Federal Register / Vol. 75, No. 225 / Tuesday, November 23, 2010 / Notices 71479 

14 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3The current FINRA rulebook consists of (1) 

FINRA Rules; (2) NASD Rules; and (3) rules 

incorporated from NYSE (‘‘Incorporated NYSE 

Rules’’) (together, the NASD Rules and Incorporated 

NYSE Rules are referred to as the ‘‘Transitional 

Rulebook’’). While the NASD Rules generally apply 

to all FINRA members, the Incorporated NYSE 

Rules apply only to those members of FINRA that 

are also members of the NYSE (‘‘Dual Members’’). 

The FINRA Rules apply to all FINRA members, 

unless such rules have a more limited application 

by their terms. For more information about the 

rulebook consolidation process, see Information 

Notice, March 12, 2008 (‘‘Rulebook Consolidation 

Process’’). For convenience, the Incorporated NYSE 

Rules are referred to as the NYSE Rules. 

4See Exchange Act Release No. 62718 (August 13, 

2010), 75 FR 51310 (August 19, 2010). This release 

was later amended to correct footnote crossreferences. Exchange Act Release No. 62718A 

(August 20, 2010), 75 FR 52562 (August 26, 2010). 

The Commission also published the corrected 

notice on its Web site. 

5See Letters from Steven B. Caruso, Maddox 

Hargett & Caruso, P.C. (Sept. 8, 2010) (‘‘Caruso 

Letter’’); Barry D. Estell, Attorney (Sept. 9, 2010) 

(‘‘Estell Letter’’); Barbara Black, Charles Hartsock 

Professor of Law and Director, Corporate Law 

Center, University of Cincinnati College of Law, and 

Jill I. Gross, Professor of Law and Director of Legal 

Skills and Director, Pace Investor Rights Clinic, 

Pace University School of Law (Sept. 9, 2010) 

(‘‘Black-Gross Letter’’); David P Neuman, Stoltmann 

Law Offices, PC (Sept. 9, 2010) (‘‘Neuman Letter’’); 

Richard M. Layne (Sept. 9, 2010) (‘‘Layne Letter’’); 

William A. Jacobson, Associate Clinical Professor of 

Law, Cornell Law School, and Director, Cornell 

Securities Law Clinic (Sept. 9, 2010) (‘‘Jacobson 

Letter’’); Scott R. Shewan, President, Public 

Investors Arbitration Bar Association (Sept. 9, 2010) 

(‘‘PIABA Letter’’); Pamela Lewis Marlborough, 

Associate General Counsel, Advocacy & Oversight, 

TIAA–CREF (Sept. 9, 2010) (‘‘TIAA–CREF Letter’’); 

Gary A. Sanders, Vice President, Securities and 

State Government Relations, National Association 

of Insurance and Financial Advisors (Sept. 9, 2010) 

(‘‘NAIFA Letter’’); Stephen Krosschell, Goodman 

Nekvasil, P.A. (Sept. 9, 2010) (‘‘Krosschell Letter’’); 

Sutherland Asbill & Brennan LLP, on behalf of the 

Committee of Annuity Insurers (Sept. 9, 2010) (‘‘CAI 

Letter’’); Lisa Catalano, Director, St. John’s 

University School of Law Securities Arbitration 

Clinic, (Sept. 9, 2010) (‘‘Catalano Letter’’); G. Mark 

Brewer, Esquire (Sept. 9, 2010) (‘‘Brewer Letter’’); 

Bari Havlik, SVP and Chief Compliance Officer, 

Charles Schwab & Co. Inc. (Sept. 9, 2010) (‘‘Schwab 

Letter’’); Peter J. Mougey, Levin, Papantonio, 

Thomas, Mitchell, Echsner, Rafferty, Proctor, P.A. 

(Sept. 9, 2010) (‘‘Mougey Letter’’); Al Van Kampen, 

Esquire (Sept. 10, 2010) (‘‘Van Kampen Letter’’); 

James T. McHale, Managing Director and Associate 

General Counsel, SIFMA (Sept. 14, 2010) (‘‘SIFMA 

Letter’’); John S. Markle, Deputy General Counsel, 

TD Ameritrade (Sept. 15, 2010) (‘‘TD Ameritrade 

Letter’’); Scott C. Ilgenfritz, Johnson, Pope, Bokor, 

Ruppel & Burns, LLP (Sept. 24, 2010) (‘‘Ilgenfritz 

Letter’’); Dale E. Brown, President and CEO, 

Financial Services Institute, Inc. (Sept. 27, 2010) 

(‘‘FSI Letter’’); Timothy R. Wing, President and CEO, 

CME Stock/Option Consulting Services, Inc. (Sept. 

