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FINRA issues proposed revisions to Rules, with substantial changes in supervision and supervisory controls rules

On May 14, FINRA released proposed Rule revisions, reflecting its efforts to merge the old NYSE and NASD rulebooks, refining and clarifying previous rules, and offering a few new wrinkles. The proposed revisions are open for comment until June 13.

 

The four separate proposed revisions relate to (1) Financial Responsibility (largely relating to net capital issues); (2) Supervision and Supervisory Controls; (3) Books and Records (consolidating and modifying various books and records rules, including in regards to client accounts and complaints); and (4) Investor Education and Protection (extending the scope of current FINRA Rule 2280). The new proposals contain extensive changes and additions, including many consolidations or relocations of existing rule provisions. 

 

Although there are specific changes in each of the four areas noted above, the changes to FINRA’s Supervision and Supervisory Controls rules (current Rules 3010 and 3012, which will be renumbered 3110 and 3120) are probably the most extensive and dramatic. Highlights include:

 

     ***  Proposed Rule 3110 provides much-needed clarification regarding the supervision of current Rule 3012’s provisions for supervision of “producing managers.” The new Rule will, more simply, prohibit “supervisory personnel” from (1) supervising themselves; and (2) being supervised by anyone who reports to or whose compensation is determined by the supervised person. The current, rather confusing, language requiring supervisory review of such managers' client accounts by “senior” or “otherwise independent” personnel will be removed.    Proposed Rule 3120 otherwise continues Rule 3012’s testing, verification, and certification requirements, though it now specifies additional information that firms with gross revenues over $150 million must include in the annual report to senior management.

 

     ***  Current Rule 3010(b)(3), requiring “heightened office inspections” for offices that generate 20% or more of a business unit’s revenue will be completely deleted. Instead, the new Rule 3110 provides a more principles-based approach that requires a firm to have written procedures reasonably designed to “prevent the inspection from being lessened in any manner due to any conflicts of interest.”

 

     ***  Current Rule 3040 (regarding private securities transactions) will be deleted, and incorporated into new Rule 3110. The proposed rule removes any distinction, for supervisory purposes, between private transactions for which an associated person is compensated and those for which no compensation is paid. Moreover, the new Rule provides a qualified exemption for firms from the supervisory rules regarding private transactions with regard to associated persons who complete the transaction as part of their separate employment by a bank, so long as the member firm is notified of the activity and receives written assurance from the bank that it has reasonable supervisory procedures for such activities.

 

     ***  New Rule 3110 clarifies that firms must institute written procedures for written customer complaints, dropping the NYSE’s inclusion of procedures for oral complaints. 

 

     ***  New supplementary material to the rule clarifies, among many other things, that member firms are to follow the previous NYSE Rule 342.21 requirement that firm’s insider trading policies contain specific procedures for reviewing and investigating trades effected for the firm’s account and the accounts of firm employees and family members.

Full post as published by OverRegd - Securities Regulation and Litigation Blog on May 15, 2008 (boomark / email).