Financial Industry Regulatory Authority

FINRA’s 2015 Regulatory and Examination Priorities

On January 6th, the Financial Industry Regulatory Authority issued its 2015 regulation and examination priorities letter. The letter highlights the significant risks which, if left unaddressed, could affect investors and the integrity of the market. Specific areas of concern include the sale and supervision of interest­rate­sensitive and complex products, such as alternative mutual funds, as well as controls around the handling of wealth events in investors' lives, management of cybersecurity risks, and treatment of senior investors. FINRA will also continue to focus on high­risk brokers and the removal of bad actors who prey on vulnerable investors. FINRA Market Regulation will focus on a range of issues including: abusive trading algorithms; high­frequency trading; cross­market and cross­ product manipulation; order routing practices, best execution and disclosure; and market access controls. FINRA Press Release. On January 7th, discussed FINRA’s interest in securities­backed lines of credit, revolving loans collateralized by stocks and bonds. Leverage Concerns.

FINRA Amendments Approved

On January 5th, The Financial Industry Regulatory Authority informed members that the SEC approved amendments to NASD Rule 2340 (Customer Account Statements) to modify the requirements relating to the inclusion of per share estimated values for direct participation program (“DPP”) and unlisted real estate investment trust (“REIT”) securities on account statements, and to FINRA Rule 2310 (Direct Participation Programs) to make similar changes to the requirements applicable to members’ participation in public offerings of DPP or REIT securities. The amendments will be effective on April 11, 2016. FINRA Regulatory Notice 15­2.

FINRA Renewal Statements Reminder

On January 2nd, the Financial Industry Regulatory Authority advised members that Web CRD/IARD statements are available for review, reconciliation, and response. Payment must be made by January 16, 2015. FINRA Regulatory Notice 15­1.

Report Filing Due Dates

On December 30th, the Financial Industry Regulatory Authority reminded firms of their Annual Audit, FOCUS, Form Custody, and supplemental FOCUS Report filing obligations. The Information Notice provides the deadlines for filings that are due in 2015 or in the first quarter of 2016. All filings submitted to FINRA must be made electronically.

Proposed Rule Changes Approved

On December 30th, the SEC approved the Financial Industry Regulatory Authority’s proposal to streamline provisions of NASD Rule 2410 (Net Prices to Persons Not in Investment Banking or Securities Business), NASD Rule 2420 (Dealing with Non­Members), NASD IM­2420­1 (Transactions Between Members and Non­Members), NASD IM­2420­2 (Continuing Commissions Policy), Incorporated NYSE Rule 353 (Rebates and Compensation), Incorporated NYSE Rule Interpretation 345(a)(i)/01 (Compensation to Non­Registered Persons) and Incorporated NYSE Rule Interpretation 345(a)(i)/02 (Compensation Paid for Advisory Solicitations), which would be deleted from the current FINRA rulebook. The proposed rule change would also adopt the requirements of NASD Rule 1060(b) (Persons Exempt from Registration) and Incorporated NYSE Rule Interpretation 345(a)(i)/03 (Compensation to Non­Registered Foreign Persons Acting as Finders), as FINRA Rule 2040(c) (Nonregistered Foreign Finders) in the consolidated FINRA rulebook without material change. In addition, the proposed rule change would amend FINRA Rule 8311 (Effect of a Suspension, Revocation, Cancellation, or Bar), add new Supplementary Material .01 (Remuneration Accrued Prior to Effective Date of Sanction or Disqualification), and adopt the requirements of NASD IM­2420­1(a) (Non­members of the Association), as FINRA Rule 0190 (Effective Date of Revocation, Cancellation, Expulsion, Suspension or Resignation). SEC Release No. 34­73954.

Background Investigation Proposal Receives Accelerated Approval

On December 30th, the SEC granted accelerated approval to the Financial Industry Regulatory Authority’s proposed adoption of NASD Rule 3010(e), relating to background investigations, as FINRA Rule 3110(e) in the consolidated FINRA rulebook. SEC Release No. 34­73966. On January 9th, Investment News summarized the new rule’s requirements and the cost of compliance. Analysis.

FINRA Investor Alert

On December 23rd, the Financial Industry Regulatory Authority issued an investor alert warning investors of aggressive promotions touting stocks that claim to capitalize on the e­cigarette and vaporizer, or "vape," market. FINRA Press Release.

FINRA Precious Metal Investor Alert

On December 18th, the Financial Industry Regulatory Authority issued a new Investor Alert called “Physical Precious Metals: Tips to Avoid Tarnishing Your Portfolio”. FINRA's new Alert warns investors of the risks involved with investing in physical precious metals. FINRA Press Release.

Extended Hours Trading Disclosures

On December 17th, the Financial Industry Regulatory Authority reminded member firms of their obligations under FINRA Rule 2265 to disclose to a customer the material risks of extended hours trading. This disclosure should include the risks described in the Model Extended Hours Trading Risk Disclosure Statement in FINRA Rule 2265 as well as any additional disclosures as necessary to address product­specific or other specific needs. FINRA Regulatory Notice 14­54.


