[ by Howard Haykin ]

In a FINRA Regulatory Notice published Thursday, the regulator requests comments on proposed rules governing markups, markdowns, commissions and fees.  Comments should be submitted on or before 4/1/13, April Fools Day. 

FINRA initially sought comment on the proposed rules 2 years ago, when it published Regulatory Notice 11-08, in February 2011.  FINRA has made several changes to the proposed rules, incorporating comments submitted at that time.  These changes include, among other things, amendments to:

• retain the 5% markup policy in NASD IM-2440-1, Mark-Up Policy;
• revise certain of the relevant factors used to determine the reasonableness of markups and commissions;
• eliminate the requirement to provide commission schedules for equity securities transactions to retail customers; and,
• extend the proposed markup rules to transactions in certain government securities.

Background & Discussion.   In RegNote 11-8, FINRA introduced: 

• proposed markup rules - proposed FINRA Rule 2121 (Fair Prices and Markups, Markdowns and Commissions) and FINRA Rule 2122 (Markups and Markdowns for Transactions in Debt Securities, Except Municipal Securities).   governing markups, markdowns and commissions; and
• proposed rules governing fees - proposed FINRA Rule 2123 (Charges and Fees for Services Performed).

These proposed FINRA rules were derived from the following rules:   (i) NASD Rule 2440 (Fair Prices and Commissions);  (ii) NASD IM-2440-1 (Mark-Up Policy),  (iii) NASD IM-2440-2 (Additional Mark-Up Policy for Transactions in Debt Securities, Except Municipal Securities);  (iv) NASD Rule 2430 (Charges for Services Performed);  and,  (v) Incorporated NYSE Rule 375 (Missing the Market).

Two years ago, 25 comment letters were received, and with new RegNote 13-7, FINRA seeks additional comments on its revised proposal.

How the Initial & Revised Proposals Differ.   The significant differences between the two proposals are described in RegNote 13-7. FINRA recommends that the proposed rule text should be carefully, for a complete and detailed understanding of the revised proposal.  As revised, revised, proposed FINRA Rule 2121 intends to:

• retain the 5% policy and related concepts from NASD IM-2440-1.  FINRA had earlier proposed to delete the 5% policy and all related statements;

• establish a rebuttable presumption that a markup, markdown or commission in excess of 5% is unfair and unreasonable;

• modify the “relevant factors” that member firms should take into consideration in determining the fairness of a markup, markdown or commission to provide additional guidance and, in some instances, expand the scope of the factor; and,

• delete previously proposed FINRA Rule 2121(e), that would have required member firms to provide commission schedule(s) for equity securities transactions to retail customers.

• The revised proposal amends proposed FINRA Rule 2122 to update the criteria applicable to eligible qualified institutional buyers (QIB) purchasing or selling noninvestment grade debt securities, whose transactions are excluded under the markup rules. The amendments would incorporate the standards regarding institutional suitability in FINRA Rule 2111 (Suitability), rather than NASD IM-2310-3, which has been superseded.

• The revised proposal amends proposed FINRA Rule 2123 to provide additional examples of charges and fees that are subject to the rule and include natural persons advised by an investment adviser and other natural persons as “retail customers” for the purposes of the rule.

• Finally, the revised proposal includes an amendment to FINRA Rule 0150 (Application of Rules to Exempted Securities Except Municipal Securities) that extends the proposed markup rules to transactions in government securities as defined in Exchange Act Section 3(a)(42) (excluding U.S. Treasury securities as defined in FINRA Rule 6710(p)).

The Regulatory Notice contains additional significant information and explanations, which C-I will comment on beginning tomorrow, Friday.   In the meantime, we offer FINRA staff contacts whom you can call for advice.  We also provide a hyperlink to Thursday's Regnote 13-07.

We'll catch you on the rebound.  Please share any thoughts, concerns and suggestions that you think others may find interesting.

FINRA Staff Contacts.   Direct questions to:   Sharon Zackula, Office of General Counsel (OGC), at (202) 728-8985; and, Erika Lazar, OGC, at (202) 728-8013.

For further details, go to:  [ FINRA RegNote 13-7, January 2013 ].