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Fixed Income Conference
March 8, 2012
© 2012 by FINRA. All Rights Reserved. The FINRA Fixed Income Conference Video is reproduced by permission of the Financial Industry Regulatory Authority, Inc. (FINRA) under a non-exclusive license and may not be rebroadcasted, reproduced, or repurposed without the express written consent of FINRA. FINRA is not responsible for any errors in or omissions from the information contained in the FINRA Fixed Income Conference Video. All such information is provided "as is" without warranty of any kind and FINRA makes no representations and disclaims all express, implied and statutory warranties of any kind to the user and/or any third party, including any warranties of accuracy, timeliness, completeness, merchantability and fitness for any particular purpose. FINRA reserves the right to amend the Fixed Income Conference Video at its discretion.
Keynote Address
Rick Ketchum, FINRA Chairman and CEO
Debt Research Reports
2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Panelists
Raymond T. Abbott – Bank of America Merrill Lynch
Chris Mahon – AllianceBernstein
Pam Torres – Goldman Sachs
Philip Shaikun – FINRA Office of General Counsel
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Background
How did we get here? Equity research rules Bond Market Association (BMA) guiding principles Examinations Auction rate securities (ARS) allegations Regulation AC and international research conflict rules Consolidated FINRA rulebook SEC concerns
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Debt Research and Trading
Debt market dynamics Price transparency Market moving factors
“Research coverage”
Essential communications between research and trading Coverage determinations Creditworthiness assessments Pricing Customer interests Trading ideas
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Debt Research Proposal – FINRA Regulatory Notice 12-09 Structure and Definitions
Tiered structure Retail debt research Institutional debt research
Definitions Debt security Debt research report Debt research analyst Institutional investor
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Debt Research Proposal – FINRA Regulatory Notice 12-09 Conflicts Management
Prepublication review
Supervision
Coverage input
Budget determinations
Debt research analyst compensation
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Debt Research Proposal – FINRA Regulatory Notice 12-09 Conflicts Management
Prohibited or restricted conduct Solicitation of investment banking Marketing Personal trading Promises of favorable research Retaliation
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Debt Research Proposal – FINRA Regulatory Notice 12-09 Content and Disclosures
Content and disclosures Recommendations and ratings Personal financial interest Investment banking relationships Receipt of compensation from issuer Principal trading Other material conflicts of interest
Public appearances
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Debt Research Proposal – FINRA Regulatory Notice 12-09 Communications Firewalls
Permissible communications Creditworthiness Pricing / valuation Customer interests Customized analysis and trading ideas
Prohibited communications Trading personnel attempting to influence analysts view for
purpose of benefiting firm or clients Analyst recommendations inconsistent with published
research Timing or investment conclusions of a pending research report
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Debt Research Proposal – FINRA Regulatory Notice 12-09 Institutional Debt Research
Exemptions for institutional debt research Supervision Coverage Budget and compensation Retail disclosures
Affirmative opt-in requirement
“Health warning”
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Debt Research Proposal – FINRA Regulatory Notice 12-09 Other Provisions
Distribution of third-party research
Exemption for firms with limited investment banking activity
Selective dissemination
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Conference resumes at 10:00 a.m.
View related resources on finra.org: Debt Research Reports FINRA Regulatory Notice 12-09, FINRA Requests Comment on a Proposal to Identify and Manage Conflicts Involving the Preparation and Distribution of Debt Research Reports (February 2012) www.finra.org/Industry/Regulation/Notices/2012/P125616
High-Yield Investments
2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Panelists
Richard Agster – Raymond James & Associates, Inc.
Samuel Israel – FINRA Enforcement
Scott Kimmel – Barclays Capital
Suzanne Michaud – Fidelity Investments
Sharon Zackula – FINRA Office of General Counsel
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Conference resumes at 11:30 a.m.