28, 2010) (‘‘CME/OCS Letter’’). 6See Letter from James Wrona, Associate Vice 

President and Associate General Counsel, FINRA to 

Elizabeth M. Murphy, Secretary, Commission, dated 

October 21, 2010 (‘‘FINRA Response’’). 

7See Amendment No. 1 to FINRA–2010–039, 

dated October 21, 2010 (‘‘Amendment No. 1’’). The 

text of Amendment No. 1 is available on FINRA’s 

Web site at http://www.finra.org/web/groups/ 

industry/@ip/@reg/@rulfil/documents/rulefilings/ 

p122318.pdf, at the principal office of FINRA, and 

on the Commission’s Internet Web site (http:// 

www.sec.gov/rules/sro/finra.shtml). 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an E-mail to rulecomments@sec.gov. Please include File 

No. SR–ISE–2010–103 on the subject 

line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–ISE–2010–103. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commissions 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room. Copies of such filing 

also will be available for inspection and 

copying at the principal office of the 

ISE. All comments received will be 

posted without change; the Commission 

does not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–ISE–2010–103 and should 

be submitted by December 14, 2010. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.14

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–29402 Filed 11–22–10; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–63325; File No. SR–FINRA– 

2010–039] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of 

Amendment No. 1 to a Proposed Rule 

Change and Order Granting 

Accelerated Approval of a Proposed 

Rule Change, as Modified by 

Amendment No. 1, To Adopt FINRA 

Rules 2090 (Know Your Customer) and 

2111 (Suitability) in the Consolidated 

FINRA Rulebook 

November 17, 2010. 

I. Introduction 

On July 30, 2010, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) (f/k/a National Association of 

Securities Dealers, Inc. (‘‘NASD’’)) filed 

with the Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’), 

pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Exchange Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

adopt FINRA Rule 2090 (Know Your 

Customer) and FINRA Rule 2111 

(Suitability) in the consolidated FINRA 

rulebook (‘‘Consolidated FINRA 

Rulebook’’).3 The Commission 

published the proposed rule change in 

the Federal Register.4

The Commission received 22 

comments in response to the proposed 

rule change.5 On September 21, 2010, 

FINRA responded to the comments 6

and filed Amendment No. 1 to the 

proposed rule change.7 The Commission 

is publishing this notice and order to 

solicit comments on Amendment No. 1 

and to approve the proposed rule 

change, as amended, on an accelerated 

basis. 

II. Description of the Proposed Rule 

Change 

As part of the process of developing 

the Consolidated FINRA Rulebook, 

FINRA proposed FINRA Rule 2090 

(Know Your Customer) and FINRA Rule 

2111 (Suitability). The ‘‘know your 

customer’’ and suitability obligations are 

critical to ensuring investor protection 

and fair dealing with customers. 

FINRA’s proposed rule change was 

designed to retain the core features of 

these obligations (set forth in NYSE 

Rule 405(1) and NASD Rule 2310), 

while modifying both rules to 

strengthen and clarify them. 

The proposed rule change built on a 

similar proposed rule change on which 

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71480 Federal Register / Vol. 75, No. 225 / Tuesday, November 23, 2010 / Notices 

8See Proposed FINRA Rule 2090. 

9See Proposed FINRA Rule 2090.01. FINRA 

proposed to change the explanation of ‘‘essential 

facts’’ in response to comments. 

10See, e.g., SEC Regulation NMS (National 

Market System), 17 CFR 242.600–242.612; FINRA 

Rule 7400 Series (Order Audit Trail System); NASD 

Rule 2320 (Best Execution and Interpositioning); 

NASD Rule 2400 Series (Commissions, Mark-Ups 

and Charges); NASD IM–2110–2 (Trading Ahead of 

Customer Limit Order); and IM–2110–3 (Front 

Running Policy). See also, FINRA Regulatory Notice 

08–80 (December 2008) (proposed FINRA Rule 

5310); FINRA Regulatory Notice 08–83 (December 

2008) (proposed FINRA Rule 5270); and Exchange 

Act Release No. 61168 (December 15, 2009) 

(proposed FINRA Rule 5320). 

11FINRA is proposing to adopt NASD Rule 3010 

as FINRA Rule 3110, subject to certain 

amendments. See FINRA Regulatory Notice 08–24 

(May 2008). 

12FINRA is proposing to adopt NASD Rule 

3110(c)(1)(C) as FINRA Rule 4512(a)(1)(D), subject 

to certain amendments. See Exchange Act Release 

No. 63181 (October 26, 2010), 75 FR 67155 

(November 1, 2010). Proposed FINRA Rule 

4512(a)(1)(D) would clarify that members maintain 

the signature of the partner, officer or manager 

denoting that the account has been accepted in 

accordance with the member’s policies and 

procedures for acceptance of accounts. 

