FINRA

SEC OCIE Examinations Announces 2018 Examination Priorities

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On February 7, the Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) announced its 2018 examination priorities. OCIE publishes its exam priorities annually “to improve compliance, prevent fraud, monitor risk, and inform policy.”

According to the Press Release publishing the examination priorities, “of particular interest this year will be matters involving critical market infrastructure, duties to retail investors, and developments in cryptocurrency, initial coin offerings, and secondary market trading.”  Orrick believes that the focus on “developments in cryptocurrency, initial coin offerings, and secondary trading market” is significant. READ MORE →

SEC Staff Issues Guidance Update and Investor Bulletin on Robo-Advisers

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On February 23, 2017, the Securities and Exchange Commission (“SEC“) published information and guidance for investors and the financial services industry on the use of robo-advisers, described by the Staff as “registered investment advisers that use computer algorithms to provide investment advisory services online with often limited human interaction.” Press Release.

The guidance update (the “Update“) was issued by the SEC’s Division of Investment Management in order to address the unique issues raised by robo-advisers. It makes a number of specific suggestions on meeting disclosure, suitability and compliance obligations under the Investment Advisers Act of 1940 (the “Advisers Act“). The Update, however, is less prescriptive than the “Report on Digital Investment Advice” issued by the Financial Industry Regulatory Authority (“FINRA“) in March 2016 (the “FINRA Report“).

The FINRA Report generally addressed the issues faced by “financial services firms” (including both broker‑dealers and investment advisers) in the use of “digital investment advice tools.” As stated by FINRA, the effective practices discussed in the FINRA Report are “specifically intended for FINRA-registered firms, but may be valuable to financial professionals generally.” Accordingly, it is suggested that the Update be read carefully in conjunction with the FINRA Report, particularly by dually registered broker-dealers and investment advisers.

The Update notes that there may be a variety of means for a robo-adviser to meet its obligations to clients under the Advisers Act and that not all of the issues addressed in the Update will be applicable to every robo-adviser.

Also on February 23, 2017, the SEC’s Office of Investor Education and Advocacy (OIEA) published an Investor Bulletin that “provides individual investors with information they may need to make informed decisions if they consider using robo-advisers.”

The Investor Bulletin describes a number of issues investors should consider, including:

  • The level of human interaction important to the investor,
  • The information the robo-adviser uses in formulating recommendations,
  • The robo-adviser’s approach to investing,

The fees and charges involved.

FINRA and SEC Announce Tick Size Pilot Program

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On October 3, 2016, the Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission (“SEC”)’s Office of Investor Education and Advocacy issued an Investor Alert announcing a new National Market System (NMS) Plan that will implement a Tick Size Pilot Program (the “Pilot”) that will widen the minimum quoting and trading increment – sometimes called the “tick size” – for some small capitalization stocks. The goal of the Pilot is to study the effect of tick size on liquidity and trading of small capitalization stocks.

The Pilot has been implemented pursuant to the Jumpstart Our Business Startups Act which, among other things, directed the SEC to conduct a study and report to Congress on how decimalization affected the number of initial public offerings, and the liquidity and trading of securities of smaller capitalization companies.

Under the Pilot, the tick size will be widened from a penny ($0.01) to a nickel ($0.05) for specified securities listed on national securities exchanges (“Pilot Securities”). For some Pilot Securities, only quoting will need to occur in $0.05 increments, while for others, both quoting and trading generally will need to occur in increments of a nickel.

The Pilot will include a specified subset of the exchange-listed stocks of companies that have $3 billion or less in market capitalization, an average daily trading volume of one million shares or less and a volume-weighted average price of at least $2.00 for every trading day. There will be a control group of approximately 1,400 securities and three test groups, each with approximately 400 securities selected by a stratified sampling.

The Plot will run for a two-year period that will commence on October 3, 2016.

The data collected from the Pilot will be used by the SEC, national securities exchanges and FINRA to assess whether wider tick sizes enhance the market quality of these stocks for the benefit of issuers and investors—such as less volatility and increased liquidity.

Resources:

FINRA Reports on Digital Investment Advice

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On March 15, the Financial Industry Regulatory Authority (commonly referred to as “FINRA”) issued a Report that emphasizes that offerings of digital investment advice requires sound governance and supervision, including effective means of overseeing the suitability of recommendations, conflicts of interest, customer risk profiles and portfolio rebalancing.  The Report also outlines lessons for investors and states that training and education are crucial for financial professionals who use digital investment advice tools.  FINRA is the regulatory authority that is responsible, under the supervision of the U.S. Securities and Exchange Commission, for the oversight of broker-dealers.

This Report is the most comprehensive commentary and guidance issued to date by any U.S. regulator regarding digital investment advice.  It merits careful consideration.

Although the rules discussed in the Report apply directly to broker-dealers, rather than investment advisers, the Report addresses the duties applicable to investment management services provided by broker-dealers as well as investment advisers.  Therefore, we expect that the principles and rules set forth in the Report are comparable to those that the SEC will apply to investment advisers that provide digital investment advice.  Report.  Press Release.

SEC Approves Consolidated FINRA Rules 2040 (Payments to Unregistered Persons, Including Foreign Finders)

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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.

 

FINRA and MSRB Release Proposals to Provide Pricing Reference Information for Investors in Fixed Income Markets

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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.

FINRA Proposes Lighter Regulatory Regime For Limited Corporate Financing Brokers

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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 Issues Proposed Rule Set for Limited Corporate Financing Brokers

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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.

SunTrust Avoids FINRA Arbitration Concerning The Sale of RMBS

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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.