Securities Law Blog

The Financial Industry Regulatory Authority (FINRA) unveiled four new regulatory proposals earlier this month. The overall aim of the measures is to consolidate NASD and New York Stock Exchange rules into one FINRA rulebook, but included are several changes to rules governing net capital requirements for member firms, supervisory roles and documentation. Proposed Rule 4110(a) would allow FINRA's executive vice president to require greater net capital requirements for clearing and carrying member firms. The authority to do is based upon broad language terminology such as "protecting investors" or "in the public interest." However, FINRA does note in its proposal that, historically, a provision such as this, akin to NYSE Rule 325(d), has this has been rarely utilized. "FINRA anticipates that it would apply [Rule 4110(a)] in similar circumstances," it notes. FINRA also proposes that firms be unable to reduce their member's equity in levels that exceed 10% of the firm's excess net capital, unless FINRA gave it the green light to do so. Proposed Rule 4110(c) (2) would apply only to carrying, clearing and (k)(2)(i) firms. FINRA also proposes that firms "must maintain discretionary accounts," a change aimed at making the rule self-limiting, it says. The SEC has proposals that could limit the legal liability of broker-dealers maintaining discretionary accounts, FINRA says in Regulatory Notice 08-25. Customer complaint records would have to be preserved for a period of four years, up from the current three, and member firms would be prohibited from drawing upon a customer's checking or savings account without "that person's expressed writing authorization," says proposed Regulatory Notice 08-25. That same notice also proposes that customer signatures would be required to be kept for three years following the date it expires, and amends the requirements concerning signatures of registered representative responsible for accounts. In an odd twist in these days of identity fraud, rather than requiring firms to maintain the signature of the registered rep, it would instead require the firm maintain "the name of the associate person" responsible for the account. The most targeted proposal concerns the bank-related securities activities of so-called dual employees. Now, unless FINRA had written assurances are in place, dual employees would be prohibited from engaging in investment banking or securities business at a bank. And where a producing manager's revenue levels rose past a certain threshold, proposed Rule 3110(b)(6) would prohibit supervisory personnel from supervising their own activities and reporting. The compensation or continued employment of these managers could not be determined by someone they are supervising. As for its Investor Education initiative, or proposed Regulatory Notice 08-26, FINRA appears to have skirted the issue of adding levels of consumer protection. FINRA's Proposed Rule 2267 includes requiring member firms to serve customers with a new batch of where-to-go disclosures, including the web address for FINRA's "BrokerCheck" program, on an annual basis. But this is simply an update based on the old NASD Rule 2280. Perhaps the most far-reaching change expressed is a proposal that Rule 2267 would now apply to member firms that conduct a "limited business with customers," including mutual fund distributors and direct participation programs.

For more information on this subject contact securities attorneys, Michaels, Ward & Rabinovitz, LLP.