As part of the process to develop a new consolidated rulebook (“Consolidated FINRA Rulebook”), the Financial Industry Regulatory Authority (FINRA) is proposing a new, “consolidated rule addressing accounts opened or established by associated persons of members at firms other than the firm with which they are associated.”1

FINRA proposes a change to adopt FINRA Rule 3210 (Accounts at Other Broker-Dealers and Financial Institutions) in the Consolidated FINRA Rulebook and to delete NASD (National Association of Securities Dealer) Conduct Rule 3050 (Transactions for or by Associated Persons), Incorporated NYSE Rules 407 (Transactions-Employees of Members, Member Organizations and the Exchange) and 407A (Disclosure of All Member Accounts) along with the related rule interpretations (Incorporated NYSE Rule Interpretations 407/01 and 407/02).2

According to sound supervisory practices, a member firm should monitor personal accounts opened or established outside of the firm by its associated persons. FINRA Rule 3210 (filed with the Securities and Exchange Commission (SEC) on July 31, 2015) incorporates and consolidates longstanding NASD and NYSE (New York Stock Exchange) rules provisions addressing this area and when combined with the new FINRA Rule 3110(d) which governs securities transaction reviews and investigation, should help facilitate the proper oversight of associated persons of member firms’ specified trading activities.3

While the proposed Rule 3210 combines many of the provisions of the deleted rules, it is broader than the existing rules, particularly with respect to the scope of the accounts covered.4 The FINRA proposals are structured to strengthen the relevant provisions and help member firms execute the required supervision of their associated persons’ personal trading activities. Rule 3210 also requires certain actions to be taken by associated persons with respect to their external accounts and in which they have a beneficial interest and in which securities transactions can be effected. This also includes:5

  • Obtaining written consent from a member firm prior to opening an account(s) at another financial services institution or member firm, including an associated person opening an account prior to being employed by or associated with a member firm, and this within 30 days of establishing that association.
  • Notifying in writing, a member firm or other financial services institution of his/her association with a member firm before opening an external account(s) (or in a situation where an associated person opened an account prior to being employed by or associated with a member firm, and this within 30 days of establishing that association).

Accounts (any accounts) in which the associated person enjoys a beneficial interest include those from, the associated person, their spouse, or their spouse’s child (if the child resides in the same household or is financially dependent upon the associated person). It also includes accounts from any other related individual the associated person has control of, or any individual the associated person has control of and the associated person materially contributes to.6

In the case of external accounts opened for associated persons, FINRA member firms are required to transmit duplicate copies of confirmations and statements, or the applicable transactional data to the associated person’s related member firm upon request.7

FINRA Rule 3120 would also require that prior to agreeing to open an external account for an associated member at a non-member firm, the member firm should consider the extent to which it can obtain the required information on an associated person’s external trading activities from the non-member firm.8

What’s Next?

  • If Rule 3210 is approved by the SEC, we should expect FINRA to announce in a regulatory notice the implementation date, which is required to be within a year of approval.9
  • The SEC published these proposals in the Federal Register and firms had 21 days to comment from that date of publication; comments were due on September 4, 2015.10

Takeaways for our Clients

Key Points of Proposed Rule 3210:11

  1. The proposed rule in addition to other FINRA rules deletes or renders outdated a number of requirements from NASD Rule 3050 and NYSE Rule 407.
  2. Associated persons must obtain written consent from the employer member prior to opening certain external accounts.
  3. Written notification should be sent by the associated persons’ external broker-dealer of his/her association with the employer member prior to opening certain accounts.
  4. When receiving a written request from the employer member, the external broker-dealer is required to send copies or the content from confirmations and statements for certain accounts.
  5. Consideration should be given to the member firm’s ability to obtain the required information on an associated person’s external trading activities from non-member firms, and this prior to giving consent to the opening of the external account.

How to Prepare

  • Firms should familiarize themselves with the proposals and consider the modifications to be made to their existing employee trading procedures if the proposals are adopted.
  • Rule 3210 highlights the importance of records retention and records retrieval, the latter being as important as the former. Our clients should assess if they are prepared to add this new layer of documentation, and how will they access and deliver these new records on a timely basis when examiners request them at a moment’s notice.

References

  1. “Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change to Adopt FINRA Rule 3210 (Accounts At Other Broker-Dealers and Financial Institutions) in the Consolidated FINRA Rulebook,” Securities and Exchange Commission, Release No. 34-75655, August 10, 2015. Access at: https://www.sec.gov/rules/sro/finra/2015/34-75655.pdf.
  2. Ibid
  3. Ibid
  4. Ibid
  5. “SEC Seeks Comments on FINRA Proposed Rule Changes Addressing External Personal Accounts of Associated Persons,” Chapman and Cutler LLP, Client Alert, August 14, 2015. Access at: http://www.chapman.com/media/publication/555_Chapman_SEC_Comments_FINRA_Proposed_Rule_Changes_External_Personal_Accounts_081415.pdf.
  6. Ibid
  7. Ibid
  8. Ibid
  9. “Personal Trading Activity of Associated Persons – Proposed FINRA Rule Filed,” The SDDCO Group, Resources/Updates, August 10, 2015. Access at: http://sddco.com/updates/finra-files-proposed-rule-on-personal-trading-activity-of-associated-persons/.
  10. “Order Approving a Proposed Rule Change, as Amended by Amendment No. 1, to Expand FINRA’s Alternative Trading System Transparency Initiative by Publishing OTC Equity Volume Executed Outside ATSs,” U.S. Securities and Exchange Commission, SR-FINRA-2015-020, October 5, 2015. Access at: http://www.sec.gov/rules/sro/finra.shtml. “SEC Seeks Comments on FINRA Proposed Rule Changes Addressing External Personal Accounts of Associated Persons,” Chapman and Cutler LLP, Client Alert, August 14, 2015. Access at: http://www.chapman.com/media/publication/555_Chapman_SEC_Comments_FINRA_Proposed_Rule_Changes_External_Personal_Accounts_081415.pdf.
  11. “Personal Trading Activity of Associated Persons – Proposed FINRA Rule Filed,” The SDDCO Group, Resources/Updates, August 10, 2015. Access at: http://sddco.com/updates/finra-files-proposed-rule-on-personal-trading-activity-of-associated-persons/.

Newsletter Author: Christian Munoz | Robimon Varughese

Newsletter Contact Person: Craig Unterseher

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