, generally must file with FINRA at least 10 business days prior to first use, any retail communication that is published or used in any electronic or other public media, including any generally accessible website.4 As another example, all members generally must file within 10 business days of first use any retail communication-including a website communication-that promotes or recommends a specific registered investment company or family of registered investment companies.5 FINRA evaluates these and other communications that are subject to filing requirements or which firms file voluntarily for compliance with applicable rules of FINRA, the SEC, the Municipal Securities Rulemaking Board and the Securities Investors Protection Corporation. Pursuant to the content standards of Rule 2210, FINRA helps to ensure that all member firms' communications are based on principles of fair dealing and good faith, are fair and balanced, and provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry or service. Among other things, FINRA rules prohibit member communications from including false, exaggerated, unwarranted, promissory or misleading statements or claims.

        Currently, Section 13 imposes a review charge for each communication filed with or submitted to FINRA (except for items that are filed or submitted in response to a written request from FINRA issued pursuant to the spot check procedures set forth in Rules 2210(c)(6) and 2220(c)(3)). The rates charged are based on the number of pages for printed material or the length of video or audio media. In addition, there are surcharges for expedited review.

        The amendments to Section 13 establish charges for submission of websites and web pages in native format, in anticipation of the upgraded AREF System capabilities. FINRA anticipates this upgraded AREF System capability will be operational in October 2017. A firm's use of the upgraded AREF functionality will be voluntary. The amendments establish rates of $125, plus $10 for each web page reviewed in excess of 10 pages. For expedited reviews, the amendments establish rates of $600 per item plus $50 for each web page reviewed in excess of 10 pages. For the purposes of the charging schedule, each distinct URL would be treated as a web page. The amendments mirror the current rates for printed material, which remain unchanged. Thus, the amendments maintain parity in charging, irrespective of the form of filing or submission.

        FINRA notes that firms will not be obligated to file or submit website communications in native format. They may continue to convert those communications to a printed format and submit them at the unchanged printed page rate if they find that method more efficient or economical. The underlying filing requirements have not changed.


        1 See Exchange Act Release No. 81801 (October 3, 2017) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to the Review Charges for Communications Filed with or Submitted to FINRA) (File No. SRFINRA-2017-030).

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

        3 Other actions FINRA has taken in response to the recommendations include additional guidance for, and amendments to, the communications with the public rules. See Regulatory Notice 17-18 (April 2017) (Guidance on Social Networking Websites and Business Communications); 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) (File No. SR-FINRA-2016-018); Regulatory Notice 15-17 (May 2015) (Guidance on Rules Governing Communications With the Public).

        4 See FINRA Rule 2210(c)(1).

        5 See FINRA Rule 2210(c)(3).

        ATTACHMENT A

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

        * * * * *

        SCHEDULE A TO THE BY-LAWS OF THE CORPORATION

        * * * * *

        Section 13—Review Charge for Communications Filed or Submitted There shall be a review charge for each and every communication, whether in printed, video or other form, filed with or submitted to FINRA, except for items that are filed or submitted in response to a written request from FINRA's Advertising Regulation Department ("the Department") issued pursuant to the spot check procedures set forth in FINRA rules as follows: (1) for printed or website material reviewed, $125.00, plus $10.00 for each printed page or webpage reviewed in excess of 10 pages; and (2) for video or audio media, $125.00, plus $10.00 per minute for each minute of tape reviewed in excess of 10 minutes.

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

      • 17-30 SEC Approves Consolidated FINRA Registration Rules, Restructured Representative-Level Qualification Examinations and Changes to Continuing Education Requirements Effective Date: October 1, 2018

        View PDF

        Qualification and Registration

        Regulatory Notice
        Notice Type

        Consolidated Rulebook
        Rule Amendment and New Rule
        Referenced Rules & Notices

        FINRA By-Laws, Article V, Section 4
        FINRA Rule 1200 Series
        FINRA Rules 2010, 3110, 3130(a),3220, 3240, 3270 and 3280
        SEA Section 15A(g)(3)
        Suggested Routing

        Compliance
        Finance
        Legal
        Operations
        Registered Representatives
        Registration
        Senior Management
        Training
        Key Topics

        Central Registration Depository(CRD®)
        Compliance Officer
        Consolidated FINRA Rules
        Continuing Education
        Financial Services Affiliate Waiver Program
        Permissive Registrations
        Principal Financial Officer and Principal Operations Officer
        Qualification and Registration
        Securities Industry Essentials™ (SIE™)

        Qualification and Registration

        Summary

        The Securities and Exchange Commission (SEC) approved a proposed rule change to: (1) adopt consolidated FINRA registration rules;1 (2) restructure the representative-level qualification examinations by creating a general knowledge examination called the Securities Industry Essentials (SIE) and transforming the representative-level examinations into specialized knowledge examinations; and (3) amend the Continuing Education (CE) requirements.2

        These changes become effective October 1, 2018.

        The text of the new and amended rules is available at www.finra.org/notices/17-30.

        Questions regarding this Notice should be directed to:

        •   Afshin Atabaki, Associate General Counsel, Office of General Counsel, at (202) 728-8902 or by email at afshin.atabaki@finra.org;
        •   Joe McDonald, Senior Director, Testing and Continuing Education Department, at (240) 386-5065 or by email at joe.mcdonald@finra.org; or
        •   Alexandra Toton, Associate Director, Testing and Continuing Education Department, at (240) 386-4677 or by email at alexandra.toton@finra.org.

        Background and Discussion

        Section 15A(g)(3) of the Securities Exchange Act of 1934 (Exchange Act or SEA) authorizes FINRA to prescribe standards of training, experience and competence for persons associated with FINRA members. FINRA's registration rules ensure that associated persons attain and maintain specified levels of competence and knowledge pertinent to their function. In general, the registration rules: (1) require that persons engaged in a firm's investment banking or securities business who are to function as representatives or principals register with FINRA in each category of registration appropriate to their functions by passing one or more qualification examinations; (2) provide a process for firms to request a waiver of a qualification examination; (3) exempt specified associated persons from the registration requirements; and (4) allow firms to permissively register specified persons.

        FINRA has consolidated the NASD and Incorporated NYSE registration rules as FINRA rules. The consolidated rules streamline, and bring consistency and uniformity to, the qualification and registration requirements. The consolidated rules, among other things, allow a member firm to permissively register, or maintain the registration(s) as a representative or principal of, any associated person of the firm, establish a waiver program for individuals registered with a member firm who move to a financial services industry affiliate of a member firm and require firms to designate a Principal Financial Officer and a Principal Operations Officer. In conjunction with these changes, FINRA has also restructured the representative-level qualification examination program into a more efficient format whereby all representative-level applicants will take a general knowledge examination (the SIE) and a tailored, specialized knowledge examination (a revised representative-level qualification examination) for their particular registered role. Individuals who are not associated persons of firms, such as members of the general public, are also eligible to take the SIE. The restructured program, among other things, eliminates duplicative testing of general securities knowledge on representative-level examinations and eliminates several representative-level registration categories that have become outdated or have limited utility. In addition, FINRA has made corresponding and clarifying changes to the CE requirements.

        Summary of Consolidated Registration Rules

        The following is a summary of the consolidated registration rules.

        FINRA Rule 1210 (Registration Requirements)

        FINRA Rule 1210 requires that each person engaged in the investment banking or securities business of a member firm register with FINRA as a representative or principal in each category of registration appropriate to his or her functions and responsibilities as specified in FINRA Rule 1220 (Registration Categories), unless exempt from registration pursuant to FINRA Rule 1230 (Associated Persons Exempt from Registration). FINRA Rule 1210 also provides that such person is not qualified to function in any registered capacity other than that for which the person is registered, unless otherwise stated in the rules. In addition, FINRA Rule 1210 addresses the following: (1) requirement to have a minimum number of registered principals;3 (2) ability to maintain permissive registrations for associated persons;4 (3) requirement to pass an appropriate qualification examination and, in the case of representatives, the SIE, and process for obtaining a waiver of a qualification examination;5 (4) requirements applicable to registered persons functioning as principals prior to passing an appropriate principal qualification examination;6 (5) rules of conduct for taking examinations and confidentiality of examinations;7 (6) waiting periods for retaking a failed examination;8 (7) requirement that registered persons satisfy CE;9 (8) lapse of registration and expiration of the SIE;10 (9) waiver program for individuals working for a financial services industry affiliate of a member firm;11 (10) status of persons serving in the Armed Forces of the United States;12 and (11) impermissible registrations.13

        FINRA Rule 1220 (Registration Categories)

        FINRA Rule 1220 sets forth the definitions of "principal"14 and "representative"15 as well as the qualification and registration requirements for principals,16 such as General Securities Principals, and representatives,17 such as General Securities Representatives. The rule also addresses the following: (1) status of certain foreign registrations;18 (2) additional requirements for registered persons engaged in security futures activities;19 (3) requirements applicable to firms operating with only one Registered Options Principal;20 (4) scope of the General Securities Sales Supervisor registration category;21 (5) scope of the Operations Professional registration category;22 and (6) status of eliminated registration categories.23

        FINRA Rule 1230 (Associated Persons Exempt from Registration)

        FINRA Rule 1230 identifies associated persons who are not required to be registered with FINRA, including, among others, associated persons whose functions are solely and exclusively clerical or ministerial. The rule further provides that the function of accepting customer orders is not considered a clerical or ministerial function.24 FINRA Rule 1240 (Continuing Education Requirements) FINRA Rule 1240 sets forth the CE requirements, which consist of a Regulatory Element and a Firm Element. The Regulatory Element consists of periodic online-based training on regulatory, compliance, ethical, supervisory subjects and sales practice standards.25 The Firm Element consists of annual, firm-developed and administered training programs designed to keep specified registered persons current regarding job- and product-related subjects.26

        Significant Changes

        For the most part, the consolidated registration rules are substantially similar to the legacy NASD and Incorporated NYSE rules that they replaced. Yet, there are some significant differences between the consolidated rules and the legacy rules, which are described below.

        SIE

        FINRA has restructured the representative-level qualification examination program by creating the SIE and revising the representative-level qualification examinations. Beginning on October 1, 2018, all new representative-level applicants are required to pass the SIE and a revised representative-level qualification examination, such as the revised General Securities Representative (Series 7) examination,27 appropriate to their job functions at the firm with which they are associating before their registration can become effective.28 For example, an individual who is applying for registration as a General Securities Representative, for the first time on October 10, 2018, is required to pass both the SIE and the revised General Securities Representative (Series 7) examination. This requirement also applies to applicants who are seeking a representative-level registration as a prerequisite to a principal-level registration.29 As described below, certain former and current registered representatives will be considered to have passed the SIE. Further, similar to the current waiver process, firms can request a waiver of the qualification requirements for applicants required to pass the SIE.

