09-02 ALL FIRMS
Request for Comment on Proposed FINRA Rule 4540 Governing Information and Data Reporting and Filing Requirements
The proposed rule establishes a new information reporting requirement; requires member firms to report additional applicable contact information; and consolidates, streamlines and modifies into one rule several separate reporting and filing requirements in the NASD and Incorporated NYSE Rules. It also supports FINRA's efforts to consolidate several existing electronic reporting platforms into a single electronic platform that all firms will use to report required information. The comment period ended February 20, 2009 and comments received by FINRA are available on their website.
09-03 ALL FIRMS
Request for Comment on Proposed FINRA Rule 4150, 4522 and 4523 Governing Financial Responsibility and Operational Requirements
The proposed rules are based, in part, on Incorporated NYSE and NASD Rules governing financial responsibility, as well as certain operational and contractual requirements of member firms. The comment period ended February 20, 2009 and comments received by FINRA are available on their website.
09-05 ALL FIRMS
FINRA Reminds Firms of their Obligations to Determine whether Securities are Eligible for Public Sale
Recent FINRA investigations revealed instances in which firms failed to recognize certain "red flags" that signaled the possibility of an illegal, unregistered distribution of securities. This Notice identifies situations in which firms should conduct additional due diligence to comply with their regulatory obligations under the federal securities laws and FINRA rules and examples of procedures employed by some of the firms they examined.
09-06 FIRMS OFFERING RETAIL FOREX
Request for Comment on Proposed FINRA Rule 2380 Governing Leverage Limitations on Retail Forex
The proposed rule would prohibit any member firm from permitting a customer to initiate any forex position with a leverage ratio of greater than 1.5 to 1. In addition, customers would be prohibited from withdrawing money from an open forex position that would cause the leverage ratio for such position to be greater than 1.5 to 1. The comment period ended February 20, 2009 and comments received by FINRA are available on their website.
09-08 GENERAL SECURITIES FIRMS
SEC Approves Amendments to FINRA Trade Reporting Rule
Effective Monday, August 3, 2009, the trade reporting obligations of members for over-the-counter (OTC) equity transactions will change. Specifically, amendments to FINRA trade reporting rules will:
- replace the current market maker-based trade reporting structure with an "executing party" structure; and
- require firms with the trade reporting obligation that are acting in a riskless principal or agency capacity on behalf of another member firm(s) to submit non-tape report(s) to FINRA, as necessary, to identify such other firm(s) as a party to the trade.
OTC equity transactions are transactions in NMS stocks effected otherwise than on an exchange, which are reported through the Alternative Display Facility (ADF) or a Trade Reporting Facility (TRF) and transactions in OTC Equity Securities (e.g., OTC Bulletin Board and Pink Sheets securities), Direct Participation Program (DPP) securities and PORTAL equity securities, which are reported through the OTC Reporting Facility (ORF).
09-09 FIRMS OFFERING UNLISTED REITS
AND DPPS
Customer Account Statements and Due Diligence Requirements for Unlisted Real Estate Investment Trusts (REITs) and Direct Participation Programs (DPPs)
This Notice addresses certain requirements that apply to the per-share customer account statement values and dividend distributions of REITs and DPPs (collectively, "real estate investment programs") that are sold through broker-dealers, invest in real estate, and do not trade on a national securities exchange. Specifically, the Notice reminds firms of their obligation related to the use of estimated values and “par values” on customer account statements as well as their obligations in determining whether facts presented in offering materials including the anticipated distribution of dividends are accurate and likely to occur given pressures on the real estate markets. Where dividends are unlikely to be paid in current market conditions, the member must ensure appropriate disclosure is added to reflect this.
09-10 ALL FIRMS
SEC Approves Amendments to NASD Rules 2210 and 2211 Regarding the Supervision of Market Letters
Effective February 5, 2009, firms may supervise "market letters" as correspondence rather than sales literature, unless the letters are distributed to 25 or more existing retail customers within any 30-calendar-day period and make a financial or investment recommendation or otherwise promote the firm's product or service.
Market letter is defined as a communication that is excepted from the definition of "research report" under NASD Rule 2711(a)(9)(A). This exception consists of:
- discussions of broad-based indices;
- commentaries on economic, political or market conditions;
- technical analyses concerning the demand and supply for a sector, index or
- industry based on trading volume and price;
- statistical summaries of multiple companies’ financial data, including listings of
- current ratings;
- recommendations regarding increasing or decreasing holdings in particular
- industries or sectors; and
- notices of ratings or price target changes (subject to certain disclosure requirements).