View related resources on finra.org: FINRA Annual Conference May 21 – 23, 2012 • Washington, DC Features over 30 sessions on regulatory and compliance topics, including fixed-income related topics: Municipal Securities Research Fixed Income Developments Trading and Market Developments
www.finra.org/annualconference
TRACE Developments
2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Panelists
Gina Accolla – First Empire Securities
Bruce Bracco – Freddie Mac
Ola Persson – FINRA Transparency Services
Elliot Levine – FINRA Transparency Services
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Conference resumes at 1:45 p.m.
View related resources on finra.org: TRACE Fact Book An historical perspective on the OTC U.S. corporate and agency bond markets Fact Book features: Market performance indicators Ranking of the most actively traded issues Transaction and par value data
www.finra.org/trace/factbook
Municipal Securities
2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Panelists
Elaine Greenberg – Securities and Exchange Commission
Peg Henry – Municipal Securities Rulemaking Board
Craig Noble – Wells Fargo Advisors
Mac Northam – FINRA Member Regulation, Sales Practice
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Municipal Securities Craig Noble
Director of Fixed Income Trading
February, 2012
FINANCIAL PROFESSIONAL USE ONLY
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WFA: Municipal Resources Point of Sale Tools for Financial Advisors:
Offerings Listed on BondDesk (Trading Platform): Display Municipal Insurance and Rating information
V-Link (MarketView): MSRB Data - Price Transparency for 2 and 30 Day Trading History
M-Link (MuniPoints): Material Events, OS Information, Related News – can be emailed to client
Order Entry Window: Requires order-by-order electronic attestation by FA that any material events were disclosed to client, a link to the material events is provided to the FA
Customer Confirmation: Includes web link to EMMA site on every transaction in municipal securities
Research: Client approved Moody’s research reports are now accessible via BondDesk for various offerings
Investment Objective: Firm is considering using systemic hard edits that would block certain accounts from purchasing certain municipal securities
FINANCIAL PROFESSIONAL USE ONLY Provided by Wells Fargo Advisors, LLC
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WFA: Municipal Resources Continuing Disclosure Efforts:
ASG Notification to Financial Advisors – scrape vs. client holdings for certain material events and downgrades
Proxy Department mailings to clients based on EMMA notices
FINANCIAL PROFESSIONAL USE ONLY Provided by Wells Fargo Advisors, LLC
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WFA: Municipal Resources Ongoing Client & Financial Advisor Educational Efforts:
Continuing Education for Financial Advisors regarding Municipal Securities
“Guide to Investing in Municipal Securities”, client approved
“Important Information about Municipal Securities”, statement insert that was sent to all WFA clients – written by Patrick Early, Chief Municipal Analyst
FINANCIAL PROFESSIONAL USE ONLY Provided by Wells Fargo Advisors, LLC
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BondDesk V- link: FA Desktop Access to live MSRB DATA
FINANCIAL PROFESSIONAL USE ONLY Provided by Wells Fargo Advisors, LLC
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M- link: MuniPOINTS
FINANCIAL PROFESSIONAL USE ONLY Provided by Wells Fargo Advisors, LLC
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Material Events: available in buy ticket
FINANCIAL PROFESSIONAL USE ONLY Provided by Wells Fargo Advisors, LLC
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© 2012 Wells Fargo Advisors, LLC. All rights reserved. 0212-2949
FINANCIAL PROFESSIONAL USE ONLY
2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Conference resumes at 3:00 p.m.