        The restructured program eliminates duplicative testing of general securities knowledge on the representative-level qualification examinations by moving such content into the SIE. The SIE will test fundamental securities-related knowledge, including knowledge of basic products, the structure and function of the securities industry, the regulatory agencies and their functions and regulated and prohibited practices,30 whereas the revised representative-level qualification examinations will test knowledge relevant to day-to-day activities, responsibilities and job functions of representatives.31

        As stated below, FINRA is eliminating several representative-level registration categories and associated examinations. Individuals maintaining the eliminated representativelevel registrations will be grandfathered (i.e., they may continue to maintain their current registration on or after October 1, 2018, unless the registration lapses). FINRA, however, is retaining the following representative-level registrations: Investment Company and Variable Contracts Products Representative; General Securities Representative; Direct Participation Programs Representative; Securities Trader; Investment Banking Representative; Private Securities Offerings Representative; Research Analyst; and Operations Professional. The table below lists the representative-level registration categories that FINRA is retaining and the current and future examinations that individuals must pass in order to register in these categories. The table also includes the number of questions on each current examination and the anticipated number of questions on each future examination.32

        FINRA Representative-Level Registration Categories and Qualification Examinations
        Registration Category (and CRD System Designation) Current Examination(s)(prior to October 1, 2018) Future Examination(s)(on or after October 1, 2018)
        Investment Company and Variable Contracts Products Representative (IR) Series 6 (100 questions) SIE (75 questions) + Revised Series 6 (50 questions)
        General Securities Representative (GS) Series 7 (250 questions) SIE (75 questions) + Revised Series 7 (125 questions)
        Direct Participation Programs Representative (DR) Series 22 (100 questions) SIE (75 questions) + Revised Series 22 (50 questions)
        Securities Trader (TD) Series 57 (125 questions) SIE (75 questions) + Revised Series 57 (50 questions)
        Investment Banking Representative (IB) Series 79 (175 questions) SIE (75 questions) + Revised Series 79 (75 questions)
        Private Securities Offerings Representative (PR) Series 82 (100 questions) SIE (75 questions) + Revised Series 82 (50 questions)
        Research Analyst (RS) Series 7 (250 questions) + Series 86 (Part I: Analysis) (100 questions) + Series 87 (Part II: Regulatory Administration and Best Practices) (50 questions) SIE (75 questions) + Revised Series 86 (Part I: Analysis) (100 questions) + Revised Series 87 (Part II: Regulatory Administration and Best Practices) (50 questions)
        Operations Professional (OS) Series 99 (100 questions) SIE (75 questions) + Revised Series 99 (50 questions)

        Individuals applying for registration with FINRA as a representative can schedule both the SIE and the applicable representative-level qualification examination(s)33 for the same day, provided they are able to reserve space at one of FINRA's designated testing centers. Individuals applying for registration as a representative must pass both the SIE and the applicable representative-level qualification examination(s). Therefore, individuals who fail either the SIE or the applicable representative-level qualification examination(s) will not qualify for registration as a representative. In addition, individuals applying for registration must satisfy all other requirements relating to the registration process (e.g., submit fingerprints).

        With the exception of individuals registered solely as Order Processing Assistant Representatives or Foreign Associates, the following individuals will be considered to have passed the SIE: (1) individuals whose registration as a representative was terminated between October 1, 2014, and September 30, 2018, provided they re-register as a representative within four years from the date of their last registration; and (2) individuals who registered as representatives prior to October 1, 2018, and who continue to maintain those registrations on or after October 1, 2018.34 All other individuals seeking representative-level registration must pass the SIE, unless they obtain a waiver.

        Further, the representative-level (and principal-level) registrations continue to be subject to a two-year lapse of registration period, while the SIE is subject to a four-year expiration period. Accordingly, if an individual was last registered as a representative two or more years immediately preceding the date of receipt by FINRA of a new application for registration as a representative, the individual would not be able to re-register as a representative without passing an appropriate representative-level qualification examination. If an individual last passed the SIE or was last registered as a representative, whichever occurred last, four or more years immediately preceding the date of receipt by FINRA of a new application for registration as a representative, the individual would not be able to re-register as a representative without passing the SIE in addition to passing an appropriate representative-level qualification examination. FINRA uses the termination date stated on an individual's Form U5 (Uniform Termination Notice for Securities Industry Registration) to determine when the individual was last registered for purposes of lapse of registration.

        The following examples illustrate the application of the new requirements to former, current and future representative-level applicants who re-register as representatives on or after October 1, 2018:

        •   Individual A was last registered as a Private Securities Offerings Representative prior to October 1, 2014. He applies to re-register as a Private Securities Offerings Representative on or after October 1, 2018. To re-register as a Private Securities Offerings Representative, he would need to pass both the SIE and the revised Private Securities Offerings Representative (Series 82) examination. Likewise, if he applies to register in another representative-level registration category on or after October 1, 2018, he would need to pass both the SIE and the representative-level examination(s) applicable to that category.
        •   Individual B was last registered as an Investment Company and Variable Contracts Products Representative on April 1, 2016. He applies to re-register as an Investment Company and Variable Contracts Products Representative at some point between October 1, 2018, and March 31, 2020. To re-register as an Investment Company and Variable Contracts Products Representative, he would need to pass the revised Investment Company and Variable Contracts Products Representative (Series 6) examination, but not the SIE. Similarly, if he applies to register in another representative-level registration category at some point between October 1, 2018, and March 31, 2020, he would need to pass the applicable representative-level examination(s), but not the SIE. If he waits to apply for registration in a representative category until April 1, 2020, or thereafter, he would need to pass both the SIE and the applicable representative-level examination.
        •   Individual C was last registered as a Direct Participation Programs Representative on December 1, 2016. She applies to re-register as a Direct Participation Programs Representative on November 1, 2018. To re-register as a Direct Participation Programs Representative, she is not required to pass any examinations. If she were to apply for registration as a Direct Participation Programs Representative at some point between December 1, 2018, and November 30, 2020, she would be required to pass the revised Direct Participation Programs Representative (Series 22) examination, but not the SIE. Similarly, if she applies to register in another representative-level registration category at some point between December 1, 2018, and November 30, 2020, she would need to pass the applicable representative-level examination(s), but not the SIE. If she waits to apply for registration as a Direct Participation Programs Representative until December 1, 2020, or thereafter, she would need to pass both the SIE and the revised Direct Participation Programs Representative (Series 22) examination.
        •   Individual D, who registered as a General Securities Representative on August 1, 2016, remains registered as a General Securities Representative after October 1, 2018. He is not required to take any additional examinations to maintain that registration. He subsequently applies for registration as an Investment Banking Representative on February 1, 2019. To register as an Investment Banking Representative, he is required to pass the revised Investment Banking Representative qualification (Series 79) examination, but not the SIE. He then terminates his registrations altogether on March 2, 2020. He applies for registration as a General Securities Representative with another member firm on February 1, 2022. To re-register as a General Securities Representative, he is not required to pass any examinations. If he were to apply for registration at some point between March 2, 2022, and March 1, 2024, he would be required to pass the revised General Securities Representative (Series 7) examination, but not the SIE. If he waits to apply for registration until March 2, 2024, or thereafter, he would need to pass both the SIE and the revised General Securities Representative (Series 7) examination.

        Individuals are not precluded from applying to register as representatives between now and September 30, 2018. Individuals who apply for registration as a representative prior to October 1, 2018, will be required to pass the current representative-level examination appropriate to that registration category, not the revised version. In addition, such individuals will not be required to pass the SIE in order to register as a representative. However, if such individuals fail to pass the current representative-level examination and the next eligibility date for retaking the examination is on or after October 1, 2018,35 they will be required to pass the SIE and the revised representative-level qualification examination in order to register as a representative. Such individuals may take the SIE and the revised representative-level examination at the next available date on or after October 1, 2018. These individuals would not have to wait the requisite period for retaking a failed examination because the SIE and the revised representative-level examinations are different examinations than the current representative-level examinations.

        The following examples address the application of the new requirements to individuals who apply for registration as a representative between now and September 30, 2018:

        •   Individual E applies for registration as an Investment Banking Representative on August 1, 2018, which will open a 120-day enrollment window for the individual to schedule an appointment to take the current Investment Banking Representative (Series 79) examination. She schedules to take the examination at a designated testing center on November 1, 2018, and she passes the examination. She is now eligible to register as an Investment Banking Representative.
        •   Individual F, who has no prior registration, applies for registration as an Operations Professional on September 3, 2018, which will open a 120-day enrollment window for the individual to schedule an appointment to take the current Operations Professional (Series 99) examination. He schedules to take the examination at a designated testing center on December 3, 2018, and he fails the examination. He will be required to pass the SIE and the revised Operations Professional (Series 99) examination in order to register. Further, he could schedule to take the SIE and the revised Operations Professional (Series 99) examination immediately at the next available date on or after October 1, 2018, and does not have to wait 30 calendar days to take them, which is the mandatory waiting period for retaking a failed examination.
        •   Individual G, who has no prior registration, applies for registration as a General Securities Representative on July 2, 2018, which will open a 120-day enrollment window for the individual to schedule an appointment to take the current General Securities Representative (Series 7) examination. He schedules to take the examination at a designated testing center on September 5, 2018, and he fails the examination. He must wait 30 calendar days to be eligible to retake that examination. However, because the eligibility date falls on October 5, 2018, which is after October 1, 2018, he is required to pass the SIE and the revised General Securities Representative (Series 7) examination to register. Moreover, he could take the SIE and the revised General Securities Representative (Series 7) examination on any available date on or after October 1, 2018.

        In addition, beginning on October 1, 2018, all associated persons, such as associated persons whose functions are solely and exclusively clerical or ministerial, as well as individuals who are not associated persons of firms, such as members of the general public, are eligible to take the SIE.36 While all associated persons of firms as well as individuals who are not associated persons are eligible to take the SIE, passing the SIE alone, as noted above, will not qualify an individual for registration with FINRA. Rather, to be eligible for registration, an individual must be associated with a firm, pass an appropriate qualification examination(s) for representative or principal and satisfy the other requirements relating to the registration process.

        Associated persons who take the SIE are subject to the SIE Rules of Conduct.37 Further, associated persons taking a representative- or principal-level examination are subject to the Rules of Conduct for representative and principal examinations.38 A violation of the SIE Rules of Conduct or the Rules of Conduct for representative and principal examinations by an associated person will be deemed to be a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade). Moreover, if FINRA determines that an associated person has violated the SIE Rules of Conduct or the Rules of Conduct for representative and principal examinations, the associated person may forfeit the results of the examination and may be subject to disciplinary action by FINRA.

