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As we wrote about here, in April the Department of Labor issued its highly anticipated, re-proposed regulation addressing the standard of care for broker-dealers and other financial professionals who provide retirement investment advice. Since its release, the proposed rule has come under fire from critics who maintain that the DOL proposal, while well intentioned, will ultimately limit access to affordable retirement services and result in investor confusion. Last week, the chorus of opposition grew louder as the proposed rule’s 90-day notice-and-comment period came to an end.

Sensing the growing opposition, earlier this month Timothy Hauser, the Deputy Assistant Secretary for Program Operations in the DOL’s Employee Benefits Security Administration (“EBSA”), signaled that the DOL is open to reworking its controversial fiduciary proposal. Speaking at a meeting of the Securities and Exchange Commission’s Investor Advisory Committee, Mr. Hauser said that, while the DOL is committed to addressing the issue of conflicted investment advice, the agency is not “wedded to any particular choice of words or regulatory text.”

Earlier this month, the Securities Industry and Financial Markets Association (“SIFMA”) released its “Proposed Best Interests of the Customer Standard for Broker-Dealers” – an alternative to the U.S. Department of Labor’s (“DOL”) proposed regulation addressing the standard of care for broker-dealers and other financial professionals who provide retirement investment advice.  Unlike the DOL’s proposed rule, which we wrote about here, SIFMA’s across-the-board proposal emphasizes disclosure and investor consent as mechanisms to promote a uniform “best interest” standard.

In remarks accompanying SIFMA’s announcement, Kenneth E. Bentsen, the organization’s President and CEO, reiterated SIFMA’s support for a uniform standard to govern broker-dealers and investment advisers providing investment advice to retail customers.  Mr. Bentsen highlighted a number of issues with the current DOL proposal, expressing specific concern that it would limit access to affordable retirement services and result in investor confusion.  Mr. Bentsen explained that, given the increased liability risk and compliance costs associated with the current DOL proposal, firms have indicated that, if enacted, they plan to shift their commission-based brokerage accounts to (more expensive) fee-based accounts.  Because, according to Mr. Bentsen, most firms are willing to provide fee-based services only for higher-balanced accounts, this could potentially leave millions of consumers with “no option for advice or guidance.”  In addition, Mr. Bentsen said that “it is hard to see how investors won’t be confused” by the DOL’s proposed rule, which will apply different standards to broker-dealers when they provide retirement-related investment advice than when they provide investment advice that is not retirement related.

Last week, Richard Ketchum, Chairman and CEO of the Financial Industry Regulatory Authority (“FINRA”), doubled-down on his recent criticism of the U.S. Department of Labor’s (“DOL”) proposed regulation addressing the standard of care for broker-dealers providing retirement investment advice. Speaking at FINRA’s annual conference, Chairman Ketchum said that, while he supports a “best interests of the customer” standard, the DOL’s proposal – which we wrote about here – is “not the appropriate way to meet that goal.”

Chairman Ketchum expressed particular concern over language in the DOL proposal that would require an advisor to make recommendations in the best interest of the customer “without regard to the financial or other interests” of the advisor. He worried that this language could lead to class action lawsuits and arbitration where the standard would be misapplied, stating, “I’m not sure, but I suspect, a judicial arbiter might draw a sharp line prohibiting most products with higher financial incentives no matter how sound the recommendation might be.”

FINRA recently released updated and revised Sanction Guidelines and an accompanying Regulatory Notice that, among other things, call for stricter penalties against broker-dealers who commit fraud or violate suitability rules. The revisions are effective as of May 12, 2015.

