FINRA Issues Notice Regarding Payments for Market Making (FINRA Reg. Notice 14-26) (with Lofchie Comment)

FINRA issued a regulatory notice to alert firms and associated persons of FINRA Rule 5250 ("Payments for Market Making"), which prohibits accepting payments for market making. Also, FINRA announced a new requirement under Rule 6432 ("Compliance with the Information Requirements of SEA Rule 15c2-11").

FINRA reminded firms that accepting monetary compensation or receiving shares of stock in connection with publishing a quotation, including filing of a Form 211, is prohibited pursuant to Rule 5250. In order to emphasize the prohibition, FINRA announced it adopted an additional certification under Rule 6432 that requires firms to certify to FINRA that neither the firm nor its associated persons have "accepted or will accept any payment or other consideration, directly or indirectly, from the issuer of the security to be quoted, or any affiliate or promoter thereof, for publishing a quotation or acting as market maker in the security to be quoted, or submitting an application in connection therewith, including the submission of the Form 211."

The new certification will be included in an amended Form 211 starting July 7, 2014.

Lofchie Comment: In light of last week's SEC announcement that it will direct the development of a pilot program that will experiment with tick-size to encourage broker-dealers to make markets in smaller issuers, there seems no obvious reason that there should not also be an experiment allowing an issuer to subsidize a firm willing to make a market in its stock. Provided that there is disclosure of the fact of the payments and of the manner in which market makers would receive credit towards the payments, this seems reasonable. In fact, it seems a far more flexible manner of allowing issuers to reward market makers than narrowing the tick size, as individual issuers could decide whether to make any payments as well as the terms for such payments.

See: FINRA Regulatory Notice 14-26.