FINRA Initiates Retrospective Rule Review Heavy on Process, Vague on End Game

April 09, 2014

On April 8, 2014, FINRA published two regulatory notices (“Regulatory Notices”) kicking off its much discussed retrospective review of significant rulemaking. According to FINRA, the purpose of the retrospective review is to determine whether specific rules are meeting their “intended investor-protection objectives by reasonably efficient means.”1 While each Regulatory Notice requests comments on a different set of FINRA rules, both Regulatory Notices focus primarily on the process by which FINRA will seek and then analyze and address comments it receives. The Comment Period for both Notices expires on May 8, 2014.

The Review Process

FINRA states in the Regulatory Notices that for each rule set it reviews, it will assess issues including:

  • Duplicative, inconsistent or ineffective regulatory obligations;
  • Whether market or other conditions have changed to suggest there are ways to improve the efficiency or effectiveness of a regulatory obligation without loss of investor protections; and
  • Potential gaps in the regulatory framework.

Findings will be reported to the FINRA Board of Governors with a general staff recommendation as to whether rules should be maintained, modified or deleted.

Since joining FINRA, Robert Colby, the Chief Legal Officer, has recognized the obstacles that can emerge when well-meaning rules are implemented and applied. In order for these retrospective reviews to be truly effective, FINRA staff throughout the organization will have to be willing to discuss all facets of these rules, and not simply be satisfied by being able to demonstrate that the rules meet investor-protection objectives. Likewise, if FINRA members want FINRA’s assessment to be effective and ultimately result in “(1) findings and (2) action,” these members will have to provide FINRA with hard facts and data regarding rule sets that members hope to see modernized, streamlined, or, perhaps, eliminated if they are duplicative or overly burdensome relative to the protections they provide.

FINRA has specifically stated that it will take into account the costs as well as the benefits of proposed rules, and from statements by Mr. Colby and others, its seems that cost benefit analysis will have a role in the retrospective regulatory reviews. What remains to be seen is, when presented with cost data, how FINRA will value and balance it against the effectiveness of the rules.

The Substantive Requests

FINRA has opted to focus first on rules regarding Communications with the Public and rules regarding Gifts and Gratuities and Non-Cash Compensation.

Communications Rules

FINRA recently overhauled its rules on Communications with the Public, requiring member firms to revisit long established policies, procedures and processes to ensure compliance with the new, combined FINRA rules in this area. The costs to member firms have varied, depending on their practices prior to the new rules taking effect. Firms are still waiting to see how FINRA will enforce compliance with the new rules. FINRA lists the rules on which it seeks comment as:

  • Rule 2210 (Communications with the Public)
  • Rule 2212 (Use of Investment Company Rankings in Retail Communications)
  • Rule 2213 (Requirements for the Use of Bond Mutual Fund Volatility Ratings)
  • Rule 2214 (Requirements for Use of Investment Analysis Tools)
  • Rule 2215 (Communications With the Public Regarding Securities Futures)
  • Rule 2216 (Communications With the Public Regarding Collateralized Mortgage Obligations)

Gifts, Gratuities and Non-Cash Compensation

Unlike the communications rules, which were substantially rewritten, FINRA moved the rules on Gifts and Gratuities and Non-Cash Compensation into the FINRA rulebook almost verbatim. Many no doubt think that these rules are in much need of modernization. FINRA lists the rules on which it seeks comment as:

  • Rule 3220 (Influencing or Rewarding Employees of Others)
  • Rule 2310(c) (Direct Participation Programs)
  • Rule 2320(g)(4) (Variable Contracts of an Insurance Company)
  • Rule 5110(h) (Corporate Financing Rule — Underwriting Terms and Arrangements)
  • Rule 2830(l)(5) (Investment Company Securities) 

The recent review given to the communications rules suggests that comments there may focus on the cost of the rules and the processes they require. With respect to the Gifts and Gratuities and Non-Cash Compensation rules, the retrospective rule review presents a good opportunity for FINRA and the industry to rethink the rules generally as well as the difficulties in applying them, particularly to accommodate a broad array of changes that have impacted the industry in the years since the rules were adopted.

The Regulatory Notices afford FINRA members and other interested parties the unique opportunity to both describe the strengths and weaknesses of FINRA rules, and to present to FINRA empirical information that can be analyzed in support of the descriptions. With the Regulatory Notices, FINRA is soliciting a comprehensive review of the impact of these rules on investors, on regulated entities and on the markets. From our conversations with clients over the years, we have come to know well the challenges and difficulties in applying both rule sets covered in the Regulatory Notices, in particular as technology and industry practices have become increasingly sophisticated. We encourage our readers to respond to FINRA’s request in the Regulatory Notices. Please do not hesitate to contact us to discuss responses to FINRA’s request for comments.

For more information about the subject matter of this alert, please contact the authors or a Bingham partner with whom you regularly work.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:


1 See Regulatory Notice 14-15, Retrospective Rule Review: FINRA Requests Comment on the Effectiveness and Efficiency of its Communications with the Public Rules (April 2014); Regulatory Notice 14-15, Retrospective Rule Review: FINRA Requests Comment on the Effectiveness andEfficiency of its Gifts and Gratuities and Non-Cash Compensation Rules (April 2014). Links to both Regulatory Notices can be found at:

This article was originally published by Bingham McCutchen LLP.