BDs Demand a Revamp of These FINRA Rules

Opening up its rulebook is part of the self-regulatory organization's three-pronged FINRA Forward initiative, launched in late April, Cook said.

Marketing

Robinhood told FINRA that it should work with the SEC to harmonize FINRA Rule 2210 (Communications With the Public) with the SEC's marketing rule for advisors.

Change is warranted, Robinhood said, as the IA Marketing Rule offers greater flexibility "with respect to certain types of performance information," so "broker-dealers and investment advisers are competing on an unequal playing field when advertising their services to investors."

With the SEC’s Marketing Rule in full effect since 2022, FINRA should review its advertising rules "with an eye toward regulatory modernization, increased adoption of a principles-based approach, and the reduction of burdens and regulatory complexity for dually registered firms," the Financial Services Institute added in another comment letter.

Many dual registrants "face additional advertising review for communications geared toward advisory services," FSI said.

FINRA should narrow its rule's "scope so that communications for advisory services are not subsumed into BD communications covered by FINRA advertising and communications rules and reviews," FSI added, and "explore principles-based frameworks to further modernize" its advertising and communications rules. FINRA should also look toward a risk-based approach to required advertising reviews and approvals, and identify opportunities to harmonize with the SEC’s marketing rule.

For both retail and institutional investors, FINRA's marketing rule should "allow firms to take the same approach on determining whether to share hypothetical or targeted performance and whether to use investment tools as allowed" under the SEC's rule, the Securities Industry and Financial Markets Association said in its comment.

FINRA should also "clarify whether and under what circumstances Rule 2210 applies to communications distributed by a firm that are clearly not related to its securities business," SIFMA says. For example, dually registered firms may issue communications on behalf of their advisory business that include references to underlying holdings, such as mutual funds, ETFs, or individual stocks or bonds, that are not a solicitation or offer of the referenced securities; this can be reinforced with a disclosure.

The American Securities Association recommended amendments it floated last year to allow broker-dealers to "project performance or targeted returns in communications with qualified purchasers and other certain investors where specific conditions are met," which in many ways are consistent with the SEC’s Marketing Rule.

The insurance industry is seeing "inconsistencies in the marketing rule guidance and audits applicable to Registered Index-Linked Annuities," the American Council of Life Insurers told FINRA.

"For example, the advertising rules applicable to RILAs are borrowed from Variable Universal Life Products (VULs)," ACLI said. "At the same time, FINRA audits have applied the variable annuity rules rather than the VUL rules to RILAs."

Essentially, ACLI is "encouraging FINRA audits to be consistent with the marketing rule guidance they provide for RILAs," an ACLI spokesperson said in an email.

Off-Channel Communications

While the Securities and Exchange Commission's off-channel communications sweep has ended, "it’s worth emphasizing that off-channel obligations remain firmly in place for both SEC and FINRA-regulated entities," Tiffany Magri, senior regulatory advisor at Smarsh, said Monday in an email. "Although recent public enforcement activity has slowed, the underlying rules have not changed. Firms should not interpret this as regulatory softening — compliance with communication recordkeeping and supervision requirements is still expected and enforceable."

The SEC and FINRA aligning how they interpret and enforce marketing and communications rules "could reduce uncertainty across the industry — particularly for firms that are dually registered or navigating differences between regulatory regimes," Magri said.

Historically, "FINRA has taken a more prescriptive stance on communications oversight, while SEC guidance has often leaned toward a principles-based framework," Magri added. "That distinction has real consequences: If the SEC adopts a more rules-based posture — or if FINRA begins to embrace principles-based supervision under a new administration — firms may find themselves recalibrating their compliance programs, regardless of registration status."

FINRA should convene a roundtable on off-channel communications to explore, among other variables, developing a clear definition of "business as such," to provide firms with greater clarity on what constitutes regulated communications, the American Securities Association said in its comment letter.

"Business as such" encompasses all communications and transactions directly connected to the firm's business activities, regardless of the platform or device used.

Given that texting "has become the primary method of communication for many individuals, including clients and families not connected to the financial industry," regulators "must address the realities of how people communicate today. Simply disallowing texting as a communication channel is not a practical or effective solution," ASA wrote.

From a private client standpoint, ASA said that "the requirements for regulatory capture of text messages should be narrowed to communications that directly involve trades or customer accounts."

For institutional capital markets clients and trading desks, "only texts that pertain to clients, trades, or the color of the market should be subject to capture requirements," ASA said. "This approach would allow for effective oversight without imposing unnecessary burdens on member firms or infringing on personal communications."

Suitability

FINRA should also work with the SEC to modernize the definition of a “recommendation” for purposes of FINRA’s suitability rule (Rule 2111) and Regulation Best Interest, Robinhood said.

"Decades-old guidance" from the National Association of Securities Dealers suggests that merely sending a communication to a group of customers could, in some circumstances, constitute a recommendation.

That guidance "is terminally outdated, particularly with respect to self-directed brokers who make clear to investors that they do not provide recommendations," Robinhood said. No reasonable customer of a self-directed firm would view a broadly disseminated communication from such a self-directed broker to be a recommendation. Moreover, the purpose of the recommendation-related rules is to manage the conflicts of interest that arise when a broker-dealer earns a commission on a transaction or stands to benefit from a customer’s purchase of one security to the exclusion of another — concerns not relevant in the modern self-directed brokerage space."

Self-directed broker-dealers "should be able to empower investors and provide information without risk of transforming that information into a recommendation," Robinhood said.

Gifts

FINRA recently filed a rule change with the SEC to increase the gift limit from $100 to $250 per person per year.

Robinhood suggested a substantial increase to the current $100 limit on gifts, which has been in place for over 30 years, to $500 "to not only take into account historical inflation, but to also provide a cushion for future inflation and reflect the overall low risk of gifts."

By raising the FINRA limit to $250, the proposed change "would help alleviate some of the operational burdens faced by dual registrants who must currently navigate differing standards," ASA wrote in its comment letter.

The change, ASA said, "would also provide greater clarity and fairness across the industry, making compliance easier and more transparent."

Reps' Contact Information

FINRA should update Regulatory Notice 19-10 to require firms to direct customers to BrokerCheck for departing rep’s new contact information, Fidelity told FINRA, instead of requiring firms to tell clients when the rep leaves for another firm.

"There is an easier, more efficient way to provide more information: customers should be directed to BrokerCheck, which exists for this very reason," Fidelity said. "Information regarding a representative’s new firm can easily be found through FINRA’s BrokerCheck system."

Directing customers to BrokerCheck for a rep’s new contact information "would have the added benefit of ensuring that the customer is aware of any relevant disclosures related to the departed representative," Fidelity added.