FINRA is conducting retrospective reviews of its communications and gifts, gratuities and non-cash compensation rules. These reviews are intended to assess whether the rules are meeting their investor protection objectives in an efficient manner and to determine how best to maintain or improve the effectiveness of the rules while minimizing negative economic impacts.
Two phase review
FINRA’s reviews have been separated into an assessment phase, which is currently taking place, and an action phase, which will take place once the assessment phase is completed. During the assessment phase, the FINRA staff have analyzed the effectiveness and efficiency of the rules as currently implemented. The FINRA staff also solicited opinions regarding the rules from various securities industry sources by using FINRA notices that solicited comment on the rules as well as by directly approaching firms and individuals having experience with the rules. The FINRA staff also looked internally, speaking to individuals within FINRA’s operating departments who work with these rules on a daily basis. In addition, the FINRA staff distributed a survey to all FINRA member firms and non-member firm subject matter experts (i.e., individuals/firms with direct and substantial experience with FINRA rules). The survey tested the views that initially arose in the comment and interview process and permitted respondents to identify potentially missing points of view.
In the upcoming action phase, FINRA intends to contemplate specific rule proposals and other initiatives that would resolve some of the issues identified during the assessment phase.
For purposes of conducting its communications rules review, the FINRA staff examined FINRA Rules 2210 (Communications with the Public), 2212 (Use of Investment Company Rankings in Retail Communications), 2213 (Requirements for the Use of Bond Mutual Fund Volatility Ratings), 2214 (Requirements for the Use of Investment Analysis Tools), 2215 (Communications with the Public Regarding Securities Futures) and 2216 (Communications with the Public Regarding Collateralized Mortgage Obligations) (together the “Communications Rules”). The FINRA staff’s review did not cover communications rules governing options and variable insurance products.
The FINRA staff compiled the views expressed in the comments to FINRA Regulatory Notice 14-14 and in interviews conducted by the FINRA staff. Several themes emerged regarding the current FINRA Communications Rules:
- the Communications Rules have generally been effective at addressing the problems they were designed to mitigate but there are a number of areas where investor protection objectives and economic impacts do not align
- the communications filing requirements with FINRA are overbroad relative to the investor protection they provide
- the amount of required disclosure has become disproportionate to the substance of marketing materials, which has diminished their value to investors
- principal-based content standards are too subjective and are difficult to apply
- differing standards for broker-dealers and investment advisers with respect to communications creates confusion about which rules are applicable and harmonization of differing standards would be beneficial
- the Communications Rules have not kept pace with technological innovations and more clarity is needed with respect to online content and distribution
- the definition of “institutional investor” is too narrow and there should be harmonization between the various institutional investor standards within FINRA and the federal securities laws
- the costs of filing and re-filing communications with FINRA can be significant, particularly where firms must convert electronic media to pdf format
The subsequent survey responses in most cases corroborated the views outlined above. However, most of the survey respondents reported that the FINRA filing requirements were justified and that the amount and content of the required risk disclosures are appropriate for the investor protection they provide. In addition, most respondents reported that the content standards are clear and, in conjunction with FINRA’s interpretive guidance, can be applied objectively and consistently.
Based on the views presented, the FINRA staff determined that the Communications Rules and FINRA’s administration of such rules may benefit from updating. The FINRA staff recommends exploring a combination of guidance and proposed rule modification and administrative measures to enhance the effectiveness and efficiency of the rules. This includes:
- aligning the filing requirements and review process with the risk of the communications;
- facilitating simplified and more effective risk disclosure
- providing more guidance regarding application of the content standards
- adapting rules and guidance in light of emerging technologies
- updating FINRA’s electronic filing system
Gifts, gratuities and non-cash compensation rules
FINRA conducted a similar review of the gifts, gratuities and non-cash compensation rules. For purposes of conducting the review, the FINRA staff examined FINRA Rule 3220 (Influencing or Rewarding Employees of Others) (the “Gifts Rule”) and NASD Rules 2820 (Variable Contracts of an Insurance Company), 2830 (Investment Company Securities), FINRA Rules 5110 (Corporate Financing Rule—Underwriting Terms and Arrangements) and 2310 (Direct Participation Programs) (the “Non-Cash Compensation Rules”).
After considering the viewpoints expressed in comments addressed to FINRA Regulatory Notice 14-15 and in interviews conducted by FINRA staff, certain themes regarding these rules emerged:
- The Gifts and Non-Cash Compensation Rules have been effective at addressing the problems they were intended to mitigate and concerns about bribery and conflicts of interest are generally not present today
- The Gifts and Non-Cash Compensation Rules are scattered throughout the FINRA rulebook, causing difficulties from a reference and compliance standpoint
- FINRA should consider whether the Non-Cash Compensation Rules should be applied consistently to all securities products, rather than only certain specified products (e.g., investment company securities, variable insurance products, direct participation programs and public offerings of securities)
- a $100 limit on gifts is too low, although a FINRA-prescribed dollar limit on gift-giving should be implemented rather than a principles-based approach in which member firms could establish their own limits
- FINRA should consider a de minimis amount for gifts below which member firms would not be required to track gifts
- FINRA should apply a principles-based approach to setting limits on business entertainment based on the facts and circumstances, including regional cost differences as well as variations in business models
- FINRA should apply a principles-based approach to the training or educational meetings provisions in the Non-Cash Compensation Rules
- the costs associated with keeping track of gifts, business entertainment and non-cash compensation are burdensome
Survey responses mostly confirmed the views expressed during the interview and comment process. In light of the information obtained, the FINRA staff is recommending consideration of the following areas:
- consolidating FINRA rules governing gifts and non-cash compensation into a single rule governing both topics
- amending the non-cash compensation rule to cover all securities products
- increasing the current limits on gifts, including a de minimis threshold below which firms would not have to track gifts given or received
- creating a single rule governing business entertainment in all contexts
providing firms with more flexibility regarding training or educational meetings