Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, to FINRA's Suitability, Non-Cash Compensation and Capital Acquisition Broker (CAB) Rules in Response to Regulation Best Interest, 37970-37974 [2020-13539]
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37970
Federal Register / Vol. 85, No. 122 / Wednesday, June 24, 2020 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89091; File No. SR–FINRA–
2020–007]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 1, to FINRA’s
Suitability, Non-Cash Compensation
and Capital Acquisition Broker (CAB)
Rules in Response to Regulation Best
Interest
June 18, 2020.
I. Introduction
On March 12, 2020, Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’
or ‘‘SEC’’), pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend FINRA Rules 2111 (Suitability),
2310 (Direct Participation Programs),
2320 (Variable Contracts of an Insurance
Company), 2341 (Investment Company
Securities), and 5110 (Corporate
Financing Rule—Underwriting Terms
and Arrangements) and Capital
Acquisition Broker (CAB) Rule 211
(Suitability). The proposed rule change
would: (1) Amend the FINRA and CAB
suitability rules to state that the rules do
not apply to recommendations subject
to Regulation Best Interest (‘‘Reg BI’’),3
and to remove the element of control
from the quantitative suitability
obligation; and (2) conform the rules
governing non-cash compensation to
Reg BI’s limitations on sales contests,
sales quotas, bonuses and non-cash
compensation.
The proposed rule change was
published for comment in the Federal
Register on March 25, 2020.4 The public
comment period closed on April 15,
2020.5 On April 28, 2020, FINRA
consented to an extension of the time
period in which the Commission must
approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
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1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 17 CFR 240.15l–1.
4 See Exchange Act Release No. 88422 (Mar. 19,
2020), 85 FR 16974 (Mar. 25, 2020) (File No. SR–
FINRA–2020–007 (‘‘Notice’’)).
5 All comment letters received on the proposed
rule change are available on the Commission’s
website at https://www.sec.gov.
2 17
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whether to approve or disapprove the
proposed rule change to June 23, 2020.6
On May 14, 2020, FINRA responded
to the comment letters received in
response to the Notice and filed an
amendment to the proposed rule change
(‘‘Amendment No. 1’’).7 The
Commission is publishing this notice to
solicit comments on Amendment No. 1
from interested persons, and is
approving the proposed rule change, as
modified by Amendment No. 1, on an
accelerated basis.
II. Description of the Proposed Rule
Change
Background
On June 5, 2019, the Commission
adopted Reg BI, a new rule under the
Exchange Act, which establishes a
standard of conduct for broker-dealers
and natural persons who are associated
persons of a broker-dealer (unless
otherwise indicated, together referred to
as ‘‘broker-dealer’’) when they make a
recommendation of any securities
transaction or investment strategy
involving securities to a retail
customer.8
As stated in the Reg BI Release, Reg
BI enhances the broker-dealer standard
of conduct beyond existing suitability
obligations, and aligns the standard of
conduct with retail customers’
reasonable expectations by requiring
broker-dealers, among other things, to:
Act in the best interest of the retail
customer at the time the
recommendation is made, without
placing the financial or other interest of
the broker-dealer ahead of the interests
of the retail customer; and address
conflicts of interest by establishing,
maintaining, and enforcing policies and
procedures reasonably designed to
identify and fully and fairly disclose
material facts about conflicts of interest,
and in instances where we have
determined that disclosure is
insufficient to reasonably address the
conflict, to mitigate or, in certain
instances, eliminate the conflict.9 The
date by which broker-dealers must
6 See Letter from Joseph Savage, Vice President
and Counsel, Office of General Counsel, FINRA, to
Daniel Fisher, Branch Chief, Division of Trading
and Markets, U.S. Securities and Exchange
Commission, dated April 28, 2020.
7 See Letter from Joseph Savage, Vice President
and Counsel, Office of General Counsel, FINRA, to
Vanessa Countryman, Secretary, U.S. Securities and
Exchange Commission, dated May 13, 2020
(‘‘FINRA Letter’’). The FINRA Letter and the text of
Amendment No. 1 are available at the
Commission’s website at https://www.sec.gov/
comments/sr-finra-2020-007/srfinra2020007.htm.
8 See Securities Exchange Act Release No. 86031
(Jun. 5, 2019), 84 FR 33318 (Jul. 12, 2019) (‘‘Reg BI
Release’’).
9 See Reg BI Release at 33318.
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comply with Reg BI is June 30, 2020.10
FINRA proposed to amend its suitability
and non-cash compensation rules to
address inconsistencies between the
FINRA rules and Reg BI, and to make
clear how these rules will intersect. The
effective date of FINRA’s proposed rule
change will be the compliance date of
Reg BI.
Original Proposal
Suitability
As FINRA stated in its Notice, FINRA
Rule 2111 requires that a broker-dealer
‘‘have a reasonable basis to believe that
a recommended transaction or
investment strategy involving a security
or securities is suitable for the customer,
based on the information obtained
through the reasonable diligence of the
member or associated person to
ascertain the customer’s investment
profile.’’ 11 Rule 2111 further explains
that a ‘‘customer’s investment profile
includes, but is not limited to, the
customer’s age, other investments,
financial situation and needs, tax status,
investment objectives, investment
experience, investment time horizon,
liquidity needs, risk tolerance, and any
other information the customer may
disclose to the member or associated
person in connection with such
recommendation.’’ 12
Rule 2111 imposes three main
suitability obligations: Reasonable basis
suitability, customer-specific suitability
and quantitative suitability.13
Reasonable basis suitability requires a
member or associated person to have a
reasonable basis to believe, based on
reasonable diligence, that the
recommendation is suitable for at least
some investors.14 Customer-specific
suitability requires that a member or
associated person have a reasonable
basis to believe that the
recommendation is suitable for a
particular customer based on that
customer’s investment profile.15
Quantitative suitability requires a
member or associated person who has
actual or de facto control over a
customer account to have a reasonable
basis for believing that a series of
recommended transactions, even if
suitable when viewed in isolation, are
not excessive and unsuitable for the
customer when taken together in light of
the customer’s investment profile.16
10 Id.
11 See
Notice at 16975.
id.
13 See id.
14 See id.
15 See id.
16 Id.
12 See
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Rule 2111(b) provides an exemption
to customer-specific suitability for
recommendations to institutional
customers under specified
circumstances. FINRA rule 2111 sets
forth three criteria that must be satisfied
in order for this exemption to apply.
