FINRA Rule 2040 governs the payment of transaction-based compensation by member firms to unregistered persons.
Rule 2040(a) – General.
Rule 2040(a) directs persons to look to SEC rules to determine whether the activities in question require registration as a broker-dealer under SEA Section 15(a). The provision also prohibits payments to appropriately registered associated persons unless such payments comply with applicable federal securities laws, FINRA rules, and SEA rules and regulations.
Rule 2040(c) – Foreign Finders.
Rule 2040(c) replaces NASD Rule 1060(b) and NYSE Interpretation 345(a)(i)/03, and provides that a member firm and persons associated with a member firm may pay transaction related compensation to non-registered foreign finders where the finders’ sole involvement is the initial referral to the member firm of non-U.S. customers, and the member firm complies with all the conditions set forth in the rule.
Based solely on its activities in compliance with Rule 2040(c), a foreign finder would not be considered an associated person of the member firm. However, unless otherwise permitted by the federal securities laws or FINRA rules, a person who receives commissions or other transaction-based compensation in connection with securities transactions generally has to be a registered broker-dealer or an appropriately registered associated person of a broker-dealer who is supervised by a broker-dealer. Member firms that engage foreign finders would be required to have reasonable procedures that appropriately address the limited scope of activities permissible under such arrangements. Regulatory Notice.
On November 17, the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB) released companion proposals that would require disclosure of pricing reference information on customer confirmations for transactions in fixed income securities. The proposals are substantially similar, but seek input on factors unique to the corporate and municipal bond markets.
Under the two proposals, bond dealers in retail-sized fixed income transactions would be required to disclose on the customer’s confirmation the price of certain same-day principal trades in the same security, as well as the difference between this reference price and the customer’s price. News Release.
The Financial Industry Regulatory Authority (FINRA) recently issued a Regulatory Notice requesting comment on a Proposed Rule Set for Limited Corporate Financing Brokers (LCFBs). The comment period expires on April 28, 2014. Please click here for Orrick’s Alert which provides an overview and analysis of the Rule Set and its merits.
FINRA issued for comment a Proposed Rule Set for Limited Corporate Financing Brokers (LCFBs). The proposed rule set would provide a lighter regulatory regime for LCFBs, defined as any broker that solely engages in one or more of the following activities:
- advising an issuer, including a private fund, concerning its securities offerings or other capital raising activities;
- advising a company regarding its purchase or sale of a business or assets or regarding its corporate restructuring, including a going-private transaction, divestiture or merger;
- advising a company regarding its selection of an investment banker;
- assisting in the preparation of offering materials on behalf of an issuer;
- providing fairness opinions; and
- qualifying, identifying or soliciting potential institutional investors.
The rule set would not apply to firms that carry or maintain customer accounts, handle customers’ funds or securities, accept customers’ trading orders or engage in proprietary trading or market-making. The proposed rule set also is limited in that, among other things, it would not eliminate all exam requirements for principals and representatives that are associated with an LCFB and would not eliminate the net capital requirements. The comment period expires on April 28. Regulatory Notice.
On May 16, Judge Naomi Reice Buchwald of the United States District Court for the Southern District of New York granted a permanent injunction against hedge fund Turnberry Capital Management LP (Turnberry) in its attempt to compel a FINRA proceeding against SunTrust Banks Inc. (SunTrust). Judge Buchwald held that because Turnberry did not purchase the RMBS at issue from SunTrust, it was not a customer of the SunTrust unit that underwrote the securities and therefore could not compel SunTrust to arbitrate. Turnberry had purchased the securities at issue from the brokerage firm Raymond James & Associates, Inc. Decision.
On December 10, FINRA issued Regulatory Notice 12-55, which provides regulatory guidance in the form of a FAQ regarding customer suitability issues under FINRA Rule 2111. The amendments to the FAQ address the scope of the terms “customer” and “investment strategy.” FINRA Notice.
On July 11, the SEC approved a rule to require the national securities exchanges and FINRA to establish a market-wide consolidated audit trail to enhance regulators’ ability to monitor and analyze trading activity. The rule requires the exchanges and FINRA to jointly submit a plan detailing how they would implement an audit trail to collect and identify every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options across all U.S. markets. The rule will be effective 60 days after publication in the Federal Register. SEC Release.
On June 14, the SEC approved the adoption by FINRA of final rules governing member firms’ communications with the public. The final rules include general contact standards, such as requiring communications to provide a sound basis for evaluating the facts with respect to a security, as well as content standards that apply to specific issues or securities. The final rules will be effective on February 4, 2013. FINRA Notice. FINRA Rules.
On June 6, FINRA proposed amendments to Rule 5110 that address current deferred compensation arrangements for financial industry advisory services in connection with public offerings, eliminate a filing requirement for exchange traded funds structured as statutory or grantor trusts, and new electronic filing requirements. Comments to the proposed amendments must be submitted by July 23.
On June 1, the SEC approved two proposals submitted by the national securities exchanges and FINRA that are designed to address extraordinary volatility in individual securities and the broader U.S. stock market. One initiative establishes a “limit up-limit down” mechanism to prevent trades in individual exchange-listed stocks outside of a specified price band. The second initiative updates existing market-wide circuit breakers which halt trading in all exchange-listed securities throughout the U.S. markets when triggered. The changes lower the percentage-decline threshold for triggering a trading halt and shorten the period of time that trading is halted. Changes will be implemented by February 4, 2013, and have been approved for a one-year pilot period. SEC Release. National Market System Plan Approval Order. Market-Wide Circuit Breaker Approval Order.