FINRA 2018 Regulatory and Exam Priorities Released

The Financial Industry Regulatory Authority (FINRA) recently released its 2018 Regulatory and Examination Priorities Letter (the “Priorities Letter”), highlighting topics FINRA will focus on in 2018.

FINRA regulates brokerage firms doing business with the public in the United States. FINRA writes rules; examines for and enforces compliance with FINRA rules and federal securities laws; registers broker-dealer personnel and offers them education and training; and informs the investing public. FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. 

Some of the key topics identified in the Priorities Letter as areas of focus in 2018 are fraud, high-risk firms and brokers, operational and financial risks—including technology governance and cybersecurity—and market regulation. Other areas of priority in 2018 include: 

 

• Sales practice risks, including recommendations of complex products to unsophisticated, vulnerable investors 
• Protection of customer assets and the accuracy of firms’ financial data 
• Market integrity, including best execution, manipulation across markets and products, and fixed income data integrity 

In the Priorities Letter, FINRA CEO Robert Cook wrote, “The coming year will bring both continuity and change in FINRA’s programs. . . . The continuity comes, first and foremost, in our unwavering commitment to our mission: protecting investors and promoting market integrity in a manner that facilitates vibrant capital markets. Change will come in how we accomplish that mission.” 

FINRA flags the following significant new rules that are currently scheduled to become applicable in 2018. 

• Financial Exploitation of Specified Adults – FINRA Rule 2165 will become effective February 5, 2018. The rule permits 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. 
• Amendments to FINRA Rule 4512 (Customer Account Information) – An amendment to FINRA Rule 4512 requires members to make reasonable efforts to obtain the name of and contact information for a trusted contact person for a non-institutional customer’s account. The amendment will become effective February 5, 2018. 
• Amendments to FINRA Rule 2232 (Customer Confirmations) – The amended FINRA 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 offsetting principal trades 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 are scheduled to become effective on May 14, 2018. 
• Margin Requirements for Covered Agency Transactions (Amendments to FINRA Rule 4210) – FINRA’s new margin requirements for Covered Agency Transactions are slated to become effective June 25, 2018. 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. Members are reminded that the risk limit determination requirements under the amendments to Rule 4210 became effective on December 15, 2016.

FINRA Board Accused of Conflicts of Interest

As reported in InvestmentNews, the Public Investors Arbitration Bar Association (PIABA) issued a report asserting that certain “public governors” on the Financial Industry Regulatory Authority’s (FINRA) 24-person board serve on too many corporate boards and/or have connections to Wall Street such that they cannot represent the publicly effectively and face conflicts of interest.

FINRA is a self-regulatory organization which oversees thousands of broker-dealers on behalf of the Securities and Exchange Commission (SEC). It has 13 public governors, 10 industry governors and one seat for its CEO. The PIABA report notes that, under FINRA’s by-laws, its public governors shall not have any material business relationship with a broker or dealer or other self-regulatory organization.

PIABA states that, instead of bringing a customer-oriented view to the table, FINRA’s public governors “often provide additional representation for security industry constituencies.” PIABA also critiques the selection of public governors with ties to the security industry. It states, “In many instances FINRA’s public governors join the board after long careers in the securities industry. . . . Although some academics and former regulators do serve on FINRA’s board as public governors, the board only infrequently includes persons primarily identified as investor protection advocates. This absence is troubling for an organization that publicly characterizes itself as dedicated to investor protection.”

InvestmentNews also reports that a FINRA spokesperson defended the FINRA board and its public governors, noting that “Each governor, regardless of his or her affiliation or classification, is responsible for serving in an unbiased and objective manner, and voting on matters for the good of the investors, industry and marketplace.”

New Hampshire Adopts Uniform Securities Act - Effective January 1, 2016

On July 27, 2014 New Hampshire’s Governor signed into law a new Uniform Securities Act. The new Act repeals and replaces New Hampshire’s current Uniform Securities Act which is based on the 1956 model securities act. The new Act is based on the Uniform Securities Act of 2002, drafted by the Uniform Law Commission of the American Bar Association, which is a model statute designed to guide each state in drafting its state securities law.

The new Act goes into effect on January 1, 2016 and is intended to simplify and facilitate capital-raising by small-and medium-sized companies, better align securities offering rules with regulatory interests, update and clarify securities compliance requirements, and preserve and enhance investor protections. It is also expected to eliminate any disincentives for companies to operate in New Hampshire and bring consistency between New Hampshire securities law and the securities law of many other states.

A link to the new Securities Act is here.