FINRA Proposes New Rules, Releases Budget for the First Time


Last December, FINRA made public its 2018 budget and updated Financial Guiding Principles, after approval by the SRO’s Board of Governors. In a new information release, the SRO also detailed several rule proposals for the year and planned improvements to its registration technology.

As part of one of its five annual meetings, the Board also met with SEC Chairman Jay Clayton to align priorities, especially relating to both FINRA and the SEC’s focus on protecting retail investors.

Several of the proposed changes are a response to concerns raised during FINRA’s CEO’s “listening tour” and other industry engagement programs.

FINRA Rule Proposals for 2018

  • Improve audit trail for transactions involving Treasury securities.  FINRA’s proposal involves requiring “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),” according to the SRO’s press release.
  • Facilitate capital formation. FINRA is reportedly looking to “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).”
  • Enhance investor protections under FINRA’s suitability rule; an effort to shield investors from brokers who recommend an excessive number of trades.
  • Impose tighter restrictions on the outside activities of registered individuals. According to FINRA, “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.”
  • Enhance alignment with the Fair Access to Investment Research Act (FAIR) Act.
  • Establish a $60 fee for the newly implemented Securities Industry Essentials examination.
  • Ensure transparency regarding FINRA’s Finances

FINRA’s vows of transparency are especially welcome, as the way it handles its budget and proceeds from penalties have been among the chief concerns expressed by both registered individuals and registered firms during Robert W. Cook’s listening tour.

In mid-January, FINRA fulfilled its promise to release the current Financial Guiding Principles and a summary of its budget. This is the first time since its inception that the SRO makes its budget public.

Upon release of the budget summary, FINRA Chairman William H. Heyman and CEO Cook said in an accompanying statement,

As a not-for-profit, self-regulatory organization whose operations are funded by industry fees – without the support of any taxpayer dollars – we must prudently manage our finances to ensure we can fund our mission to protect investors and promote market integrity in a manner that facilitates vibrant capital markets. In the interest of promoting greater transparency regarding our operations, we are publishing – for the first time – a summary of our Financial Guiding Principles, as well as an overview of FINRA’s 2018 budget.

According to the released budget summary, FINRA projects a revenue of $842 million and expenses amounting to $978 million. The plan is reportedly to rely on fine revenue to bridge the budgetary gap.

Although FINRA fines hit a $173.8 million record in 2016, the industry does not view this reliance on fluctuating fine monies as a healthy habit, since increased compliance would somewhat ironically seriously compromise the SRO’s finances.

Trouble with FINRA or the SEC or just want to fine tune your firm’s compliance procedures? At Herskovits PLLC we practice exclusively securities law, our focus for 20+ years. Call 212.897.5410 or Connect Online for experienced and cost-effective securities counsel.

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