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Compliance March 11, 2016
FINRA Signals Coming Update to Membership Rules
FINRA highlights the success of its recent compliance
efforts in a new report, while signaling the beginning of a process to
modernize and update its membership application process.
Reported by John Manganaro
The Financial Industry Regulatory Authority (FINRA) rules governing its Membership Application Program (MAP) will soon be updated, the self-regulatory organization announced Friday.
That’s the central message in a report published by FINRA, which says the membership program has “been effective in meeting our investor-protection objectives.” But, there are always opportunities to make regulations and related processes more efficient, it says, and so an update process is well underway.
Specifically, FINRA is conducting a “retrospective review of the NASD Rule 1010 Series (Membership Proceedings) (collectively, MAP rules), which govern FINRA’s Membership Application Program (MAP).” It says the purpose of the review is to “assess whether the rules are meeting their intended investor protection objectives by reasonably efficient means and to take steps to maintain or improve the effectiveness of the rules while minimizing negative economic impacts.”
FINRA says this current review is part of an ongoing initiative launched in April 2014 to periodically look back at significant groups of rules to ensure they remain relevant and appropriately designed to achieve their objectives, particularly in light of industry and market changes. Other recent, related actions from FINRA include turning up its focus on the values of a firm and the approval, alongside the Securities and Exchange Commission (SEC), of a new broker-check system mandate.
FINRA has separated the current MAP review into an assessment phase and an action phase.
“During the assessment phase, which is the focus of this first report, the staff analyzed the effectiveness and efficiency of the MAP rules as currently implemented,” FINRA explains. “The assessment encompassed not only the substance and application of the rules, but also FINRA’s processes to administer them. In the ensuing action phase, FINRA staff intends to consider specific rule proposals or other initiatives resulting from the assessment phase.”
FINRA will eventually engage in its usual rulemaking process to propose any amendments to the rules based on the new MAP assessment.
NEXT: So, what exactly is coming next?
Further explaining its analysis effort, FINRA says its staff “initially looked back through the comments received to an earlier proposal in Regulatory Notice 13-29 to transfer the MAP rules into the Consolidated FINRA Rulebook. The staff then solicited broad and diverse views through issuance of Regulatory Notice 15-10 requesting comment on the effectiveness and efficiency of the MAP rules. The Notice explained the review process and asked a series of questions with respect to the rules.”
These included: Have the rules effectively addressed the problem(s) they were intended to mitigate? What have been experiences with implementation of the rule set, including any ambiguities in the rules or challenges to comply with them? What have been the costs and benefits arising from FINRA’s rules? Have the costs and benefits been in line with expectations described in the rulemaking? And, can FINRA make the rules more efficient and effective, including FINRA’s administrative processes?
Industry practitioners had a variety of responses to these questions, identifying a number of common “pain points,” detailed extensively in the report. At a very high level, FINRA says most responding external stakeholders “agreed that the MAP rules have been effective at addressing their intended investor-protection objectives. However, the stakeholders also identified areas where they believed the investor protection objectives and economic impacts could better align or where the rules could be made more effective or efficient.”
For example, many of the stakeholders asserted that while the MAP rules effectively serve to protect investors, the rules and application review process should be tailored based on a firm’s types of business by identifying activities that may warrant a more streamlined or simplified application process for engaging in certain business lines
“They stated that a one-size-fits-all approach set forth in the MAP rules imposes significant direct and indirect costs on firms and potentially diverts FINRA resources from higher risk matters,” FINRA candidly admits. “Many of the firms suggested that a risk-based approach under the MAP rules and application review processes would be a better use of both firm and FINRA resources. Many of the stakeholders supported the new Fast Track review process implemented by the MAP Group to expedite processing of certain types of applications.”
NEXT: Other criticisms
FINRA goes on to explain most of the responding stakeholders “asserted that the requirement to apply all 14 of the current standards to all applications leads to challenges to specific business models. Some of the stakeholders noted that some of the 14 standards do not reflect current industry business environment and practices (e.g., office space, leases, source of funding) and suggested that FINRA conduct risk-based reviews of applications by applying only the standards that are relevant to a specific application versus the current practice of reviewing an application against all 14 standards.”
Other stakeholders noted the need to give the MAP Group discretion to apply relevant standards based on the risks presented by an application. Several stakeholders also commented on the lack of understanding of the term “not substantially complete” for purposes of rejecting an application.
Finally, FINRA says many of the stakeholders asserted that the definition of a “material change in business operations,” as used in the MAP rules, is ambiguous and leads to confusion on when a firm needs to file an application with the MAP Group.
Taking all the criticism and complements together, FINRA says it expects to propose updates to the MAP processes in the near- or mid-term future. Among the areas to be considered in the action phase, as described above, are “better aligning the application review process with the relative risk of the applicant and its business; clarifying the scope and nature of information to be reviewed; and providing additional guidance on key areas.”
The full FINRA report is here, including extensive discussion of the specific tenants of the MAP program currently under review.