Notice to Member Summaries
Source NTM
Type of Business
Summary Description RETURN TO AUGUST NEWSLETTER
FINRA reminds firms of their obligations in supervising the use of marketing materials designed to establish expertise
Representatives are being provided with more and more materials designed to establish their expertise. These materials frequently come from marketing companies and are written in such a manner that appears they have been authored by the representative. Rule 2210 prohibits false or misleading statements so the use of these materials in such a way as to imply that the representative created them or is responsible for their content may violate this standard. Firms are reminded that they must supervise their representative’s activities relating to such materials and ensure that representatives are not holding themselves as “experts” by using materials created by someone else.
The SEC approved amendments to eliminate the separate designations of Senior Registered Options Principal (SROP) and Compliance Registered Options Principal (CROP).
Effective June 23, 2008, Rule 1022, 2220 and 2860 have been revised to replace the separate designations of SROP and CROP with a new designation of Registered Options and Security Futures Principal (ROSFP). For Principals currently holding the Series 4 and acting in the capacity of a SROP or CROP, this change does not permit them supervise futures activities nor does it require them to participate in security futures firm element continuing education. The changes do permit the ROSFP to act in a capacity previously held by either the SROP or CROP and requires firms to designate which ROSFP, if there is more than one, will assume certain supervisory duties, such as review of discretionary account activities.
Securities Industry/Regulatory Council on Continuing Education issue Firm Element Advisory.
Quarterly the Securities Industry/Regulatory Council issues a notice advising firms as sales practice and regulatory issues they may want to include in their firm element training plan. This notice includes the Council’s 2nd quarter 2008 recommendations.
FINRA provides guidance relating to Illiquid Investments
FINRA provided guidance to firm regarding the handling of and unsolicited request by a client to sell generally illiquid investments where the client is aware and specific buying interest in the security. FINRA reminded firms that there are no rules that would require a firm to refuse to follow the customer’s instruction even when they have reason to believe that the market price for the security is not favorable. However, firms do have an obligation to ensure that the client is aware of the pricing risks and that the firm receives written acknowledgement from the customer that they understand those risks. The Notice also sets forth conditions when the firm must act on the client’s request without delay.
SEC Approves Exemption from the Requirements of IM-2110-2 and Rule 2111 for certain Reg NMS Compliant Intermarket Sweep Orders (ISO)
Effective May 6, 2008, the requirements of IM-2110-2 and Rule 2111, regarding trading ahead of customers, do not apply to certain proprietary trades that are a result of intermarket sweep orders that comply with the requirements under Reg NMS. To qualify for the exemption the customer order must be received after the BD routed the intermarket sweep order or the firm must be executing the ISO in its proprietary account to facilitate a customer order and the customer has consented to not receive the better price obtained through the ISO.
The Collection and Processing of Regulation T and SEC Rule 15c3-3 Extension Requests are Consolidated into a Single system.
As part of the consolidation of NYSE Regulation and NASD processing systems, FINRA announced the consolidation of systems to collect and process quests for extensions under Regulation T and SEC Rule 15c3-3. The new online system is available through FINRA’s Firm Gateway and allows firms to process requests and upload forms related to the requests. The system also provides a portal for clearing firm monthly reporting.
Minor Rule Violation Plan (MRVP) Amended to Include Violations of Options Position and Exercise Limits and Contrary Exercise Advice
Effective June 6, 2008, IM-9216, which sets forth FINRA’s MRVP, was amended to allow FINRA to impose a fine of up to $2500 for violations of options position and exercise limits as defined under Rule 2860(b)(3) and (b)(4) and contrary exercise advice procedures as defined in Rule 280(b)(23).
DPPS AND REITS
Sec Approves Amendments to Rule 2810 relating to Direct Participation Programs (DPPs)
Effective August 6, 2008, Rule 2810, regarding public offerings of DPPs and real estate investment trusts (REITs) are amended to:
- Provide greater clarity to underwriting compensation limits and the use and allocation of offering proceeds;
- Require disclosure regarding the liquidity of prior programs offered by the same sponsor;
- Prohibit sales loads on reinvested dividends; and
- Allow for bona fide training and education meetings at appropriate locations.
The Scope of IM-2440-1 and Rule 2440 is Expanded to Include All Securities
Prior to amendment IM-2440-1 and Rule 2440 specifically required firms to charge only fair commissions or charges and to buy or sell securities only at a fair price in transaction involving OTC securities. The IM and Rule are amended to remove OTC securities so that all listed and unlisted securities are now covered.
FINRA Guidance on SEC Emergency Orders on Short-Selling
On July 15, 2008, the SEC issued an Emergency Order regarding short selling in certain securities. This Order was amended on July 18. The Amended Emergency Order issued July 18 address naked short selling in 19 public companies. The order prohibits short selling in these specific companies unless the person or agent doing the short sales:
- has borrowed or arranged to borrow the security or
- otherwise has the security available to borrow in its inventory prior to the short sale and delivers the security on settlement date.
FINRA Notice sets forth the manner in which firms who have pre-borrows shares must document the link between the borrow, the short sale and the related delivery to avoid violations of the possession and control requirements in Rules 15c3-3(b) and (d).
08-39
FINRA Requests Comments on Proposed New Rules Governing Communications about Variable Insurance Products
The proposal sets forth changes to guidelines regarding illustrations of tax-deferred versus taxable compounding in variable life insurance and variable annuity advertising and sales materials. The proposal would:
- Shorten and simplify existing provisions regarding product identification, liquidity and guarantee claims;
- Consolidate previous FINRA staff guidance;
- Address changes in variable insurance products and the manner in which they are advertised, particularly with regard to riders, hypotheticals and investment analysis tools; and
- Codify FINRA staff guidance regarding comparative illustrations relating to the mathematical principal of tax-deferral versus taxable compounding.
FINRA announced that the effective date for changes to the TRACE reporting system relating to equity-linked noted has been moved from August 4 to November 3, 2008.
ON April 30, 2008, the SEC approved a supplement to the Options Disclosure Document (ODD) (www.optionsclearing.com/publications/risks/riskstoc_apr08_sup.pdf). This supplement provides additional disclosures regarding certain binary options and delayed start options. The amendment to the ODD also includes changes to the list of exchanges that trade options issued by The Options Clearing Corporation (OCC) on the front cover page.