        Further, individuals taking the SIE who are not associated persons must agree to be subject to the SIE Rules of Conduct. Among other things, the SIE Rules of Conduct require individuals to attest that they are not qualified to engage in the investment banking or securities business based on passing the SIE and prohibits individuals from cheating on the examination or misrepresenting their qualifications to the public subsequent to passing the SIE. Individuals taking the SIE who are not associated persons may forfeit their SIE results and may be prohibited from retaking the SIE if FINRA determines that they cheated on the SIE or that they misrepresented their qualifications to the public subsequent to passing the SIE.39 In addition, if FINRA discovers that such individuals have engaged in other types of misconduct subsequent to passing the SIE, FINRA will refer the matter to the appropriate authorities or regulators.

        As is the case today, firms must use the CRD system to request registrations for representatives. Firms may also use the CRD system to request the SIE for an associated person who is not seeking registration as a representative. FINRA is creating an enrollment system separate from the CRD system to allow individuals who are not associated persons of a firm, including members of the general public, to enroll and pay the SIE fee. An associated person who is not seeking registration as a representative may also use this enrollment system to schedule the SIE and pay the associated fee, rather than going through the CRD system.

        All individuals who take an examination will receive a passing or failing result. FINRA is exploring options for providing appropriate performance feedback to individuals who fail an examination. Firms will be able to access passing or failing results for associated persons who are registering as representatives through the CRD system. In addition, firms will be able to view whether an associated person who is not registering as a representative or an individual seeking to associate with the firm has passed or failed the SIE using an interface within the CRD system. For such individuals, the firm must obtain written permission, from the individual, authorizing the firm to review the individual's CRD record or SIE results. The CRD system will also automatically obtain the SIE passing or failing result of an individual who is seeking to associate with a firm once the firm submits a Form U4 (Uniform Application for Securities Industry Registration or Transfer) and requests a registration for that individual.

        Consistent with current practice and guidelines, FINRA will consider examination waiver requests submitted by a firm for individuals associated with the firm who are seeking registration in a representative- or principal-level registration category. FINRA will also consider waivers of the SIE alone or the SIE and the representative- and principal-level examination(s) for such individuals. In addition, firms may request a waiver of the SIE for an individual applying for registration with FINRA as a representative who is in good standing as a representative with the Financial Conduct Authority in the United Kingdom or with a Canadian stock exchange or securities regulator. Finally, FINRA will not consider a waiver of the SIE for individuals who are not associated persons of a firm or for associated persons who are not seeking registration as representatives with a firm.

        Financial Services Affiliate Waiver Program

        Effective October 1, 2018, FINRA is implementing a waiver program for individuals who terminate their registrations as representatives or principals to go to work for a foreign or domestic financial services industry affiliate of a member firm.40 Under the waiver program, individuals who go to work for a financial services industry affiliate of a member firm would terminate their registrations with the firm and would be granted a waiver of their requalification requirements, including the SIE, upon reapplying with FINRA for registration as a representative or principal, subject to the following conditions:

        •   the individual must have been registered as a representative or principal for a total of five years within the most recent 10-year period prior to his or her initial designation under the waiver program;
        •   the individual must have been registered as a representative or principal for at least one year prior to his or her initial designation under the waiver program with the member firm that is designating him or her;
        •   all waiver requests under the program must be made within seven years of the individual's initial designation;
        •   the individual's initial designation and any subsequent designation must be made concurrently with the filing of the individual's related Form U5;
        •   the individual must have continuously worked for a financial services industry affiliate of a member firm since his or her last Form U5 filing;
        •   the individual must have complied with the Regulatory Element of CE; and
        •   the individual must not have any pending or adverse regulatory matters,41 or terminations,42 that are reportable on the Form U4, and must not have been subject to a statutory disqualification as defined in Section 3(a)(39) of the Exchange Act while eligible under the program.

        Individuals would be eligible for a single, fixed seven-year waiver period from the date of their initial designation, and the period will not be tolled or renewed. However, individuals are not required to return to the member firm that designated them as eligible for a waiver under the program. They could return to a firm other than the one that designated them.

        Further, during the seven-year period, an individual can move back and forth between a member firm and its affiliate or move to another member firm. An individual could also move between the financial services affiliates of a member firm or move from a financial services affiliate of one member firm to the financial services affiliate of another member firm, so long as the individual is continuously working for a financial services affiliate of a member firm since his or her last Form U5 filing. While individuals must be continuously working for a financial services affiliate of a member firm to be eligible for a waiver, FINRA recognizes that eligible individuals may need sufficient time to transfer between member firms and their affiliates or between affiliates of member firms. FINRA expects eligible individuals to make such transfers promptly and no later than 30 calendar days.

        Under the program, firms are responsible for designating eligible individuals upon terminating their registrations and requesting waivers and providing the necessary representations upon registering them. Specifically, when a registered person is transferring to a financial services industry affiliate of a member firm, the member firm with which the individual is associated must designate the individual as an eligible person by notifying FINRA. Firms must notify FINRA through the CRD system. The firm must also concurrently file a Form U5 to terminate the individual's registration with FINRA, which would also terminate the individual's other SRO and state registrations. Further, BrokerCheck® would reflect that the individual is no longer registered or associated with a firm.43 Under the program, an individual cannot be registered with a member firm while working for a financial services industry affiliate of a member firm. In addition, an individual who has been designated as eligible under the program will not be able to take additional examinations to gain additional registrations while working for a financial services affiliate of a member firm.

        An eligible individual will be subject to a Regulatory Element program that correlates to his or her most recent registration category, and CE would be based on the same cycle had he or she remained registered. If the individual fails to complete the prescribed Regulatory Element during the 120-day window for taking the session, he or she would lose eligibility under the waiver program (i.e., the individual would have the standard two-year period after termination to re-register without having to retake an examination). FINRA will directly notify eligible individuals of upcoming Regulatory Element CE via email, and it will provide them an interface to the FINRA CE Online System™ so that they can complete the requirement within the 120-day window. Eligible individuals will be responsible for providing FINRA their contact information, including a valid email address, and for updating such information. Eligible individuals will also be responsible for paying the CE fee.

        If a firm decides to associate with and register an individual who is eligible for a waiver under the program, the firm must file a Form U4 and request the appropriate registration(s) for the individual. To request a waiver, the firm must also submit an examination waiver request to FINRA, similar to the process used today for waiver requests. As part of the waiver request, the firm must represent that the individual has satisfied the conditions of the waiver, as described above.44 While FINRA will rely on the firm's representation, FINRA may also independently verify whether the individual has satisfied the conditions of the waiver. For instance, FINRA will be able to identify whether an individual was designated as eligible under the program and track whether the individual completed the Regulatory Element of CE while working for a financial services industry affiliate of a member firm. FINRA will review the waiver request and determine whether to grant the request within 30 calendar days of receiving the request. FINRA will consider a waiver of the SIE, the representative-level qualification examination(s) or the principal-level qualification examination(s), whichever is applicable. Individuals who do not qualify for a waiver under the program may still be eligible for a waiver under FINRA's general waiver process, which FINRA evaluates on a case-by-case basis.

        The following examples illustrate the application of the waiver program:

        •   Individual A has been registered with Firm A as a General Securities Representative since September 1, 2017. Prior to that, she had been registered with Firm B since August 1, 2013. Firm A decides to transfer her to Firm A's insurance affiliate located in Nebraska. On December 3, 2018, Firm A notifies FINRA through the CRD system that it is designating her as eligible for a waiver under the financial services affiliate waiver program. Firm A concurrently files a Form U5 to terminate her registration with FINRA.

        Within a month of leaving Firm A, Individual A starts working for the insurance affiliate. After working for Firm A's insurance affiliate for six and a half years, she leaves the affiliate and rejoins Firm A. She rejoins Firm A within a month of leaving the affiliate.

        Individual A completed the Regulatory Element of CE while working for the affiliate. Further, while working for the affiliate, she does not have any pending or adverse regulatory matters, or terminations, that are reportable on the Form U4, and is not subject to a statutory disqualification. On August 1, 2025, Firm A files a Form U4 requesting registration for her as a General Securities Representative. Firm A also submits an examination waiver request to FINRA, requesting a waiver of the SIE and the revised General Securities Representative (Series 7) examination. Firm A represents in its waiver request that she has satisfied the conditions of the financial services affiliate waiver program. FINRA grants the waiver.
        •   Individual B has been registered with Firm A as an Investment Company and Variable Contracts Products Representative since April 2, 2012. Firm A decides to transfer him to Firm A's insurance affiliate located in New York. On October 1, 2018, Firm A notifies FINRA through the CRD system that it is designating him as eligible for a waiver under the financial services affiliate waiver program. Firm A concurrently files a Form U5 to terminate his registration with FINRA.

        Within a month of leaving Firm A, Individual B starts working for the insurance affiliate. After working for Firm A's affiliate for three years, he leaves the affiliate and rejoins Firm A. He rejoins Firm A within a month of leaving the affiliate.

        Individual B completed the Regulatory Element of CE while working for Firm A's affiliate. Further, while working for the affiliate, he does not have any pending or adverse regulatory matters, or terminations, that are reportable on the Form U4, and is not subject to a statutory disqualification. On December 1, 2021, Firm A files a Form U4 requesting registration for him as an Investment Company and Variable Contracts Products Representative. Firm A also submits an examination waiver request to FINRA, requesting a waiver of the SIE and the revised Investment Company and Variable Contracts Products Representative (Series 6) examination. Firm A represents in its waiver request that he has satisfied the conditions of the financial services affiliate waiver program. FINRA grants the waiver.

        After six months at Firm A, the firm transfers Individual B back to its insurance affiliate. On June 1, 2021, Firm A notifies FINRA through the CRD system that it is designating him as eligible for a waiver under the financial services affiliate waiver program. Firm A concurrently files a Form U5 to terminate his registration with FINRA. Within a month of leaving Firm A, he returns to the insurance affiliate. After working for the insurance affiliate for three years, he leaves the affiliate and rejoins Firm A. Within a month of leaving the affiliate, he rejoins Firm A.

        Individual B completed the Regulatory Element of CE while working for Firm A's affiliate for a second time. Further, while working for the affiliate, he does not have any pending or adverse regulatory matters, or terminations, that are reportable on the Form U4, and is not subject to a statutory disqualification. On August 1, 2025, Firm A files a Form U4 requesting registration for him as an Investment Company and Variable Contracts Products Representative. Firm A also submits an examination waiver request to FINRA, requesting a waiver of the SIE and the revised Investment Company and Variable Contracts Products Representative (Series 6) examination. Firm A represents in its waiver request that he has satisfied the conditions of the financial services affiliate waiver program. FINRA grants the waiver.
        •   Individual C has been registered with Firm A as a Private Securities Offering Representative since June 1, 2012. Firm A decides to transfer him to Firm A's advisory affiliate located in the United Kingdom. On February 1, 2019, Firm A notifies FINRA through the CRD system that it is designating him as eligible for a waiver under the financial services affiliate waiver program. Firm A concurrently files a Form U5 to terminate his registration with FINRA.

