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FINRA Provides Preview of 2018 Rulemaking Activity

Posted in Broker-Dealer Regulation

In a December 20, 2017 press release, FINRA announced that, at its final Board of Governors meeting for 2017, it approved the filing of several proposed amendments to its rules.

The rule proposals will include the following:

  • Capital Formation: the proposed rule amendments that would remove certain potential impediments to capital formation; in particular, Rules 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) and 5131 (New Issue Allocations and Distributions) would be amended to exempt additional persons and certain transactions from the scope of the rules, modify current exemptions to enhance regulatory consistency, and address unintended operational issues.
  • Suitability and Churning: FINRA’s principal suitability rule, Rule 2111,¹ would be amended to allow cases to be brought for churning of customer accounts based on the broker’s recommendation of an excessive number of trades, without the need to prove that the investor had no control over the account.
  • Research Reports on Covered Investment Funds: FINRA proposes to amend Rules 2210 (Communications with the Public) and 2241 (Research Analysts and Research Reports) to conform these rules to the Fair Access to Investment Research Act of 2017 (the “FAIR Act”). The FAIR Act is designed to eliminate restrictions and to reduce burdens for broker-dealers issuing research reports on a variety of investment funds, such as registered investment companies, ETFs, etc.
  • Outside Business Activities and Private Securities Transactions: a new proposal is intended to reduce unnecessary burdens. While requiring registered persons to provide their member firms with prior written notice of a broad range of outside activities, broker-dealers would only have a duty to reasonably assess a narrower set of activities that are investment-related, and potentially more likely to raise potential investor-protection concerns. The proposal also would generally exclude from the rule a registered person’s personal investments and work performed on behalf of a firm’s affiliate, and would eliminate supervisory obligations for non-broker-dealer outside activities, such as investment advisory activities conducted at an unaffiliated third-party adviser.²

We will provide additional information as more detail about the proposals, and their potential impact, emerge.

[1] For a summary of current Rule 2111, our FAQs may be found here.

[2] As previously discussed in this publication here, FINRA has conducted a retrospective review of these rules, which led in part to the new proposal. In FINRA’s December 2017 report as to examination findings (our summary is available here), FINRA expressed concern as to a variety of issues that have arisen in terms of compliance.