More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Anti-Fraud Provisions of the Investment Advisers Act RIAs and IARs should view themselves as fiduciaries at all times, whether they meet the legal definition or not. Deviating from the fiduciary standard of full disclosure while courting clients may cause the advisor significant problems.
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.”