Congress enacted the 2006 Military Personnel Financial Services Protection Act (“Military Act”), which amended Section 15A(b) of the Exchange Act by requiring self-regulatory organizations (“SROs”), including FINRA, to adopt certain rules governing the offer and sale of securities on the premises of any military installation to members of the U.S. Armed Forces or their dependents. The Military Act was aimed at protecting members of the military and their families from unscrupulous sales of insurance, financial and investment products.
On April 23, 2015, FINRA proposed Rule 2272 to implement the Military Act requirements and the SEC published the notice to solicit comments on the proposal on May 6, 2015. Comments are due on or before June 2, 2015.Proposed Rule 2272 would require:
- Disclosure: The member shall clearly and conspicuously disclose in writing, which may be electronic, to such potential investor prior to engaging in sales or offers of sales of securities to such investor: (1) the identity of the member offering the securities; (2) that the securities offered are not being offered or provided by the member on behalf of the federal government; and (3) that the offer of such securities is not sanctioned, recommended or encouraged by the federal government. Electronic delivery of the disclosures required by proposed rule must be consistent with SEC guidance on the use of electronic media to satisfy delivery obligations which, among other things, requires affirmative consent of the customer for delivery of certain documents.
- Suitability: Proposed Rule 2272 incorporates the suitability obligations under FINRA’s suitability rule, Rule 2111. As noted in the proposing release, “FINRA believes that the suitability obligations imposed by Rule 2111 satisfy the statutory requirement that FINRA adopt rules requiring its members to perform an appropriate suitability determination, including consideration of costs and knowledge about securities, prior to making a recommendation.”
- Referral Fee Restrictions: No member shall cause a person to receive a referral fee or incentive compensation in connection with sales or offers of sales of securities on the premises of a military installation with any member of the U.S. Armed Forces or a dependent thereof, unless such person is an associated person of a registered broker-dealer who is appropriately qualified consistent with FINRA rules, and the payment complies with applicable federal securities laws and FINRA rules.
Three Takeaways from Proposed Rule 2272
One: This overall proposal is not controversial because it is implementing Congressionally mandated requirements that are already laid out in the amendments to the Exchange Act and some of the requirements basically already existed, including suitability protections. However, there are new obligations that firms will need to include in amendments to supervisory procedures and disclosure documents. Further, once the rules are adopted and go into effect, FINRA will be examining for implementation and compliance.
Two: FINRA states that they “will read with interest comments as to whether proposed Rule 2272 should be broadened to apply to sales or offers of sales of securities both on and off the premises of a military installation to any member of the U.S. Armed Forces or a dependent thereof.” (Rel. 34-74890, at p. 5, emphasis added.) This would create a broader obligation than required by the Military Act and the amendments to the Exchange Act. Those with opinions and perspectives on this issue should be aware of the June 2ndcomment deadline and make their views known for the regulators to consider.
Three: FINRA states there will be increased costs to broker-dealers due to the additional disclosure requirements and associated requirements to ensure that supervisory policies and procedures are adopted and implemented. FINRA notes, however, that the additional disclosures may be provided at the same time that other mandated disclosures occur. This will help mitigate any additional costs. (Rel. 34-74890, at p. 7.)