        Within a month of leaving Firm A, Individual C starts working for the advisory affiliate. After working for Firm A's advisory affiliate for four years, he leaves the affiliate and rejoins Firm A. He rejoins Firm A within a month of leaving the affiliate.

        Individual C completed the Regulatory Element of CE while working for Firm A's affiliate. Further, while working for the affiliate, he does not have any pending or adverse regulatory matters, or terminations, that are reportable on the Form U4, and is not subject to a statutory disqualification. On April 3, 2023, Firm A files a Form U4 requesting registration for him as a Private Securities Offering Representative. Firm A also submits an examination waiver request to FINRA, requesting a waiver of the SIE and the revised Private Securities Offering Representative (Series 82) examination. Firm A represents in its waiver request that he has satisfied the conditions of the financial services affiliate waiver program. FINRA grants the waiver.

        After three months at Firm A, the firm transfers Individual C back to its advisory affiliate. On July 3, 2023, Firm A notifies FINRA through the CRD system that it is designating him as eligible for a waiver under the financial services affiliate waiver program. Firm A concurrently files a Form U5 to terminate his registration with FINRA. Within a month of leaving Firm A, he returns to the advisory affiliate. After working for Firm A's advisory affiliate for one year, he leaves the affiliate and joins the banking affiliate of Firm B, another member firm. Within a month of leaving Firm A's affiliate, he starts working for Firm B's affiliate. He works for Firm B's banking affiliate for one year then decides to leave the affiliate and join Firm B. He joins Firm B within a month of leaving the affiliate.

        Individual C completed the Regulatory Element of CE while working for Firm B's affiliate. Further, while working for Firm B's affiliate, he does not have any pending or adverse regulatory matters, or terminations, that are reportable on the Form U4, and is not subject to a statutory disqualification. On October 1, 2025, Firm B files a Form U4 requesting registration for him as a Private Securities Offering Representative. Firm B also submits an examination waiver request to FINRA, requesting a waiver of the SIE and the revised Private Securities Offering Representative (Series 82) examination. Firm B represents in its waiver request that he has satisfied the conditions of the financial services affiliate waiver program. FINRA grants the waiver.
        •   Individual D has been registered as an Investment Banking Representative with a member firm, Firm A, since August 1, 2012. Firm A decides to transfer her to Firm A's banking affiliate located in California. On November 1, 2018, Firm A notifies FINRA through the CRD system that it is designating her as eligible for a waiver under the financial services affiliate waiver program. Firm A concurrently files a Form U5 to terminate her registration with FINRA.

        Within a month of leaving Firm A, Individual D starts working for the banking affiliate. After working for Firm A's banking affiliate for four years, she leaves the affiliate and joins the insurance affiliate of Firm B, another member firm. Within a month of leaving Firm A's banking affiliate, she starts working for Firm B's insurance affiliate, which is located in France. She works for Firm B's insurance affiliate for one year and then decides to leave the affiliate and join the advisory affiliate of another FINRA member, Firm C. Within a month of leaving Firm B's insurance affiliate, she starts working for Firm C's advisory affiliate located in New York. Finally, after working for Firm C's advisory affiliate for a year, she decides to return to the securities industry by joining Firm D, another member firm that is also located in New York. Within a month of leaving Firm C's advisory affiliate, she joins Firm D.

        Individual D completed the Regulatory Element of CE while working for the affiliates of Firms A, B and C. Further, while working for the affiliates of Firms A, B and C, she does not have any pending or adverse regulatory matters, or terminations, that are reportable on the Form U4, and is not subject to a statutory disqualification. On March 1, 2024, Firm D files a Form U4 requesting registration for her as an Investment Banking Representative. Firm D also submits an examination waiver request to FINRA, requesting a waiver of the SIE and the revised Investment Banking Representative (Series 79) examination. Firm D represents in its waiver request that she has satisfied the conditions of the financial services affiliate waiver program. FINRA grants the waiver.

        Permissive Registrations

        Beginning on October 1, 2018, firms may permissively register or maintain the registration of any associated person,45 including individuals working solely in a clerical or ministerial capacity. This is an expansion of the current categories of permissive registrations.46 For instance, an individual working in the technology department of a firm would be able to obtain and maintain a General Securities Representative registration with the firm. As another example, an associated person of a firm who is registered and functioning as a General Securities Representative would be able to permissively obtain and maintain a General Securities Principal registration with the firm. In addition, as is the case today, a firm may continue to permissively register or maintain the registration of individuals engaged in the investment banking or securities business of a foreign securities affiliate or foreign securities subsidiary of the firm.

        Individuals maintaining a permissive registration are considered associated persons as well as registered persons and subject to all FINRA rules, to the extent relevant to their activities. By way of example, FINRA rules that relate to interactions with customers, such as FINRA Rule 3240 (Borrowing From or Lending to Customers), would not have any practical application to the conduct of a permissively-registered individual who does not have any customer contact. However, rules that have general application to the conduct of all associated persons, or all registered persons, would also apply to the conduct of permissively-registered individuals. For instance, FINRA Rules 3270 (Outside Business Activities of Registered Persons) and 3280 (Private Securities Transactions of an Associated Person) apply to an individual's activities outside the course of the individual's association with a member firm, regardless of the individual's function at the firm. Therefore, these rules apply to the outside activities of all permissively-registered persons, irrespective of their activities for member firms. As another example, all registered persons, including those who solely maintain a permissive registration, are required to satisfy the Regulatory Element of CE.

        Firms are required to have adequate supervisory systems and procedures reasonably designed to ensure that individuals with permissive registrations do not act outside the scope of their assigned functions. FINRA does not anticipate that this requirement will have any significant impact on the supervision of individuals who are currently registered and functioning as representatives or principals who permissively maintain another registration under the new requirements. Firms are currently required to supervise the activities of these individuals consistent with the requirements of FINRA Rule 3110 (Supervision), including the assignment of an appropriately registered supervisor under FINRA Rule 3110(a)(5) who is responsible for supervising their activities.

        Firms will also have to address the supervision of an individual who solely maintains a permissive registration, such as an individual working in a firm's technology department who is permissively registered as a General Securities Representative. While firms are not required to assign a registered person as the day-to-day supervisor of an individual who solely maintains a permissive registration, for purposes of compliance with FINRA Rule 3110(a)(5), firms are required to assign a registered supervisor to the permissively registered individual who will be responsible for periodically contacting the individual's day-to-day supervisor to verify that the individual is not acting outside the scope of his or her assigned functions. If the permissively-registered individual is registered as a representative, the assigned registered supervisor must be registered as a representative or principal. If the permissively-registered individual is registered as a principal, the assigned registered supervisor must be registered as a principal. However, the assigned registered supervisor is not required to be registered in the same representative or principal registration category as the permissively-registered individual. For instance, in the example above, an Investment Company and Variable Contracts Products Representative is eligible to function as the assigned registered supervisor of the individual in the technology department who is permissively registered as a General Securities Representative.

        FINRA is enhancing the CRD system and BrokerCheck to enable the general public, firms, FINRA and other regulators to identify whether a registered person is maintaining only a permissive registration. FINRA will provide additional information regarding the process for identifying such individuals in the future.

        Principal Financial Officer and Principal Operations Officer

        Effective October 1, 2018, firms are required to designate: (1) a Principal Financial Officer with primary responsibility for financial filings and the related books and records; and (2) a Principal Operations Officer with primary responsibility for the day-to-day operations of the business, including overseeing the receipt and delivery of securities and funds, safeguarding customer and firm assets, calculation and collection of margin from customers and processing dividend receivables and payables and reorganization redemptions and those books and records related to such activities.47 This requirement replaces the current requirement that dual members of FINRA and the NYSE designate a Chief Financial Officer (CFO) and a Chief Operations Officer (COO) and that other FINRA members designate a CFO.

        The requirement to designate a Principal Financial Officer and a Principal Operations Officer applies to all firms, including those firms that are currently exempt from the requirement to have a Financial and Operations Principal or an Introducing Broker-Dealer Financial and Operations Principal. Further, individuals designated as Principal Financial Officers or Principal Operations Officers must qualify and register as Financial and Operations Principals or Introducing Broker-Dealer Financial and Operations Principals, as applicable.48 Principal Financial Officers and Principal Operations Officers must also be registered in the CRD system as Operations Professionals because their activities and responsibilities intersect with those of covered persons as specified in FINRA Rule 1220(b)(3). However, individuals designated as Principal Financial Officers and Principal Operations Officers are not required to pass the Operations Professional (Series 99) examination in order to register as Operations Professionals, if they already hold a qualifying registration. Moreover, because Principal Financial Officers and Principal Operations Officers are required to be registered as Financial and Operations Principals or Introducing Broker-Dealer Financial and Operations Principals, they will be eligible to register as Operations Professionals as these registrations qualify for the Operations Professional registration.49

        Firms that neither self-clear nor provide clearing services may designate the same person as the Principal Financial Officer, Principal Operations Officer and Financial and Operations Principal or Introducing Broker-Dealer Financial and Operations Principal (that is, such firms are not required to designate different persons to function in these capacities). Firms that are clearing and self-clearing must designate separate persons to function as Principal Financial Officer and Principal Operations Officer, though such individuals may also carry out the responsibilities of a Financial and Operations Principal. A clearing or selfclearing firm that is limited in size and resources may request a waiver of the requirement to designate separate persons to function as Principal Financial Officer and Principal Operations Officer.

        A firm is not precluded from designating multiple Principal Operations Officers, provided that the firm precisely defines and documents the areas of primary responsibility and makes specific provision for which of the officers has primary responsibility in areas that can reasonably be expected to overlap. A firm, however, may not designate multiple Principal Financial Officers, given the importance of having one principal who is responsible for the financial statements of a firm as a whole. Finally, a Principal Financial Officer or a Principal Operations Officer is permitted to delegate his or her day-to-day duties to other principals at the firm with the understanding that ultimate responsibility for the function rests with the Principal Financial Officer and the Principal Operations Officer.

        New Principal Registration Categories

        FINRA has established three new principal registration categories, Compliance Officer, Investment Banking Principal and Private Securities Offerings Principal.

        Compliance Officer

        Beginning on October 1, 2018, an individual designated as Chief Compliance Officer (CCO) on Schedule A of Form BD (Uniform Application for Broker-Dealer Registration) of a member firm,50 other than a firm engaged in limited investment banking or securities business, is required to register as a Compliance Officer.51 An individual designated as a CCO on Schedule A of Form BD of a firm that is engaged in limited investment banking or securities business may be registered in a principal category that corresponds to the limited scope of the firm's business,52 rather than register as a Compliance Officer.

