Articles Posted in The FINRA Rule Watch – FINRA Rules of Importance to Investors

SEC Order Approving FINRA Rule Change Relative to How Member Firms are Required to Calculate the Value of Unlisted Real Estate Investment Trusts and Direct-Participation Programs:

The Sec has approved FINRA’s plan to overhaul how member firms calculate the value of unlised real estate investment trusts (“REITs”) and direct-participation programs (“DPPs”).  Under the new rules – specifically FINRA Rule 2310 – the firms will be required to include on customer account statements a per-share estimated value for any unlisted REIT and DPP securities that they have reason to believe is reliable.  

Firms also will need to make new disclsoures about the nature of the investment, including that they are not traded on a public securities exchange and that the price that the investor receives may be less than the estimated per-shre value.  

Proposed Rule Change to Amend the Discovery Guide Used in Customer Arbitration Proceedings to Provide Guidance on Electronic Discovery Issues and Product Cases and to Clarify the Existing Provision Relating to Affirmations:

Financial Industry Regulatory Authority, Inc. (“FINRA”) has recently filed with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change to amend the Discovery Guide (“Guide”) used in customer arbitration proceedings to provide general guidance on electronic discovery (“e-discovery”) issues and product cases and to clarify the existing provision relating to affirmations made when a party does not produce documents specified in the Guide. The proposed rule change fulfills FINRA’s commitment to review the topics of e-discovery and product cases with the Discovery Task Force (“Task Force”) that FINRA established in 2011. 

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Adoption of Final Rule for Broker-Dealers Engaging in a Retail Forex Business

The Securities and Exchange Commission (Commission) recently announced the adoption of a final rule (Rule 15b12-1) to permit a registered broker-dealer to engage in a retail forex business, provided that the broker-dealer complies with the Securities Exchange Act of 1934, the rules and regulations thereunder, and the rules of the self-regulatory organization(s) of which the broker-dealer is a member insofar as they are applicable to retail forex transactions. The Commission is adopting Rule 15b12-1 substantially in the form previously adopted as an interim final temporary rule and is providing that the rule will expire on July 31, 2016. 

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Proposed Rule Change to Adopt the Consolidated FINRA Supervision Rules:

Financial Industry Regulatory Authority, Inc. (“FINRA”) recently filed with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change to adopt the consolidated FINRA supervision rules. Specifically, the proposed rule change would (1) adopt FINRA Rules 3110 (Supervision) and 3120 (Supervisory Control System) to largely replace NASD Rules 3010 (Supervision) and 3012 (Supervisory Control System), respectively; (2) incorporate into FINRA Rule 3110 and its supplementary material the requirements of NASD IM-1000-4 (Branch Offices and Offices of Supervisory Jurisdiction), NASD IM-3010-1 (Standards for Reasonable Review), Incorporated NYSE Rule 401A (Customer Complaints), and Incorporated NYSE Rule 342.21 (Trade Review and Investigation); (3) replace NASD Rule 3010(b)(2) (often referred to as the “Taping Rule”) with new FINRA Rule 3170 (Tape Recording of Registered Persons by Certain Firms); (4) replace NASD Rule 3110(i) (Holding of Customer Mail) with new FINRA Rule 3150 (Holding of Customer Mail); and (5) delete the following Incorporated NYSE Rules and NYSE Rule Interpretations: (i) NYSE Rule 342 (Offices-Approval, Supervision and Control) and related NYSE Rule Interpretations; (ii) NYSE Rule 343 (Offices-Sole Tenancy, and Hours) and related NYSE Rule Interpretations; (iii) NYSE Rule 351(e) (Reporting Requirements) and NYSE Rule Interpretation 351(e)/01 (Reports of Investigation); (iv) NYSE Rule 354 (Reports to Control Persons); and (v) NYSE Rule 401 (Business Conduct).

The Financial Industry Regulatory Authority, Inc. (“FINRA”) recently filed with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change to amend the By-Laws of FINRA Dispute Resolution, Inc. (By-Laws) to clarify that services provided by mediators, when acting in such capacity and not representing parties in mediation, should not cause the individuals to be classified as Industry Members under the By-Laws.

Mediation is an important step in the dispute resolution process.  It is a process whereby the litigants appear before an independent third party generally referred to as a “mediator” to attempt to resolve, through a negotiated agreement, their issues. The mediator is usually trained and certified in the mediation process.  Mediation can be commenced either before or during a pending action be it a lawsuit or an arbitration.  Currently, in pending arbitration cases, mediation is usually voluntary.  In pending court actions, mediation is generally mandated before the actual trial of the matter can take place.

For the most part, mediation has a structure, timetable and dynamics that “ordinary” negotiation lacks. The process is private and confidential. The mediator acts as a neutral third party and facilitates rather than directs the process.

The purpose of this post is to provide the reader with information relative to recently proposed or adopted rule changes issued by the Financial Industry Regulatory Authority (FINRA), in addition to Guidance Releases relating to the interruptation of these rules. This information is being provided for informational purposes only. Thus, it should not be relied upon as legal advice, Also, the information provided below is subject to withdrawal, revocation and modification by FINRA, which may or may not be reflected on this site. Consequently, the reader should contact a qualified professional concerning the current status of any of the information referenced below.

Recently Filed Proposed Rule Change Relating to FINRA Rule 4210 (Margin Requirements)

Broker/Dealer – Private Placements:

As a result of the recent private placement debacle that seems to be discussed daily in the financial press, FINRA has proposed an amendment to its rules, which it believes will enhance investor protection. While the amendment is not the end-all to the problems that have recently been exposed in this area, it is a step in the right direction.

The comment period for a proposed amendment to FINRA Rule 5122, relating to private placements, expires on March 14, 2011. Current Rule 5122 requires, subject to certain exemptions, disclosure in the offering document of the intended use of offering proceeds, expenses, and the amount of selling compensation to be paid to the broker-dealer and its associated persons, in any private placement in which a participating broker-dealer (or its control entity) is the issuer. The rule also requires that at least 85 percent of the offering proceeds must be used for the business purposes identified in the offering document. Lastly, the rule requires each offering document to be submitted to FINRA to allow the staff to conduct ex post reviews to assess compliance with the rule and to identify problematic terms and conditions.

SEC Approves Consolidated FINRA Rules Governing Know-Your-Customer:

Effective October 7, 2011, new consolidated FINRA rules governing your broker/dealer’s and your account executive’s know-your-customer and suitability obligations become effective for the consolidated FINRA rulebook. The new rules are based in part on and replace provisions in the NASD and NYSE rules.

These rules are of critical importance for broker/dealers and customers alike. They form critical standards by which the firm’s can reasonably monitor the activity that is taking place in your account and they provide guidance to you, the customer, to understand your role verses that of your account executive. In order for the protections of these rules to surround the activity in your account, you must, at the start of your relationship with the broker/dealer and your account executive, provide complete information as discussed below. Importantly, if your circumstances change, it is critical that these changes be communicated to your account executive and firm so that they can fulfill their regulatory obligations to you.

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