Russell Sacks, Jennifer Morton, Jenny Jordan, Steven Blau and Sean Kelly
In April 2017, FINRA issued a regulatory notice addressing the use of social media and digital communications by broker-dealers. The notice expanded on previous FINRA guidance on…
Abstract
Purpose
In April 2017, FINRA issued a regulatory notice addressing the use of social media and digital communications by broker-dealers. The notice expanded on previous FINRA guidance on these topics. This article provides clarity regarding how social media and digital communications fit within the requirements of various FINRA rules and provides guidance to firms and their registered representatives.
Design/methodology/approach
The principal topics addressed by FINRA’s regulatory notice are: (a) text messaging, (b) personal versus business communications, (c) third-party content and hyperlinks, (d) native advertising, (e) testimonials and endorsements and (f) links to BrokerCheck. This article presents an overview of each of these topics, respectively.
Findings
Under recordkeeping requirements, firms must ensure that they are able to retain communications made through text messaging and chat services. Business communications, which relate to the products or services of the firm, are subject to filing and content requirements, while personal communications are not. Under certain circumstances, third-party posts on social media sites established by the member and testimonials may be attributable to the firm. Native advertising, while permissible, must comply with content requirements. Firm-created electronic applications do not have to provide a link to BrokerCheck.
Originality/value
Firms and their registered representatives will gain a better understanding of what is permissible pursuant to FINRA and SEC rules as they communicate digitally and via social media.
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Russell D. Sacks, Steven R. Blau and Taro Nishide
To address practical issues broker-dealers may face in reviewing and revising their policies and procedures in response to FINRA’s new fixed-income research rule, modifications to…
Abstract
Purpose
To address practical issues broker-dealers may face in reviewing and revising their policies and procedures in response to FINRA’s new fixed-income research rule, modifications to its equity research rule, and its FAQs regarding conflicts of interest in the offering process.
Design/methodology/approach
Reviews FINRA’s new fixed-income research rule, modifications to its equity research rule, and its FAQs regarding the its equity research rule, and provides detailed comparisons between current rules and new rules to help firms consider how to review and revise their policies and procedures.
Findings
Although significant exemptions may apply depending on firm structure, under FINRA’s new fixed-income research rule, firms producing fixed-income research reports will now be subject to regulation similar to that FINRA has imposed on firms producing equity research reports, including with respect to information barriers, other policies and procedures, and certain disclosures. The modified FINRA equity research rule retains the core provisions of the existing NASD and NYSE equity research rules and adds a “principles-based procedures” approach to potential conflicts of interest, shortens or eliminates quiet periods, and imposes some of the Global Settlement prohibitions on all firms. Firms will need to review and revise their policies and procedures for research in response to these rule changes. Firms should also take note of FINRA’s guidance in its FAQs regarding conflicts of interest in the offering process.
Originality/value
Overview of recent FINRA enforcement activity, rule modifications, and practical guidance from experienced securities and financial services lawyers.
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Jennifer Morton, Russell Sacks, Jenny Ding Jordan, Steven Blau, P. Sean Kelly, Taylor Pugliese, Andrew Lewis and Caitlin Hutchinson Maddox
This article provides a resource for traders and other market participants by providing an overview of certain automatic circuit breaker mechanisms and discretionary powers that…
Abstract
Purpose
This article provides a resource for traders and other market participants by providing an overview of certain automatic circuit breaker mechanisms and discretionary powers that the U.S. Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) and the U.S. president, as applicable, can exercise to pause or stop the trading of individual securities or trading activities across exchanges during extreme market volatility, each of which can cause interruptions to trading activity.
Design/methodology/approach
This article surveys automatic and discretionary mechanisms to halt trading activity under extreme market conditions. In particular, the article examines automatic cross-market circuit breakers, limit up-limit down pauses, the alternative uptick rule, as well as discretionary authority to stop short selling of particular securities and to stop trading across exchanges.
Findings
The article concludes that market participants must be cognizant not only of automatic cross-market circuit breakers, but also several other forms of potential market disruptions that may occur due to increased market volatility during the COVID-19 pandemic and beyond.
