FINRA tightening regulations


The Financial Industry Regulatory Authority (FINRA) announced recently that it is planning to require firms to put procedures in place between their research departments and their proprietary trading desks to prevent the exchange of non-public information.  This announcement marks a change from the past in that previously such procedures were optional for firms.Forcing separation between research and prop traders has two effects.  The first is a benefit to the buy side in general.  Buy-siders should now feel more comfortable that prop trading desks aren’t getting a jump on positions coming from sell-side research before it is announced.  Clearly, being able to take a position in a firm before a report comes out allows for a substantial amount of money to be made and now at least there will be one less investor taking that position.

The second effect for the research community is to make sell-side research more credible.  Without the added incentive of upgrading or downgrading a stock so that their firm can make money, it is easier to accept the recommendations made in sell-side reports as unbiased.The change is part of a number of tweaks FINRA is currently folding into its rulebook.

The regulator is also clarifying a number of rules in order to make sure that they are not overly restrictive.  For example, a prop trading desk is not prohibited from taking a position so long as it can prove it was trading on readily discernible public information.

  FINRA has however extended the regulation to cover positions in any securities, whether they are listed on an exchange or not.

Information from this story was used in this post.

CORRECTION: In yesterday’s article we included a chart mentioning some independent research firms specializing in various areas. Our chart included various firms in the category of “management,” one of which was “The Corporate Library.” However, this firm is better classified under “Governance,” since their primary mission is to provide independent corporate governance research and analysis.


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