FINRA Securities Activities: SRO Withdraws Proposal to Make Financial Firms Link to BrokerCheck, Gets Request from SIFMA to Modify ‘Inability to Pay’ Rule, and Says Broker-Dealers Can Give Investors PIP Data About ETPs

SRO Says Brokerage Can Institutional Customers PIP Data About ETPs Under Certain Conditions
Financial Industry Regulatory Authority staff have determined that under certain conditions, broker-dealers are permitted to include pre-inception performance information in communications with institutional investors about exchange-traded products, also known as ETPs. Staffers said that FINRA Rule 2210, which governs institutional communications, allows for the use of this data in the way that a fund company is proposing. ALPA Distributors is proposing using the PIP information just in institutional communications, per FINRA Rule 2210 and subject to certain criteria.

However, in “applying the suitability standards” for recommendations to institutional customers,” the SRO said brokerage firms should be cautious about putting too much “weight” on PIP information, while taking into consideration the correlation between performance of other, similar ETPs managed by the investment adviser, sponsor, or index provider and the PIP data. The staff’s letter was in response to a letter written by the fund company, which sees value in giving institutional investors the information for ETPs analysis.

FINRA Withdraws Proposed Rule Change Mandating That Firms Add BrokerCheck Web Link
FINRA has temporarily withdrawn its proposed rule change to Rule 2267 that would have upped investor use of information from BrokerCheck and mandated that member firms include a link and reference to the free online database on their respective websites. This resource, found on the SRO’s website, provides information about brokerage firms, brokers, investment adviser firms, and investment advisers. FINRA said it took back the filing to have more time to look at the comments it received regarding proposed rule change but that it intends to refile.

Although North American Securities Administrators Association, the Public Investor Arbitration Bar Association, and certain lawyers commented with their support of the proposal, the Investment Company Institute, the Securities Industry and Financial Markets Association, and a number of financial firms found the proposal “vague” and “unworkable.” They believe that the proposed rule change should be modified.

SIFMA Wants ‘Inability-to-Pay’ Rule Modified
The Securities Industry and Financial Markets Association wants FINRA to amend its Rule 9554 so that respondents would be precluded from making an “inability-to-pay defense” against a claimant. SIFMA says that should a respondent successfully bring up the defense, this should be reported to the public for the good of retail customers, regulators, and prospective employees.

Brokerage firms/a financial adviser can invoke the “inability to pay” defense when they are told to pay an arbitration award in expedited proceedings involving industry and customer claimants. While the SEC did approve FINRA’s proposal to preclude a respondent from raising this defense against a customer claimant., now SIFMA wants FINRA to amend the rule so respondents also are barred from raising this defense against industry claimants.

At Shepherd Smith Edwards and Kantas, LTD LLP, our securities fraud lawyers represent investors with claims against financial advisers and brokerage firms.

Read the FUND company letter

BrokerCheck, FINRA
SIFMA’s letter (PDF)

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