Notice to Member Summaries
Source NTM
Type of Business
Summary Description RETURN TO JUNE NEWSLETTER
Information Release
2-21-08
Effective February 19, 2008 Firms are no longer required to maintain copies of certain registration forms
Given the storage and back-up capabilities of FINRA’s CRD system, firms will no longer be required to maintain copies of registration forms that do not require original signatures. The forms that no longer must be maintained in hard-copy by firms include amendments to Form U4, excluding amendments to add or change disclosure information, Form BR (original and amendments) and Form U5 (all filings, except amendments regarding the Internal Review Disclosure Review Page or a change of the residential address for the registered representative.Trade Reporting Notice
2-22-08
Modifications to the TRACE Reporting System relating to certain securities with Equity CUSIPs were announced
In this Notice, FINRA announced modification to the TRACE system to accommodate the reporting of certain securities with equity CUSIPs, such as unlisted convertible debt securities and unlisted equity-linked notes. FINRA also reminded firms as to their reporting obligations related to these securities.
FINRA Temporarily raised the Margin Maintenance Requirement on Auction Rate Securities backed by Fixed Income Products
Given the crisis in the credit markets and the overall uncertainty surrounding the auctions for these securities, FINRA announced that the margin maintenance requirement for Auction Rate Securities backed by Fixed Income Securities was increased to 25% effective March 6, 2008. The margin maintenance rate for “investment grade debt securities” previously was 10%. Although no termination date for this requirement was included in the Notice, the intention is that this will be temporary until markets stabilize. Firms were also reminded that auction rate securities issued by closed-end funds are not marginable.
Options Positions and Exercise Limits previously permitted under the FINRA Pilot Program were made permanent effective February 28, 2008
Changes to Rule 2660(b)(3)(A) and IM-2860-1 previously announced as part of a pilot program in 2007, were made permanent effective February 28, 2008. Firms should refer to this Notice or to the amended Rules regarding the applicable increases.
Rule 2210 was Amended to Create an Exception to Principal Approval for Certain previously Filed Materials
The amendment to 2210 eliminates the duplicative review and approval of certain sales materials by eliminating the requirement that a Principal review materials that qualify for the exception. The exception only applies to sales materials that have previously been filed with FINRA Advertising for review, have received a FINRA review letter finding that the content appears to be consistent with applicable standards and are being used without revision. Materials that have not received a “clean” review letter or which are being revised by the firm or its representative must be approved by the Principal and may require filing with FINRA Advertising if the revisions are material. Firms must still keep a copy of the materials being used for a period of 3 years and if they rely on the exception, they must retain the name of the firm that filed the materials with FINRA and a copy of the related review letter with the applicable materials.
Effective June 30, 2008, the Collection of Short Interest Date is being consolidated into a single system.
The requirement for reporting of short interest through a single portal was scheduled to be effective May 18. However, testing of the system has been extended until June 3 so the final effective date requiring the bi-monthly reporting has been extended to June 30, 2008. Firms that report short interest data should review the Notice and the requirements of reporting through the new portal located at https://regfiling.finra.org.
Foreign Research Analyst Exemption from Research Analyst Qualification Examination
Effective April 7, 2008, research analysts employed by foreign affiliates of US members who contribute to the preparation of the member’s research reports and meet certain qualifications will be exempt from examination requirements under Rule 1050. The requirements are that the associated person:
- is an employee of a non-member foreign affiliate of the member firm;
- resides outside the US; and
- contributes, partially or entirely, to the preparation of “globally branded” or foreign affiliate research reports and does not contribute to the preparation of a member’s research, including “mixed-team” reports that are not globally branded.
Research prepared by exempt individuals must be reviewed and approved by a Principal prior to use and must contain appropriate disclosures as outlined by Rule 2711 and 1050((3)(B) and (C).
Third Party Research Disclosure and Supervisory Review Obligations
Effective April 7, 2008 Rule 2711(h)(13) was amended with regard to “independent third-party” research. The changes add a third exemption to the types of reports requiring third-party research disclosure and change the current requirements for Principal review and approval of such reports. Firms who make available or distribute third-party research are no longer required to review and approve the content of such reports. Third-party research is defined as the report is produced by a person or entity that:
- has no affiliation or business or contractual relationship with the distributing member or that member’s affiliates that is likely to cause the author to inform the member or its affiliate as to the content of its research reports; and
- makes content determination without any input from the distributing member or the member’s affiliates.
Further the requirement to ensure that appropriate third-party disclosure is provided does not apply when the member makes independent third-party research available to its customers
- upon request;
- in connection with a solicited order when the registered person has informed the customer during the solicitation of the order as to the availability of such research and the customer has requested it; or
-
through the member’s website.
Reporting of Customer Complaints relating to Auction Rate Securities
FINRA added three new product categories to the 3070 reporting system relating to complaints arising from the sales of Auction Rate Securities. The new codes will be available beginning with the second quarter reporting due on July 15, 2008. The new Codes are:
39 – Auction Rate Securities – Municipal Debt
40 – Auction Rate Securities – Corporate Debt
41 – Auction Rate Securities – Closed-end Funds
FINRA Highlights Sound Practice for Preventing and Detecting Unauthorized Proprietary Trading
In response to a number of cases relating to proprietary trading abuses, FINRA is highlighting several sound practices for preventing or detecting improper proprietary trading. For more information on the highlights and recommendations, see the article on Guidelines for Supervision of Proprietary Traders in this newsletter.
FINRA Announces changes to Gross Income Assessment
As part of the consolidation of NYSE Regulation and the NASD. FINRA announced a change of the Gross Income Assessment. These changes will be phased in over a three-year period to reduce the potential impact on some firms and are outlined in detail in the Notice.
FINRA Issues Guidance to BDs on Partial Redemptions of Auction Rate Securities
Issuers of Auction Rate Securities are offering partial redemptions of some issues and FINRA reminds forms of their obligations to their customer in allocating these redemptions. For additional information on Auction Rate Securities and redemptions, see the article entitled Auction Rate Securities elsewhere in this newsletter.
These Notices announce a series of proposed rule changes as a result of the consolidation between NYSE Regulation and NASD. The Notices include changes to numbering of Rules as well as changes based on the business, size and organization structure of the firm. The Comment Period on each expires June 13. To follow is brief synopsis of each:
08-23: Financial Responsibility: This proposal would add new FINRA Rules 4110, 4120, 4130 4140 and 45121 which would govern member’s financial responsibility requirements and amend Rules 9557 and 9559 relating to the appeals process relating to notification sunder the financial responsibility rules.
08-24: Supervision & Supervisory Controls: This proposal would rewrite a number of provisions of existing supervision and supervisory controls rules (primarily 3010 and 3012) to permit firms more flexibility in establishing procedures based on the business, size and organizational structure.
08-25: Books & Records: This proposal would help streamline current regulations to make them clearer, group books and records requirements along similar subject matter and eliminate duplicative or obsolete rules.
08-26: Investor Education: This proposal would change the requirements relating to the delivering of certain information relating to FINRA’s website address and information regarding BrokerCheck by changing the definition of the firms required to provide such information annually.
The text of these Notices is too broad to provide more detail in this limited forum so we strongly encourage firms to review the proposed changes and to contact us if you have any questions. Further, Regulatory Compliance will continue to monitor the progress of these proposals and will notify our clients when final rule changes or made or as new proposals are released. If you would like to make comments, please follow the instructions contained in each Notice.