13See 31 CFR 103.122. 

14See 31 CFR 103.19. 

15See, e.g., Exchange Act Rule 15g–1 through 

15g–9 (Penny Stock Rules); FINRA Rule 2360 

(Options); FINRA Rule 2370 (Security Futures); 

FINRA Rule 2130 (Approval Procedures for DayTrading Accounts). 

16FINRA is proposing to adopt NASD Rule 

3110(c) as FINRA Rule 4512 (Customer Account 

Information), subject to certain amendments. See 

Exchange Act Release No. 63181 (October 26, 2010), 

75 FR 67155 (November 1, 2010). 

FINRA requested comment in FINRA 

Regulatory Notice 09–25 (May 2009). 

The proposed rule change FINRA filed 

with the Commission included both a 

comprehensive response to the 

comments FINRA received in response 

to Regulatory Notice 09–25 and 

modifications to address those 

comments. 

A. Proposed FINRA Rule 2090 

The proposed ‘‘Know Your Customer’’ 

obligation in FINRA Rule 2090 

encompasses the main ethical standard 

of NYSE Rule 405(1). As proposed, the 

rule would require broker-dealers to use 

‘‘reasonable diligence,’’ with regard to 

the opening and maintenance of every 

account, in order to know and retain the 

essential facts concerning every 

customer.8 The obligation would arise at 

the beginning of the customer/broker 

relationship, independent of whether 

the broker has made a recommendation, 

and continue throughout the term of 

that relationship. The proposed 

supplementary material would define 

‘‘essential facts’’ as those ‘‘required to (a) 

Effectively service the customer’s 

account, (b) act in accordance with any 

special handling instructions for the 

account, (c) understand the authority of 

each person acting on behalf of the 

customer, and (d) comply with 

applicable laws, regulations, and 

rules.’’ 9

The proposal would not incorporate 

the requirement in NYSE Rule 405(1) to 

learn the essential facts relative to 

‘‘every order.’’ FINRA proposed to 

exclude the ‘‘every order’’ language 

because of the application of existing 

order-handling rules.10 In addition, the 

reasonable-basis obligation under 

FINRA’s suitability rule requires brokerdealers and their associated persons to 

use reasonable diligence to understand 

the securities and strategies they 

recommend. 

FINRA also proposed to delete NYSE 

Rule 405(2) through (3), NYSE 

Supplementary Material 405.10 through 

.30, and NYSE Rule Interpretation 405/ 

01 through/04 because they generally 

are duplicative of other rules, 

regulations, or laws. For instance, NYSE 

Rule 405(2) requires firms to supervise 

all accounts handled by registered 

representatives. That provision is 

redundant because NASD Rule 3010 

requires firms to supervise their 

registered representatives.11

NYSE Rule 405(3) generally requires 

persons designated by the member to be 

informed of the essential facts relative to 

the customer and to the nature of the 

proposed account prior to approving the 

opening of the account. However, 

FINRA believes that a number of other 

FINRA rules do, and proposed FINRA 

rules would, create substantially similar 

obligations. For example, proposed 

FINRA Rule 2090 would require 

members to know the essential facts as 

to each customer, and NASD Rule 

3110(c)(1)(C) requires the signature of 

the member, partner, officer or manager 

who accepts the account.12

FINRA Rule 3310, which requires a 

firm to have procedures reasonably 

designed to achieve compliance with 

the Bank Secrecy Act (‘‘BSA’’) and the 

implementing regulations, also affect a 

firm’s account-opening obligations. One 

BSA regulation requires a firm to verify 

the identity of a customer opening a 

new account.13 Another BSA regulation 

requires a firm to engage in due 

diligence sufficient to enable the firm to 

evaluate the risk of each customer and 

to determine if transactions by the 

customer could be suspicious such that 

the firm would need to file a suspicious 

activity report.14

Moreover, before certain customers 

can purchase certain types of 

investment products (such as options, 

futures or penny stocks) or engage in 

certain strategies (such as day trading), 

the firm must explicitly approve their 

accounts for such activity.15

FINRA also believes that NYSE 

Supplementary Material 405.10 is 

redundant of other FINRA proposed and 

existing requirements, and that the cross 

references provided in NYSE 

Supplementary Material 405.20 and .30 

are no longer necessary. NYSE 

Supplementary Material 405.10 

generally discusses the requirements 

that firms know their customers and 

understand the authority of third parties 

to act on behalf of customers that are 

legal entities. As discussed above, 

proposed FINRA Rule 2090 and 

proposed FINRA Supplementary 

Material 2090.01 would require firms to 

know the essential facts concerning 

every customer. Moreover, NASD Rule 

3110(c) (Customer Account 

Information), requires firms to maintain 

a record identifying the person(s) 

authorized to transact business on 

behalf of a customer that is a legal 

entity.16 NYSE Supplementary Material 

405.20 and .30 provide cross references 

to NYSE Rule 382 (Carrying 

Agreements) and NYSE Rule 414 (Index 

and Currency Warrants), respectively, 

which are no longer necessary or 

appropriate for inclusion in proposed 

FINRA Rule 2090. 

