Finra plan to increase power draws ire

Brokerage firms are howling over a far-reaching proposal that would give Finra substantially more power.

The proposal, which would require giving written notice to the Financial Industry Regulatory Authority Inc. of changes in a number of business activities and detailed information on affiliates, got little attention when the regulator floated the changes at the start of the year.

Finra summarized the proposal, which requires approval from the Securities and Exchange Commission, as part of its continuing rule book consolidation and as an effort to streamline its review of member firms and new applicants (Regulatory Notice 10-01).

But within the 93-page rule filing, Finra proposes that firms be required to give it 30 days’ notice of changes for a long list of seemingly routine business activities: new products or services; expansion of sales personnel and branches beyond certain limits; investments or divestitures that involve 10% or more of a firm’s ownership, assets or revenue; changes in key personnel; and changes in a member’s service providers.

A brokerage firm would also have to alert Finra if it “reasonably believed” that it faced financial, operational or control problems.

In some cases, a brokerage firm would have to alert Finra if it sought buyers for all or part of the firm or its assets.

After a firm gave an advance notice to Finra, the regulator could require a formal approval process — known as a continuing-member application — and object to any changes.

In blistering comment letters filed last month, the Securities Industry and Financial Markets Association and the Financial Services Institute Inc., among others, blasted the proposal as an improper power grab by the regulator.

The new rules, if approved, could force brokerage firms “to delay corporate actions or potential transactions, and even more routine business matters such as launching new products or services,” SIFMA said in a letter it submitted.

A representative from SIFMA wasn’t available for comment.

Finra’s goal of seeking more information to head off possible fraud at members and their affiliates is laudable, but overreaching, said FSI general counsel David Bellaire.

“We certainly understand their desire, but we’re concerned about using the rule book to extend their jurisdiction,” he said in an interview.

“We have seen throughout the rule book consolidation process a common theme of expanding Finra’s jurisdiction beyond the traditional bounds,” Mr. Bellaire said. “And now we’re seeing it again with this [proposal].”

The proposal “is a very significant expansion of authority for Finra,” said Hardy Callcott, a securities lawyer and partner at Bingham McCutchen LLP. “Finra is under a lot of political pressure to show that they’re an effective regulator.”

In their letters, SIFMA and the FSI urged Finra to back off from many of its proposed changes.

Some in the industry wrote in their comment letters that the kind of prior notice Finra wants would be impossible and that some of the information is already disclosed to Finra regularly in filings.

Finra said it wants firms to give notice of changes as soon as possible, if circumstances make meeting the 30-day time period impractical.

In proposing the rule, the regulator said that the changes would “enhance Finra’s ability to assess [member] applicants as well as significant changes in the business activities, and control relationships of member firms and their affiliates.”

Finra spokesman Herb Perone declined to comment.

Observers said that the proposal appears to be an effort to formalize some tougher standards that Finra has already been using.

Finra has been “push[ing] the envelope of its jurisdiction through aggressive use of [Rule] 8210” requests, said Alan Wolper, an industry attorney at Locke Lord Bissell & Liddell LLP.

Rule 8210 gives Finra broad power to compel firms to produce documentation.

Since Finra centralized its member approval process last year, it has “become very demanding” in asking for much of the information covered in the rule filing for new applicants, Mr. Callcott said.

Finra also wants considerable information on affiliates of a broker-dealer, including their finances.

The Committee of Annuity Insurers, a coalition of 31 life insurance companies, complained in a comment letter that its members would be especially burdened with this provision because most have affiliated broker-dealers.

The information that Finra wants on affiliates is “too broad” and “without proper limits,” the committee wrote in its comment letter.

Both insurers and broker-dealers said that they don’t control these outside firms and that neither they nor Finra have the authority to access affiliates’ books and records.

Another proposed new standard would require Finra to determine that a startup firm had sources of funding that were “not objectionable” and consider the disciplinary histories for all an applicant’s affiliates, according to the proposal.

Finra also wants to extend the time it has to approve a new-member application to 45 days, from 30 days.

Some in the industry wrote in comment letters that this change would be unfair. Applicants have only 30 days to respond to requests for more information, so Finra should be held to the same standard, they argued.

In another provision, the proposal would let Finra impose higher net-capital requirements for new broker-dealer firms that are involved in the investment advisory business.

Mr. Bellaire said he thinks that the proposal might go “through an iteration or two” before a final rule is submitted for approval.

E-mail Dan Jamieson at [email protected].