Revisions to Risk Management Framework Proposed

On January 5th, the SEC provided notice of ICE Clear Credit’s filing of proposed revisions to the ICC Risk Management Framework to incorporate risk model enhancements related to Recovery Rate Sensitivity Requirements, anti­procyclicality, and ICC’s Guaranty Fund allocation methodology. ICC also proposes revisions which are intended to remove obsolete references and ensure consistency. ICC believes such revisions will facilitate the prompt and accurate clearance and settlement of securities transactions and derivative agreements, contracts, and transactions for which it is responsible. Comments should be submitted on or before January 30, 2015. SEC Release No. 34­73980.

International Securities Exchange

Strike Price Interval Proposal Approved

On January 6th, the SEC approved the International Securities Exchange’s proposed rule change to extend the current $0.50 strike price intervals in non­index options to short term options with strike prices less than $100. SEC Release No. 34­73999.

Disapproval Proceedings Instituted for Informational Barrier Proposal

On December 31st, the SEC instituted proceedings to determine whether to approve or disapprove the International Securities Exchange’s proposed amendment of ISE Rules 810 (Limitations on Dealings) and 717 (Limitations on Orders) governing information barriers. The amendment of Rule 810 would permit information to flow to a member’s Electronic Access Member (“EAM”) unit, which handles the customer/agency side of the business, from its affiliated Primary Market Maker (“PMM”) and/or Competitive Market Maker (“CMM”) (jointly, “market makers”) unit. As amended, ISE Rule 810 would allow EAMs to know where, and at what price, their affiliated market makers are either quoting or have orders on the order book and to use that information to influence routing decisions. The Exchange represents that it currently provides guidance to its members that ISE Rule 810 is to be interpreted as a two­way information barrier between the EAM unit and its affiliated market maker unit. The Exchange also proposes to amend ISE Rule 717, Supplementary Material .06 to specify that the orders of a EAM unit and its affiliated PMM and/or CMM unit may interact within one second without violating the ISE Rule 717(d) and (e) order exposure requirements when the firm can demonstrate that: (1) the customer order was marketable when routed; (2) the EAM was not handling the affiliated market maker quote/order; and (3) the affiliated market maker quote/order was in existence at the time the customer order(s) were entered into the ISE system. In combination, the proposed amendments to ISE Rules 810 and 717 would make it possible for an EAM to route a customer order to the ISE to immediately interact with the quote or an order of an affiliated market maker, but only subject to the conditions stated above. Comments should be submitted on or before January 27, 2015. Rebuttals should be submitted on or before February 10, 2015. SEC Release No. 34­73973.


New Optional Functionality Approved

On December 30th, the SEC approved the NASDAQ Stock Market’s proposed amendment of NASDAQ Rule 4751(f)(5) to provide a new optional functionality for Minimum Quantity Orders. SEC Release No. 34­73959.

Public Disclosure of Listing Denial

On December 22nd, the SEC provided notice of The NASDAQ Stock Market’s filing of a proposal that would require companies to publicly disclose the denial of a listing application. Comments should be submitted on or before January 20, 2015. SEC Release No. 34­73912.

National Futures Association

Member Swap Activities

On January 5th, the National Futures Association announced CFTC approval of an amendment to NFA Compliance Rule 2­4, which extends to swaps the requirement that members observe high standards of commercial honor and just and equitable principles of trade in the conduct of their commodity futures business. The amendment is effective immediately. NFA Notice I­15­01.


Extension of Price Protection Mechanism Proposed

On January 8th, the SEC provided notice of NYSE Arca’s and NYSE MKT’s separately filed proposals to provide price protection for Market Maker quotes. The Exchanges currently offer price protection mechanisms for orders and are proposing to expand those mechanisms to make price protection available for Market Maker quotes as well. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of January 12.

Longer Period Designated for Proposed Order Types Amendment

On December 22nd, the SEC designated February 18, 2015 as the date by which it will approve, disapprove, or institute disapproval proceedings regarding NYSE MKT’s proposed amendment of Exchange Rule 13 ­ Equities and other Exchange rules governing order types and order modifiers. SEC Release No. 34­73913.

Amendment to Trade Collar Rule Approved

On December 17th, the SEC approved NYSE Arca’s and NYSE MKT’s individually proposed amendment of their respective rules relating to their “Trade Collar Protection” mechanisms for options.

The Options Clearing Corporation

Clarification Regarding Futures Transactions Proposed

On December 30th, the SEC provided notice of The Options Clearing Corporation’s filing of a proposed amendment that would permit OCC to add an interpretation and policy clarifying that OCC would not treat a futures transaction that is an exchange­for physical or block trade as a non­competitively executed trade, and therefore subject to delayed acceptance for clearing, if the exchange on which such trade is executed has provided OCC with representations satisfactory to OCC that it has policies and procedures requiring such trades to be executed at reasonable prices and that such prices are validated by the exchange. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of January 12. SEC Release No. 34­73961.