09-11 RESEARCH FIRMS
SEC Approval for FINRA Rule 5280 Regarding Trading Ahead of Research Reports
The SEC approved a new consolidated FINRA Rule relating to trading ahead of research reports, which will take effect on April 20, 2009. The rule change adopts former NASD IM-2110-4 with three (3) modifications and creates FINRA Rule 5280. The rule change amends the IM in three respects. It extends the application of the IM to cover inventory positions with respect to any security—including debt, or derivative thereof, irrespective of whether the security is exchange-listed; applies the rule only to circumstances where a firm establishes or adjusts its inventory based on non-public advance knowledge of the content or timing of a research report in that security; and eliminates the option to establish internal controls to manage the flow of information between the research and trading departments, and instead mandates that firms establish policies and procedures reasonably designed to restrict or limit the information flow between research department personnel, or other persons with knowledge of the content or timing of a research report and trading personnel.
09-12 FIRMS THAT OFFERED AUCTION
RATE SECURITIES
Reporting Requirements for Settlements of Customer Disputes Involving Auction Rate Securities
FINRA reminds firms that reach settlements of claims related to the sale of auction rate securities that, in determining the settlement amount for the purpose of potential reporting obligations, firms must include the full dollar amount that was refunded to the customer as part of a repurchase agreement, plus any other damages identified in the settlement.
09-14 GENERAL SECURITIES FIRMS
SEC Approves Alternative Means for Calculating the Minimum Price-Improvement Obligations under Certain Circumstances
Effective February 11, 2009, firms are permitted to use an alternative method for calculating the minimum price improvement obligation under NASD IM-2110-2 (Trading Ahead of Limit Orders) in cases where the firm receives a customer limit order in an OTC equity security that is priced below $1.00 and where there is no current published inside spread in that security. In such cases, firms may calculate the current inside spread by contacting and obtaining priced quotations from at least two unaffiliated dealers. Once the firm has obtained bid and ask prices from at least two unaffiliated dealers, the firm must use the highest bid and lowest offer as the basis for calculating the current inside spread for determining its minimum price improvement obligation. Additionally, where there is a one-sided quote, the amendments permit a firm to determine the current inside spread by using the best price obtained from at least two unaffiliated dealers on the other side of the quote.
The amendments also require that firms document (1) the name of each dealer contacted and (2) the quotations received that were used as the basis for determining the current inside spread. In addition, this alternative means of calculating the current inside spread applies solely to minimum price-improvement calculations under IM-2110-2 and would not implicate other rules or requirements, such the Three Quote Rule.
9-15 GENERAL SECURITIES FIRMS
Request for Comment on Proposed FINRA Rule 5320 Regarding Trading Ahead of Customer Orders
FINRA proposes integrating IM-2110-2 and Rule 2111 into a single rule (5320) governing firms’ treatment of customer orders and applying the new rule uniformly to all equity securities, other than the no-knowledge exception. In addition to streamlining and simplifying the rules, the proposal extends the application of Rule 2111 protections to OTC equity securities. Currently, Rule 2111 applies only to exchange-listed securities, while IM-2110-2 applies to both exchange-listed and OTC equity securities.
Under FINRA’s “no-knowledge” exception, if a firm implements and utilizes an effective system of internal controls, such as appropriate information barriers that operate to prevent a non-market-making proprietary desk from obtaining knowledge of customer orders held at the firm’s market-making desk, those “walled off” proprietary desks are permitted to trade at prices that would satisfy the customer orders held by the market-making desk without such proprietary executions triggering an obligation to fill pending customer orders at the same price or better.
Information Notice – January 8, 2009 ALL FIRMS
This Notice to remind firms that the SEC's December 12, 2006 Order permitting non-public broker-dealer firms to have their balance sheet and income statements audited by independent public accounting firms not registered with the Public Company Accounting Oversight Board (PCAOB) expired December 31, 2008.
Firms whose fiscal year ends after December 31, 2008, must comply with the section of the Sarbanes-Oxley Act of 2002 that requires that their financial statements be audited by a PCAOB-registered accounting firm. For more information, please see the article from Danielle Paul provided in this newsletter.
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