Finra review of old rules could lead to changes

B-D regulator picks communications and gratuities – areas with plenty of complaints, questions – for initial focus

Apr 10, 2014 @ 2:08 pm

By Mark Schoeff Jr.

finra, broker-dealer, communications, gifts, gratuities, compliance, robert colby
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Finra is tackling one of its most complex and wide-ranging oversight areas — regulations surrounding broker communications with customers — as it launches a review of existing rules to see if they are cost-effective and keeping pace with the markets.

On Tuesday, the Financial Industry Regulatory Authority Inc. said it would assess the communications rules as well as those that govern gifts, gratuities and non-cash payments to brokers.

“We thought we'd try one that is very big — communications — and one that is not as major, which is gifts and gratuities, to do some broad balancing,” Robert Colby, Finra's chief legal officer, said in an interview.

Finra said that it is doing the retrospective analyses to ensure that the rules are efficiently meeting investor-protection objectives as the financial industry and market conditions change.

The regulator chose communications and gratuity regulations because they are areas that have generated significant complaints and difficult interpretive questions, according to Mr. Colby. Finra consulted with both industry and investor committees before targeting those areas.

But Peter Mafteiu, principal at Sound Compliance Services, questioned Finra's focus, arguing that investors are more threatened by abusive sales practices involving complex products such as real estate investment trusts.

“My reaction was, basically, 'blah,'” Mr. Mafteiu said. “I don't understand the logic of why [Finra picked] those particular sets of rules. If we're talking about risk identification, risk mitigation and consumer protection, then I think there are other modernization reviews they can do.”

In communications, the Finra evaluation will encompass not only the broad communications rule but also five others that address specific areas, such as the use of company rankings and ratings of various kinds of investments.

“We're going to take them as a bundle and look at all of them at once,” Mr. Colby said. “It's meant to be a rethink. We'll get a log of different viewpoints.”

The retrospection is welcomed by Jim Biddle, president and chief executive of The Securities Center Inc. He said that it's easy for financial advisers to run afoul of complicated rules governing interaction with clients.

“Every time I sit down at a keyboard to communicate with customers, I'm essentially writing a letter that could come back to haunt me in some way,” Mr. Biddle said. “That's dangerous stuff, if you carry it into a legal environment.”

Finra, the industry-funded broker-dealer regulator, will conduct the rules review in two phases.

First, its staff will analyze whether the rules are duplicative or ineffective, out of step with current market conditions or leave regulatory gaps.

Part of the first phase includes a request for public input. The comment period for each of the first two reviews is May 8.

The Finra staff will recommend to the board whether the rules should be kept intact, modified or discontinued. If the board decides to change a rule, amendments will be proposed and comments solicited through the normal rule-making process as part of the second phase.

The staff hopes to deliver recommendations to the board before the end of the year, Mr. Colby said.

The rules review is an element of the emphasis that Finra is putting on economic analysis. Last year, the organization hired its first chief economist, Jonathan Sokobin. His office is responsible for analyzing the costs and benefits of proposed rules, as well as those that are already on the books.

Mr. Colby said that more rules will be put up for scrutiny.

“We'll go to others, when we have experience with this,” he said.

He anticipates that some existing regulations will be changed at the end of the review process.

“I wouldn't feel it was a failure if with some rules we said they're OK,” Mr. Colby said. “[But] I don't think that will be the usual result.”

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