First, the account must meet the
definition of institutional account as
defined in FINRA Rule 4512(c).17
Second, the broker-dealer must have a
reasonable basis to believe that the
institutional customer is capable of
evaluating investment risks
independently, both in general and with
regard to particular transactions and
investment strategies involving a
security or securities.18 Third, the
institutional customer must
affirmatively indicate that it is
exercising independent judgment in
evaluating the member’s or associated
person’s recommendations. Where an
institutional customer has delegated
decision making authority to an agent,
such as an investment adviser or a bank
trust department, these factors are
applied to the agent.19
Reg BI requires firms to satisfy four
component obligations: Disclosure,
Care, Conflict of Interest, and
Compliance.20 Consistent with the
Commission’s statements, FINRA stated
that Reg BI’s Care Obligation
incorporates and enhances principles
that are also found in Rule 2111.21
FINRA stated that two key
enhancements are that Reg BI explicitly
imposes a best interest standard and
requires a consideration of costs. In
addition, FINRA stated in its Notice that
as compared to suitability, Reg BI: (i)
Places greater emphasis than the
suitability rule on consideration of
reasonably available alternatives; 22 (ii)
explicitly applies to recommendations
of types of accounts (e.g., broker-dealer
or investment adviser, or among brokerdealer accounts, including
recommendations of IRA rollovers); and
(iii) eliminates the ‘‘control’’ element of
the quantitative suitability obligation.23
FINRA stated that in light of these
enhancements included in Reg BI and to
provide clarity on the intersection
between Reg BI and the FINRA rules, it
proposed to amend its suitability rule to
provide that it will not apply to
recommendations subject to Reg BI.24
FINRA stated that it did not propose to
17 Id.
18 Id.
id.
id. See also Reg BI Release.
21 See Notice at 16975.
22 See id. See also Reg BI Release at 33381.
23 See Notice at 16975.
24 See proposed FINRA Rule 2111.08.
eliminate the suitability rule because it
applies broadly to all recommendations
to customers whereas Reg BI applies
only to recommendations to ‘‘retail
customers,’’ which Reg BI defines as a
natural person, or the legal
representative of such natural person,
who receives a recommendation of any
securities transaction or investment
strategy involving securities from a
broker-dealer and uses the
recommendation primarily for personal,
family, or household purposes.25 Thus,
FINRA believed its suitability rule is
still needed for entities and institutions
(e.g., pension funds), and natural
persons who will not use
recommendations primarily for
personal, family, or household purposes
(e.g., small business owners and
charitable trusts).26
In addition, the proposed rule change
modified the quantitative suitability
obligation under FINRA Rule 2111.05(c)
to remove the element of control that
currently must be proved to
demonstrate a violation of that rule.27
FINRA stated that this change is
consistent with Reg BI, which
eliminates the control element from the
third component of its Care Obligation.
Finally, the proposed rule change
amended CAB Rule 211 to state that it
will not apply to recommendations
subject to Reg BI.28
Non-Cash Compensation
FINRA Rules 2310 (Direct
Participation Programs), 2320 (Variable
Contracts of an Insurance Company),
2341 (Investment Company Securities),
and 5110 (Corporate Financing Rule—
Underwriting Terms and Arrangements)
each include provisions restricting the
payment and receipt of non-cash
compensation in connection with the
sale and distribution of securities
governed by those rules.29 FINRA stated
that, as a general matter, these rules
limit non-cash compensation
arrangements to:
• Gifts that do not exceed $100 in
value and that are not preconditioned
on the achievement of a sales target;
• An occasional meal, a ticket to a
sporting event or the theater, or other
comparable entertainment that does not
raise any question of propriety and is
not preconditioned on the achievement
of a sales target;
• Payment or receipt by ‘‘offerors’’
(generally product sponsors and their
affiliates) in connection with training or
19 See
20 See
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25 See
17 CFR 240.15l–1(b)(1).
Notice at 16975.
27 See proposed FINRA Rule 2111.05(c).
28 See proposed CAB Rule 211.03.
29 See Notice at 16975.
26 See
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37971
education meetings, subject to specified
conditions, including that the payment
of such compensation is not
conditioned on achieving a sales target;
and
• Internal non-cash compensation
arrangements between a member and its
associated persons, subject to specified
conditions. If the internal non-cash
compensation arrangement is in the
form of a sales contest, the contest must
be based on the total production of
associated persons with respect to all
securities within the rule’s product
category, and credit for those sales must
be equally weighted.30
Reg BI’s Conflict of Interest Obligation
requires, among other things, that
broker-dealers establish, maintain, and
enforce written policies and procedures
reasonably designed to identify and
eliminate any sales contests, sales
quotas, bonuses, and non-cash
compensation that are based on the
sales of specific securities or specific
types of securities within a limited time
period.31 FINRA stated that its current
non-cash compensation rules permit
internal firm sales contests that may not
meet this standard, since they permit
contests based on sales of specific types
of securities (such as mutual funds or
variable annuities).32
FINRA proposed to modify its rules
governing non-cash compensation
arrangements to specify that any noncash compensation arrangement
permitted by those rules must be
consistent with the requirements of Reg
BI. FINRA also proposed to eliminate
provisions in Rules 2320, 2341, and
5110 that require internal non-cash
compensation arrangements to be based
on total production and equal weighting
of securities sales.33 FINRA stated that
firms generally would no longer have
been permitted to sponsor or maintain
internal sales contests based on sales of
securities within a product category
within a limited time, even if they were
based on total production and equal
weighting and that this requirement also
would have applied to the non-cash
compensation provisions governing
gifts, business entertainment and
training or education meetings.34
Further, FINRA stated that these forms
of non-cash compensation may not be
preconditioned on achievement of a
sales target.35 Nevertheless, FINRA
30 See FINRA Rules 2310(c), 2320(g), 2341(l)(5),
and 5110(h).
31 See 17 CFR 240.15l–1(a)(2)(iii)(D).
32 See Notice at 16976.
33 See proposed amendments to FINRA Rules
2310(c), 2320(g), 2341(l)(5), and 5110(h).
34 See Notice at 16976.
35 Id.
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believed that it must make clear that
these provisions do not permit
arrangements that conflict with Reg BI.
Proposed Rule Change as Modified by
Amendment No. 1
In response to comments 36 (discussed
below), FINRA is modifying its
proposed rule change by not deleting
rule text in FINRA Rules 2320(g)(4)(D)
and 2341(l)(5)(D) that require non-cash
compensation arrangements between a
member and its associated persons, or
between a non-member company and its
sales personnel who are associated
persons of an affiliated member, for the
sale of variable insurance products
(under Rule 2320) or investment
company securities (under Rule 2341) to
be based on the total production and
equal weighting of sales of those
products.37 FINRA also is not deleting
rule text in FINRA Rules 2310(c)(2)(C),
2320(g)(4)(C), 2341(l)(5)(C) and
5110(h)(2)(C) that reference Rules
2310(c)(2)(D), 2320(g)(4)(D),
2341(l)(5)(D), and 5110(h)(2)(D),
respectively.38 In its Amendment No. 1,
FINRA also cautions members not to
conclude that any sales contest that
awards non-cash compensation for sales
of securities within particular product
categories is per se permissible under
Reg BI.39 FINRA’s Proposed
Amendment No. 1 does not alter the
proposed suitability changes to FINRA
Rule 2111 and CAB Rule 211.