        Individuals can qualify for registration as Compliance Officers in several ways. An individual who is designated as CCO on Schedule A of Form BD of a member firm and who is registered with FINRA as a General Securities Representative and a General Securities Principal prior to October 1, 2018, and who continues to maintain the CCO designation and the General Securities Representative and General Securities Principal registrations on October 1, 2018, will automatically be granted Compliance Officer registration on October 1, 2018. Further, other individuals who are registered with FINRA as a General Securities Representative and a General Securities Principal prior to October 1, 2018, and who continue to maintain those registrations on or after October 1, 2018, are qualified to register as Compliance Officers without having to take any additional examinations. Similarly, an individual who is registered as a Compliance Official in the CRD system prior to October 1, 2018, and who continues to maintain that registration on or after October 1, 2018, is qualified to register as a Compliance Officer without having to take any additional examinations.

        In addition, individuals whose registrations as General Securities Representatives and General Securities Principals, or whose registrations as Compliance Officials, were terminated between October 1, 2016, and September 30, 2018, are qualified to register as Compliance Officers without having to take any additional examinations, provided they register as a Compliance Officer within two years from the date of terminating those registrations.

        All other individuals registering as Compliance Officers on or after October 1, 2018, are required to: (1) satisfy the General Securities Representative prerequisite registration, including pass the SIE, and pass the General Securities Principal (Series 24) qualification examination; or (2) pass the Compliance Official (Series 14) qualification examination.

        Investment Banking Principal

        Effective October 1, 2018, principals responsible for supervising specified investment banking activities are required to register as Investment Banking Principals.53 Individuals can qualify for registration as an Investment Banking Principal in several ways. An individual who is registered with FINRA as an Investment Banking Representative and a General Securities Principal prior to October 1, 2018, and who continues to maintain those registrations on October 1, 2018, will automatically be granted an Investment Banking Principal registration on October 1, 2018.54 Further, an individual whose registrations as an Investment Banking Representative and a General Securities Principal were terminated between October 1, 2016, and September 30, 2018, is qualified to register as an Investment Banking Principal without having to take any additional examinations, provided he or she registers as an Investment Banking Principal within two years from the date of terminating those registrations. All other individuals registering as Investment Banking Principals on or after October 1, 2018, are required to satisfy the Investment Banking Representative prerequisite registration, including passing the SIE, and passing the General Securities Principal (Series 24) qualification examination.

        Private Securities Offerings Principal

        Also effective on October 1, 2018, principals solely responsible for supervising specified activities relating to private securities offerings may register as Private Securities Offerings Principals, instead of registering as General Securities Principals.55 Individuals can qualify for registration as a Private Securities Offerings Principal in several ways. An individual who is registered with FINRA as a Private Securities Offerings Representative and a General Securities Principal prior to October 1, 2018, and who continues to maintain those registrations on October 1, 2018, will automatically be granted a Private Securities Offerings Principal registration on October 1, 2018.56 Further, an individual whose registrations as a Private Securities Offerings Representative and a General Securities Principal were terminated between October 1, 2016, and September 30, 2018, is qualified to register as a Private Securities Offerings Principal without having to take any additional examinations, provided he or she registers as a Private Securities Offerings Principal within two years from the date of terminating those registrations. All other individuals registering as Private Securities Offerings Principals on or after October 1, 2018, are required to satisfy the Private Securities Offerings Representative prerequisite registration, including pass the SIE, and pass the General Securities Principal (Series 24) qualification examination.

        To lessen the administrative burden on firms from multiple registration submissions to the CRD system, FINRA is considering enhancements to the system to automatically register individuals as principals, including individuals registering as Investment Banking Principals, Research Principals, Securities Trader Principals and Private Securities Offerings Principals, based on a combination of their approved representative-level registrations and their principal-level qualification examination(s). Such automatic registrations will be subject to firm review. For instance, such an enhancement would enable the CRD system to automatically register an individual who is registered as a General Securities Representative and a Securities Trader as a General Securities Principal and a Securities Trader Principal upon his passing the General Securities Principal (Series 24) examination, subject to review by the firm with which the person is registered.

        Eliminated Representative-Level Registration Categories

        As part of the restructuring of the representative-level examinations, FINRA is eliminating several representative-level registration categories, and the related examinations, that have become outdated or have limited utility. Specifically, FINRA is eliminating the current registration categories of Order Processing Assistant Representative, United Kingdom Securities Representative, Canada Securities Representative, Options Representative, Corporate Securities Representative, Government Securities Representative and Foreign Associate. However, FINRA is grandfathering individuals registered in these categories.

        Specifically, individuals registered as Order Processing Assistant Representatives, United Kingdom Securities Representatives, Canada Securities Representatives, Options Representatives, Corporate Securities Representatives and Government Securities Representatives on September 30, 2018, may continue to maintain these same registrations on October 1, 2018. In addition, individuals whose registrations in these categories were terminated between October 1, 2016, and September 30, 2018, are qualified to re-register in the same categories, provided they re-register in these categories within two years from the date of terminating those registrations. Individuals registered in these categories who terminate their registrations with FINRA on or after October 1, 2018, and whose registrations remain terminated for two or more years, will not be able to reregister in these categories.

        Currently, registration as a United Kingdom Securities Representative or a Canada Securities Representative is considered equivalent to registration as a General Securities Representative, provided the representative does not engage in municipal securities activities. While FINRA is eliminating the United Kingdom Securities Representative and Canada Securities Representative registration categories, individuals maintaining these registrations will be grandfathered and their registrations will continue to be viewed as equivalent to registration as a General Securities Representative registration, provided they do not engage in municipal securities activities.57 In addition, currently, individuals who are registered as Government Securities Representatives are qualified to register as Government Securities Principals, without having to pass a principal-level qualification examination. Individuals who maintain their registrations as Government Securities Representatives on or after October 1, 2018, will similarly be eligible to register as Government Securities Principals.

        Further, individuals registered as General Securities Principals and Corporate Securities Representatives (in lieu of registration as General Securities Representatives) on September 30, 2018, may continue to maintain these same registrations on October 1, 2018, and may continue to supervise corporate securities activities as currently permitted. Individuals whose registrations in these categories were terminated between October 1, 2016, and September 30, 2018, are also qualified to re-register in the same categories and may continue to supervise corporate securities activities, provided they re-register in these categories within two years from the date of terminating those registrations.

        Finally, an individual registered as a Foreign Associate on September 30, 2018, may continue to maintain that same registration on October 1, 2018. However, if such individual subsequently terminates his or her Foreign Associate registration with FINRA, he or she will not be able to re-register as a Foreign Associate.

        Research Analyst, Research Principal and Supervisory Analyst Qualification Requirements

        Beginning on October 1, 2018, individuals registering as Research Analysts will no longer be required to satisfy the General Securities Representative prerequisite registration. Rather, to register as a Research Analyst, an individual will be required to pass the SIE and the revised Research Analyst (Series 86 and Series 87) qualification examinations. Further, an individual seeking registration as a Research Principal will be required to register and qualify as a Research Analyst (pass the SIE and the revised Series 86 and 87 examinations) and pass the General Securities Principal (Series 24) qualification examination. Alternatively, an individual can register as a Research Principal by registering and qualifying as a Supervisory Analyst (pass the Series 16 examination) and pass the General Securities Principal (Series 24) qualification examination. FINRA is also eliminating the current prerequisite experience requirement (i.e., three or more years prior experience within the immediately preceding six years involving securities or financial analysis) for individuals seeking registration as Supervisory Analysts. Therefore, individuals registering as Supervisory Analysts will only be required to pass the Supervisory Analyst (Series 16) examination to demonstrate their knowledge of the subject matter. These changes do no impact the qualification requirements of individuals whose registrations are grandfathered.58

        Registered Persons Functioning as Principals for a Limited Period

        Effective October 1, 2018, firms may designate a registered representative to function (or act) as a principal for 120 calendar days, rather than the current 90 calendar days, before having to pass an appropriate principal-level qualification examination. However, any registered representative who is designated to function as a principal before passing an appropriate principal-level qualification examination must have at least 18 months of experience functioning as a registered representative within the five-year period immediately preceding the designation. This requirement also applies to representatives who are designated to function in a principal category that does not require a prerequisite representative-level registration, such as the Financial and Operations Principal category. Firms will have the flexibility to designate a principal to function in another principal category for 120 calendar days before passing any applicable examinations, without having to satisfy the experience requirement for representatives. For instance, a firm may designate a Financial and Operations Principal to function as a General Securities Principal for 120 calendar days before having to pass the SIE, the revised General Securities Representative (Series 7) examination and the General Securities Principal (Series 24) examination.

        Accepting Orders From Customers

        Beginning on October 1, 2018, unregistered persons cannot accept an order from a customer under any circumstances. Only appropriately registered persons can accept an order from a customer. If a customer contacts a firm to place an unsolicited order for the purchase or sale of securities and an appropriately registered person is unavailable to accept such an order, an unregistered person may transcribe the order details, provided that an appropriately registered person subsequently contacts the customer to confirm the order details before the order is accepted.

        Additional Resources

        For additional information regarding examination restructuring, please visit the Exam Restructuring web page, which provides details and information that firms and applicants need to know. FINRA will regularly update the web page with any new information.


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

        2 See Securities Exchange Act Release No. 81098 (July 7, 2017), 82 FR 32419 (July 13, 2017) (Order Approving File No. SR-FINRA-2017-007).

        3 FINRA Rule 1210.01 (Minimum Number of Registered Principals).

        4 FINRA Rule 1210.02 (Permissive Registrations).

        5 FINRA Rule 1210.03 (Qualification Examinations and Waivers of Examinations).

        6 FINRA Rule 1210.04 (Requirements for Registered Persons Functioning as Principals for a Limited Period).

        7 FINRA Rule 1210.05 (Rules of Conduct for Taking Examinations and Confidentiality of Examinations).

        8 FINRA Rule 1210.06 (Waiting Periods for Retaking a Failed Examination).

        9 FINRA Rule 1210.07 (All Registered Persons Must Satisfy the Regulatory Element of Continuing Education).

        10 FINRA Rule 1210.08 (Lapse of Registration and Expiration of SIE).

        11 FINRA Rule 1210.09 (Waiver of Examinations for Individuals Working for a Financial Services Industry Affiliate of a Member).

