The SEC Division of Trading and Markets (“Division”) sent a letter to FINRA CEO Robert Cook recommending that FINRA review its rules in order to (i) identify instances in which the rules apply to private securities, but not to U.S. government securities transacted by FINRA members, and (ii) expand the scope of the rules to apply to governments.
In particular, the Division suggested that FINRA review the following rules:
- FINRA Rule 2090 (“Know Your Customer”);
- FINRA Rule 2242 (“Debt Research Analysts and Debt Research Reports”);
- FINRA Rule 5240 (“Anti-Intimidation/Coordination”);
- FINRA Rule 5270 (“Front Running of Block Transactions”);
- FINRA Rule 5320 (“Prohibition against Trading ahead of Customer Orders”);
- FINRA Rule 5280 (“Trading ahead of Research Reports”); and
- NASD Rule 1032(f) (“Categories of Representative Registration: Securities Trader”).
The Division asked FINRA to review its rules as soon as possible, and provide a “preliminary schedule of how and when FINRA intends to address any identified gaps,” by October 7, 2016.
Lofchie Comment: Since the SEC’s recommendation is not terribly controversial, FINRA likely will seek to act on it reasonably promptly. FINRA members should expect changes to these rules to become effective and should determine whether the implementation will require any time-consuming operational changes. The only real issue here is when the changes will be made.
Historically, the FINRA rules have not applied fully to transactions in U.S. government securities because the U.S. Treasury Department (“Treasury”) believed that the burdens imposed by regulation would add costs to the market. The Treasury wanted the market to be as inexpensive as possible because it believed that leaner costs could lower the price of funding government debt. That logic now is being discarded, and probably rightfully so. It seems unlikely that applying existing rules to a new set of securities would result in a substantial increase in costs. Many firms might voluntarily apply some of these rules to government securities already.
In light of the potential regulatory changes, it is worth remembering that banks that are registered government securities dealers pursuant to Section 15C of the Securities Exchange Act, are not required to become FINRA members and are not subject to the FINRA Rules.