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III. Discussion and Commission
Findings
After careful review of the proposed
rule change, as modified by Amendment
No. 1, the comment letters, and FINRA’s
response to the comments, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with the
requirements of the Exchange Act and
the rules and regulations thereunder
that are applicable to a national
securities association.40 Specifically, the
Commission finds that the proposed
rule change is consistent with Section
15A(b)(6) of the Exchange Act,41 which
requires, among other things, that
FINRA rules be designed to prevent
36 See letter from Clifford Kirsch and Eric
Arnolds, Eversheds Sutherland (US) LLP, for the
Committee of Annuity Insurers, dated April 15,
2020 (‘‘CAI Letter’’) and letter from Robin M.
Traxler, Financial Services Institute, April 15, 2020
(‘‘FSI Letter’’).
37 See FINRA Letter.
38 Id.
39 Id.
40 In approving the proposed rule change, the
Commission has considered the rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
41 15 U.S.C. 78o–3(b)(6).
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fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest.
Proposed Suitability Rule Changes
Most commenters supported the
changes to FINRA Rule 2111
(Suitability) and CAB Rule 211
(Suitability),42 and none objected.43 For
example, one commenter commended
FINRA for the proposed changes and
encouraged the SEC to approve the
proposed rule change because ‘‘it brings
important clarity and consistency to the
standards governing broker-dealers’
relationships with retail customers.’’ 44
However, one commenter that
supported the proposed rule change
stated that ‘‘Reg BI should have gone
further.’’ 45 No commenters suggested
amendments to the proposed rule text
amending Rule 2111 and CAB Rule 211.
Taking into consideration the
comments, the Commission believes
that the proposed suitability rule
changes are consistent with the
Exchange Act. As the Commission
stated in the Reg BI Release, the Care
Obligation of Reg BI incorporates and
enhances existing suitability
requirements.46 In light of the overlap,
the Commission believes that it would
be redundant and unnecessary for
FINRA’s suitability rule to apply to
recommendations that are subject to Reg
BI.
As stated by FINRA, without these
changes, a broker-dealer would be
required to comply with both Reg BI
and FINRA’s suitability rules when
making recommendations to retail
customers, and in such circumstances,
compliance with Reg BI would result in
compliance with FINRA’s suitability
rules.47 The Commission agrees with
FINRA and believes that the proposed
rule change will help protect investors
and the public interest by avoiding
potential confusion surrounding
whether Reg BI or FINRA’s suitability
obligations apply, which in turn will
facilitate compliance with applicable
regulations. In addition, the changes
42 See letter from Christopher A. Iacovella,
American Securities Association, dated April 20,
2020 (‘‘ASA Letter’’); letter from Kristen
Malinconico, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce, dated
April 15, 2020 (‘‘CCMC Letter’’); letter from Emily
Micale, Insured Retirement Institute, dated April
15, 2020 (‘‘IRI Letter’’); letter from Samuel B.
Edwards, Public Investors Advocate Bar
Association, dated April 15, 2020 (‘‘PIABA Letter’’);
and FSI Letter.
43 One commenter did not address the proposed
changes to the Suitability Rules. See CAI Letter.
44 See CCMC Letter.
45 See PIABA Letter.
46 Reg BI Release at 33327.
47 See Notice at 16974.
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will provide continued protections of
FINRA’s suitability rules for customers
that are not retail customers for
purposes of Reg BI.
The Commission further believes that
the removal of the element of control
from the quantitative suitability
obligation will align FINRA’s suitability
rule with the Care Obligation of Reg BI,
which the Commission believes will
enhance investor protection for
customers that are not retail customers
for purposes of Reg BI by requiring a
broker-dealer to always form a
reasonable basis as to the recommended
frequency of trading in a retail
customer’s account—irrespective of
whether the broker-dealer ‘‘controls’’ or
exercises ‘‘de facto control’’ over the
retail customer’s account.48
For these reasons, the Commission
finds that the proposed rule change to
the suitability rules is appropriate and
designed to protect investors and the
public interest, consistent with Section
15A(b)(6) of the Exchange Act and the
rules and regulations thereunder.
Proposed Changes to Non-Cash
Compensation Rules
Most commenters supported the
changes to the non-cash compensation
provisions in FINRA Rules 2310, 2320,
2341, and 5110.49 These commenters
generally supported FINRA’s goal of
aligning its non-cash compensation
rules consistent with Reg BI.50
However, a few commenters
expressed concerns with FINRA’s
statements suggesting that contests
based on sales of securities within
particular product categories, such as
mutual funds or variable annuities,
would no longer be permitted under Reg
BI.51 One commenter stated ‘‘what
seems more consistent with what the
SEC had in mind with respect to
variable contracts and mutual funds
would be to apply the limited period
sales contest prohibition to specific
types of variable annuities or funds
within those general product
categories.’’ 52 The commenter also said
that ‘‘FINRA has effectively converted
the language restricting limited period
sales contests for ‘specific types of
securities’ under Reg BI to a restriction
on limited period sales contests that are
for a ‘product category’’’ and that
FINRA’s conclusion that variable
contracts be viewed as constituting a
specific type of security under Reg BI is
48 See
Reg BI Release at 33374.
PIABA Letter, CCMC Letter, ASA Letter,
and IRI Letter.
50 See id.
51 See FSI Letter and CAI Letter.
52 See CAI Letter.
49 See
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‘‘fundamentally inconsistent with how
the SEC describes and interprets that
phrase under the Reg BI Adopting
Release.’’ 53 The other commenter
expressed similar concerns and
suggested that FINRA clarify that its
non-cash compensation rules are meant
to align with Reg BI in all respects,
including what constitutes sales of
specific types of securities.54
In response, FINRA stated it was not
its intent to propose changes to its noncash compensation rules that would
prohibit sales contests, sales quotas,
bonuses or non-cash compensation that
are permissible under Reg BI.55
Accordingly, as noted above, FINRA
modified its proposed rule change by
not deleting rule text in FINRA Rules
2320 and 2341 that require non-cash
compensation arrangements between a
member and its associated persons, or
between a non-member company and its
sales personnel who are associated
persons of an affiliated member, for the
sale of variable insurance products or
investment company securities to be
based on the total production and equal
weighting of sales of those products.56
FINRA also modified its proposed rule
change by not deleting rule text in
FINRA Rules 2310, 2320, 2341, and
5110.57 Finally, FINRA cautioned
members not to conclude that any sales
contest that awards non-cash
compensation for sales of securities
within particular product categories is
per se permissible under Reg BI.58
Taking into consideration the
comments, the FINRA Letter, and
Amendment No. 1, the Commission
believes that the proposed rule change
to FINRA’s non-cash compensation
rules, as amended, is consistent with the
Exchange Act. The Commission
recognizes that some commenters raised
concerns about the proposed changes to
the non-cash compensation rules on the
basis that FINRA suggested that contests
based on sales of securities within
particular product categories would no
longer be permitted under Reg BI.59 The
Commission further recognizes FINRA’s
response and Amendment No. 1, and
believes that the Amendment No. 1
appropriately addresses commenters’
concerns by clarifying that the proposed
changes to its non-cash compensation
rules are to be read consistent with Reg
BI.60
53 See
id.
