July 8, 2020

Volume X, Number 190

July 07, 2020

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July 06, 2020

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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.

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume X, Number 150


About this Author

Susan Light, Katten Law Firm, Finance Law Attorney, New York

Susan Light focuses her practice on financial services regulatory matters. She counsels broker-dealers, hedge funds, investment banks and financial services clients on enforcement issues involving the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), other self-regulatory organizations (SROs) and state and federal regulatory authorities. She has particular experience related to sales practice issues, financial and operational issues, anti-money laundering, crowdfunding, cybersecurity, and cryptocurrencies.

Michael T. Foley, Katten, Lawyer, Finance, FINRA, Chicago
Special Counsel

Michael Foley represents broker-dealers, investment advisers and other financial services industry participants with respect to a broad spectrum of legal and regulatory matters arising under the federal securities laws.

Michael has nearly 20 years of experience in private practice and in-house at both a large, full-service broker-dealer and at an online discount broker-dealer, advising broker-dealers and other financial institutions regarding compliance with the federal securities and commodities laws, and with the regulations of the US Securities and Exchange Commission, the US Commodity Futures Trading Commission and financial industry self-regulatory organizations. 

Gregory Uffner, Financial Services Attorney, Katten Law Firm

Gregory Uffner is an associate in the Financial Services practice. 

While in law school, Gregory was an associate editor for the Moot Court Board, a member of the Fordham Urban Law Journal and served as managing editor for the Fordham Sports Law Forum.