At a roundtable discussion sponsored by SIFMA and held at the offices of Morgan Lewis in Washington DC, and then over a working lunch, various representatives from FINRA, the SEC, and the MSRB met with industry member firms to offer insights into recent regulatory issues and findings. The following is a brief summary of those comments. I would be glad to discuss any of the topics in more detail with those who wish to contact me.
FINRA:
FINRA representatives pointed out that they are seeing better compliance overall, and that the cases that end up with enforcement actions seem to be “outliers”- firms that are truly failing at their compliance efforts.
While they will continue to focus on three major areas, (harm to investors, harm to market, and excessive risk that could eventually cause harm to either of the other two), they are also implementing a process of “informal reach-outs”.
This means that, unlike in the past, rule violation does not necessarily mean enforcement action.
By implementing programs like Rapid Remediation (also mentioned at the Fixed Income Conference a few weeks ago), they are able and willing to give firms a tap on the shoulder, and allow them to fix problems before they become actionable.
They also pointed out that they believe fines are not always the answer, while having a firm hire an outside consultant might be.
Regarding the recent Mark- up and PMP rules, Finra says they immediately began doing exams on the topics because the SEC was very interested in how well it was being implemented by firms. Their initial findings indicate that there have been some bumps in the road but overall it was implemented successfully. The major issues that they have found include:
A lack of robust procedures that describe how firms approach Mark-up and PMP (as well as best execution on bonds of limited interest)
Firms that have not been properly reviewing confirms
Firms that have misunderstood their responsibilities and those of their vendors.
The SEC:
The SEC continues to carefully monitor (and promote and enforce) issues that were mentioned in its 2012 Report on Municipal Securities. In that regard, the SEC is holding a Municipal Conference to follow up on the report, to be held in DC in December of this year. Topics are not yet set, but attendees on Monday believe that they will include Municipal Advisors, Market Structure (including comments from the FIMSAC meeting regarding pre-trade price transparency), and Issuer Disclosure (discussing changes to 15c 2-12- and any guidance that would be coming out regarding that rule)
The MSRB:
The MSRB continues to expand their educational abilities, focusing on both industry members and retail investors. They are considering moving to a cloud based system that would give them more ability to maintain databases, but the costs and time of implementation will be a challenge.
The MSRB plans to continue a “retro review” of its rules and their applicability. Industry members with suggestions regarding rule changes or guidance should contact them
A common theme during the day was the request by industry members that the MSRB co-ordinate (harmonize) its rule making with FINRA and SEC- examples of lack of harmony were advertising and customer account transfer, where differences remain and firms may not be properly fulfilling the requirements of both. The MSRB replied that much consideration goes into determining which rules it needs to enact in order to achieve its mandate, while considering duplication and harmonization.
Other General Takeaways:
Pre-trade price transparency is still a work in progress.
Minimum denom is still an issue but firms are using exception reports and often fixing them before Finra gets involved.
For the less liquid securities, firms should:
Lay out the steps that their traders are supposed to take in order to provide fair and reasonable (Best Ex) prices.
Show evidence that bonds were put out for bid (if indeed they were).
Develop more robust WSPs and document that the firm followed those more robust procedures.
Pay attention to the guidelines of Supplemental .06 regarding PMP and Mark-up