U.S. FINRA Update - First Quarter 2020

The Compliance and Regulatory Consulting practice summarizes announcements and priorities relating to FINRA from the third quarter of 2020.

FINRA Provides Guidance on Retail Communications Concerning Private Placement Offerings

On July 1, 2020, FINRA provided guidance to help firms comply with FINRA Rule 2210, Communications with the Public, when creating, reviewing, approving, distributing or using retail communications concerning private placement offerings. FINRA Rule 2210(d)(1) requires all communications:

  • Be fair, balanced and not misleading;
  • Sent to promote potential rewards of an investment disclose risks associated with such investments;
  • Not contain any false, misleading or promissory statements or claims;
  • Be approved by an appropriately registered principal; and
  • not contain projections or predictions of returns to investors (i.e. yields, income, dividends, capital appreciation percentages or any other future investment performance)

While FINRA does not consider reasonable forecasts of issuer operating metrics to be inconsistent with the rule, they have stated that firms should consider the following:

  • The time period forecasted;
  • Whether the growth rate assumptions are comparable with nature and scale of the business;
  • Whether forecasted gross margins are comparable to industry averages; and
  • Whether sales and customer acquisition forecasts are reasonable in relation to the overall market for the issuer’s products or services.

Read more here.

FINRA Announces Updates to the Interpretations of FINRA’s Margin Rule Regarding Control and Restricted Securities and Consolidation of Accounts

On July 2, 2020, FINRA announced updates to FINRA Rule 4210(e)(8) regarding margin requirements for control and restricted securities, and FINRA Rule 4210(f)(5) regarding the consolidation of two or more accounts carried for the same customer.

Paragraph (e)(8)(D) of FINRA Rule 4120 is an exemption that allows for the immediate sale of securities, without restriction, in the event the customer fails to meet a margin call or otherwise defaults, despite whether that customer is an affiliate or non-affiliate.

FINRA Rule 4120(f)(5) allows firms to consolidate two or more accounts carried for a given customer should that customer consent that the money and securities in the accounts be used to carry or pay any deficit in the accounts. Although Section 220.4(a)(2) of Regulation T only permits firms to maintain multiple margin accounts for a single customer under three specific circumstances, firms may maintain multiple sub-accounts of a customer’s margin account as provided in the interpretations.

Read more here.

FINRA Amends Arbitration Codes to Apply Minimum Fees to Requests for Expungement of Customer Dispute Information

FINRA has amended its Codes of Arbitration Procedure for Customer and Industry Disputes to apply minimum fees to requests for the expungement of customer dispute information, whether the request is made as part of the customer arbitration or the associated person files an expungement request in a separate arbitration. The amendments also apply a minimum process fee and member surcharge to straight-in requests, as well as a minimum hearing session fee to expungement-only hearings. These fees are effective as of September 14, 2020.

Read more here.

FINRA Encourages Firms to Notify FINRA if They Engage in Activities Related to Digital Assets

Pursuant to FINRA’s ongoing effort to encourage firms to keep FINRA informed on July 23, 2020, they have issued Regulatory Notice 20-23 to encourage communications on current and planned activities relating to digital assets. Examples of the types of activities of interest to FINRA include the following:

  • Purchases, sales or executions of transactions in digital assets
  • Purchases, sales or executions of transactions in a pooled fund investing in digital assets
  • Creation, management or provision of advisory services for a pooled fund related to digital assets
  • Purchases, sales or executions of transactions in derivatives tied to digital assets
  • Participation in an initial or secondary offering of digital assets (e.g., ICO, pre-ICO)
  • Creation or management of a platform for the secondary trading of digital assets
  • Custody or similar arrangement of digital assets
  • Acceptance of cryptocurrencies from customers
  • Mining of cryptocurrencies
  • Recommending, soliciting or accepting orders in cryptocurrencies and other virtual coins and tokens
  • Displaying indications of interest or quotations in cryptocurrencies and other virtual coins and tokens
  • Providing or facilitating clearance and settlement services for cryptocurrencies and other virtual coins and tokens
  • Recording cryptocurrencies and other virtual coins and tokens using distributed ledger technology or any other use of blockchain technology

Until July 31, 2021, FINRA encourages firms to promptly notify their risk monitoring analyst in writing (including email) of these types of activities.

Read more here.

Proposed Rule Change to Further Extend the Expiration Date of the Temporary Amendments Set Forth in SR-FINRA-2020-015

FINRA filed a proposed rule change to extend the expiration date of the temporary amendments to provide FINRA with temporary relief from certain timing, method of service and other procedural requirements during the period in which FINRA’s operations are impacted by the outbreak of COVID-19 from July 31, 2020 to a date to be specified in a public notice issued by FINRA which will be at least two weeks from the date of the notice and no later than December 31, 2020.

Read more here.

FINRA Introduces Mandatory Multi-Factor Authentication (MFA) to Access Various FINRA Applications

FINRA has added extra security measures beyond the standard user ID and password to log in to FINRA applications. Currently, only Super Account Administrators and Account Administrators will be required to utilize MFA, however all users will have an opportunity to enroll in the MFA service.

Read more here.

FINRA Alerts Firms to Fake FINRA Domain Name

FINRA issued a regulatory notice on August 12, 2020 to warn member firms of a fake website (www.finnra.org), that also has a link to an illegitimate registration site. FINRA has warned that possible bad actors may leverage the domain to send fake emails that may pose cyber security threats. A request has been made to the domain registrar to suspend the site.

Learn more here.

Fraudsters Using Registered Representatives’ Names to Establish Imposter Websites

On August 20, 2020, FINRA published a regulatory notice stating that they have been informed that fraudsters are using registered representatives’ names to establish imposter websites. This notice describes certain common characteristics of imposter websites and actions firms and registered representatives can take to monitor and address these sites. These websites have been observed utilizing the following fraudulent tactics:

  • Using the registered representative’s name as the domain name for the website (e.g., firstnamemiddlenamelastname.com)
  • Including a picture purporting to be the registered representative
  • Providing information about the registered representative’s employment history, including prior employers’ CRD numbers and examination history
  • Asking individuals to fill out a contact form with the individuals’ names, email addresses, phone numbers, the subject of the inquiry and space for a message

FINRA warns that possible bad actors may leverage these fake domains to send fake emails, posing as the registered representative, with embedded cyber security threats a such as phishing links or attachments containing malware. FINRA has outlined a variety of steps for firms to consider, should they come across one of these imposter websites.

Read more here.

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