Regulatory Notice 18-13
Summary
SIFMA provided comments to FINRA on Regulatory Notice 18-13. The Proposal would amend the current quantitative suitability obligation under FINRA Rule 2111 to remove the element of control that currently must be proved to demonstrate a violation.
Excerpt
June 18, 2018
Via E-Mail to [email protected]
Jennifer Piorko Mitchell
Office of the Corporate Secretary
FINRA
1735 K Street, NW
Washington, DC 20006-1506
Re: Regulatory Notice 18-13 (proposed amendments to the quantitative suitability obligation under FINRA Rule 2111)
Dear Ms. Mitchell:
The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates the opportunity to comment on Notice 18-13 (the “Notice” or the “Proposal”). 2 The Proposal would amend the current quantitative suitability obligation under FINRA Rule 2111 to remove the element of control that currently must be proved to demonstrate a violation. We respectfully submit the following comments and recommendations for your consideration.
FINRA should allow the SEC’s rulemaking process to run its course before proceeding with its own.
As a threshold matter, FINRA points out that the SEC’s proposed Regulation Best Interest – which is currently out for comment until August 7, 2018 – incorporates a prohibition on excessive trading that expressly excludes the control element in FINRA’s quantitative suitability rule.3 Thus, FINRA concludes, the SEC’s proposal is consistent with FINRA’s proposed amendment.4
The better approach would be the reverse. FINRA should allow the SEC proposal to run its course, and then ensure that any subsequent FINRA proposal is consistent with the final SEC rules. If the SEC’s final rules eliminate the control element – just as FINRA is proposing here, query whether FINRA would even need its own rule change. And, if the SEC’s final rules turn out somewhat differently, then FINRA should consider conforming its rules accordingly. For the foregoing reasons, we respectfully recommend that FINRA set-aside its Proposal pending the completion of the SEC’s rulemaking process.
FINRA’s investor protection mandate does not extend to facilitating civil recoveries and enforcement actions.
In the Notice, FINRA states that “[it] has reconsidered the appropriateness of the control element in light of its experience with the rule….” This is a euphemistic way of saying that FINRA has not been prevailing in its excessive trading cases as frequently as it would like. This interpretation is reinforced as FINRA explains that “[r]emoving the control element … would likely increase FINRA’s ability to [successfully bring enforcement actions for excessive trading.]”
It also means that claimants are not prevailing in their private civil claims as often as FINRA would like. FINRA likewise acknowledges that the control element places “a heavy and unnecessary burden on customers” and that removing it “increases the probability of establishing a violation in the presence of less evidence.” Thus, FINRA concludes that the control element is “an impediment to investor protection.”
1 SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.
2 FINRA Regulatory Notice 18-13, available at http://www.finra.org/industry/notices/18-13.
3 See Notice at fn. 4. See also Exchange Act Release No. 83062 (Apr. 18, 2018) at p. 150, available at https://www.sec.gov/rules/proposed/2018/34-83062.pdf.
4 Id. at fn. 4.