FSI Letter.
55 See FINRA Letter.
56 See id.
57 See id.
58 See id.
59 See FSI Letter and IRI Letter.
60 See FINRA Letter.
54 See
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The Commission believes that
FINRA’s proposed rule change, as
amended by Amendment No. 1,
facilitates consistency between FINRA’s
non-cash compensation rules and Reg
BI. In particular, the relevant FINRA
rules as amended will be consistent
with the applicable requirements under
Reg BI. As described above, commenters
raised concerns that FINRA’s proposed
rule change would prohibit certain sales
contests that may be permitted under
Reg BI. In response, FINRA amended its
proposal to be consistent with Reg BI,
but cautioned members not to conclude
that any sales contest that awards noncash compensation for sales of securities
within particular product categories is
per se permissible under Reg BI.61
Similarly, the Commission reiterates
that, while certain practices will not be
per se prohibited by Reg BI, such
practices are not per se consistent with
Reg BI or other obligations under the
federal securities laws.62
The Commission believes that the
approach proposed by FINRA with
respect to its non-cash compensation
rules is appropriate and designed to
protect investors and the public interest,
consistent with Section 15A(b)(6) of the
Exchange Act. In particular, the
Commission believes that the proposed
rule change, as amended by
Amendment No.1, will help protect
investors and the public interest by
clarifying that the incentives brokerdealers may offer pursuant to non-cash
compensation arrangements under the
relevant FINRA rules as amended are
consistent with the applicable
requirements under Reg BI. For these
reasons, the Commission finds that the
proposed rule change to the non-cash
compensation rules is consistent with
the Exchange Act and the rules and
regulations thereunder.
IV. Solicitation of Comments on
Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to
submit written data, views, and
arguments concerning whether
Amendment No. 1, is consistent with
the Exchange Act. Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2020–007 on the subject line.
61 See
62 See
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37973
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–FINRA–2020–007. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549–1090, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing will also be available for
inspection and copying at the principal
office of FINRA. All comments received
will be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FINRA–
2020–007 and should be submitted on
or before July 15, 2020.
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 1, prior to
the thirtieth day after the date of
publication of notice of the amended
proposal in the Federal Register.
As discussed above, the revisions
made to the proposed rule change in
Amendment No. 1 clarify that it was not
FINRA’s intent to propose changes to its
non-cash compensation rules that
would prohibit sales contests, sales
quotas, bonuses or non-cash
compensation that are permissible
under Reg BI.63 Specifically, FINRA
modified its proposal by not deleting
rule text in FINRA Rules 2320 and 2341
that requires non-cash compensation
63 See
E:\FR\FM\24JNN1.SGM
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Federal Register / Vol. 85, No. 122 / Wednesday, June 24, 2020 / Notices
arrangements between a member and its
associated persons, or between a nonmember company and its sales
personnel who are associated persons of
an affiliated member, for the sale of
variable insurance products or
investment company securities to be
based on the total production and equal
weighting of sales of those products.64
FINRA also modified its proposal by not
deleting rule text in FINRA Rules 2310,
2320, 2341, and 5110.65
The Commission believes that this
modification responds to the primary
concerns raised by commenters on the
proposal and clarifies that the proposal
was intended to be read consistent with
Reg BI.66 As stated earlier, the
Commission believes that the proposed
rule change, as amended by
Amendment No. 1, will help protect
investors and the public interest by
clarifying that the incentives brokerdealers may offer pursuant to non-cash
compensation arrangements under the
relevant FINRA rules are consistent
with the applicable requirements under
Reg BI, thereby ensuring a consistent
approach with respect to conflicts of
interest. Accordingly, the Commission
finds good cause, pursuant to Section
19(b)(2) of the Exchange Act,67 to
approve the proposed rule change, as
modified by Amendment No. 1, on an
accelerated basis.
VII. Conclusion
It is therefore ordered pursuant to
Section 19(b)(2) of the Exchange Act 68
that the proposed rule change (SR–
FINRA–2020–007), as modified by
Amendment No. 1, be and hereby is
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.69
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–13539 Filed 6–23–20; 8:45 am]
jbell on DSKJLSW7X2PROD with NOTICES
BILLING CODE 8011–01–P
64 See
id.
id.
66 See CAI Letter and FSI Letter. See also FINRA
Letter.
67 15 U.S.C. 78s(b)(2).
68 Id.
69 17 CFR 200.30–3(a)(12).
65 See
VerDate Sep<11>2014
18:20 Jun 23, 2020
Jkt 250001
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89092; File No. SR–MSRB–
2020–04]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Filing of a Proposed
Rule Change Consisting of
Amendments to MSRB Rules A–3 and
A–6 That Are Designed To Improve
Board Governance
June 18, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’
or ‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on June 5, 2020, the Municipal
Securities Rulemaking Board (‘‘MSRB’’
or ‘‘Board’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the MSRB. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The MSRB filed with the Commission
a proposed rule change consisting of
amendments to MSRB Rules A–3 and
A–6 (the ‘‘proposed rule change’’) that
are designed to improve Board
governance. As described below, the
draft amendments would:
• Extend to five years the length of
time that an individual must have been
separated from employment or other
association with any regulated entity to
serve as a public representative to the
Board;
• Reduce the Board’s size from 21 to
15 members through a transition plan
that includes an interim year in which
the Board will have 17 members;
• Replace the requirement that at
least one and not less than 30% of
regulated members on the 21-member
Board be municipal advisors with a
requirement that the 15-member Board
include at least two municipal advisors;
• Impose a six-year limit on Board
service;
• Remove overly prescriptive detail
from the description of the Board’s
nominations process while preserving
in the rule the key substantive
requirements;
• Require that any Board committee
with responsibilities for nominations,
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00155
Fmt 4703
Sfmt 4703
governance, or audit be chaired by a
public representative; and
• Make certain other reorganizational
and technical changes.
The effective date for the proposed rule
change will be October 1, 2020. The
current versions of MSRB Rules A–3
and A–6 would remain applicable in the
interim period between SEC approval
and the effective date.
