The SEC and FINRA recently extended relief originally granted to accommodate suitability reviews of deferred variable annuities, so that the relief is now also available for mutual funds, Section 529 plans, and other securities issued in subscription-way transactions.
"Subscription-way" is a common procedure whereby the check used to purchase securities is made payable to the issuer (or other third party) and is forwarded by the selling broker-dealer to the issuer or the issuer’s agent. The new relief expands the types of securities for which broker-dealers may hold subscription-way checks for up to seven business days to complete the principal suitability review required by FINRA rules.
A broker-dealer is not deemed to be carrying customer funds for purposes of broker-dealer regulatory net capital requirements if it promptly transmits checks to third parties. For this purpose, the SEC generally interprets "promptly" to mean no later than noon of the next business day after receipt. Similarly, a FINRA rule generally requires broker-dealers to transmit payments for investment company shares no later than the end of the first business day following receipt (or, if later, the end of the third business day following receipt of the customer’s purchase order). But broker-dealers often need to hold checks for longer periods of time to complete the principal suitability review.
Accordingly, the SEC staff recently issued a no-action letter that allows up to seven business days for such reviews of subscription-way transactions. Although the SEC previously issued an exemptive order granting comparable relief, NYLIFE Securities LLC extended that relief in March to any broker-dealer not covered by the order whose circumstances are similar. Following the SEC staff’s lead, FINRA then issued Regulatory Notice 15-23 in June, granting comparable relief from FINRA prompt payment transmittal requirements.
These welcome regulatory actions place mutual fund, Section 529 plan, and other subscription-way transactions on the same suitability review playing field as deferred variable annuities.