[ by Howard Haykin ]

Spring 2013 is a special time - a time of rebirth.  Flowers are blossoming, FINRA examiners are heading out for on-site audits, individual customers are awakening to the realization that their accounts have been rifled and begin filing complaints or initiating arbitration proceedings. 

For these reasons, Spring time is a great time to get a jump on the "2013 Continuing Education Program Firm Element" Wagon for your firm or client. 

The Securities Industry/Regulatory Council on Continuing Education (Council), like clockwork, has done its part by releasing its Spring 2013 Firm Element Advisory (FEA) -  the industry's trusted source for hot-button regulatory and sales practice topics that can enhance any Firm Element training plan. 

For those who wish to skip the rest of this post, go and click onto:  [Council's Updated FEA, April 2013].

FINRA Staff Contacts.   Direct questions to:   cecounciladmin@finra.org; or, Roni Meikle, Director, Continuing Education, FINRA, at (212) 858-4084.

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Securities Industry Continuing Education Program Firm Element Advisory – Spring 2013
For your consideration, we have identified the following new or updated areas:

1.  COMMUNICATIONS WITH THE PUBLIC

(Updated) Communications with the Public.   The SEC approved new FINRA Rules 2210 and 2212 through 2216, which will replace NASD Rules 2210 and 2211, and a number of NASD Interpretive Materials that follow NASD Rule 2210. The new rules reduce the number of current communication categories from six to three: institutional communication, retail communication and correspondence. The new rules also impose certain new filing and content requirements on communications with the public. The rule became effective on February 4, 2013.

Resources Include:

• FINRA Regulatory Notice 13-03 (January 2013): FINRA Provides Guidance on New Rules Governing Communications with the Public
• FINRA Regulatory Notice 12-29 (June 2012): SEC Approves New Rules Governing Communications With the Public
• FINRA Communication with the Public Consolidated Rules Podcast (February 2013)

This podcast, the first in a 2-part series, discusses the communication categories and content standards in FINRA's new consolidated Communications with the Public rules.  Communications with the Public Consolidated Rule – Part 1. 

2.  CORPORATE FINANCE AND INSTITUTIONAL BUSINESS

(New) Research Analysts and Research Reports.   The SEC approved amendments to NASD Rule 2711 and Incorporated NYSE Rule 472 to conform to the requirements of the Jumpstart Our Business Startups Act (JOBS Act) and make certain additional changes to quiet period restrictions consistent with the policies underlying the JOBS Act. The conforming changes were effective retroactive to April 5, 2012; the other changes were effective October 11, 2012. The amendments address research analyst participation in pitch meetings for emerging growth companies (EGC) and the distribution of research reports after an EGC’s initial public offering or secondary offering and before and after the expiration, termination and waiver of lock up agreements.

Resources Include:

• FINRA Regulatory Notice 12-49 (November 2012): SEC Approves Amendments to NASD Rule 2711 and Incorporated NYSE Rule 472 to Conform to JOBS Act Requirements. Effective Dates were April 5, 2012 and October 11, 2012.

3.  DISPUTE RESOLUTION

(New) SEC Approves Amendments to Arbitration Codes Relating to Subpoenas and Orders to Direct the Appearance of Witnesses and Production of Documents Without Subpoenas.   The Customer and Industry Codes of Arbitration Procedures (Codes) provide arbitrators with the authority to issue subpoenas or orders for the appearance of witnesses and the production of documents. The amendments add procedures for non-parties to object to subpoenas and for parties and non-parties to object to arbitrator orders of production. They also standardize procedures under the Codes relating to service of motions for subpoenas and arbitrator orders; service of issued subpoenas and arbitrator orders; and time frames for responding to subpoenas and arbitrator orders. The amendments became effective on February 18, 2013, for all motions filed on or after the effective date that request a subpoena under Rules 12512 or 13512, or an arbitrator order under Rules 12513 or 13513.

Resources Include:

• FINRA Regulatory Notice 13-04 (January 2013): SEC Approves Amendments to Arbitration Codes Relating to Subpoenas and Orders to Direct the Appearance of Witnesses and Production of Documents Without Subpoenas.

(New) SEC Approves Amendments to FINRA Dispute Resolution, Inc. By-Laws to Classify Mediators as Public Members if They Are Not Otherwise Disqualified from Being Classified as Public Members.   The SEC approved amendments to the 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. The amendments became effective on January 22, 2013, and apply to nominations of mediators by the FINRA Dispute Resolution, Inc. Board for membership on the National Arbitration and Mediation Committee submitted on or after this date.