The Board previously issued a
Request for Comment on potential
changes to MSRB Rule A–3 (the
‘‘RFC’’).3 The proposed rule change
reflects the Board’s consideration of the
comments it received, which are
discussed below, along with the Board’s
responses.
The text of the proposed rule change
is available on the MSRB’s website at
www.msrb.org/Rules-andInterpretations/SEC-Filings/2020Filings.aspx, at the MSRB’s principal
office, and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
MSRB included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. The MSRB has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Background
The Exchange Act establishes basic
requirements for the Board’s size and
composition and requires the Board to
adopt rules that establish ‘‘fair
procedures for the nomination and
election of members of the Board and
assure fair representation in such
nominations and elections.’’ 4 As
amended by the Dodd-Frank Wall Street
Reform and Consumer Protection Act of
3 MSRB Notice 2020–02 (Jan. 28, 2020), available
at https://www.msrb.org/∼/media/Files/RegulatoryNotices/RFCs/2020-02.ashx??n=1. Comments on the
RFC are available on the Board’s website at https://
www.msrb.org/Rules-and-Interpretations/
Regulatory-Notices/2020/2020-02.aspx?c=1. The
proposed rule change includes certain
reorganizational and technical changes that were
not included in the RFC, as described herein.
4 Exchange Act Section 15B(b)(2)(B), 15 U.S.C.
78o–4(b)(2)(B).
E:\FR\FM\24JNN1.SGM
24JNN1
]]>Agencies
[Federal Register Volume 85, Number 122 (Wednesday, June 24, 2020)]
[Notices]
[Pages 37970-37974]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13539]
[[Page 37970]]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89091; File No. SR-FINRA-2020-007]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment No. 1, to FINRA's Suitability, Non-Cash Compensation and
Capital Acquisition Broker (CAB) Rules in Response to Regulation Best
Interest
June 18, 2020.
I. Introduction
On March 12, 2020, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend FINRA Rules 2111
(Suitability), 2310 (Direct Participation Programs), 2320 (Variable
Contracts of an Insurance Company), 2341 (Investment Company
Securities), and 5110 (Corporate Financing Rule--Underwriting Terms and
Arrangements) and Capital Acquisition Broker (CAB) Rule 211
(Suitability). The proposed rule change would: (1) Amend the FINRA and
CAB suitability rules to state that the rules do not apply to
recommendations subject to Regulation Best Interest (``Reg BI''),\3\
and to remove the element of control from the quantitative suitability
obligation; and (2) conform the rules governing non-cash compensation
to Reg BI's limitations on sales contests, sales quotas, bonuses and
non-cash compensation.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 17 CFR 240.15l-1.
---------------------------------------------------------------------------
The proposed rule change was published for comment in the Federal
Register on March 25, 2020.\4\ The public comment period closed on
April 15, 2020.\5\ On April 28, 2020, FINRA consented to an extension
of the time period in which the Commission must approve the proposed
rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to approve or disapprove the proposed
rule change to June 23, 2020.\6\
---------------------------------------------------------------------------
\4\ See Exchange Act Release No. 88422 (Mar. 19, 2020), 85 FR
16974 (Mar. 25, 2020) (File No. SR-FINRA-2020-007 (``Notice'')).
\5\ All comment letters received on the proposed rule change are
available on the Commission's website at https://www.sec.gov.
\6\ See Letter from Joseph Savage, Vice President and Counsel,
Office of General Counsel, FINRA, to Daniel Fisher, Branch Chief,
Division of Trading and Markets, U.S. Securities and Exchange
Commission, dated April 28, 2020.
---------------------------------------------------------------------------
On May 14, 2020, FINRA responded to the comment letters received in
response to the Notice and filed an amendment to the proposed rule
change (``Amendment No. 1'').\7\ The Commission is publishing this
notice to solicit comments on Amendment No. 1 from interested persons,
and is approving the proposed rule change, as modified by Amendment No.
1, on an accelerated basis.
---------------------------------------------------------------------------
\7\ See Letter from Joseph Savage, Vice President and Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
U.S. Securities and Exchange Commission, dated May 13, 2020 (``FINRA
Letter''). The FINRA Letter and the text of Amendment No. 1 are
available at the Commission's website at https://www.sec.gov/comments/sr-finra-2020-007/srfinra2020007.htm.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
Background
On June 5, 2019, the Commission adopted Reg BI, a new rule under
the Exchange Act, which establishes a standard of conduct for broker-
dealers and natural persons who are associated persons of a broker-
dealer (unless otherwise indicated, together referred to as ``broker-
dealer'') when they make a recommendation of any securities transaction
or investment strategy involving securities to a retail customer.\8\
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 86031 (Jun. 5,
2019), 84 FR 33318 (Jul. 12, 2019) (``Reg BI Release'').
---------------------------------------------------------------------------
As stated in the Reg BI Release, Reg BI enhances the broker-dealer
standard of conduct beyond existing suitability obligations, and aligns
the standard of conduct with retail customers' reasonable expectations
by requiring broker-dealers, among other things, to: Act in the best
interest of the retail customer at the time the recommendation is made,
without placing the financial or other interest of the broker-dealer
ahead of the interests of the retail customer; and address conflicts of
interest by establishing, maintaining, and enforcing policies and
procedures reasonably designed to identify and fully and fairly
disclose material facts about conflicts of interest, and in instances
where we have determined that disclosure is insufficient to reasonably
address the conflict, to mitigate or, in certain instances, eliminate
the conflict.\9\ The date by which broker-dealers must comply with Reg
BI is June 30, 2020.\10\ FINRA proposed to amend its suitability and
non-cash compensation rules to address inconsistencies between the
FINRA rules and Reg BI, and to make clear how these rules will
intersect. The effective date of FINRA's proposed rule change will be
the compliance date of Reg BI.
---------------------------------------------------------------------------
\9\ See Reg BI Release at 33318.
\10\ Id.
---------------------------------------------------------------------------
Original Proposal
Suitability
As FINRA stated in its Notice, FINRA Rule 2111 requires that a
broker-dealer ``have a reasonable basis to believe that a recommended
transaction or investment strategy involving a security or securities
is suitable for the customer, based on the information obtained through
the reasonable diligence of the member or associated person to
ascertain the customer's investment profile.'' \11\ Rule 2111 further
explains that a ``customer's investment profile includes, but is not
limited to, the customer's age, other investments, financial situation
and needs, tax status, investment objectives, investment experience,
investment time horizon, liquidity needs, risk tolerance, and any other
information the customer may disclose to the member or associated
person in connection with such recommendation.'' \12\
---------------------------------------------------------------------------
\11\ See Notice at 16975.
\12\ See id.
