December 2010 Board Update
December 9, 2010
Dear Executive Representative:
The FINRA Board of Governors met this week to discuss a number of issues, including seven rulemaking items. We have included a summary of the rule proposals, as approved by the Board, and next steps below.
As 2010 draws to a close, it's a good time to reflect on some of the changes we have seen this year. Most notable, perhaps, is the enactment of the Dodd-Frank Act, which significantly overhauls the financial services regulatory system. Although the precise impact of Dodd-Frank on broker-dealers is still being determined, I am hopeful that the industry and regulators can continue to work together effectively to close regulatory gaps and enhance investor protection.
Given the dynamic pace of change in the financial industry, this work is part of a never-ending journey to continually ensure investor protection and market integrity. The best way for us to accomplish this is to continue having meaningful conversations about market and regulatory developments that address the vital issues of the day.
I look forward to continuing that dialogue with you next year.
Sincerely,
Richard G. Ketchum
Chairman and CEO
Rulemaking Items Discussed at the December 2010 Meeting
The FINRA Board of Governors took action regarding the following rulemaking items at its December 8, 2010, meeting. Below are the Board's actions and next steps.
Private Placements
The Board considered proposed amendments to expand FINRA Rule 5122 (Private Placements of Securities Issued by Members) to govern all private placements in which a member firm participates (subject to limited exceptions). The fundamental elements of the rule—disclosure, filing requirements and limitations on the use of offering proceeds—have broad applicability to private placements, and are not only pertinent when a firm offers its own securities (or those of certain affiliates). Expanding the rule would extend investor protections and regulatory oversight to a broader range of private placements. The proposal retains all current exemptions, except the one pertaining to when a broker-dealer acts primarily in a wholesaling capacity.
The Board authorized staff to issue a Regulatory Notice requesting comment on the rule proposal.
Debt Research Conflicts of Interest
The Board considered a concept proposal for a new debt research conflicts of interest rule, which requests comments on possible tiered approaches to regulating debt research reports and research analysts, depending upon whether the research reports are distributed to an audience that includes retail investors or to an institution-only audience.
The Board authorized staff to issue a Regulatory Notice requesting comment on the concept proposal.
Short Interest Reporting
The Board considered amendments to FINRA Rule 4560 (Short Interest Reporting), which sets forth a firm's reporting obligations for customer and proprietary short interest positions. The proposal facilitates more consistent and accurate calculation of short interest positions and helps ensure that firms are reporting the type of information that would be most useful for surveillance purposes and informative to participants in the marketplace. The proposal, among other things, clarifies that firms are required to report short interest positions that have settled by the designated settlement date and provides that firms must report short interest positions based on the gross position of each individual account.
The Board authorized staff to file the rule proposal with the SEC.
Minimum Quotation Sizes
The Board considered amendments to FINRA Rule 6450 (Minimum Quotation Size Requirements for OTC Equity Securities) to ensure quotations in lower-priced securities represent a minimum aggregate dollar value commitment and to better align with the minimums in place for listed stocks. The proposal amends the minimum quotation sizes to better align with the minimums in place for listed stocks and ensure that quotations in lower-priced securities represent a significant aggregate dollar value commitment to the market. The proposal also expands the scope of the rule to cover any quotation on an inter-dealer quotation system, whether or not the quote represents a proprietary quote or a customer order and irrespective of whether the quote is being displayed by a market maker or an alternative trading system.
The Board authorized staff to file the rule proposal with the SEC.
Consolidated FINRA Registration Rules
The Board reviewed a summary of the comments received on Regulatory Notice 09-70, seeking comment on the proposed consolidated registration and qualification rules. FINRA received 22 comment letters in response to the Notice, which are available on FINRA's website. Among other changes, the time and manner limitations would be revised for individuals (Retained Associates) engaged in the business of a financial services industry affiliate of a firm to simplify the process of tracking them.
The Board authorized staff to file the rule proposal with the SEC.
Replies to Responses to Motions in Arbitration
The Board considered amendments to the FINRA Codes of Arbitration Procedure, which specify time periods for a party to respond to a motion (a procedural device that parties use to bring a contested issue before a panel). But they do not provide expressly for the party that made the original motion (the moving party) to reply to a response.
The proposal amends the Codes to provide a moving party with a five-day period to reply to a response to a motion. The proposal gives parties an opportunity to brief fully the issues in dispute, and ensures that arbitrators have all of the motion papers before issuing a final decision on the motion.
The Board authorized staff to file the rule proposal with the SEC.
Panel Composition in Arbitration in Industry Disputes Involving Promissory Notes
The Board considered amendments to the FINRA Code of Arbitration Procedure for Industry Disputes (Industry Code) that provides procedures to expedite cases that solely involve a brokerage firm's claim that an associated person failed to pay money owed on a promissory note. Under the procedures, FINRA appoints an arbitrator from the roster of arbitrators approved to hear statutory discrimination claims to resolve the dispute. Arbitrators on this roster are chair-qualified, public arbitrators who also are attorneys familiar with employment law and have at least ten years of legal experience.
Since implementing these procedures, staff has found that promissory note cases do not require the depth of experience that these arbitrators possess. In addition, the number of promissory note cases has more than doubled in the past two years, making it more difficult to appoint arbitrators to resolve these cases.
The proposal amends the Industry Code to provide that FINRA will appoint a chair-qualified, public arbitrator to resolve a promissory note dispute instead of a statutory-discrimination-qualified arbitrator. Chair-qualified arbitrators have completed chair training and are attorneys who have served through award on at least two cases, or, if not attorneys, are arbitrators who have served through award on at least three cases. The proposal ensures that FINRA has a sufficient number of qualified arbitrators readily available to resolve these matters.
The Board authorized staff to file the rule proposal with the SEC.