United States: As The Summer Wound Down … FINRA Amended The "Publicity Rule" (Rule 8313) And Discussed Best Practices In Business Continuity Plans

In the past few weeks, FINRA published several Regulatory Notices, two of which should be of interest to all broker-dealers. Regulatory Notice 13-27 discusses recently approved amendments to the oddly named "Publicity Rule" concerning release of FINRA disciplinary complaints and decisions, statutory disqualification decisions, and other information. Regulatory Notice 13-25 is a joint advisory issued with the Securities and Exchange Commission ("SEC") and the Commodity Futures Trading Commission ("CFTC"), discussing business continuity plans and "best practices and lessons learned" following the wide disruption to the markets caused by Hurricane Sandy in October 2012.

The Publicity Rule

FINRA has amended Rule 8313 (the "Publicity Rule") to increase transparency into the FINRA decision-making process and to provide additional guidance to member firms in their compliance efforts. Among other things, the amended Rule aligns FINRA's periodic publication of disciplinary information with the information already publicly available on BrokerCheck and with the SEC's practice of disclosing information on its website. The amendments take effect on December 16, 2013.1 

Disciplinary Actions and Complaints

The amendments to Rule 8313 eliminate the disclosure thresholds that previously limited disclosure of disciplinary actions to those resulting in sanctions over $10,000. Once the amendments become effective, all disciplinary complaints and decisions will be released in unredacted form, regardless of the size of the sanction, subject to limited exceptions at the discretion of FINRA and its staff, as described below. In addition, the removal of dollar thresholds will allow FINRA to notify its membership and the press when any disciplinary decision has been appealed to the SEC, including information regarding whether sanctions have been stayed during the appeal. These changes are intended to provide firms with greater access to information when evaluating their own compliance concerns and educating their associated persons, and also to better inform firms that are facing allegations of rule violations about existing disciplinary actions (for instance, the underlying facts and sanctions imposed). FINRA notes that these changes to Rule 8313 are less significant than they might have been in years past because disciplinary information now is publicly available on BrokerCheck, even when the decisions themselves are not published.

The amendments also clarify that when FINRA has published a disciplinary complaint that subsequently is dismissed or withdrawn, FINRA will publish with the complaint the order dismissing or withdrawing the complaint. FINRA states that this is consistent with the SEC's practice.

Other Amendments of Note

The amended Publicity Rule provides for the release of unredacted copies of, among other things, statutory disqualification decisions and notifications, including the identities of the statutorily disqualified individuals or member firms. This is a marked change from current FINRA rules that provide for the release of redacted versions of these materials.

The changes also address the release of expedited proceeding decisions for certain types of misconduct, like the failure to pay fees or meet eligibility requirements, and summary actions for failure to pay fines or monetary sanctions. The amendments consolidate the publication standards for these decisions and codify the current FINRA practice of releasing decisions relating to summary suspensions or expulsions for failure to pay fines. While these rule changes do not change FINRA practice, they update the Publicity Rule to comport with existing practice.

Publication of decisions from Membership and Continuing Membership Application appeals to the National Adjudicatory Council and FINRA board will now be governed by the Publicity Rule. These generally will continue to be published in redacted form, although the National Adjudicatory Council and the FINRA Board both will have the authority to direct the publication of unredacted appeals decisions.

In addition, the amendments permit the release of exemption decisions and "any other decision," although there is no requirement to publish them.

Rule 8313, as amended, includes a new provision that permits FINRA, notwithstanding the general inclination towards publication of unredacted materials, to redact information, on a case-by-case basis, if there are personal safety or privacy concerns that outweigh the investor protection concerns that the Publicity Rule generally supports. Therefore, materials that contain confidential customer information, or that might raise significant risk of identity theft or concerns about personal safety or privacy, may be redacted. This is consistent with FINRA's current approach in releasing information in BrokerCheck.

Business Continuity Planning

Regulatory Notice 13-25 (the "Joint Notice"), is a joint advisory issued with the SEC and CFTC regarding business continuity plans ("BCP"). The considerations that are presented in this notice are based on conversations between the regulators and leading market participants regarding how the firms executed their BCPs in the aftermath of Hurricane Sandy.2 

The following is a list of the major topics that the Notice encourages FINRA member firms to consider in evaluating their BCPs.