---------------------------------------------------------------------------
Rule 2111 imposes three main suitability obligations: Reasonable
basis suitability, customer-specific suitability and quantitative
suitability.\13\ Reasonable basis suitability requires a member or
associated person to have a reasonable basis to believe, based on
reasonable diligence, that the recommendation is suitable for at least
some investors.\14\ Customer-specific suitability requires that a
member or associated person have a reasonable basis to believe that the
recommendation is suitable for a particular customer based on that
customer's investment profile.\15\ Quantitative suitability requires a
member or associated person who has actual or de facto control over a
customer account to have a reasonable basis for believing that a series
of recommended transactions, even if suitable when viewed in isolation,
are not excessive and unsuitable for the customer when taken together
in light of the customer's investment profile.\16\
---------------------------------------------------------------------------
\13\ See id.
\14\ See id.
\15\ See id.
\16\ Id.
---------------------------------------------------------------------------
[[Page 37971]]
Rule 2111(b) provides an exemption to customer-specific suitability
for recommendations to institutional customers under specified
circumstances. FINRA rule 2111 sets forth three criteria that must be
satisfied in order for this exemption to apply. First, the account must
meet the definition of institutional account as defined in FINRA Rule
4512(c).\17\ Second, the broker-dealer must have a reasonable basis to
believe that the institutional customer is capable of evaluating
investment risks independently, both in general and with regard to
particular transactions and investment strategies involving a security
or securities.\18\ Third, the institutional customer must affirmatively
indicate that it is exercising independent judgment in evaluating the
member's or associated person's recommendations. Where an institutional
customer has delegated decision making authority to an agent, such as
an investment adviser or a bank trust department, these factors are
applied to the agent.\19\
---------------------------------------------------------------------------
\17\ Id.
\18\ Id.
\19\ See id.
---------------------------------------------------------------------------
Reg BI requires firms to satisfy four component obligations:
Disclosure, Care, Conflict of Interest, and Compliance.\20\ Consistent
with the Commission's statements, FINRA stated that Reg BI's Care
Obligation incorporates and enhances principles that are also found in
Rule 2111.\21\ FINRA stated that two key enhancements are that Reg BI
explicitly imposes a best interest standard and requires a
consideration of costs. In addition, FINRA stated in its Notice that as
compared to suitability, Reg BI: (i) Places greater emphasis than the
suitability rule on consideration of reasonably available alternatives;
\22\ (ii) explicitly applies to recommendations of types of accounts
(e.g., broker-dealer or investment adviser, or among broker-dealer
accounts, including recommendations of IRA rollovers); and (iii)
eliminates the ``control'' element of the quantitative suitability
obligation.\23\
---------------------------------------------------------------------------
\20\ See id. See also Reg BI Release.
\21\ See Notice at 16975.
\22\ See id. See also Reg BI Release at 33381.
\23\ See Notice at 16975.
---------------------------------------------------------------------------
FINRA stated that in light of these enhancements included in Reg BI
and to provide clarity on the intersection between Reg BI and the FINRA
rules, it proposed to amend its suitability rule to provide that it
will not apply to recommendations subject to Reg BI.\24\ FINRA stated
that it did not propose to eliminate the suitability rule because it
applies broadly to all recommendations to customers whereas Reg BI
applies only to recommendations to ``retail customers,'' which Reg BI
defines as a natural person, or the legal representative of such
natural person, who receives a recommendation of any securities
transaction or investment strategy involving securities from a broker-
dealer and uses the recommendation primarily for personal, family, or
household purposes.\25\ Thus, FINRA believed its suitability rule is
still needed for entities and institutions (e.g., pension funds), and
natural persons who will not use recommendations primarily for
personal, family, or household purposes (e.g., small business owners
and charitable trusts).\26\
---------------------------------------------------------------------------
\24\ See proposed FINRA Rule 2111.08.
\25\ See 17 CFR 240.15l-1(b)(1).
\26\ See Notice at 16975.
---------------------------------------------------------------------------
In addition, the proposed rule change modified the quantitative
suitability obligation under FINRA Rule 2111.05(c) to remove the
element of control that currently must be proved to demonstrate a
violation of that rule.\27\ FINRA stated that this change is consistent
with Reg BI, which eliminates the control element from the third
component of its Care Obligation.
---------------------------------------------------------------------------
\27\ See proposed FINRA Rule 2111.05(c).
---------------------------------------------------------------------------
Finally, the proposed rule change amended CAB Rule 211 to state
that it will not apply to recommendations subject to Reg BI.\28\
---------------------------------------------------------------------------
\28\ See proposed CAB Rule 211.03.
---------------------------------------------------------------------------
Non-Cash Compensation
FINRA Rules 2310 (Direct Participation Programs), 2320 (Variable
Contracts of an Insurance Company), 2341 (Investment Company
Securities), and 5110 (Corporate Financing Rule--Underwriting Terms and
Arrangements) each include provisions restricting the payment and
receipt of non-cash compensation in connection with the sale and
distribution of securities governed by those rules.\29\ FINRA stated
that, as a general matter, these rules limit non-cash compensation
arrangements to:
---------------------------------------------------------------------------
\29\ See Notice at 16975.
---------------------------------------------------------------------------
Gifts that do not exceed $100 in value and that are not
preconditioned on the achievement of a sales target;
An occasional meal, a ticket to a sporting event or the
theater, or other comparable entertainment that does not raise any
question of propriety and is not preconditioned on the achievement of a
sales target;
Payment or receipt by ``offerors'' (generally product
sponsors and their affiliates) in connection with training or education
meetings, subject to specified conditions, including that the payment
of such compensation is not conditioned on achieving a sales target;
and
Internal non-cash compensation arrangements between a
member and its associated persons, subject to specified conditions. If
the internal non-cash compensation arrangement is in the form of a
sales contest, the contest must be based on the total production of
associated persons with respect to all securities within the rule's
product category, and credit for those sales must be equally
weighted.\30\
---------------------------------------------------------------------------
\30\ See FINRA Rules 2310(c), 2320(g), 2341(l)(5), and 5110(h).
---------------------------------------------------------------------------
Reg BI's Conflict of Interest Obligation requires, among other
things, that broker-dealers establish, maintain, and enforce written
policies and procedures reasonably designed to identify and eliminate
any sales contests, sales quotas, bonuses, and non-cash compensation
that are based on the sales of specific securities or specific types of
securities within a limited time period.\31\ FINRA stated that its
current non-cash compensation rules permit internal firm sales contests
that may not meet this standard, since they permit contests based on
sales of specific types of securities (such as mutual funds or variable
annuities).\32\
---------------------------------------------------------------------------
\31\ See 17 CFR 240.15l-1(a)(2)(iii)(D).
\32\ See Notice at 16976.
