The Financial Industry Regulatory Authority (FINRA) recently issued Regulatory Notice 10-54 (Notice) requesting comment on a concept proposal to require broker-dealers, at or before commencing a business relationship with a retail customer, to provide a written statement describing in plain English the accounts and services it provides as well as conflicts of interest and any limitations on the broker-dealer’s duties to its retail customers.
The proposal broadly defines “retail customer” as any customer that is not a bank, savings and loan, insurance company, registered investment company or registered investment adviser, or that has total assets of $50 million or more.
The disclosure statement as currently conceived is intended to be similar in purpose to Form ADV Part II provided by investment advisers to their clients. The Dodd-Frank Act requires the SEC to conduct a study of the regulatory gaps and overlap between investment adviser and broker-dealer regulation. The Dodd-Frank Act also requires the SEC to facilitate simple and clear disclosures of material conflicts by both broker-dealers and investment advisers. The proposed disclosure statement stems from those requirements in the Dodd-Frank Act.
The Notice provides an overview of the types of disclosure that would be required in addition to current required sales practice disclosures, including:
- the types of brokerage accounts and services provided to retail customers;
- disclosures that permit evaluation of the scope of services and products provided to retail customers;
- limitations on services offered, e.g., that research available through the brokerdealer may be limited or influenced by the issuers with which the broker-dealer maintains an investment banking relationship, acts as a market maker or otherwise engages in proprietary trading;
- limitations on products offered, e.g., that the broker-dealer may not offer all products of a certain class or type;
- disclosure of all fees associated with services offered to retail customers;
- disclosures regarding incentives that the broker-dealer or its registered representatives have to recommend certain products or services in lieu of similar ones;
- disclosures of conflicts of interest that may arise between the broker-dealer and its retail customers and how these conflicts are managed; and
- limitations on the duties the broker-dealer owes to its customers, e.g., that it has no duty to assure the ongoing suitability of an investment or portfolio of investments, that it takes no responsibility for proprietary orders or that it may execute transactions on a principal basis.
FINRA is seeking comment on the contours of the proposed disclosure document, including the scope of the required disclosures, the delivery method (i.e., hardcopy, electronically, or both), the form and content of the disclosures and the timing of delivery of (and updates to) the disclosure. The comment period expires December 27, 2010.
A copy of the Notice can be found at http://www.finra.org/Industry/Regulation/ Notices/2010/P122361.