July 25, 2013
Several provisions of FINRA`s proposed rule changes concerning supervision and supervisory controls are especially unwise, despite their possible, superficial attractions.
Unless revised, FINRA`s approach to these particular proposed rules will have a severe, negative impact on the financial services provided to retail clients of the INDEPENDENT(i.e. non-wirehouse)financial advisor.
Also, the proposed rule`s unintended consequences will reverberate throughout the financial services marketplace, to the detriment of prospective financial security for consumers and constituents. Accordingly, FINRA`s reevaluation of these rules is strongly urged:
# ONE-PERSON OSJ SUPERVISION
The proposed changes would require that a registered principal assigned to a one-person OSJ, defined as the `on-site principal`,(who)cannot supervise his or her own sales activities must be under the effective supervision and control of another appropriately registered `senior principal.` This `senior principal` would be responsible for supervising the activities of the `on-site principal` and must conduct on-site supervision of the one-person OSJ on a `regular periodic schedule.`
This proposed change is unnecessary to ensure effective supervision, because it completely ignores the already effective supervision of `on-site, one-person OSJ office principals` through the already established,technologically advanced remote supervision systems of most securities broker/dealer firms.
FINRA`s proposed rule will have a disproportionately negative effect on INDEPENDENT financial advisors, and will undermine the overall supervisory structure currently and successfully already employed by their affiliated, INDEPENDENT BROKER/DEALER FIRMS.
# INTERNAL COMMUNICATIONS
The proposed rule would require that firms include procedures for the review of internal communications to properly identify those communications that are of a subject matter that require review under FINRA, MSRB, and federal securities laws. FINRA has indicated that firms may employ a risk-based approach to this review.
Independent broker/dealer firms that don`t engage in research, investment banking, or other activities that raise concerns with regard to internal communications, should not be subject to this additional requirement. Therefore, FINRA should exempt INDEPENDENT BROKER/DEALER firms that do not engage in any such activities from the new requirements.
# COVERED ACCOUNTS
The proposed rule would require supervisory procedures to review transactions for associated persons and for `covered accounts;` to identify trades that may violate insider trading rules.
FINRA`s proposed rule change will be unnecessarily burdensome for firms and advisors. Why? Because they will be required to alter their well-established, efficacious systems in order to capture the new specified categories, as well as the now-expanded information required under the definition of `covered accounts.`
In addition, FINRA has left vague the definition of `domestic partner` under the proposed rule.
Also, FINRA has aggressively touted the technological capabilities of its own newly-enhanced, insider trading supervision systems; and should not be forced to unnecessary offload compliance burdens to firms and affiliated reps.
# COST-BENEFIT ANALYSIS
FINRA has recently hired a Chief Economist responsible for conducting cost-benefit analysis on proposed rules. FINRA has indicated that the Chief Economist will ensure that FINRA`s regulations are intelligently fashioned to protect investors and maintain market integrity without imposing needless costs and burdens on investors and the industry.
These proposed new rules lack any such cost-benefit analysis. Because of this severe shortcoming, FINRA`s proposal has not adequately assessed whether there are less burdensome alternatives; or whether the costs of implementing these changes outweigh the cost to firms, investors, and advisors.
FINALLY, and MOST IMPORTATNLY, FINRA has not provided any specific performance objectives or identified any metrics to which it may later refer, in order to assess the effectiveness of these changes.
For the above described reasons among others, FINRA is strongly urged to reconsider these proposed changes in the rules.
Material benefits to all concerned will flow from FINRA`s serious consideration of these vital issues.
Mr. J.S. Brandenburger
FSC Securities Corporation