---------------------------------------------------------------------------
FINRA proposed to modify its rules governing non-cash compensation
arrangements to specify that any non-cash compensation arrangement
permitted by those rules must be consistent with the requirements of
Reg BI. FINRA also proposed to eliminate provisions in Rules 2320,
2341, and 5110 that require internal non-cash compensation arrangements
to be based on total production and equal weighting of securities
sales.\33\ FINRA stated that firms generally would no longer have been
permitted to sponsor or maintain internal sales contests based on sales
of securities within a product category within a limited time, even if
they were based on total production and equal weighting and that this
requirement also would have applied to the non-cash compensation
provisions governing gifts, business entertainment and training or
education meetings.\34\ Further, FINRA stated that these forms of non-
cash compensation may not be preconditioned on achievement of a sales
target.\35\ Nevertheless, FINRA
[[Page 37972]]
believed that it must make clear that these provisions do not permit
arrangements that conflict with Reg BI.
---------------------------------------------------------------------------
\33\ See proposed amendments to FINRA Rules 2310(c), 2320(g),
2341(l)(5), and 5110(h).
\34\ See Notice at 16976.
\35\ Id.
---------------------------------------------------------------------------
Proposed Rule Change as Modified by Amendment No. 1
In response to comments \36\ (discussed below), FINRA is modifying
its proposed rule change by not deleting rule text in FINRA Rules
2320(g)(4)(D) and 2341(l)(5)(D) that require non-cash compensation
arrangements between a member and its associated persons, or between a
non-member company and its sales personnel who are associated persons
of an affiliated member, for the sale of variable insurance products
(under Rule 2320) or investment company securities (under Rule 2341) to
be based on the total production and equal weighting of sales of those
products.\37\ FINRA also is not deleting rule text in FINRA Rules
2310(c)(2)(C), 2320(g)(4)(C), 2341(l)(5)(C) and 5110(h)(2)(C) that
reference Rules 2310(c)(2)(D), 2320(g)(4)(D), 2341(l)(5)(D), and
5110(h)(2)(D), respectively.\38\ In its Amendment No. 1, FINRA also
cautions members not to conclude that any sales contest that awards
non-cash compensation for sales of securities within particular product
categories is per se permissible under Reg BI.\39\ FINRA's Proposed
Amendment No. 1 does not alter the proposed suitability changes to
FINRA Rule 2111 and CAB Rule 211.
---------------------------------------------------------------------------
\36\ See letter from Clifford Kirsch and Eric Arnolds, Eversheds
Sutherland (US) LLP, for the Committee of Annuity Insurers, dated
April 15, 2020 (``CAI Letter'') and letter from Robin M. Traxler,
Financial Services Institute, April 15, 2020 (``FSI Letter'').
\37\ See FINRA Letter.
\38\ Id.
\39\ Id.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review of the proposed rule change, as modified by
Amendment No. 1, the comment letters, and FINRA's response to the
comments, the Commission finds that the proposed rule change, as
modified by Amendment No. 1, is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder that are
applicable to a national securities association.\40\ Specifically, the
Commission finds that the proposed rule change is consistent with
Section 15A(b)(6) of the Exchange Act,\41\ which requires, among other
things, that FINRA rules be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------
\40\ In approving the proposed rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\41\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
Proposed Suitability Rule Changes
Most commenters supported the changes to FINRA Rule 2111
(Suitability) and CAB Rule 211 (Suitability),\42\ and none
objected.\43\ For example, one commenter commended FINRA for the
proposed changes and encouraged the SEC to approve the proposed rule
change because ``it brings important clarity and consistency to the
standards governing broker-dealers' relationships with retail
customers.'' \44\ However, one commenter that supported the proposed
rule change stated that ``Reg BI should have gone further.'' \45\ No
commenters suggested amendments to the proposed rule text amending Rule
2111 and CAB Rule 211.
---------------------------------------------------------------------------
\42\ See letter from Christopher A. Iacovella, American
Securities Association, dated April 20, 2020 (``ASA Letter'');
letter from Kristen Malinconico, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce, dated April 15, 2020
(``CCMC Letter''); letter from Emily Micale, Insured Retirement
Institute, dated April 15, 2020 (``IRI Letter''); letter from Samuel
B. Edwards, Public Investors Advocate Bar Association, dated April
15, 2020 (``PIABA Letter''); and FSI Letter.
\43\ One commenter did not address the proposed changes to the
Suitability Rules. See CAI Letter.
\44\ See CCMC Letter.
\45\ See PIABA Letter.
---------------------------------------------------------------------------
Taking into consideration the comments, the Commission believes
that the proposed suitability rule changes are consistent with the
Exchange Act. As the Commission stated in the Reg BI Release, the Care
Obligation of Reg BI incorporates and enhances existing suitability
requirements.\46\ In light of the overlap, the Commission believes that
it would be redundant and unnecessary for FINRA's suitability rule to
apply to recommendations that are subject to Reg BI.
---------------------------------------------------------------------------
\46\ Reg BI Release at 33327.
---------------------------------------------------------------------------
As stated by FINRA, without these changes, a broker-dealer would be
required to comply with both Reg BI and FINRA's suitability rules when
making recommendations to retail customers, and in such circumstances,
compliance with Reg BI would result in compliance with FINRA's
suitability rules.\47\ The Commission agrees with FINRA and believes
that the proposed rule change will help protect investors and the
public interest by avoiding potential confusion surrounding whether Reg
BI or FINRA's suitability obligations apply, which in turn will
facilitate compliance with applicable regulations. In addition, the
changes will provide continued protections of FINRA's suitability rules
for customers that are not retail customers for purposes of Reg BI.
---------------------------------------------------------------------------
\47\ See Notice at 16974.
---------------------------------------------------------------------------
The Commission further believes that the removal of the element of
control from the quantitative suitability obligation will align FINRA's
suitability rule with the Care Obligation of Reg BI, which the
Commission believes will enhance investor protection for customers that
are not retail customers for purposes of Reg BI by requiring a broker-
dealer to always form a reasonable basis as to the recommended
frequency of trading in a retail customer's account--irrespective of
whether the broker-dealer ``controls'' or exercises ``de facto
control'' over the retail customer's account.\48\
---------------------------------------------------------------------------
\48\ See Reg BI Release at 33374.
---------------------------------------------------------------------------
For these reasons, the Commission finds that the proposed rule
change to the suitability rules is appropriate and designed to protect
investors and the public interest, consistent with Section 15A(b)(6) of
the Exchange Act and the rules and regulations thereunder.
Proposed Changes to Non-Cash Compensation Rules
Most commenters supported the changes to the non-cash compensation
provisions in FINRA Rules 2310, 2320, 2341, and 5110.\49\ These
commenters generally supported FINRA's goal of aligning its non-cash
compensation rules consistent with Reg BI.\50\
---------------------------------------------------------------------------
\49\ See PIABA Letter, CCMC Letter, ASA Letter, and IRI Letter.
\50\ See id.
