By Mark S. Nelson, J.D.
The Financial Industry Regulatory Authority, Inc. obtained SEC no-action relief so that the broker-dealer self-regulatory organization can issue temporary guidance and other relief to its members who have been affected by the COVID-19 pandemic. FINRA had been concerned that its publication of informal guidance earlier this year may have violated the Exchange Act’s requirements for SRO rule change proposals. The no-action relief will permit FINRA to provide temporary, COVID-19-specific relief to its members until June 30, 2020, unless the SEC staff extends that deadline.
FINRA maintains a webpage that contains links to the COVID-19 relief that has been extended to its members. The subject matter of the relief is diverse, but much of it deals with extended deadlines, eased requirements regarding fingerprints, and the postponement of arbitration and mediation hearings.
Some of FINRA’s relief, however, includes informal guidance and FAQs, which FINRA was concerned might not comply with requirements stated in Exchange Act Section 19 and Rule 19b-4. Specifically, Exchange Act Section 19(g)(1) requires all SROs to comply with the Exchange Act, related regulations, and the SRO’s own rules. Exchange Act Section 19(b)(1) requires an SRO to file proposed rule changes with the Commission. Exchange Act Rule 19b-4 provides further details about filing SRO rule change proposals, including provisions for effectiveness upon filing.
According to FINRA, the formal rule change proposal process might have been too slow to meet the immediate needs of FINRA members due to the COVID-19 pandemic. A key reason cited for FINRA’s rapid issuance of guidance was member firms’ need to quickly invoke their business continuity plans. For these reasons, FINRA explained that the slower rule change process might not have allowed FINRA to meet its members’ needs.
The SEC staff concluded that it would not recommend that the Commission bring an enforcement action against FINRA to the extent FINRA has or will issue "Guidance and Temporary Regulatory Relief [that] involves solely technical or ministerial relief from obligations under FINRA’s existing rules." The no-action relief also requires FINRA to abide by several conditions, including: (1) that any such temporary relief is justified based on members’ requests citing good faith needs; (2) the relief issued would have qualified to be effective upon filing had FINRA followed the Exchange Act procedures for proposed SRO rule changes; (3) FINRA members document their reliance on FINRA’s COVID-19 relief and, if appropriate, publicly disclose such reliance; and (4) that FINRA can invoke the no-action relief granted by the SEC until June 30, 2020, unless the SEC staff extends the deadline for the no-action relief.
Moreover, the no-action letter reflects (footnote 4) the SEC staff’s understanding that FINRA will otherwise follow the Exchange Act process for all other types of rule change proposals and for matters involving "technical or ministerial relief filings" when time allows. FINRA also must provide SEC staff with drafts of any proposed guidance before the guidance is published.