        12 FINRA Rule 1210.10 (Status of Persons Serving in the Armed Forces of the United States).

        13 FINRA Rule 1210.11 (Impermissible Registrations).

        14 FINRA Rule 1220(a)(1) (Definition of Principal).

        15 FINRA Rule 1220(b)(1) (Definition of Representative).

        16 Paragraphs (a)(2) through (a)(14) of FINRA Rule 1220.

        17 Paragraphs (b)(2) through (b)(9) of FINRA Rule 1220.

        18 FINRA Rule 1220.01 (Foreign Registrations).

        19 FINRA Rule 1220.02 (Additional Qualification Requirements for Persons Engaged in Security Futures Activities).

        20 FINRA Rule 1220.03 (Members With One Registered Options Principal).

        21 FINRA Rule 1220.04 (Scope of General Securities Sales Supervisor Registration Category).

        22 FINRA Rule 1220.05 (Scope of Operations Professional Requirement).

        23 FINRA Rule 1220.06 (Eliminated Registration Categories).

        24 FINRA Rule 1230.01 (Registration Requirements for Associated Persons Who Accept Customer Orders).

        25 FINRA Rule 1240(a) (Regulatory Element).

        26 FINRA Rule 1240(b) (Firm Element).

        27 FINRA is not making any changes to the examination numbering system (e.g., Series 7 will continue to be referred to as Series 7).

        28 FINRA Rule 1220(b) sets forth each representative-level registration category and applicable qualification examination.

        29 A representative-level registration is a prerequisite to qualifying as a principal, with some exceptions. For instance, representative-level registration is not a prerequisite to registration as a Financial and Operations Principal.

        30 For example, the SIE will cover, among other rules, FINRA Rule 3220 (Influencing or Rewarding Employees of Others) (the Gifts Rule).

        31 FINRA will file the SIE content outline and the content outlines for the revised representativelevel qualification examinations with the SEC in the near term. FINRA will also file a proposed rule change with the SEC to establish the fees for the SIE and the revised representative-level qualification examinations, which will include a pricing analysis.

        32 The specified number of questions for each revised examination are estimates. The final number of questions on each revised examination may slightly vary based on additional work with the respective examination committees. Further, the table does not include the number of pretest questions on each of the listed current and future examinations.

        33 To register as a Research Analyst, an individual must pass two examinations (the Series 86 and Series 87 examinations).

        34 Registered principals who do not hold a representative-level registration as described above will not be considered to have passed the SIE. For example, an individual who is registered solely as a Financial and Operations Principal will not be considered to have passed the SIE.

        35 An individual who fails an examination must wait 30 calendar days to be able to retake that examination. Further, if an individual fails an examination three or more times in succession within a two-year period, the individual is prohibited from retaking that examination until 180 calendar days from the date of the person's last attempt to pass it.

        36 Individuals who have passed the SIE but not a representative- or principal-level examination are not considered registered persons, and thus they are not subject to FINRA rules to which registered persons are subject, such as the CE requirements.

        37 The SIE Rules of Conduct will be available on the FINRA website prior to October 1, 2018.

        38 The Rules of Conduct for representative and principal examinations are currently available on the FINRA website.

        39 For instance, an individual may forfeit his SIE results if he misrepresents to the public that he is qualified to sell securities based on passing the SIE.

        40 A "financial services industry affiliate of a member" is defined as a legal entity that controls, is controlled by or is under common control with a member firm and is regulated by the SEC, CFTC, state securities authorities, federal or state banking authorities, state insurance authorities, or substantially equivalent foreign regulatory authorities.

        41 Form U4 (Questions 14C through 14E and Question 14G(1)).

        42 Form U4 (Question 14J).

        43 As is the case with all former registered persons, FINRA retains jurisdiction for up to two years over an eligible individual who ceases to be registered with a member, including with respect to conduct that commenced prior to the individual's termination of registration. See FINRA By-Laws, Article V, Section 4 (Retention of Jurisdiction). FINRA uses the filing date of an initial or, if applicable, amended Form U5 for purposes of calculating the retention of jurisdiction period for former registered persons.

        44 Upon registering an individual, firms will be able to view whether the individual was designated as eligible under the waiver program and the individual's CE status in the CRD system.

        45 Permissive registration is available to any individual who will be functioning as an associated person of a firm, including individuals who were previously functioning in a registered capacity.

        46 Currently, a firm may permissively register or maintain the registration as a representative or principal of an individual performing legal, compliance, internal audit, back-office operations or similar responsibilities for the firm as well as an individual engaged in the investment banking or securities business of a foreign securities affiliate or foreign securities subsidiary of the firm. A firm may also permissively register or maintain the registration as a representative of an individual performing administrative support functions for registered persons.

        47 Schedule A of Form BD requires firms to list individuals with similar status or functions to, among others, Chief Financial Officers and Chief Operations Officers. Therefore, firms may be required to list individuals designated as Principal Financial Officers and Principal Operations on Schedule A of Form BD, unless such individuals are already listed on the form. In addition, while not required, firms may identify their designated Principal Financial Officer and Principal Operations Officer via the FINRA Contact System (FCS).

        48 The determination of whether an individual is eligible to register as an Introducing BrokerDealer Financial and Operations Principals depends on the minimum net capital requirements of the firm with which the individual is registering.

        49 To lessen the administrative burden on firms, FINRA is considering enhancements to the CRD system to automatically register individuals as Operations Professionals if they are registered as Financial and Operations Principals or Introducing Broker-Dealer Financial and Operations Principals, subject to review by the firm with which the person is registered.

        50 See also FINRA Rule 3130(a) (Designation of Chief Compliance Officer(s)).

        51 Consistent with FINRA Rule 1210.02 relating to permissive registrations, a firm may allow other associated persons to permissively register as Compliance Officers.

        52 There is a similar exception under the twoprincipal requirement. See FINRA Rule 1210.01 (allowing, for example, a firm that is solely engaged in investment banking activities to have two Investment Banking Principals, instead of two General Securities Principals)

        53 See FINRA Rule 1220(a)(5) (Investment Banking Principal).

        54 If such an individual does not hold any other registrations, such as a General Securities Representative registration, the CRD system will only reflect the individual's principal registration as an Investment Banking Principal.

        55 See FINRA Rule 1220(a)(13) (Private Securities Offerings Principal).

        56 If such an individual does not hold any other registrations, such as a General Securities Representative registration, the CRD system will only reflect the individual's principal registration as a Private Securities Offerings Principal.

        57 Accordingly, registration as a United Kingdom Securities Representative or Canada Securities Representative will continue to satisfy the prerequisite for General Securities Principal registration.

        58 As discussed elsewhere in the Notice, FINRA is grandfathering the registrations of individuals who registered prior to October 1, 2018, and who continue to maintain those registrations on or after October 1, 2018. FINRA is also grandfathering the registrations of individuals whose registrations were terminated between October 1, 2016, and September 30, 2018, provided they re-register within two years from the date of terminating those registrations.

      • 17-29 SEC Approves Amendments to Arbitration Codes to Revise the Definition of Non-Public Arbitrator Effective Date: October 9, 2017

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        Definition of Non-Public Arbitrator

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 12100
        FINRA Rule 13100
        Suggested Routing

        Compliance
        Legal
        Registered Representatives
        Key Topics

        Arbitration
        Codes of Arbitration Procedure
        Definitions of Non-Public and Public Arbitrator

        Summary

        FINRA's proposed amendments to the definition of non-public arbitrator in the Customer and Industry Codes of Arbitration Procedure have been approved by the SEC.1 The amended definition provides that a non-public arbitrator is a person who is otherwise qualified to serve as an arbitrator, and is disqualified from service as a public arbitrator under the Codes.

        The amendments are effective on October 9, 2017.

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

        Questions concerning this Notice should be directed to:

        •   Leslie Leutwiler, Associate Director, Neutral Management, FINRA Office of Dispute Resolution, at (212) 858-4136 or leslie.leutwiler@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 classifies arbitrators under the Customer and Industry Codes of Arbitration Procedure (Codes) as either "non-public" or "public."2 Currently there is a gap between these definitions. The non-public arbitrator definition lists affiliations that might qualify a person to serve as a non-public arbitrator at the forum. The non-public arbitrator roster is composed, among other things, of individuals who work, or worked, in the financial industry. Conversely, the public arbitrator definition enumerates criteria that disqualify an applicant from inclusion on the public arbitrator roster. Public arbitrators have never been employed by the industry, do not provide services to the industry or to parties engaged in securities arbitration and litigation, and do not have immediate family members or co-workers who do so.

        In 2015, the SEC approved amendments to the definitions of non-public arbitrator and public arbitrator in the Codes, which narrowed the public arbitrator definition to individuals who do not have any significant affiliation with the financial industry as described above.3 At the time, 800 arbitrators became disqualified from the public arbitrator roster under the narrowed public arbitrator definition. Moreover, more than 100 of these arbitrators did not meet any of the criteria outlined in the non-public arbitrator definition for service on the non-public arbitrator roster, and thus were no longer eligible to serve as arbitrators at the forum in any capacity. In most instances, the basis for the ineligibility is an affiliation relating to an arbitrator's family members or co-workers.

        FINRA amended the Codes to allow FINRA to appoint individuals to the non-public arbitrator roster if they meet FINRA's general arbitrator qualification criteria, but cannot be classified as public arbitrators. Specifically, FINRA amended the non-public arbitrator definition to delete the specific criteria for inclusion on the non-public arbitrator roster. Instead, Rules 12100(r) and 13100(r) provide that the term "non-public arbitrator" means a person who is otherwise qualified to serve as an arbitrator, and is disqualified from service as a public arbitrator.

        Effective Date

        The amendments are effective on October 9, 2017.


        1 See Securities Exchange Act Release No. 81572 (September 11, 2017), 82 Federal Register 43436 (September 15, 2017) (Order Approving File No. SR-FINRA-2017-025).

        2 See FINRA Rules 12100 and 13100.

        3 See Securities Exchange Act Release No. 74383 (February 26, 2015), 80 Federal Register 11695 (March 4, 2015) (Order Approving File No. SR-FINRA-2014-028).


        Attachment A

        Proposed new language is underlined; deletions are in brackets.

        Customer Code

        Rule 12100. Definitions

        (r) Non-Public Arbitrator

        The term "non-public arbitrator" means a person who is otherwise qualified to serve as an arbitrator, and is disqualified from service as a public arbitrator under paragraph (y). [meets any of the following criteria:

        (1) is, or was, associated with, including registered through, under, or with (as applicable):
        (A) a broker or a dealer (including a government securities broker or dealer or a municipal securities broker or dealer); or

        (B) the Commodity Exchange Act or the Commodities Future Trading Commission, or a member of the National Futures Association or the Municipal Securities Rulemaking Board; or

        (C) an entity that is organized under or registered pursuant to the Securities Exchange Act of 1934, Investment Company Act of 1940, or the Investment Advisers Act of 1940; or

        (D) a mutual fund or a hedge fund; or

        (E) an investment adviser;
        (2) is an attorney, accountant, or other professional who has, within the past five years, devoted 20 percent or more of his or her professional time, in any single calendar year, to any entities listed in paragraph (r)(1) and/or to any persons or entities associated with any of the entities listed in paragraph (r)(1); or
        (3) is an attorney, accountant, expert witness or other professional who has, within the past five years, devoted 20 percent or more of his or her professional time, in any single calendar year, to representing or providing services to parties in disputes concerning investment accounts or transactions, or employment relationships within the financial industry; or
        (4) is, or within the past five years was, an employee of a bank or other financial institution who effects transactions in securities, including government or municipal securities, commodities, futures, or options or supervises or monitors the compliance with the securities and commodities laws of employees who engage in such activities.

