FINRA Regulatory Notice 17-14: Rules Impacting Capital Formation


SIFMA provided comments to FINRA on FINRA Regulatory Notice 17-14 addressing various aspects of its rules, operations and administrative processes impacting capital formation in the securities markets.

See also:
FINRA Requests Comment on FINRA Rules Impacting Capital Formation


Submitted To


Submitted By







June 6, 2017

Exclusively via email to [email protected]
Ms. Jennifer Piorko Mitchell
Office of the Corporate Secretary
1735 K Street, NW
Washington, DC 20006-1506

Re: FINRA Regulatory Notice 17-14 Request for Comment on FIRNA Rules Impacting Capital Formation

Dear Ms. Mitchell:

The Securities Industry and Financial Markets Association (“SIFMA” or “we”)1 submits this letter to the Financial Industry Regulatory Authority, Inc. (“FINRA”) in response to FINRA’s request for comment set forth in Regulatory Notice 17-14 (“RN 17-14”) addressing various aspects of its rules, operations and administrative processes impacting capital formation in the securities markets. SIFMA appreciates the opportunity to respond to this Regulatory Notice.

I. Introduction

SIFMA congratulates FINRA on its ten-year anniversary and agrees the time is right to reexamine FINRA’s regulatory regime in light of current market realities and imperatives. We acknowledge and appreciate the extensive effort FINRA has made over the course of the past year to meet with and hear from interested parties, including our committee and many of its members. While Regulatory Notice 17-14 is only a small part of the widespread FINRA360 review, it represents an important opportunity to provide feedback on areas of regulation that are impeding the capital formation process without the corresponding benefit of meaningful investor protection. SIFMA believes the modifications and clarifications of the rules detailed below are critical to increasing the efficiency and effectiveness of FINRA’s regulation of capital formation and will encourage and facilitate investment, while maintaining appropriate safeguards for investors. Our comments are organized by the order of the rules set forth in Regulatory Notice 17-14 and do not necessarily reflect their order of importance.

II. FINRA Rule 2242 Debt Research and Debt Research Reports

1. Analyst / Trader Communication

In our experience, FINRA’s debt research rule has eroded the frequency and quality of interactions between debt research and trading desk personnel, putting both at a significant information disadvantage. The debt market is primarily a principal trading market and encompasses a very wide range of asset classes, each with unique characteristics that need to be considered in determining price. Given the relative complexity of the debt market and the breadth of debt security asset classes, debt research analysts need access to current market information from traders, and traders need research analyst input to accurately price positions for clients and manage firm risk. This is particularly acute when significant news stories or corporate events are announced, and the absence of guidance from an analyst can prejudice a trader’s ability to price debt securities in real time. Additionally, the absence of this information negatively impacts the buyside’s (e.g., asset managers and pension plans) ability to make informed decisions on debt securities in their portfolios, exacerbating market liquidity in illiquid securities or during times of market stress.

Although FINRA permits certain interactions between research and trading, the discussion of permitted and prohibited activity in Supplementary Material .03 is confusing and does not go far enough to give firms comfort that certain communications are appropriate, thus discouraging debt analysts from engaging in even permissible interactions. Our principal concern in this regard is that given the diversity of securities comprising the debt market, Supplementary Material .03 should be revised to apply on a security-by-security (i.e., CUSIP-byCUSIP) basis. For example, Section .03(a)(2) provides that firms must prohibit “debt research analyst identifying or recommending specific potential trading transactions . . . that are inconsistent with such debt analyst’s currently published debt research reports.” (Emphasis added.) Unlike the equity market, where there is generally one security per issuer, a typical debt issuer will have  hundreds of outstanding debt securities/CUSIPs trading at any given time. A firm may have a “Buy” rating on a debt issuer, but the firm’s debt research reports will discuss only a fraction of the issuer’s outstanding debt securities. If a particular debt security not discussed in a firm’s debt research is viewed by an analyst as overpriced, it should not be “inconsistent with” the published research for a debt analyst to convey that information to a trader or make a “sell” recommendation to a customer for that specific security. Likewise, activities and communications permitted by Supplementary Material .03(b)(2) and (3) should be revised to make clear that an analyst’s behavior is to be judged against the information contained in published debt research on a security-by-security basis.

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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.