Originality/value
By exploring various mechanisms that respond to market disruption, this article provides a valuable resource for traders and other market participants looking to identify and respond to potential interruptions to their trading activity.
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Charles S. Gittleman and Russell D. Sacks
To describe and to discuss the implications of the US Department of the Treasury's PATRIOT Act regulations requiring “covered financial institutions” (including broker‐dealers…
Abstract
Purpose
To describe and to discuss the implications of the US Department of the Treasury's PATRIOT Act regulations requiring “covered financial institutions” (including broker‐dealers, banks, and mutual funds) to maintain risk‐based procedures to ensure that: correspondent accounts held on behalf of specified non‐US financial institutions; and private banking accounts, are subject to due diligence procedures to ensure that those accounts, and the financial institutions holding those accounts, are not being used for money laundering purposes.
Design/methodology/approach
Summarizes and analyzes the adopted rules.
Findings
Since the passage of the USA PATRIOT Act, regulation relating to anti‐money laundering has been among the highest profile – and highest priority – activity of securities and financial institution regulation. Consequently, anti‐money laundering rules and regulations have become a major aspect of compliance programs at financial institutions such as banks and broker‐dealers. The rules that are the subject of this article are noteworthy in part because they continue the trend of widening the universe of “financial institutions” that are now subject to substantial anti‐money laundering regulation. The rules described in this article add substantially to the complexity of anti‐money laundering regulation at financial institutions for a number of reasons, including: firstly, placing new, broad‐based requirements on financial institutions; secondly, requiring those financial institutions to make judgments regarding both the level of risk posed by certain accounts and the appropriate diligence that may be necessary for each such account; and thirdly, interpretive and implementation challenges.
Originality/value
A summary and analysis of new anti‐money laundering regulation, which comes at a time when US regulators are placing substantial emphasis on anti‐money laundering.
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Russell Sacks, Michael Blankenship and Steven Blau
The purpose of this paper is to describe the Financial Industry Regulatory Authority's new rule for IPO allocation and the requirements for compliance with the rule.
Abstract
Purpose
The purpose of this paper is to describe the Financial Industry Regulatory Authority's new rule for IPO allocation and the requirements for compliance with the rule.
Design/methodology/approach
The paper provides an overview of the new FINRA Rule 5131, containing, among other things, provisions that prohibit the “spinning” of IPO shares to certain present and prospective investment banking clients. Specifically, the paper outlines the new regulations on “quid pro quo” allocations, “spinning”, “flipping” and IPO pricing and trading practices. The paper also provides detailed guidance to broker‐dealers regarding their obligations under the rule.
Findings
The proposed new rule is intended to prevent the following types of conduct: the allocation of IPO shares as consideration or inducement for the payment of excessive compensation for other services provided by the member; the acceptance of market orders of IPO shares prior to the development of a secondary market; the allocation of IPO shares to an executive officer or director of a company on the condition that the officer or director send the company's investment banking business to the member, or as consideration for investment banking services previously rendered; and the imposition of a penalty on registered representatives whose retail customers have “flipped” IPO shares when similar penalties have not been imposed with respect to syndicate members.
Originality/value
The paper provides practical guidance from experienced regulatory lawyers regarding an important proposed change.
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Russell Abratt and Diane Sacks
Whether societal marketing is regarded as a legitimate andnecessary aspect of marketing in the tobacco and liquor industries isinvestigated. A review of previous research on…
Abstract
Whether societal marketing is regarded as a legitimate and necessary aspect of marketing in the tobacco and liquor industries is investigated. A review of previous research on societal marketing has been undertaken. The views of both industries are discussed and some conclusions are made with regard to their role in practising societal marketing and, thus, their influence on consumer welfare.
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Charles S. Gittleman, Russell D. Sacks and Jennifer D. Morton
– The purpose of the paper is to describe the recent amendments to FINRA's IPO Allocation Rule that were approved by the US Securities and Exchange Commission.
Abstract
Purpose
The purpose of the paper is to describe the recent amendments to FINRA's IPO Allocation Rule that were approved by the US Securities and Exchange Commission.
