FINRA Proposes Rule Changes Regarding Accounts of Employees and Families
Commentary by Steven Lofchie
FINRA proposed a rule change with the SEC to adopt FINRA Rule 3210 (Accounts at Other Broker-Dealers and Financial Institutions) into the consolidated FINRA rulebook. FINRA also proposed to delete NASD Rule 3050 (Transactions for or by Associated Persons) as well as delete incorporated NYSE Rules 407 (Transactions – Employees of Members, Member Organizations and the Exchange) and 407A (Disclosure of All Member Accounts) as well as the related Incorporated NYSE Rule Interpretations 407/01 and 407/02 (Transactions – Employees of Member Organizations and the Exchange).
The proposed rule (as well as the various rules that it replaces) deal with the obligations that a member firm has to supervise the accounts of its associated persons, wherever those accounts may be held.
An associated person is required to obtain consent from the person's employer to establish accounts in which the associated person has a "beneficial interest." The term "beneficial interest" is defined to include, not only accounts of the associated person, but also, at a minimum, accounts of the following persons: (a) the spouse of the associated person; (b) a child of the associated person or of the associated person's spouse, provided that the child resides in the same household as or is financially dependent upon the associated person; (c) any other related individual over whose account the associated person has control; or (d) any other individual over whose account the associated person has control and to whose financial support the associated person materially contributes. Additionally, the associated person must notify the executing broker of the associated person's employment relationship with a FINRA member firm.
See: FINRA Rule Filing Announcement; FINRA Text of Proposed Rule Change to Adopt Rule 3210.
Commentary
The proposed rule is similar to the ones that it would replace, but it is not the same. The new rule is broader, particularly concerning the scope of accounts that may be covered, and as to firms that do not supervise spouses' accounts. Accordingly, all firms, even those that require that their employees trade with them, will have to revisit their employee trading procedures if the new rules are adopted. The first step would likely be for firms to determine what accounts their employees may have that would come within the scope of the proposed rule and then to consider what procedures will be required to supervise such accounts, or if it will be desirable to attempt to further limit the places where employees may hold accounts in which they are deemed to hold a beneficial interest.