On Oct. 9 FINRA filed with the SEC a proposed rule change to adopt Funding Portal Rules 100 (general standards), 110 (funding portal application), 200 (funding portal conduct), 300 (funding portal compliance), 800 (investigations and sanctions), 900 (code of procedure), 1200 (arbitration and mediation) and related forms. The rule changes would apply to SEC-registered funding portals that become FINRA members pursuant to the JOBS Act and the SEC’s proposed Regulation Crowdfunding. FINRA also proposes to adopt FINRA Rule 4518, which would require members already registered as brokers to notify FINRA before engaging in transactions in reliance on the Crowdfunding exemption in Section 4(a)(6) of the Securities Act or upon controlling or being controlled by a funding portal.
FINRA also filed with the SEC on Oct. 9 a proposed rule change to amend FINRA’s By-Laws to impose fees upon member funding portals. These fees include new member application fees, continuing member application fees, fees based upon an assessment of the gross income of the funding portal and other miscellaneous fees.
On Oct. 12 FINRA published Regulatory Notice 15-36 requesting comment on a proposed rule that would require member firms to disclose additional information on customer confirmations for transactions in corporate and agency debt securities. FINRA initially sought comment on the proposed rule in Regulatory Notice 14-52. In response to the comments received, FINRA is proposing several changes to the proposed rule. These changes include replacing the size-based disclosure threshold with a retail customer standard; permitting firms to use alternate methodologies for calculating the reference price for more complex trade scenarios; requiring firms to add a link to TRACE on the confirmation; and proposing additional exceptions from the requirements. The MSRB has published Regulatory Notice 2015-16 soliciting comment on a revised proposal that differs from FINRA’s proposal. FINRA also invites comment on the MSRB’s revised approach. Comments on the FINRA proposal are due on Dec. 11.
On Oct. 8 the CFPB announced that it had issued a Bulletin providing guidance to the mortgage industry regarding marketing services agreements. The Bulletin offers an overview of the federal prohibition on mortgage kickbacks and referral fees, and describes examples from the CFPB’s enforcement experience as well as the risks faced by lenders entering into these agreements. The CFPB stated that during the course of supervising mortgage lenders and enforcing federal law, it had found that marketing services agreements carry legal and regulatory risk for lenders. The Bulletin explains that “while marketing services agreements are usually framed as payments for advertising or promotional services, in some cases the payments are actually disguised compensation for referrals,” which may constitute a violation of law.
Enforcement & Litigation
On Oct. 13 the SEC announced that UBS AG had agreed to pay $19.5 million to settle charges that it made false or misleading statements and omissions in offering materials provided to U.S. investors in structured notes linked to a proprietary foreign exchange trading strategy. Structured notes are financial products whose returns are typically tied to the performance of other securities, commodities, currencies or proprietary indices during the term of the note. The SEC alleged that UBS misled U.S. investors in structured notes tied to the V10 Currency Index with Volatility Cap. In the Order, the SEC stated that “UBS engaged in three types of conduct that were undisclosed to investors — taking unjustified markups, engaging in hedging trades with non-systematic spreads and trading in advance of certain hedging transactions — that negatively impacted or, in the case of trading before hedging transactions, had the potential to negatively impact, pricing inputs used to calculate the V10,” resulting in investor losses of approximately $5.5 million. The SEC announcement also linked to a Jan. 12, 2015 Investor Bulletin discussing the features and risks of structured notes.