---------------------------------------------------------------------------
However, a few commenters expressed concerns with FINRA's
statements suggesting that contests based on sales of securities within
particular product categories, such as mutual funds or variable
annuities, would no longer be permitted under Reg BI.\51\ One commenter
stated ``what seems more consistent with what the SEC had in mind with
respect to variable contracts and mutual funds would be to apply the
limited period sales contest prohibition to specific types of variable
annuities or funds within those general product categories.'' \52\ The
commenter also said that ``FINRA has effectively converted the language
restricting limited period sales contests for `specific types of
securities' under Reg BI to a restriction on limited period sales
contests that are for a `product category''' and that FINRA's
conclusion that variable contracts be viewed as constituting a specific
type of security under Reg BI is
[[Page 37973]]
``fundamentally inconsistent with how the SEC describes and interprets
that phrase under the Reg BI Adopting Release.'' \53\ The other
commenter expressed similar concerns and suggested that FINRA clarify
that its non-cash compensation rules are meant to align with Reg BI in
all respects, including what constitutes sales of specific types of
securities.\54\
---------------------------------------------------------------------------
\51\ See FSI Letter and CAI Letter.
\52\ See CAI Letter.
\53\ See id.
\54\ See FSI Letter.
---------------------------------------------------------------------------
In response, FINRA stated it was not its intent to propose changes
to its non-cash compensation rules that would prohibit sales contests,
sales quotas, bonuses or non-cash compensation that are permissible
under Reg BI.\55\ Accordingly, as noted above, FINRA modified its
proposed rule change by not deleting rule text in FINRA Rules 2320 and
2341 that require non-cash compensation arrangements between a member
and its associated persons, or between a non-member company and its
sales personnel who are associated persons of an affiliated member, for
the sale of variable insurance products or investment company
securities to be based on the total production and equal weighting of
sales of those products.\56\ FINRA also modified its proposed rule
change by not deleting rule text in FINRA Rules 2310, 2320, 2341, and
5110.\57\ Finally, FINRA cautioned members not to conclude that any
sales contest that awards non-cash compensation for sales of securities
within particular product categories is per se permissible under Reg
BI.\58\
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\55\ See FINRA Letter.
\56\ See id.
\57\ See id.
\58\ See id.
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Taking into consideration the comments, the FINRA Letter, and
Amendment No. 1, the Commission believes that the proposed rule change
to FINRA's non-cash compensation rules, as amended, is consistent with
the Exchange Act. The Commission recognizes that some commenters raised
concerns about the proposed changes to the non-cash compensation rules
on the basis that FINRA suggested that contests based on sales of
securities within particular product categories would no longer be
permitted under Reg BI.\59\ The Commission further recognizes FINRA's
response and Amendment No. 1, and believes that the Amendment No. 1
appropriately addresses commenters' concerns by clarifying that the
proposed changes to its non-cash compensation rules are to be read
consistent with Reg BI.\60\
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\59\ See FSI Letter and IRI Letter.
\60\ See FINRA Letter.
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The Commission believes that FINRA's proposed rule change, as
amended by Amendment No. 1, facilitates consistency between FINRA's
non-cash compensation rules and Reg BI. In particular, the relevant
FINRA rules as amended will be consistent with the applicable
requirements under Reg BI. As described above, commenters raised
concerns that FINRA's proposed rule change would prohibit certain sales
contests that may be permitted under Reg BI. In response, FINRA amended
its proposal to be consistent with Reg BI, but cautioned members not to
conclude that any sales contest that awards non-cash compensation for
sales of securities within particular product categories is per se
permissible under Reg BI.\61\ Similarly, the Commission reiterates
that, while certain practices will not be per se prohibited by Reg BI,
such practices are not per se consistent with Reg BI or other
obligations under the federal securities laws.\62\
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\61\ See FINRA Letter.
\62\ See Reg BI Release at footnote 148.
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The Commission believes that the approach proposed by FINRA with
respect to its non-cash compensation rules is appropriate and designed
to protect investors and the public interest, consistent with Section
15A(b)(6) of the Exchange Act. In particular, the Commission believes
that the proposed rule change, as amended by Amendment No.1, will help
protect investors and the public interest by clarifying that the
incentives broker-dealers may offer pursuant to non-cash compensation
arrangements under the relevant FINRA rules as amended are consistent
with the applicable requirements under Reg BI. For these reasons, the
Commission finds that the proposed rule change to the non-cash
compensation rules is consistent with the Exchange Act and the rules
and regulations thereunder.
IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1, is consistent with the
Exchange Act. Comments may be submitted by any of the following
methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2020-007 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2020-007. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549-1090, on official business days between the hours of 10:00 a.m.
and 3:00 p.m. Copies of such filing will also be available for
inspection and copying at the principal office of FINRA. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-FINRA-2020-007 and should be
submitted on or before July 15, 2020.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the amended proposal in the
Federal Register.
As discussed above, the revisions made to the proposed rule change
in Amendment No. 1 clarify that it was not FINRA's intent to propose
changes to its non-cash compensation rules that would prohibit sales
contests, sales quotas, bonuses or non-cash compensation that are
permissible under Reg BI.\63\ Specifically, FINRA modified its proposal
by not deleting rule text in FINRA Rules 2320 and 2341 that requires
non-cash compensation
[[Page 37974]]
arrangements between a member and its associated persons, or between a
non-member company and its sales personnel who are associated persons
of an affiliated member, for the sale of variable insurance products or
investment company securities to be based on the total production and
equal weighting of sales of those products.\64\ FINRA also modified its
proposal by not deleting rule text in FINRA Rules 2310, 2320, 2341, and
5110.\65\
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\63\ See FINRA Letter.
\64\ See id.
\65\ See id.
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The Commission believes that this modification responds to the
primary concerns raised by commenters on the proposal and clarifies
that the proposal was intended to be read consistent with Reg BI.\66\
As stated earlier, the Commission believes that the proposed rule
change, as amended by Amendment No. 1, will help protect investors and
the public interest by clarifying that the incentives broker-dealers
may offer pursuant to non-cash compensation arrangements under the
relevant FINRA rules are consistent with the applicable requirements
under Reg BI, thereby ensuring a consistent approach with respect to
conflicts of interest. Accordingly, the Commission finds good cause,
pursuant to Section 19(b)(2) of the Exchange Act,\67\ to approve the
proposed rule change, as modified by Amendment No. 1, on an accelerated
basis.
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\66\ See CAI Letter and FSI Letter. See also FINRA Letter.
\67\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion
It is therefore ordered pursuant to Section 19(b)(2) of the
Exchange Act \68\ that the proposed rule change (SR-FINRA-2020-007), as
modified by Amendment No. 1, be and hereby is approved.
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\68\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\69\
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\69\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-13539 Filed 6-23-20; 8:45 am]
BILLING CODE 8011-01-P
