SIFMA Submits Comments Regarding FINRA Retrospective Rule Review (with Lofchie Comment)

SIFMA submitted comments regarding the FINRA retrospective rule review of communications with the public, gifts, gratuities, and non-cash compensation, instituted in FINRA Regulatory Notices 14-14 and 14-15. SIFMA applauded FINRA conducting a review of its rules to determine if they were actually effective and if the cost and burdens of the rules outweighed the anticipated benefits of the rules. SIFMA encouraged FINRA to continue its retrospective rule review process for the entire FINRA rulebook.

In creating new rules, SIFMA encouraged FINRA to consider a principles-based regulation rather than "highly prescriptive" and specific rules. SIFMA stated that overly detailed and specific rules are more likely to become more outdated and ineffective than rules that establish general principles. One area where SIFMA stated that these principles can be applied is through the communications with the public rules. Applying a principles-based approach to communications with the public, focusing on potential customer harm, SIFMA asserted would be more efficient and effective than the current rule regime FINRA has in place.

SIFMA additionally advocated that FINRA employ a risked-based approach that should focus on areas where the risks to retail investors or capital markets are greatest. SIFMA stated that the same risk-based approach FINRA currently applies in its own examination program should also be utilized when drafting substantive rules. SIFMA further asserted that more prescriptive rules are best justified when the risks to harm investors are greatest and most apparent.

SIFMA encouraged FINRA to explore ways to make staff-level guidance about its rules more consistent and transparent. SIFMA recommended that FINRA release more FAQs on its various rules, instead of only the current podcasts, Compliance Alerts, Regulatory Notices, and exemptive letters. SIFMA stated that the communications with the public and the gifts and gratuities/non-cash compensation rules would be good candidates for FAQs that are updated on a regular basis to provide substantive guidance about the standards that the FINRA staff is applying in its review of these issues. Additionally, SIFMA referenced the GAO report on Mutual Fund Advertising, which found that there was "substantial frustration" among member firms that the FINRA staff’s interpretations of the communications with the public rules are not consistent either within or across member firms. Finally, SIFMA recommended that FINRA take a less formal approach to address new products or services, similar to the SEC Division of Corporate Finance Compliance and Disclosure Interpretations, which could be faster and more effective than writing a new rule of interpretative material whenever a new product becomes available.

Lofchie Comment: One interesting administrative law aspect of the FINRA rulemaking and enforcement process is that all of FINRA's rules, and significant rule interpretations, must be approved by the SEC. This raises an interesting question as to how open-ended FINRA can be in its rulemaking and still be deemed to have received SEC approval of the rule. Further, FINRA has indicated that it intends to conduct a cost-benefit analysis of new rules. This will be a significant challenge considering the extent that the rules being analyzed have somewhat indeterminate requirements.

See: SIFMA Comment Letter.Related news: FINRA Launches Retrospective Rule Review: FINRA Regulatory Notices 14-14 and 14-15 (April 8, 2014).