[ by Howard Haykin ]

FINRA's Board of Governors held their April meeting and gave the staff authorization to proceed with establishing news rules or rule amendments in the following areas: 

• TRACE Eligible 144A Transactions
• ADF Requirements
• Arbitration Panels
• Discovery in Arbitration Cases
• Unlisted DPPs and REITs on Customer Statements

Dissemination of TRACE-Eligible Rule 144A Transactions.   FINRA will propose amending FINRA Rules 6750 and 7730 to provide for the dissemination of transactions in TRACE-eligible securities effected pursuant to Securities Act Rule 144A.  TRACE would begin disseminating Rule 144A transactions, provided that the asset type currently is subject to dissemination under FINRA Rule 6750.  Rule 144A transactions would be subject to the same dissemination caps as are currently in effect for non-Rule 144A transactions in similar securities.  As amended, an Historic Rule 144A Data Set would be established, and fees currently in effect for similar real-time disseminated data and Historic TRACE Data would be applied, as well, to the respective Rule 144A Data Sets.

FINRA Chairman and CEO Ketchum adds the following comments on the 144A Rule Proposal.   Public dissemination of 144A transactions in TRACE-eligible securities would only be for asset types currently subject to dissemination.  FINRA has taken into account following:  (i) comments submitted in response to FINRA's September 2012 Regulatory Notice;  and, (ii) JOBS Act provisions.  FINRA believes that making this information publicly available will help market participants determine the quality of their executions and help firms comply with their regulatory obligations.

ADF Market Participant Requirements.    FINRA will propose amending the Rule 6270 Series - Quoting and Trading in ADF-Eligible Securities - to revise and clarify requirements that a member firm must meet to register as an Alternative Display Facility (ADF) market participant.  This would include completion of:  (i) ADF Market Participant application;  (ii) Certification Record;  and,  (iii) executed Participant Agreement. As amended, potential ADF market participants would be required to pay upfront fees to offset costs associated with a new participant, with an ability to earn credits against those fees during the first 2 years that the ADF market participant quotes and reports trades to the ADF.

Arbitration Panel Composition.     FINRA will propose amending FINRA Rule 12403 to simplify the panel selection rules.  Rather than requiring the customer to elect a panel selection method, parties in all customer cases with 3 arbitrators would have the same selection method. As amended, all parties would see lists of 10 chair-qualified public arbitrators, 10 public arbitrators and 10 non-public arbitrators. 

• They'd be permitted 4 strikes on each of the public arbitrator lists. 
• Any party could select an all-public arbitration panel by striking all of the arbitrators on the non-public list.
• Alternatively, if one or more non-public arbitrators remain listed on the non-public list, the parties could have a majority public panel - i.e., 2 public and 1 non-public arbitrators.

Discovery Guide Used in Investor Arbitration Proceedings.    FINRA will propose amending the Customer Arbitration Discovery Guide to provide general guidance on e-discovery issues and product cases, and to clarify existing provisions relating to affirmations.  Specifically, FINRA would amend the Discovery Guide introduction to:

• include guidelines for arbitrators to consider when deciding disputes relating to the form of e-discovery;
• add guidance on product cases to explain, among other matters, that these cases are different from other customer cases and that the Document Production Lists may not provide all of the documents parties usually request in a product case; and
• clarify that a party may request an affirmation when an opposing party makes a partial production.

Unlisted DPPs amd REITs on Customer Account Statements.     FINRA will propose amending NASD Rule 2340 - Customer Account Statements - and FINRA Rule 2310 - Direct Participation Programs - to modify the requirements relating to the per share estimated values for unlisted DPP and REIT securities included in customer account statements. As amended, no member firm would be required to include a per share estimated value of an unlisted DPP or REIT security in a customer account statement.

However, a firm may choose to do so, in which case the per-share estimated value musst be developed in a manner reasonably designed to ensure that such estimate is reliable and the firm does not have a reason to believe that it is unreliable. The rule proposal provides 3 presumed acceptable methods:

• for 2 years after breaking escrow, "net investment," consisting of gross offering price less any cash distributions to investors and "organization and offering expenses" - as defined by Rule 2310 - that are funded through borrowing or offering proceeds (a firm may rely on the issuer's periodic reports for this information);
• at any time, a valuation performed by an independent valuation service, which - under a proposed amendment to Rule 2310 - the issuer must commit to provide and must perform at least once every 3 years; and
• a periodic valuation by any program that provides them according to a methodology disclosed in the prospectus.

FINRA is not proposing to amend the Document Production Lists, which specify documents that are presumptively discoverable in customer cases. The proposed amendments encourage arbitrators to consider the totality of the circumstances, including the costs and burdens of production, when resolving discovery disputes.

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Enhancing FINRA Communications.    Separate and apart from the above rule proposals, the Board decided to try something new they hope will enhance FINRA's communications with firms and the public. Beginning with the July Board meeting, Rick Ketchum and several Governors will host a webcast immediately following the board meeting.  The goal is to provide a timely report on important issues discussed at each Board meeting and to help explain the process and thinking behind certain Board actions.

For further details, go to:   [ FINRA Governors Meeting Update, 4/19/13 ].