Resources Include:

• FINRA Regulatory Notice 12-57 (December 2012): SEC Approves Amendments to Dispute Resolution, Inc. By-Laws to Classify Mediators as Public Members if They Are Not Otherwise Disqualified From Being Classified as Public Members.

4.  MARGIN AND MARGIN ACCOUNTS

(New) SEC No-Action Guidance Expanding the Definition of “Ready Market” for Certain Foreign Equity Securities.   On November 28, 2012, the staff of the Division of Trading and Markets of the SEC issued a no-action letter indicating that the Division would not recommend enforcement if a broker-dealer treats certain foreign equity securities as having a “ready market” under SEA Rule 15c3-1(c)(11) and subject to the haircuts under SEA Rule 15c3-1(c)(2)(vi)(J), provided the enumerated conditions are met. This expands the number of foreign securities eligible as foreign margin stock under Regulation T.

Resources Include:

• FINRA Regulatory Notice 12-58 (December 2012): SEC No-Action Letter Regarding the Definition of “Ready Market” for Certain Foreign Equity Securities.

(New) SEC Approves Amendments to FINRA Rule 4210 Margin Requirements.   The SEC approved amendments to Rule 4210 (Margin Requirements) related to option spread strategies, maintenance margin requirement for non-margin eligible equity securities, free-riding, exempt accounts and stress testing in portfolio margin accounts. Amendments related to option spread strategies became effective on October 26, 2012. All other amendments were effective on January 23, 2013.

Resources Include:

• FINRA Regulatory Notice 12-44 (October 2012): SEC Approves Amendments to FINRA Rule 4210 (Margin Requirements).

5.   MUNICIPAL SECURITIES

(New) Interdealer Dollar Price Reporting Requirement.   Effective February 25, 2013, the MSRB requires dealers to report the contractual dollar price at which an inter-dealer transaction is executed. Inter-dealer transaction reporting is accomplished by both the purchasing and selling dealer submitting information about the transaction to the Depository Trust and Clearing Corporation’s (DTCC) Real-Time Trade Matching System (RTTM). Information submitted to RTTM is forwarded to the MSRB’s Real-Time Transaction Reporting System (RTRS) for trade reporting. In addition to information currently reported, the contractual dollar price at which transactions are executed provides the RTRS an additional data point to evaluate which dollar price will be disseminated from RTRS for price transparency purposes.

Resources Include:

• MSRB Notice 2013-03 (January 2013): RTRS Inter-Dealer Regulatory Dollar Price Reporting Requirement Effective February 25, 2013.
• MSRB Notice 2012-55 (November 2012): Update on November 5, 2012 Effectiveness of Changes to Transaction Reporting Requirement.

The MSRB’s RTRS real-time data will display the exact par value on all transactions with a par value of $5 million or less, an increase from the current $1 million or less threshold (with an indicator of “MM+” in place of the exact par value on transactions where the par value is greater than $5 million). The exact par value of all transactions will continue to be disseminated from RTRS five business days later. The changes become effective on November 5, 2012.

Resources Include:

• MSRB Notice 2012-53 (October 2012): SEC Approves Enhancements to Large Trade Price Transparency.

Application of MSRB Rule G-17 to Underwriters of Municipal Securities.   The MSRB published an interpretive notice describing the application of MSRB Rule G-17 to underwriters of municipal securities. The notice describes the fair practice duties of brokers, dealers and municipal securities dealers owed to issuers of municipal securities when acting as underwriters for issuers’ new issues of municipal securities. The notice also reiterates that all representations made by underwriters to issuers of municipal securities in connection with municipal securities underwritings must be truthful and accurate and must not misrepresent or omit material facts. The MSRB subsequently issued implementation guidance (including many practical considerations) to assist dealers in revising their written supervisory procedures, as required under MSRB Rule G-27 to ensure compliance with the dealers’ fair practice obligations.