The Sanction Guidelines, first published in 1993, are intended to assist FINRA’s adjudicators in determining the appropriate disciplinary penalties for violations of the FINRA rules. Rather than provide predetermined or fixed sanctions for particular violations, the Sanction Guidelines provide a suggested range of penalties for such violations and allow adjudicators to consider various factors in determining the appropriate penalty. The Sanction Guidelines provide members and associated persons with an understanding of the sanctions associated with particular violations, thereby facilitating settlements.

finra_logoOn May 1, 2015, Richard Ketchum, Chairman and CEO of the Financial Industry Regulatory Authority (“FINRA”), reaffirmed his support for a uniform fiduciary standard for broker-dealers. Testifying before the House Financial Services Committee, Chairman Ketchum emphasized that the U.S. Securities and Exchange Commission (the “SEC”) – and not the U.S. Department of Labor (the “DOL”) – is best suited to establish and implement a new industry-wide standard of care.

Chairman Ketchum’s comments come less than three weeks after the DOL issued its highly anticipated, re-proposed regulation addressing when a person providing certain types of retirement investment advice is considered a fiduciary under the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (“Code”). At present, broker-dealer recommendations typically must be based on a reasonable determination that the investment is suitable in light of the investor’s financial situation and investment objectives. Under the proposed rule, broker-dealers providing retirement investment advice would be held to a higher (fiduciary) standard – they would be required to act in the best interest of their client.

On March 25, 2015, the SEC proposed an amendment to Rule 15b9-1 that would require high-frequency trading firms to register with FINRA.  According to the SEC, the proposed amendment will better align the scope of Rule 15b9-1 with today’s market structure.

Rule 15b9-1, as presently written, exempts certain market participants from the requirement under the Securities Exchange Act that broker-dealers become a member of a registered national securities association.  Specifically, Rule 15b9-1 exempts broker-dealers from the membership requirement if they (1) are a member of a national securities exchange, (2) carry no customer accounts, and (3) derive $1,000 or less in gross annual income from securities transactions conducted outside of a national securities exchange of which they are a member (the “de minimis allowance”).  Under the current Rule, income derived from trading for the broker-dealer’s own account with other broker-dealers does not count against the $1,000 limit.

The SEC recently approved FINRA’s proposed new rule changes to the definitions of public arbitrator (FINRA Rules 12100(u) and 13100(u)) and non-public arbitrator (FINRA Rules 12100(p) and 13100(p)), after receiving over 300 comment letters in addition to two letters from FINRA responding to the comment letters.  The new rule significantly limits the pool of potential public arbitrators by, chiefly, permanently disqualifying any person who worked in the financial industry from being a public arbitrator.  FINRA believes that this and other changes to the definitions of public and non-public arbitrators, as discussed below, address both investor and industry concerns about perceived bias and arbitrator neutrality. 

finra_logoIn a pair of recent opinions, the Securities and Exchange Commission (SEC) found that FINRA acted within the scope of its rules and governing statutory scheme in refusing to announce corporate actions for companies whose executives were subjects of regulatory actions alleging securities laws violations.

FINRA is a self-regulatory organization (SRO) responsible for regulating the market for securities.  It owns and operates the OTC Bulletin Board (OTCBB), an electronic inter-dealer quotation system that FINRA provides to its members for securities not listed on a national securities exchange, such as NASDAQ and NYSE.  FINRA provides various services for companies whose securities are listed on the OTCBB, such as processing requests to announce and effectuate certain corporate actions, including mergers, dividends, splits, and name and domicile changes.

In 2010, based on concerns that FINRA’s corporate action announcement processing services could potentially be used by companies to perpetrate stock fraud and other securities laws violations, FINRA proposed, and the SEC approved, FINRA Rule 6490.  This rule permits FINRA to deny an issuer’s request that FINRA announce a corporate action under certain circumstances.  Specifically, FINRA Rule 6490(d)(3) states that where a company-related action is deemed deficient (i.e., FINRA has actual knowledge that officers or directors connected to the company are the subject of an adjudicated or settled regulatory action related to fraud or other securities laws violations), FINRA may determine not to process the corporate action if refusing to do so promotes the protection of investors, the public interest and the maintenance of fair and orderly securities markets.