Widespread Disruption Considerations:

  • The possibility of a widespread lack of critical utilities (i.e., telecom, transportation, electricity), office space, fuel and water, with consideration of redundancy services and the proximity of vendors for these services to the area affected by a potential BCP event.
  • The extent to which a BCP is dependent on remote access and services necessary for employees to work remotely during a crisis event; because remote access relies heavily on fully functional telephone and internet service, firms should also evaluate alternatives that do not require fully functional telecommunications systems for key control functions such as compliance, risk management, back office operations, and financial and regulatory reporting.

Alternative Locations Considerations:

  • Whether primary sites and alternative locations such as back-up data centers and operations sites rely on the same critical utility services, and whether alternative locations should be located in a different geographic area.
  • The accessibility of, and staff's familiarity with, alternative locations, and the ability of staff to travel to such locations when transit and lodging options may be impacted.
  • The appropriate number of staff and amount of space at alternative locations necessary to perform critical activities, such as risk functions, control functions, finance and treasury activities, and the appointment of designated supervisors of BCP functions.
  • The adequacy of operational and logistical requirements (for example, backup generator capacity) to supply critical functions and users.
  • The availability of BCPs, contact lists and other necessary documents, procedures and manuals at alternative locations, ideally in paper form, in the event that electronic files cannot be accessed.
  • The ability to pre-arrange reserved space at remote locations, including hotels, and transit for key personnel, as well as whether to move critical staff in advance of a significant BCP event.

Vendor Relationship Considerations:

  • Whether vendors that provide critical services or supplies (for example, clearance and settlement, banking and finance, trading support, fuel, telecommunications, electricity and other utilities) have their own BCPs and whether those BCPs are adequate.

Telecommunications Services and Technology Considerations:

  • The adequacy of relying on a single telecommunications service provider, and the possible need to contract with multiple telecommunications carriers to provide a failover to a different carrier, if necessary, to maintain fax, voice mail, and landline and VoIP services.
  • Whether there are mechanisms and processes to provide customers, trading counterparties, and regulators with updated contact information if alternate telephone lines must be used.

Communication Plans Considerations:

  • Providing customers and trading counterparties with contact information, and keeping the firm's website updated to include operational status and general contact information.
  • Establishing relationships with multiple broker-dealers to facilitate alternative market entry points.
  • Implementing a communication plan that allows firms to better communicate and coordinate with regulators, exchanges, emergency officials and other firms, with focus on reducing the likelihood of inconsistent communications.
  • Establishing a centralized process for accounting for all firm staff members, and frequently updating emergency contact lists with relevant firm staff members.
  • Adopting diverse methods of communication with staff, particularly critical staff, including providing them with multiple communications devices on multiple carriers, if necessary.

Regulatory and Compliance Considerations:

  • Remaining aware of time-sensitive regulatory requirements that coincide with a potential BCP event.
  • Updating BCPs to include new regulatory and SRO requirements.

Review and Testing Considerations:

  • Conducting full BCP tests and participating in industry testing, at least annually, but more frequently if changes to the plan or to the business are made.
  • Conducting annual or more frequent BCP training to familiarize all personnel with the plan and any critical roles they have been pre-assigned in carrying out the BCP.
  • Incorporating stress tests into the firms' BCPs (for example, performing a stress test on the firm's liquidity position and reviewing the level of excess customer reserves, to be better prepared to adjust liquidity or excess reserves prior to an event).

The Joint Notice does not suggest that any of the firms contacted had inadequate BCPs or that the regulators identified any particular problems with firms' actions to address the impact of the storm. That said, having provided this new guidance based on the first-hand experiences afforded by Hurricane Sandy, such as fuel shortages, telecommunications down from multiple carriers, transportation snarls, and both New York City and significant parts of New Jersey impacted, the regulators likely will scrutinize firms' BCPs and disaster recovery plans closely in the future.

Footnotes

1. The text of the amendments are found here.

2. Regulatory Notice 13-25, Business Continuity Planning (August 2013). The SEC Office of Compliance Inspections and Examinations at the same time issued a National Examinations Program Risk Alert, "SEC Examinations of Business Continuity Plans of Certain Advisers Following Operational Disruptions Caused by Weather-Related Events Last Year" (August 27, 2013).

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