View related resources on finra.org: Report Center Secure access to data and reports designed to support firms’ compliance activities MSRB G-32 Report Card Municipal Continuing Disclosure Report Municipal Primary Offering Disclosure Report TRACE Quality of Markets Report Cards
www.finra.org/reportcenter
Examinations and Enforcement
2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Panelists
Patrick Geraghty – FINRA Market Regulation
Samuel Israel – FINRA Enforcement
Jeffrey Pasquerella – FINRA New York District Office
Anand Ramtahal – FINRA Member Regulation, Office of Risk Oversight and Operational Regulation
Cindy Friedlander – FINRA Member Regulation, Sales Practice
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Market Regulation
2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
TRACE Transaction Reporting Sweeps
Late reporting (corporate and agency)
Excessive commissions (corporate and agency)
Dealer mis-match / under or mis-reporting (corporate and agency)
Negative yields (corporate and agency)
Contra execution times (corporate and agency)
Large (blocks) and late (corporate and agency)
FINRA Rule 6760-Underwriter Late Notice (corporate and agency)
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
ABS, MBS, CMO, and TBA Transaction Reporting Sweeps
Late reporting
Excessive commissions
Dealer mis-match / under or mis-reporting
Contra execution times
FINRA Rule 6760-Underwriter Late Notice
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Municipal Transaction Reporting Sweeps
Late reporting
Negative yield
Excessive commissions
Time of trade
Large (blocks) and late
Contra execution times
Mismatched destination codes
Late submissions to SHORT
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Municipal Reviews
MSRB Notice 2011-62 Supervision of Municipal Transactions
Mismatched Destination Codes – MSRB Notice 2003-20 Step-outs vs. actual trades
Late trade compliance rates
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
TRACE Corporate and Agency Reviews
Compliance trends
Recent migration to MPP Reporting of commissions Reporting of volume Reporting of settlement date
Trade Reporting Notice (December 2011) FAQ’s addressing use of P1 and knowing your counterparty
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Fixed Income Investigations
Fair pricing reviews Morgan Stanley case Additional matters
Continued focus on markups above and below five percent
New surveillance patterns Fair pricing for mortgage backed securities (MBSs) and
collateralized mortgage obligations (CMOs) Wash sales
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
FINRA Report Cards
Securitized products has peer groups
Report cards contain information regarding mis-matched inter-dealer transactions (summary and detailed)
January 2012 report card contains summary statistics from February 1st through 3rd
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Member Regulation
2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Overview of Amendments to MSRB Rules G-16 and G-9
Amendments to MSRB Rule G-16 on Periodic Compliance Examination Effective on 12/16/11 and establishes a risk-based compliance
examination program for members of FINRA and the MSRB. The rule change facilitates the modernization of the
examination process, permits greater flexibility in the administration of periodic compliance exams, and permits us to focus more closely on firms that by virtue of various risk factors, pose the greatest risk to investors and other market participants, as well as to the municipal securities market on a systemic basis. Firms must now be examined at least once every four calendar
years for compliance with applicable MSRB rules and federal securities laws.
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Overview of Amendments to MSRB Rules G-16 and G-9
Amendments to MSRB Rule G-9 on Preservation of Records Effective on 6/16/12 to provide dealers with sufficient time to
modify their policies and systems to comply with the new record retention period. Dealers that are FINRA members must retain certain records
for four years, rather than for three years in order to ensure that the records are available at those firms that are examined every four calendar years.
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Municipal Regulatory and Examination Priorities
Representative underwriting risks: Bid rigging and potential collusion to secure competitive
offerings Pay to play to secure negotiated offerings Political contributions and PACs
Representative trading risks: Failure to disclose material risks to retail investors or issuers Unfair pricing and suitability issues
– Yield chasing – “Daisy Chain”
Failure to maintain adequate supervisory controls – Rogue broker issues
Trade reporting and clearing firm reliance
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Risk Based Planning Approach
Transactional and underwriting data was used to identify those firms that comprise the bulk of the market Complaints, disclosures and matters data was leveraged to
identify firms with a history of sales practice violations that were consistent with municipal exam priorities.
What does this mean for you? Majority of firms will have less frequent onsite reviews of their
municipal business and, thus, have exams in line with their regular cycle examination. A small subset of firms will experience more frequent onsite
reviews due to the size and risk of their municipal activity.
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
ROOR Update
2012 Examination Priorities
Examination Issues
Reporting and Interpretive Issues
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2012 Fixed Income Conference March 8, 2012 © 2012 FINRA. All rights reserved.
Enforcement Priorities
Structured products Approval process for new products Sales practice issues, especially suitability and disclosures Training and supervision of staff
Municipal underwriting Solicitation of municipal underwriting Ratings trips and entertainment Unfair practices
Markups on fixed income securities transactions
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