FINRA issued Regulatory Notice 10-54 (the Notice) requesting comment on a concept proposal to require broker-dealers, on or before commencing a business relationship with a retail customer, to provide a disclosure document describing in plain English the accounts and services it offers as well as conflicts of interest and any limitations on the broker-dealer’s duties to its retail customers.
The Notice envisages the proposed disclosure to be similar in purpose to Form ADV Part II, which is a brochure provided to clients by investment advisers that discloses information about the advisers. The disclosure document was proposed in response to certain requirements set forth in the Dodd-Frank Act. The Act requires the SEC to conduct a study of the regulatory gaps and overlap between investment adviser and broker-dealer regulation. It also requires the SEC to facilitate simple and clear disclosures of material conflicts by both broker-dealers and investment advisers.
The Notice provides an overview of the types of disclosure that would be required in addition to current required sales practice disclosures, including, among other things, information about the broker-dealer’s products and services, conflicts of interest, and compensation arrangements.
FINRA received in excess of 50 comment letters on this proposal. Below are synopses of several of the comment letters.
The ICI filed a letter supporting the initiative with the exception that mutual fund underwriters should be excluded or exempted from the disclosure requirement, because, as the ICI explains, the business model and regulatory requirements applicable to mutual fund underwriters are significantly different from those of retail broker-dealers. The ICI asserts that the proposed disclosure would be essentially meaningless to a mutual fund investor and that the delivery requirements for the disclosure statement would be disruptive. The ICI requests that FINRA detail how the rule would be applied to mutual fund underwriters if they are not exempted from the rule. In its comment letter, the National Society of Compliance Professionals (NSCP) agrees that a broker-dealer that exists only as a distributor for a mutual fund company possesses a very different business model than that of other broker-dealers. Thus, the NSCP argues, the scope of the FINRA proposal may be overly broad in that it would incorrectly treat all broker-dealers alike.
Another industry participant, Wells Fargo Advisors (WFA), urges in its comment letter that there be a “coordinated and cohesive rulemaking approach” between the SEC and FINRA, and that it would be premature to divorce FINRA’s efforts from federally mandated rulemaking by the SEC under Section 913 of the Dodd-Frank Act. WFA posits that the final SEC rules could affect what FINRA would deem appropriate disclosures at the commencement of a business relationship between a broker-dealer and a retail customer. The NSCP comment letter agrees that the FINRA proposal is premature to the extent that it is intended to precede future SEC rulemaking. The NSCP notes that a FINRA disclosure document that might become obsolete as a result of SEC rulemaking would cause confusion among investors and firms.
The views offered by industry participants responding to the FINRA concept proposal indicate that while many agree that broker-dealer disclosure at the inception of a business relationship with a retail customer is appropriate, they also believe that such a requirement must be focused in coverage and coordinated with SEC rulemaking efforts. FINRA will review and consider these comment letters in proceeding with its concept proposal.
A copy of the Notice can be found at: http://www.finra.org/Industry/Regulation/Notices/2010/P122361. Comments on the Concept Proposal can be found at http://www.finra.org/Industry/Regulation/Notices/2010/P122362.