The Securities Industry/Regulatory Council on Continuing Education (Council) recently released its Firm Element Needs Analysis Quarterly Highlights (formerly known as Firm Element Advisory) to assist industry participants with the identification of potential topics to include in Firm Element training plans. The Council has identified the topics from a review of the industry, regulatory and self-regulatory organization (SRO) announcements, and publications of significant events.

The Council suggests that firms use the FE Training Ideas Firm Element Needs Analysis Quarterly Highlights as an aid in evaluating and prioritizing their Firm Element needs and developing written training plans. However, firms are reminded to not rely on the report as a comprehensive list of all areas they should consider. This article summarizes the Council’s complete guide and strictly focuses on the “New” material that was listed in the recent Firm Element Advisory (FEA).

FIRM OPERATIONS: BOOK & RECORDS

(New) Customer Account Statements

FINRA has adopted amendments to Rule 2231 (Customer Account Statements) to add eight new supplementary materials pertaining to:

  • compliance with Rule 4311 (Carrying Agreements);
  • the transmission of customer account statements to other persons or entities;
  • the use of electronic media to satisfy delivery obligations;
  • compliance with Rule 3150 (Holding of Customer Mail);
  • the information disclosed on customer account statements;
  • assets externally held;
  • the use of logos and trademarks, etc.; and
  • the use of summary statements.

FINRA Amends FINRA Rule 2231

FIRM OPERATIONS: CYBERSECURITY AND TECHNOLOGY GOVERNANCE

(New) Ransomware

FINRA has received reports about the increasing numbers and sophistication of ransomware incidents. Ransomware typically involves bad actors gaining unauthorized access to firm systems and encrypting or otherwise accessing sensitive firm data or customer information, then holding that hijacked data for ransom. Some ransomware attacks have become significant threats that include theft of data and bad actors’ ongoing network access.

Rule 30 of the U.S. Securities and Exchange Commission’s (SEC) Regulation S-P requires firms to have written policies and procedures that are reasonably designed to safeguard customer records and information. FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information) also applies to ransomware attacks that include denials of service and other interruptions to members’ operations.

FINRA Alerts Firms to Ransomware Risks

(New) Heightened Threat of Fraud

FINRA alerts members to an emerging threat to customers and members, where FINRA, NASDAQ and NYSE have observed initial public offerings (IPOs) for certain small capitalization (small-cap) issuers listed on U.S. stock exchanges that may be the subject of pump-and-dump-like schemes (sometimes referred to as “ramp-and-dump” schemes in other jurisdictions). FINRA has observed significant unusual price increases on the day of or shortly after the IPOs of certain small-cap issuers, most of which involve issuers with operations in other
countries. FINRA has concerns regarding potential nominee accounts that invest in the small-cap IPOs and subsequently engage in apparent manipulative limit order and trading activity. Some of the investors harmed by ramp-and-dump schemes appear to be victims of social media scams. This Notice addresses concerns similar to those previously raised in the Anti-Money Laundering sections of the 2022 and 2021 Reports on FINRA’s Examination and Risk Monitoring Program.

FINRA Alerts Firms to Recent Trend in Small Capilization IPOs 

FIRM OPERATIONS: TRUSTED CONTACT PERSON

(New) FINRA Shares Practices for Obtaining Customers’ Trusted Contacts

Member firms are required to make reasonable efforts to obtain the name of and contact information for a trusted contact for a non-institutional customer’s account. This Notice summarizes member firms’ regulatory obligations, discusses the benefits of trusted contacts in administering customers’ accounts, highlights customer education resources, and shares effective practices member firms use.

FINRA Shares Practices for Obtaining Customers’ Trusted Contacts

MARKET INTEGRITY: TRADE REPORTING

(New) FINRA Adopts Amendments to Require Reporting of Transactions in U.S. Dollar-Denominated Foreign Sovereign Debt Securities to TRACE

FINRA has adopted amendments to the Rule 6700 Series to require firms to report transactions in U.S. dollar-denominated foreign sovereign debt securities to TRACE. “Foreign sovereign debt security” is defined as a debt security that is issued or guaranteed by the government of a foreign country, any political subdivision of a foreign country, or a supranational entity. Transaction reports in U.S. dollar-denominated foreign sovereign debt securities will not be subject to public dissemination.

Transactions in U.S. dollar-denominated foreign sovereign debt securities generally will be subject to a same-day reporting requirement. Specifically, reportable TRACE transactions in U.S. dollar-denominated foreign sovereign debt securities executed on a business day at or after 12:00 a.m. Eastern Time (ET) through 5:00 p.m. ET must be reported the same day during TRACE system hours. Transactions executed on a business day after 5:00 p.m. ET but before the TRACE system closes must be reported no later than the next business
day (T+1) during TRACE system hours, and, if reported on T+1, designated “as/of” and include the date of execution. Firms that wish to report transactions in U.S. dollar-denominated foreign sovereign debt securities on an immediate basis may do so. These amendments become effective date on November 6, 2023.

TRACE Reporting of Foreign Sovereign Debt Securities

(New) FINRA Adopts Enhancements to TRACE Reporting for U.S Treasury Securities

FINRA has adopted amendments to Rule 6730 (Transaction Reporting) to: (i) require members to report transactions in U.S. Treasury securities to FINRA’s Trade Reporting and Compliance Engine (TRACE) as soon as practicable but no later than 60 minutes from the time of execution; and (ii) require members to report electronically executed transactions in U.S. Treasury securities to TRACE in the finest increment captured by the system used to execute the transaction, subject to an exception for members with limited trading volume in U.S. Treasury securities. FINRA is also revising its TRACE Frequently Asked Questions (FAQs) to standardize price reporting for Treasury bills and Floating Rate Notes (FRNs) by requiring all transactions to be reported using the dollar price. The amendments to reduce the trade reporting timeframe for transactions in U.S. Treasury securities will take effect on May 15, 2023. The amendments related to the granularity of execution timestamps, as well as the revisions to the TRACE FAQs to standardize price reporting, will take effect on November 6, 2023.

FINRA Adopts Enhancements to TRACE Reporting for U.S. Treasury Securities

To view the full Firm Element Advisory, click here.

To view Quest CE’s full Firm Element course catalog, click here.