Board Approves 2018 Budget, Rule Proposals, Enhanced Committee Structure and Improved Registration System

WASHINGTON — FINRA’s Board of Governors held its final meeting of 2017 on Dec. 13-14 in New York, where it approved FINRA’s 2018 budget and updated Financial Guiding Principles – both of which FINRA will publish for the first time in early 2018. It also approved advancing several rule proposals and improving the technology supporting FINRA’s registration system.

The FINRA Board, which meets five times annually, also met with Securities and Exchange Commission Chairman Jay Clayton to discuss the respective regulatory priorities of the SEC and FINRA, particularly their shared focus on the protection of retail investors.

The Board also received an update on various FINRA360 initiatives, and approved several changes to FINRA’s Advisory Committee and District Committee structure in response to feedback from CEO Robert W. Cook’s listening tour and the FINRA360 Special Notice on FINRA’s engagement programs. FINRA will release details on those changes in early January.

The Board approved several rule proposals to be published by FINRA for comment or filed with the SEC:

  • Enhancing the audit trail for Treasury securities transactions
  • Facilitating capital formation
  • Strengthening investor-protection requirements in FINRA’s suitability rule
  • Streamlining restrictions on registered individuals’ outside business activities and private securities transactions
  • Aligning communications and research rules with the FAIR Act
  • Setting fees for the new Securities Industry Essentials examination.

Increased Transparency into FINRA’s Finances

The Board approved a budget for 2018 that does not include any fee rate increases for member firms. It also approved an updated set of Financial Guiding Principles. In early January, FINRA will publish – for the first time – an overview of FINRA’s 2018 budget, along with the updated Financial Guiding Principles, building on the fully audited annual financial report that FINRA has long published. This increased transparency for FINRA’s finances is responsive to feedback received through Cook’s listening tour and is a key outcome of the ongoing FINRA360 organizational review.

“The Financial Guiding Principles set forth the key considerations that guide FINRA’s financial planning and the development of our annual budget,” said Cook. “By publishing these Principles and our 2018 budget, we will be providing more transparency about how we prudently manage our financial resources in order to fulfill our regulatory responsibilities and further our mission to protect investors and promote market integrity in a manner than facilitates vibrant capital markets.”


Enhancing the Reporting of Treasury Securities Transactions

The Board authorized staff to file with the SEC a proposed rule change to require alternative trading systems (ATSs) to identify certain subscribers when reporting transactions in U.S. Treasury securities to FINRA’s Transaction Reporting and Compliance Engine (TRACE). FINRA staff will continue to work with other regulators and the ATSs that trade U.S. Treasury securities to develop the final proposal.

Facilitating Capital Formation

As part of FINRA’s initiative to facilitate capital formation and following a FINRA360 review of related rules, the Board authorized publication of a Regulatory Notice seeking comment on rule amendments that would remove certain impediments to capital formation that are unnecessary to protect investors. Specifically, the proposal would amend Rules 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) and 5131 (New Issue Allocations and Distributions) to exempt additional persons and types of transactions from the scope of the rules, modify current exemptions to enhance regulatory consistency, and address unintended operational issues.

Streamlining Rules on Outside Business Activities and Private Securities Transactions

Following a FINRA360 retrospective review of rules regarding registered representatives’ outside business activities and private securities transactions, the Board approved the publication of a Regulatory Notice seeking comment on a proposal that would reduce unnecessary burdens while maintaining strong investor protections. The proposal would require registered persons to provide their member firms with prior written notice of a broad range of outside activities, and would impose on firms a duty to reasonably assess a narrower set of activities that are investment-related, allowing firms to focus on outside activities that are more likely to raise potential investor-protection concerns. The proposal also would streamline the obligations by generally excluding from the rule a registered person’s personal investments and work performed on behalf of a firm’s affiliate, and it would eliminate supervisory obligations for non-broker-dealer outside activities, including investment advisory activities at an unaffiliated third-party adviser.

Strengthening Investor Protection in Suitability Rule

The Board authorized staff to publish a Regulatory Notice soliciting comment on proposed amendments to FINRA Rule 2111 (Suitability) to allow cases to be brought for churning of a customer account based on the broker’s recommendation of an excessive number of trades, without proving that the investor had no control over the account. The proposed amendments would still require proof that the recommended trading was clearly excessive for the customer.

Establishing Fee for New Securities Industry Essentials Examination

The Board authorized staff to file with the SEC a proposed rule change to establish a $60 fee for the new Securities Industry Essentials (SIE) examination and revise the fees for other representative-level examinations. The SIE is part of an initiative to streamline competency exams and facilitate opportunities for professionals seeking to enter or re-enter the securities industry. The new exam structure eliminates duplicative testing and barriers to demonstrating and maintaining qualifications. The changes would make it easier for an individual with no prior securities industry experience – whether an investor, a recent college graduate or a professional seeking a second career – to take a general-knowledge SIE exam as an important first step to entering the industry. Individuals who wish to enter the industry are also required to pass a second, specialized-knowledge exam, and must be associated with and sponsored by a firm. In addition, individuals who transfer to a financial-services affiliate of a firm may qualify for a waiver that allows their credentials to be reinstated, should they return to the industry within a seven-year period and meet the requirements of the waiver program.

Aligning Communications and Research Rules with FAIR Act

The Board authorized staff to publish proposed amendments to FINRA Rules 2210 (Communications with the Public) and 2241 (Research Analysts and Research Reports) to conform these rules with the requirements of the Fair Access to Investment Research Act of 2017 (FAIR Act). The FAIR Act eliminates restrictions and reduces burdens for broker-dealers issuing research reports on “covered investment funds” (such as investment companies registered under the Investment Company Act, business development companies and exchange-traded commodity and currency funds). Among other things, the FAIR Act requires the SEC to expand the scope of the safe harbor in Securities Act Rule 139 for covered investment fund research reports; prohibits FINRA from maintaining rules to prohibit publication of such reports (e.g., quiet periods); and eliminates requirements to file such reports with the SEC or FINRA.

Transforming the Technology Supporting FINRA’s Registration System

The Board authorized an initiative to move FINRA’s registration process onto modern systems that use open-source architecture and cloud-based infrastructure. The transformation is designed to deliver increased efficiency, effectiveness and data protection to FINRA, federal and state regulators, industry and other stakeholders.


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