Category Archives: Compliance

Shortening the Settlement Cycle

In 2017, broker-dealers will be required to devote significant time and attention to preparing for a shortened settlement cycle.  As a means of reducing credit risk, counterparty risk and overall systemic risk, the Securities and Exchange Commission (SEC) has moved forward with proposed rules that would amend Rule 15c6-1(a) in order to reduce the settlement cycle to two business days (T+2).

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FINRA Enhanced Pricing Disclosure Rule

In November 2016, the Securities and Exchange Commission approved FINRA’s proposed rules amending Rule 2232, which will require FINRA members to provide additional pricing information on retail customer confirmations for non-municipal fixed income transactions.  The additional requirements have proven quite controversial and over the years FINRA had proposed and re-proposed various similar amendments. The Municipal Securities Rulemaking Board, or MSRB, has adopted corresponding rule amendments.

The amended rule requires that if a FINRA member trades as principal with a non-institutional customer in a corporate debt or agent debt security, the member would, subject to certain exceptions, be required to disclose the member’s mark-up or mark-down from the prevailing market price for the security on the customer confirmation. Rule 10b-10 under the Exchange Act already requires that FINRA members provide customers with limited pricing information (e.g., transaction cost information) in connection with transactions in equity securities where  the member acts as principal; however, no such requirement had existed for transactions in fixed income securities.

Requirements

The disclosure requirements would apply where:

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Combating Disruptive Electronic Trading: Expedited Cease and Desist Proceedings by FINRA

The Financial Industry Regulatory Authority, Inc. (“FINRA”) recently filed an immediately effective proposal with the Securities and Exchange Commission (“SEC”) to adopt new rules aimed at certain abusive forms of electronic trading.  The proposed rules prohibit two specific types of disruptive quoting and trading activity, and permit FINRA to bring expedited cease and desist proceedings against violations, even if there is no showing of improper intent.  The proposal was published by the SEC on November 21, and will become operative on December 15 (see SR-FINRA-2016-043, available here).

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Ensuring Adequate Cybersecurity Procedures and Systems

On November 14, 2016, FINRA fined a registered broker-dealer $650,000 for failing to safeguard confidential customer data against foreign hackers.  Confidential customer information was stored on the firm’s electronic system without adequate protection from cyber hackers, which resulted in the exposure of confidential information for approximately 5,400 firm customers.  Although there was no evidence that the exposure of this customer information resulted in any distinct customer harm, FINRA insisted that the firm’s cybersecurity procedures and systems were inadequate.  The firm’s prior disciplinary history (similar fine in 2011) was also an important factor in FINRA’s decision to levy this $650,000 punishment.

Beware the Binary Option Trading Contract

On November 10, 2016, the SEC announced charges against an Israeli-based firm related to its sale of binary option trading.  The SEC fined the firm more than $1.7 million for failing to register the binary options as securities, failing to register as a broker-dealer for its sales of binary options to U.S. investors, and for misleading investors in its disclosures related to the risks associated with binary option trading.

In connection with this enforcement action, the SEC also issued an “Investor Alert” on the same day, warning potential investors that many binary option trading contracts are not properly registered with the SEC and may be associated with fraudulent investment schemes.