Design/methodology/approach
The paper provides a description of the IPO Allocation Rule and its operation, followed by a description of the IPO Allocation Rule amendments recently amended.
Findings
On November 27, 2013, the Securities and Exchange Commission approved a change to FINRA's IPO allocation rule 5131 (the “amendment”). The amendment allows a fund of funds or other collective investment account that is investing in an IPO to rely on a written representation from an unaffiliated private fund investor that does not look through to its beneficial owners, provided that such unaffiliated private fund is managed by an investment adviser, has assets greater than $50 million, and meets certain other indicia of independence that are described.
Originality/value
The paper provides practical guidance from experienced regulatory lawyers regarding an amendment to an important rule governing IPO sales and allocation practices.
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Russell D. Sacks and Michael J. Blankenship
The purpose of this paper is to describe the Securities and Exchange Commission's recently proposed new rules to establish a large trading reporting system.
Abstract
Purpose
The purpose of this paper is to describe the Securities and Exchange Commission's recently proposed new rules to establish a large trading reporting system.
Design/methodology/approach
The paper provides an overview of the new Rule 13h‐1, which, if adopted, would require large traders to identify themselves to the SEC and to be issued a “Large Trader Identification Number”. It outlines the proposed definition of a large trader and describes how a large trader would report itself to the SEC and the broker‐dealers it uses to effect trades using a new Form 13H. The paper also provides detailed guidance to broker‐dealers regarding their books and records obligations under the proposed rule.
Findings
The proposed new rule and form are intended to provide the SEC with data to facilitate its ability to assess the impact of the trading activity, to reconstruct trading activity following periods of unusual market volatility, and to analyze significant market events for regulatory purposes. Registered broker‐dealers would also be under an obligation to maintain records of transactions effected in accounts identified to it as large trader accounts; electronically report large trader transaction information to the SEC upon request; and monitor compliance with the new rule.
Originality/value
The paper provides practical guidance from experienced securities lawyers regarding an important proposed change.
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Russell D. Sacks, Thomas Donegan and Charles S. Gittleman
To explain a No-Action letter recently issued by the USA Securities and Exchange Commission (SEC) permitting persons who qualify as “M&A Brokers” to facilitate the sale of private…
Abstract
Purpose
To explain a No-Action letter recently issued by the USA Securities and Exchange Commission (SEC) permitting persons who qualify as “M&A Brokers” to facilitate the sale of private companies without registering with the SEC as broker-dealers, subject to a number of restrictions.
Design/methodology/approach
Explains how persons engaged in merger and acquisition activity have historically been required to register with the SEC, summarizes the conditions to the relief for the newly defined M&A Broker, explains what an M&A Broker can and cannot do, lists 10 criteria an M&A Broker must meet to obtain relief from registration, recommends policies and procedures for companies planning on taking advantage of the exemption from registration, and explains comparable UK legislation that applies to financial advisers advising on investments or arranging deals for M&A transactions.
Findings
While many questions and considerations remain, including how this guidance will play out in respect of various state law regimes, the M&A Broker designation has the potential to relieve some of the burdens of registration for advisors specializing in private business combinations.
Originality/value
Practical guidance from experienced securities and financial services lawyers.
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Russell D. Sacks and Michael J. Blankenship
The purpose of this paper is to provide frequently asked questions and answers in connection with the large trader reporting system.
Abstract
Purpose
The purpose of this paper is to provide frequently asked questions and answers in connection with the large trader reporting system.
Design/methodology/approach
The paper explains the large trader rule and filing requirements, including the application of the rule to non‐US entities; definitions, including Securities and Exchange Commission's (SEC's) definition of a “large trader”, a “NMS security”, and “person” for purposes of the rule; filing requirements; and the likely impact of broker‐dealers.
Findings
Certain broker‐dealers and entities that meet a trading threshold of aggregate transactions in NMS securities that equal or exceed two million shares or $20m during any calendar day, or 20 million shares or $200m during any calendar month, must file a Form 13H with the SEC.
Practical implications
The rule requires attention to an entity's trading levels, and requires making a filing with the SEC upon meeting certain activity levels.
Originality/value
The paper presents practical guidance from experienced financial services lawyers and compliance officers.