The Financial Industry Regulatory Authority, stung by industry criticism, has re-proposed its anti-rumor mongering rule.
FINRA originally proposed Rule 2030 in November in the wake of charges that short sellers had circulated false rumors about the health of some of the investment banks, leading to their collapse.
The proposal was blasted by officials on both the buyside and the sellside as overly broad and unworkable.
The new proposal, announced last week, is an attempt by FINRA to craft a rule that more closely resembles NYSE Regulation’s anti-rumor mongering rule.
“New York got it right on this one,” Tom Gira, an executive vice president in FINRA’s market regulation department, said at an industry conference recently. “We got a lot of comments telling us we were all wet.”
The proposed rule is an attempt by FINRA to prohibit traders from spreading rumors about companies they believe are false and likely to impact the price of the company’s security.
Critics of FINRA’s first draft complained the rule needlessly targeted rumors that were immaterial or true as well as those that were false. They also maintained the rule would needlessly eliminate the normal trading room chatter about rumors, which would cut the flow of information and do more harm than good.
FINRA’s revised rule targets only those rumors deemed false. Also, under a revised Rule 2030 traders will be free to discuss rumors as long as the purpose is to ascertain the veracity of the rumor, explain the impact of the rumor on trading conditions and/or offer their views on the veracity of the rumor.
Despite industry criticism, FINRA decided to retain a requirement that broker-dealers report rumors to the regulator they deem to be false and likely to impact the price of a security. This is also part of NYSE Regulation’s Rule 435(5).
“I can’t say our proposal will be exactly the same, but we wanted to come much closer,” Gira told attendees of SIFMA’s annual market structure conference. “We were pretty far apart. We want to be as identical as possible.”
FINRA, which was formed by the merger of the NASD and parts of NYSE Regulation two years ago, is in the process of rewriting its rulebook to eliminate duplication between some of the rules of the two agencies.
Rule 2030 would replace FINRA’s Rule 6140 and, eventually, NYSE Rule 435(5). The comment period ends July 16.
