FINRA Amends Rules Related to Membership Application Program to Promote Payment of Arbitration Awards and Issues Regulatory Notice on Sales Practice Obligations With Respect to Oil-Linked Exchange-Traded Products
FINRA Amends Rules Related to Membership Application Program to Promote Payment of Arbitration Awards
The Financial Industry Regulatory Authority (FINRA) amended its Membership Application Program (MAP) rules to incentivize payment of arbitration awards by preventing an individual from switching firms, or a firm from using asset transfers or similar transactions, to avoid payment of arbitration awards. The MAP rules govern the way in which FINRA reviews a new membership application and a continuing membership application; through these applications, applicants show their ability to comply with applicable securities laws and FINRA rules. To address the issue of customer recovery of unpaid arbitration awards, FINRA made the following key changes:
- member firms must receive a materiality consultation for specified changes in ownership, control or business operations involving a covered pending arbitration claim or unpaid arbitration awards or settlements;
- a rebuttable presumption to deny an application for new FINRA membership where the applicant or its associated person is the subject of a pending arbitration claim;
- to overcome the rebuttable presumption, the applicant must demonstrate its ability to satisfy unpaid awards, settlements or claims, and guarantee that these funds will be used for that purpose; and
- the applicant must notify FINRA of any arbitration claim involving the applicant or its associated persons that is filed, awarded, settled or becomes unpaid.
These changes go into effect on September 14, 2020.
The notice is available here.
FINRA Issues Regulatory Notice Regarding Sales Practice Obligations With Respect to Oil-Linked Exchange-Traded Products
On May 15, the Financial Industry Regulatory Authority (FINRA) issued a regulatory notice (the Notice) reminding firms of their obligations in connection with oil-linked exchange-traded products (ETPs). In light of the practical difficulties involved in investing directly in commodities such as oil, commodity-linked ETPs, which often track commodity futures or futures indices rather than the underlying spot commodity, can provide investors with exposure to such commodities. Due to their complexity, ETPs may not be well understood by investors, as the products may be linked to unfamiliar indices or reference benchmarks. As the crude oil market has recently endured extraordinary conditions, several oil-linked ETPs have experienced significant volatility and lost a substantial percentage of their value.
The Notice serves as a reminder to firms of their sales practice obligations in connection with oil-linked ETPs. Specifically, (1) recommendations to customers must be based on a full understanding of the terms, features and risks of the product recommended; (2) firms must have fair and accurate communications with the public; and (3) firms must have reasonably designed supervisory procedures in place to ensure that these obligations are met. Additionally, firms that offer complex ETPs, such as oil-linked ETPs, must train registered representatives who sell these products about the terms and risks of these products.
In addition, the Notice acknowledges that, starting on June 30, 2020, recommendations of these ETPS will be governed by SEC Regulation Best Interest. Among other obligations, Reg BI will require firms to (1) have a reasonable basis to believe that the recommended security is suitable for at least some investors; and (2) have a reasonable basis that the recommended security in the specific retail customer’s best interest at the time the recommendation is made.
The notice is available here.