Resources Include:

• MSRB Notice 2012-25 (May 7, 2012): Securities and Exchange Commission Approves Interpretive Notice on the Duties of Underwriters to State and Local Government Issuers
• MSRB Notice 2012-38 (July 18, 2012): Guidance on Implementation of Interpretive Notice Concerning the Application of MSRB Rule G-17 to Underwriters of Municipal Securities

6.  OPTIONS

(New) Standard Monthly Option Expiration Date Moved From Saturday to Friday.   The Options Clearing Corporation (OCC) is pursuing the transition of standard option monthly expiration processing from Saturday morning to Friday evening. As a result, the expiration date for standard monthly options will be changing from the Saturday following the third Friday of the month to the third Friday of the month. The OCC has approved a plan to establish a cutover date of February 1, 2015.

Resources Include:

• CBOE Regulatory Circular RG12-135 (October 2012)

(New) CBSX Record of Written Complaints.   CBSX adopted Rule 53.7 which requires CBSX Trading Permit Holders (TPH) to keep and preserve written customer complaints and records of the actions taken by the TPH due to the complaint for at least five years. For the first two years, TPHs are required to keep these files readily accessible for examination or spot checks.

Resources Include:

• CBOE Regulatory Circular RG12-126 (September 2012)

7.   SALES PRACTICE AND SUPERVISION

(Updated) Know-Your-Customer and Suitability Obligations.   FINRA’s new rules governing know-your-customer requirements (FINRA Rule 2090) and suitability obligations (FINRA Rule 2111) became effective on July 9, 2012. Although the new rules are based on the core obligations of the NASD and NYSE rules that they replace, the new rules include some modified and new requirements. The suitability rule, for instance, now explicitly applies to recommendations of investment strategies, including recommendations to hold securities. The new rule also codifies the three main suitability obligations: reasonable-basis, customer-specific, and quantitative suitability. Furthermore, the new rule adds to the explicit list of customer-specific factors that firms generally must attempt to obtain and analyze when making recommendations. The new rule, moreover, makes important changes to the institutional-customer exemption to customer-specific suitability. These changes and FINRA’s discussion of risk-based approaches to evidencing compliance with the suitability rule are discussed in the Notices referenced below. In addition, FINRA updated its new account application template to reflect changes to the rules. FINRA also created a suitability Web page that, among other things, locates in one place answers to frequently asked questions regarding FINRA Rule 2111.

Resources Include:

• FINRA Regulatory Notice 12-55 (December 2012): Guidance on FINRA’s Suitability Rule
• FINRA Regulatory Notice 12-25 (May 2012): Additional Guidance on FINRA’s New Suitability Rule

8.   TRADING PRACTICES AND SUPERVISION

(New) SEC Approves Consolidated Front Running Rule.   Effective June 1, 2013, FINRA Rule 5270, which addresses the front running of block transactions, will replace NASD IM-2110-3 in the Consolidated FINRA Rulebook. Rule 5270 applies to a broader range of securities than IM-2110-3, includes new Supplementary Material regarding permitted transactions, and codifies that front running a customer order may also violate other FINRA rules or the federal securities laws.

Resources Include:

• FINRA Regulatory Notice 12-52 (December 2012): SEC Approves Consolidated Front Running Rule.

(New) SEC Approves Amendments Relating to Stop Orders.   The SEC approved new FINRA Rule 5350 (Stop Orders), which replaces the stop order provision of FINRA Rule 6140(h). The rule provides that any order labeled as a “stop order” or a “stop limit order” must be triggered by a transaction at the stop price, but permits firms to offer alternative order types with different triggers. The rule became effective January 21, 2013.

Resources Include:

• FINRA Regulatory Notice 12-50 (November 2012): SEC Approves Amendments Relating to Stop Orders.

(New) Limit Up/Limit Down Plan Pilot Program.   On May 31, 2012, the Securities and Exchange Commission (SEC) approved, on a pilot basis, a National Market System Plan, known as the Limit Up/Limit Down Plan or LULD, to address extraordinary market volatility. The Plan is designed to prevent trades in individual NMS Stocks from occurring outside of specified price bands, which will be set at a percentage level above and below the average reference price of a security over the preceding five-minute period. Phase 1 is currently scheduled to commence on April 8, 2013, along with the modified market wide circuit breakers.

Resources Include:

• FINRA Alert on Limit Up/Limit Down (LULD) Plan (February 2013)
• FINRA has published two charts to assist members in identifying the types of transactions that are excluded from the price bands under the LULD Plan and FAQs to provide guidance on LULD
• FINRA Regulatory Notice 13-12 (March 2013): FINRA Adopts Amendments Relating to Regulation NMS Plan to Address Extraordinary Market Volatility

For further details, go to:   [ FINRA RegNote 13-14, April 2013 ].