More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Pay-to-Play Rule Violating the pay-to-play rule can result in serious consequences, and RIAs should adopt robust policies and procedures to prevent and detect contributions made to influence the selection of the firm by a government entity.
After being deluged with comments against its plan to end a 5% threshold on commissions and markups, the Financial Industry Regulatory Authority is giving broker-dealers yet another chance to weigh in.
As part of the process to develop a new, consolidated rulebook—merging the NYSE rule book with FINRA’s—FINRA released a second request for comment via a Regulatory Notice on Thursday regarding its proposed rules governing markups, markdowns, commissions and fees.
FINRA initially sought comment on the proposed rules in Regulatory Notice 11-08, issued in 2011.
The regulatory agency said that in response to the first round of comments received, it is now proposing several changes to the proposed rules, including 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.
Comments are due to FINRA by April 1.
Securities lawyer Patrick Burns of The Law Offices of Patrick J. Burns in Los Angeles told AdvisorOne on Tuesday that the industry was “surprised” by the 5% threshold when the regulator originally proposed it because FINRA “examiners have been saying 2% to 3% was acceptable during exams.” Says Burns: “There appears to be a disconnect between this proposal and what FINRA’s position is during exams.”
Indeed, the North American Securities Administrators Association (NASAA) told FINRA during the first round of comments that “NASAA wonders what deleterious effect the 5% cap would have and why FINRA would attempt to abandon 70 years of public policy through a notice for rule consolidation.” The study cited by FINRA in its consolidation proposal, NASAA said, “found the average markup/commission falls between 2-2.2%. Therefore, the cap does not appear to be excessively burdensome to ordinary commercial interests but rather serves as a legal backstop to more extreme practices in the industry.”
The Securities Industry and Financial Markets Association (SIFMA) told FINRA during the first round of comments that FINRA had said it would "provide future guidance on what percentage markups, markdowns and commissions would warrant additional regulatory scrutiny." SIFMA said in its March 2011 comment that while it "agrees with FINRA that the Five Percent Policy should be withdrawn, we believe that FINRA should withdraw the Five Percent Policy only in conjunction with issuing the new guidance, so that member firms may fully evaluate the potential consequences of the proposal. It is difficult for SIFMA to fully embrace giving up the Five Percent Policy without knowing what may replace it."
As noted in the current proposal, FINRA also wants to “extend the reach of the 5% rule to other types of securities,” Henschen says. “This seems to be a continued effort [by FINRA] to wage war against commission business.”
However, FINRA’s proposal to eliminate the requirement to provide commission schedules for equity securities transactions to retail customers is a good idea, Henschen says, as “commission schedules to the client are a layer of disclosure that we can do without; clients don’t track or read those disclosures anyway.”