As proposed, before commencing a business relationship with a retail customer, a broker-dealer is required to provide in writing a description of the types of accounts and services it provides, conflicts associated with such services, and any limitations on the duties the firm otherwise owes to its retail customers.  FINRA would like your comment by Christmas.  FINRA's point-person is AVP Philip Shaikun.

FINRA staff has long concluded that retail customers would benefit from an upfront disclosure document that  sets forth in plain English a firm’s accounts and services, its associated conflicts of interest and any limitations on duties owed to the customer.  The staff conceived of a document similar in purpose to Form ADV, which RIA's must provide to each advisory customer.  With enactment of the Dodd-Frank Act, the staff believes the concept is even more appropriate, if not an outright necessity. 

For complete details, click onto:   [ FINRA RegNote 10-54, October ]

Dodd-Frank requires the SEC to conduct a study of the obligations of B/D's and IA's, and authorizes subsequent SEC rulemaking to establish a fiduciary duty for B/D's.  Notably, the study must consider the regulatory gaps between B/D and IA regulation, and the SEC has asked for comment as to how such gaps may be closed.

The legislation further requires the SEC to facilitate simple and clear disclosures of material conflicts by both B/D's and IA's.  Accordingly, in anticipation of satisfying any resultant rulemaking mandates and to enhance retail investors’ understanding of the business, relationships and conflicts of their brokers, FINRA staff is seeking comment on the "contours of a proposal" that would require each firm to timely provide to retail customers a statement of services, conflicts and duties.  Firms would continue to provide the more particularized sales practice disclosures currently required in interactions between RR's and customers.

    The 'Conceived ' Document.   A possible new rule proposal would require a firm, at or prior to commencing a business relationship with a retail customer, to provide to the customer a written statement that sets forth the types of brokerage accounts and services the firm provides to retail customers and the conflicts associated with such services.

“Retail Customer” Defined.  A customer that does not qualify as an institutional account under NASD Rule 3110(c)(4).  “Institutional Account” consists of a bank, savings and loan, insurance company, RIC (registered investment company), RIA (registered investment adviser) or any entity - including natural persons - with total assets of at least $50 million.

The document would include the following characteristics and subject matter:

• The types of brokerage accounts and services the firm provides to retail customers, such as research, underwriting and  recommendations of securities, products and strategies.

• Disclosures that are reasonably designed to permit existing and prospective retail customers of the firm to evaluate:
  • scope of services provided by the firm to its retail customers and any limitations on the scope of the services offered (e.g., that the universe of research covered may be limited or influenced by the issuers with which the firm maintains an investment banking relationship or the securities for which the firm acts as a market maker or otherwise engages in proprietary trading);
  • scope of products offered to the firm’s retail customers;
  • to extent applicable, that the firm may not offer all products of a certain class or type and that it or its affiliates may be the sponsor or originator of certain products and may determine in some cases to act as a distributor or placement or sales agent for a fee from the issuer or sponsor of the product;  and,
  • all fees associated with each brokerage account and service offered to retail customers, a specific description of the service provided for each fee and whether fees are negotiable presented in a manner to allow customers to make comparisons between broker-dealers.

• Disclosures as to financial or other incentives that a firm or its registered representatives have to recommend certain products, investment strategies or services over similar ones, including:
  • in the case of investment company securities, the information required by proposed FINRA Rule 2341(l)(4);
  • any arrangement in which the firm receives any economic benefit (including cash, revenue sharing, commissions, equipment, research or non-research services) from any person, including an issuer or product manufacturer in connection with providing a particular product, investment strategy or service to a customer;
  • any arrangement in which the firm compensates or receives any economic incentive for customer referrals from or to any individual or firm; and
  • any arrangement in which a registered representative receives different payouts or other rates of compensation for certain products or services that are reasonably likely to provide an incentive for the registered representative to offer that product in lieu of similar products offered by the firm.

• Disclosure of conflicts that may arise between a firm and its customers, as well as those that may arise in meeting the competing needs of multiple customers, and how the firm manages such conflicts.

• Limitations on the duties a firm owes to its customers; for example, that the firm:
  • does not assure the ongoing suitability of an investment or portfolio of investments;
  • takes no responsibility for the propriety of unsolicited orders, other than to discharge its best execution obligation; or
  • may execute any transaction on a principal basis, absence instructions to act only in an agency capacity.