        For purposes of the non-public arbitrator definition, the term "professional time" shall not include mediation services performed by mediators who are also arbitrators, provided that the mediator acts in the capacity of a mediator and does not represent a party in the mediation.]

        * * * * *

        Industry Code

        Rule 13100. Definitions

        (r) Non-Public Arbitrator

        The term "non-public arbitrator" means a person who is otherwise qualified to serve as an arbitrator, and is disqualified from service as a public arbitrator under paragraph (x). [meets any of the following criteria:

        (1) is, or was, associated with, including registered through, under, or with (as applicable):
        (A) a broker or a dealer (including a government securities broker or dealer or a municipal securities broker or dealer); or

        (B) the Commodity Exchange Act or the Commodities Future Trading Commission, or a member of the National Futures Association or the Municipal Securities Rulemaking Board; or

        (C) an entity that is organized under or registered pursuant to the Securities Exchange Act of 1934, Investment Company Act of 1940, or the Investment Advisers Act of 1940; or

        (D) a mutual fund or a hedge fund; or

        (E) an investment adviser;
        (2) is an attorney, accountant, or other professional who has, within the past five years, devoted 20 percent or more of his or her professional time, in any single calendar year, to any entities listed in paragraph (r)(1) and/or to any persons or entities associated with any of the entities listed in paragraph (1) (1); or
        (3) is an attorney, accountant, expert witness or other professional who has, within the past five years, devoted 20 percent or more of his or her professional time, in any single calendar year, to representing or providing services to parties in disputes concerning investment accounts or transactions, or employment relationships within the financial industry; or
        (4) is, or within the past five years was, an employee of a bank or other financial institution who effects transactions in securities, including government or municipal securities, commodities, futures, or options or supervises or monitors the compliance with the securities and commodities laws of employees who engage in such activities.

        For purposes of the non-public arbitrator definition, the term "professional time" shall not include mediation services performed by mediators who are also arbitrators, provided that the mediator acts in the capacity of a mediator and does not represent a party in the mediation.]

      • 17-28 FINRA Makes Available Frequently Asked Questions and Guidance and Extends Effective Date of Margin Requirements for Covered Agency Transactions: New Effective Date: June 25, 2018

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        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

        FINRA Rule 4210
        SEA Rule 15c3-1
        SEA Rule 15c3-3
        Suggested Routing

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

        Covered Agency Transactions
        Margin
        TBA Market

        Summary

        In June 2016 the SEC approved1 FINRA's rule change (referred to as the "rule change") amending FINRA Rule 4210 to establish margin requirements for Covered Agency Transactions.2 To assist members in complying with the rule change, FINRA has made available a set of frequently asked questions and guidance. In addition, FINRA is extending, to June 25, 2018, the effective date of the requirements pursuant to the rule change that otherwise would have become effective on December 15, 2017.3

        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;
        •   Yui Chan, Managing Director, ROOR, at (646) 315-8426 or Yui.Chan@finra.org;
        •   Adam Rodriguez, Director, Credit Regulation, ROOR, at (646) 315-8572 or Adam.Rodriguez@finra.org;
        •   Peter Tennyson, Director, ROOR, at (646) 315-8403 or Peter.Tennyson@finra.org;
        •   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

        FINRA issued Regulatory Notice 16-31 in August 2016 to announce the SEC's approval of the rule change and the effective dates of the new requirements. FINRA announced that the risk limit determination requirements as set forth in paragraphs (e)(2)(F),(e)(2)(G) and (e)(2)(H) of Rule 4210, and Supplementary Material .05 of Rule 4210, each as respectively amended or established by the rule change (collectively referred to as the "risk limit determination requirements") would become effective on December 15, 2016. As announced in Notice 16-31, all other requirements pursuant to the rule change—broadly, the substantive margin requirements for Covered Agency Transactions—were to become effective on December 15, 2017.

        In response to questions received from industry participants, FINRA has made available a set of Responses To Frequently Asked Questions & Guidance Regarding Covered Agency Transactions Under FINRA Rule 4210 to facilitate members' efforts to comply with the new requirements.4 Further, FINRA has made available a set of Frequently Asked Questions Regarding SEA Rule 15c3-1 and Rule 15c3-3 in Connection With Covered Agency Transactions Under FINRA Rule 4210 provided by the staff of the SEC's Division of Trading and Markets.

        In addition, FINRA is extending, until June 25, 2018, the effective date of the requirements that otherwise would have become effective on December 15, 2017.5


        1 See Securities Exchange Act Release No. 78081 (June 15, 2016), 81 FR 40364 (June 21, 2016) (Notice of Filing of Amendment No. 3 and Order 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).

        2 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 defined more fully in paragraph (e)(2)(H)(i)c. of FINRA Rule 4210.

        3 See Securities Exchange Act Release No. 81722 (September 26, 2017) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change to Delay the Implementation Date of Certain Amendments to FINRA Rule 4210 Approved Pursuant to SR-FINRA-2015-036) (extending, until June 25, 2018, the implementation date of the amendments to FINRA Rule 4210 pursuant to SR-FINRA-2015-036, other than the amendments pursuant to SRFINRA-2015-036 that were implemented on December 15, 2016).

        4 FINRA will periodically update the frequently asked questions and guidance as appropriate.

        5 See note 3. Members should note that the risk limit determination requirements became effective on December 15, 2016, and are not affected by this Notice.

      • 17-27 Guidance to Members Affected by Hurricane Harvey

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      • 17-26 FINRA Adopts New Electronic Form 211 for Purposes of Compliance with FINRA Rule 6432

        View PDF

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 6432
        SEA Rule 15c2-11
        Suggested Routing

        Compliance
        Legal
        Operations
        Systems
        Trading and Market Making
        Training
        Key Topics

        Form 211
        Market Making

        Summary

        FINRA has adopted a new electronic Form 211 for purposes of compliance with FINRA Rule 6432 (Compliance with the Information Requirements of SEA Rule 15c2-11).1 Firms must begin using the electronic Form 211 in place of the current paper form beginning on October 23, 2017, but may voluntarily begin using the electronic Form 211 beginning on September 11, 2017.

        Questions regarding this Notice should be directed to:

        •   Yvonne Huber, Vice President, Market Regulation (MR), at (240) 386-5034 or by email at yvonne.huber@finra.org;
        •   Steven Genegaban, Manager, MR, at (240) 386-5040 or by email at steven.genegaban@finra.org; or
        •   for legal and interpretive questions, Racquel Russell, Associate General Counsel, Office of General Counsel, at (202) 728-8363 or by email at racquel.russell@finra.org.

        Background & Discussion

        FINRA Rule 6432 prescribes the method by which firms must demonstrate to FINRA compliance with SEA Rule 15c2-11. Rule 6432 generally provides that no member shall initiate or resume quotations in a non-exchange-listed security2 unless the member demonstrates compliance by making a filing with, and in the form required by, FINRA ("Form 211"). FINRA previously required firms to comply with Rule 6432 by submitting a paper Form 211, which is being replaced with a new electronic Form 211.

        The new electronic Form 211, accessible to firms through FINRA's Firm Gateway,3 consists of a cover page and five sections: (1) issuer and security information; (2) information required pursuant to SEA Rule 15c2-11(a)(1), (a)(2), (a)(3), (a)(4) or (a)(5), as applicable; (3) information required pursuant to paragraphs (b)(1) through (b)(3) of SEA Rule 15c2-11; (4) supplemental information; and (5) the certification. The electronic Form 211 generally solicits the same information currently requested in the paper form and permits firms to upload, or reference (if available on the SEC's Electronic Data Gathering, Analysis, and Retrieval system), all requested information, along with any supplemental information a firm may wish to submit.4

        Beginning on October 23, 2017, FINRA no longer will accept paper Form 211; thus, firms may continue to use the paper Form 211 until then. However, firms can voluntarily transition to the new electronic Form 211 beginning on September 11, 2017.

        Firms that do not have access to the electronic Form 211 on FINRA Firm Gateway should have their Super Account Administrator (SAA) contact the FINRA Gateway Call Center at (301) 590-6500. Firms with questions about completing or filing the Form 211 should contact the FINRA OTC Compliance Team at (240) 386-5100.


        1. See File No. SR-FINRA-2017-028 (Proposed Rule Change to Implement a New Electronic Form 211).

        2. For purposes of Rule 6432, the term "nonexchange-listed security" means any equity security, other than a Restricted Equity Security (defined in FINRA Rule 6420(k)), that is not traded on any national securities exchange. See Rule 6432(e).

        3. The Firm Gateway is a single point of service that allows firms to quickly interact with FINRA. The Firm Gateway provides consolidated access to regulatory applications and filings, and FINRA's electronic billing system; one-click quick access to common tasks, useful resources and key firm information; an at-a-glance view of important filing dates, tasks and events; and centralized FINRA Information Requests. The applications and filings that firms can access through the Firm Gateway include Web CRD, IARD, OATS, Report Center and virtually all electronic regulatory filing applications, including FOCUS, Firm Profile, FINRA Contact System and Rule 4530 Customer Complaints.

        4. FINRA requests additional information in follow-up correspondence as necessary to support a firm's Form 211 submission. Follow-up correspondence relating the electronic Form 211 will be sent via Request Manager, FINRA's electronic correspondence system.

      • 17-25 SEC Approves Amendments to the Codes of Arbitration Procedure Regarding Expedited List Selection; Effective Date: September 18, 2017

        Expedited Arbitrator List Selection

        View PDF

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 12402
        FINRA Rule 12403
        FINRA Rule 13403
        Suggested Routing

        Compliance
        Legal
        Key Topics

        Arbitration
        Codes of Arbitration Procedure
        Generating Lists
        Neutral List Selection System
        Sending Lists

        Summary

        The Securities and Exchange Commission (SEC) approved1 amendments to FINRA customer and industry arbitration rules to provide that the Director of FINRA's Office of Dispute Resolution (ODR Director)2 will send lists of arbitrators to all parties at the same time, within approximately 30 days after the last answer is due, regardless of the parties' agreement to extend any answer due date.

        The amendments are effective for cases filed on or after September 18, 2017.

        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
        •   Mignon McLemore, Assistant Chief Counsel, FINRA Office of Dispute Resolution, at (202) 728-8151 or mignon.mclemore@finra.org.

        Background & Discussion

        Under the Codes of Arbitration Procedure for Industry and Customer Disputes (Codes), a party must serve an answer on each other party to an arbitration within the timeframes specified under the applicable provisions of the Codes. For example, FINRA Rule 12303 requires a respondent to serve an answer specifying the relevant facts and available defenses to the statement of claim on each other party to the arbitration within 45 days of receipt of the statement of claim (the answer due date).3 If there are multiple respondents to an arbitration, and the respondents are added to the case at different times, each respondent would have a different answer due date.4 The Codes also require the ODR Director to wait until after the last answer is due5 to send the list or lists of arbitrators generated by the Neutral List Selection System (NLSS)6 to the parties. Specifically, the Codes provide that the ODR Director must send the list or lists of arbitrators to all parties at the same time within approximately 30 days after the last answer is due.7 Currently, when parties to an arbitration agree to extend the deadline for when an answer is due, the ODR Director uses that new, agreed-upon extended answer due date as the last answer due date for sending the arbitrator list or lists to the parties.

        FINRA has amended FINRA Rules 12402(c), 12403(b) and 13403(c) to provide that the ODR Director will send the list or lists generated by the NLSS to all parties at the same time, within approximately 30 days after the last answer is due, regardless of the parties' agreement to extend any answer due date. Under the amendments, party agreements to extend answer due dates will no longer affect the timing of providing the arbitrator list or lists to the parties.

        Effective Date

        The amendments are effective for cases filed on or after September 18, 2017.


        1. See Securities Exchange Act Release No. 80973 (June 19, 2017), 82 Federal Register 28724 (June 23, 2017) (Order Approving File No. SR-FINRA-20176-009).

        2. Unless the rules provide that the ODR Director may not delegate a specific function, the term includes FINRA staff to whom the ODR Director has delegated authority. See FINRA Rules 12100(k) and 13100(k). See also FINRA Rules 12103 and 13103.

        3. See also FINRA Rule 13303.

        4. If an amended claim adds a new party to the arbitration, the new party would be required to serve an answer on all other parties within 45 days of receipt of the claim. See FINRA Rules 12306, 12310, 13306 and 13310.

        5. The answer due date for the last respondent added to the arbitration would be when the last answer is due for purposes of the Codes.

        6. The NLSS is a computer system that generates, on a random basis, a list or lists of arbitrators from FINRA's rosters of arbitrators for the selected hearing location for each arbitration proceeding. The parties will select their panel through a process of striking and ranking the arbitrators on a list or lists generated by the system.

        7. The Codes also state that the parties will receive employment history for the past 10 years and other background information for each arbitrator listed. See FINRA Rules 12402, 12403 and 13403.


        Attachment A

        Customer Code

        12402. Cases with One Arbitrator

        (a)—(b) No change.
        (c) Sending Lists to Parties
        (1) The Director will send the list generated by the Neutral List Selection System to all parties at the same time, within approximately 30 days after the last answer is due, regardless of the parties' agreement to extend any answer due date. The parties will also receive employment history for the past 10 years and other background information for each arbitrator listed.
        (2) No change.
        (d)—(g) No change.

        12403. Cases with Three Arbitrators

        (a) No change.
        (b) Sending Lists to Parties
        (1) The Director will send the lists generated by the Neutral List Selection System to all parties at the same time, within approximately 30 days after the last answer is due, regardless of the parties' agreement to extend any answer due date. The parties will also receive employment history for the past 10 years and other background information for each arbitrator listed.
        (2) No change.
        (c)—(h) No change.

        Industry Code

        13403. Generating and Sending Lists to the Parties

        For disputes involving statutory employment discrimination claims, see Rule 13802.

        (a)—(b) No change.
        (c) Sending Lists to Parties
        (1) The Director will send the lists generated by the Neutral List Selection System to all parties at the same time, within approximately 30 days after the last answer is due, regardless of the parties' agreement to extend any answer due date. The parties will also receive employment history for the past 10 years and other background information for each arbitrator listed.
        (2) No change.

      • 17-24 FINRA Issues Guidance on the Enhanced Confirmation Disclosure Requirements in Rule 2232 for Corporate and Agency Debt Securities

        View PDF

        Pricing Disclosure in the Fixed Income Markets

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 7730
        Suggested Routing

        Fixed Income
        Research
        Trading
        Key Topics

        Historic TRACE Data
        TRACE Transaction Data

        Summary

        FINRA is issuing this Notice to announce publication on its website of Frequently Asked Questions (FAQ) relating to enhanced confirmation disclosure requirements for corporate and agency debt securities pursuant to FINRA Rule 2232. The new requirements are scheduled to take effect May 14, 2018.

        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.

        Discussion

        FINRA recently adopted enhanced confirmation disclosure requirements for corporate and agency debt securities.1 Beginning May 14, 2018, members will be subject to the new requirements, set out in Rule 2232, concerning confirmation disclosure of mark-ups and mark-downs, time of execution, and a security-specific URL for webpages that contain relevant information about the traded securities.

        The new requirements, approved by the Securities and Exchange Commission in November 2016, will 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.2 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.3

        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 a variety of fixed income securities. FINRA continued to coordinate closely with the MSRB as it developed the FAQ, which it believes are materially the same as FAQ that the MSRB is publishing separately.

        The FAQ address several different subject-matter areas relating to the new confirmation disclosure requirements, including:

        •   when the disclosure requirements are triggered;
        •   the scope of securities and transactions subject to the disclosure requirements;
        •   the required content and format of disclosure under the requirements; and
        •   the determination of prevailing market price.

        The FAQ can be found on FINRA's website. FINRA expects to update the FAQ periodically. New questions will be marked "new" and, to the extent previously published questions are updated or revised, they will be marked "updated."

        Firms are encouraged to contact FINRA at the numbers listed above to suggest additional topics or questions for inclusion in the FAQ.


        1. See Securities Exchange Act Release No. 79346 (November 17, 2016), 81 FR 84659 (November 23, 2016) (Order Approving SR-FINRA-2016-032).

        2. Rule 2232(d) contains two exceptions to the mark-up disclosure requirements of Rule 2232(c): an exception for trades executed by functionally separate trading desks within a firm; and an exception for bonds acquired in a fixed-price offering and sold to retail customers at the same offering price on the same day.

        3. For additional detail on the rulemaking process, see Regulatory Notice 17-08 (announcing approval and effective date of new disclosure requirements) and SR-FINRA-2016-032 (proposed rule change filed with the SEC).

      • 17-23 SEC Approves Rule Change to Reduce the Delay Period for the Corporate and Agency Debt Historic TRACE Data Sets; Effective Date: October 2, 2017

        View PDF

        Trade Reporting and Compliance Engine (TRACE)

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

        FINRA Rule 7730
        Suggested Routing

        Fixed Income
        Research
        Trading
        Key Topics

        Historic TRACE Data
        TRACE Transaction Data

        Summary

        Effective October 2, 2017, FINRA is reducing the delay period applicable to Historic TRACE Data for corporate bonds and agency debt, including Rule 144A transactions in such securities, from 18 months to six months. The text of the amendments 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 Historic TRACE Data, please contact TRACE Data Services at (888) 507-3665.

        Background and Discussion

        On June 23, 2017, the SEC approved FINRA's proposed rule change to reduce the delay period for two Historic TRACE Data Sets—the Historic Corporate Bond Data Set and the Historic Agency Data Set, including Rule 144A transactions in corresponding securities— from 18 months to six months.1 FINRA will retain the current 18-month delay for the Historic SP Data Set.2

        Historic TRACE Data provides transaction-level data for all trades reported to TRACE in classes of TRACE-eligible securities that currently are disseminated, and includes, among other things, price, date, time of execution and yield. Historic TRACE Data also may include transactions or items of information that were not disseminated previously, such as exact trade volumes (rather than the capped amounts that are disseminated in real-time), and both the buy- and sell-side of inter-dealer transactions (only sell-side trade reports are subject to real-time dissemination).3 The amendment did not change the fees applicable to Historic TRACE Data.4

        Historic TRACE Data for the Corporate Bond Data Set and the Historic Agency Data Set, including Rule 144A transactions in corresponding securities, will be made available on a six-month delay beginning on October 2, 2017.


        1 See Securities Exchange Act Release No. 81011 (June 23, 2017), 82 FR 29597 (June 29, 2017)# (Order Approving File No. SR-FINRA-2017-012).

        2 The Historic SP Data Set generally includes information on transactions in asset-backed securities, mortgage-backed securities, and Small Business Administration-backed securities traded To Be Announced and in specified pool transactions, collateralized mortgage-backed securities, collateralized mortgage obligations, and collateralized debt obligations.

        3 Complete information regarding the fields contained in Historic TRACE Data is available on the FINRA TRACE Content Licensing web page.

        4 Applicable fees are set forth in Rule 7730 (Trade Reporting and Compliance Engine (TRACE)).

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

        View PDF

        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

        View PDF

        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

        View PDF

        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

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        Pricing Disclosure in the Fixed Income Markets

        Regulatory Notice
        Notice Type

        Rule Amendment
        Referenced Rules & Notices

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

        Compliance
        Fixed Income
        Legal
        Operations
        Systems
        Trading
        Training
        Key Topics

        Fixed Income
        Pricing Information
        TRACE
        Transaction Confirmations

        Executive Summary

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

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

        Questions regarding this Notice should be directed to:

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

        Background and Discussion

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

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

        Mark-Up Disclosure Requirements

        When Disclosure is Required

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

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

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

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

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

        Methods to Calculate and Disclose Mark-Ups

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

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

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

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

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

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

        Time of Execution Disclosure Requirement

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

        Implementation Period

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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        Electronic Filing of Broker-Dealer Annual Reports

        Regulatory Notice
        Notice Type

        Guidance
        Referenced Rules & Notices

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

        Accounting
        Compliance
        Finance
        Legal
        Regulatory Reporting
        Senior Management
        Key Topics

        Annual Report
        Electronic Filing

        Executive Summary

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

        Questions concerning this Notice should be directed to:

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

        Background & Discussion

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

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

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

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


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

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

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

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        Communications with the Public

        Regulatory Notice
        Notice Type

        Request for Comment
        Referenced Rules & Notices

        FINRA Rule 2210
        FINRA Rule 2241
        FINRA Rule 3110
        Suggested Routing

        Advertising
        Compliance
        Legal
        Operations
        Registered Representatives
        Senior Management
        Key Topics

        Communications with the Public
        Supervision

        Executive Summary

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

        The proposed rule text is attached as Attachment A.

        Questions concerning this Notice should be directed to:

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

        Action Requested

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

        Comments must be submitted through one of the following methods:

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

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

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

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

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

        Background and Discussion

        Rule 2210

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

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

        Proposed Amendments

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

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

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

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

        Economic Impact Assessment

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

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

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

        Anticipated Benefits

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

        Anticipated Costs

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

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

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

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

        Request for Comment

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

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

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

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

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

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

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

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

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

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

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

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

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


        Attachment A

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

        2210. Communications with the Public
        (a) Definitions

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

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

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

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

        No change.
        (e)–(g)

        No change.

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

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        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

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        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