FINRA believes that the associated 

NYSE Rule Interpretations also are 

redundant. NYSE Rule Interpretations 

405/01 (Credit Reference—Business 

Background) and/02 (Approval of New 

Accounts/Branch Offices) recommend 

that the credit references and business 

backgrounds of a new account be 

cleared by a person other than the 

registered representative opening the 

account and require a designated person 

to approve a new account. These 

obligations are substantially similar to 

the requirements in NASD Rule 

3110(c)(1)(C) and FINRA Rule 3310, 

discussed above. 

NYSE Rule Interpretation 405/03 

(Fictitious Orders) provides that firm 

‘‘personnel opening accounts and/or 

accepting orders for new or existing 

accounts should make every effort to 

verify the legitimacy of the account and 

the validity of every order.’’ The 

interpretation contemplates knowing 

the customer behind the order as part of 

the process of ensuring that the order is 

bona fide. Proposed FINRA Rule 2090 

and FINRA Rule 3310 together would 

similarly require firms to know their 

customers. 

To the extent NYSE Rule 

Interpretation 405/03 seeks to guard 

against the use of fictitious trades as a 

means of manipulating markets, existing 

FINRA rules address currently these 

activities. FINRA Rule 5210 (Publication 

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Federal Register / Vol. 75, No. 225 / Tuesday, November 23, 2010 / Notices 71481 

17See, e.g., Terrance Yoshikawa, Exchange Act 

Release No. 53731 (April 26, 2006), 87 SEC Docket 

2924, 2006 SEC LEXIS 948 (upholding finding that 

president of broker-dealer violated just and 

equitable principles of trade and anti-fraud 

provisions by fraudulently entering orders designed 

to manipulate the price of securities). 

18See Proposed FINRA Rule 2111(a). 

19See Proposed FINRA Rule 2111(a). FINRA 

modified various aspects of the proposed 

information-gathering requirements in response to 

comments. 

20FINRA is proposing to adopt NASD IM–2210– 

6 as FINRA Rule 2214 without material change. See 

Regulatory Notice 09–55 (September 2009). 

21See Proposed FINRA Rule 2111.03. FINRA 

included this exception in response to comments. 

22See Proposed FINRA Rule 2111.03. 

23See Proposed FINRA Rule 2111(b). The 

requirement in proposed FINRA Rule 2111(b) that 

the firm or associated person have a reasonable 

basis to believe that ‘‘the institutional customer is 

capable of evaluating investment risks 

independently, both in general and with regard to 

particular transactions and investment strategies’’ 

comes from NASD IM–2310–3. As FINRA explained 

in that IM, ‘‘[i]n some cases, the member may 

conclude that the customer is not capable of making 

independent investment decisions in general. In 

other cases, the institutional customer may have 

general capability, but may not be able to 

understand a particular type of instrument or its 

risk.’’ FINRA further stated that, ‘‘[i]f a customer is 

either generally not capable of evaluating 

investment risk or lacks sufficient capability to 

evaluate the particular product, the scope of a 

member’s customer-specific obligations under the 

suitability rule would not be diminished by the fact 

that the member was dealing with an institutional 

customer.’’ FINRA also stated that ‘‘the fact that a 

customer initially needed help understanding a 

potential investment need not necessarily imply 

that the customer did not ultimately develop an 

understanding and make an independent decision.’’ 

24See Proposed FINRA Rule 2111(b). 

25 Id. FINRA noted that the institutional-customer 

exemption applies only if both parts of the two-part 

test are met: (1) There is a reasonable basis to 

believe that the institutional customer is capable of 

evaluating investment risks independently, in 

general and with regard to particular transactions 

and investment strategies, and (2) the institutional 

customer affirmatively indicates that it is exercising 

independent judgment in evaluating 

recommendations. 

26See Proposed FINRA Rule 2111(b). FINRA is 

proposing to adopt NASD Rule 3110(c)(4) as FINRA 

Rule 4512(c), without material change. See 

Continued 

of Transactions and Quotations) 

prohibits members from publishing or 

circulating or causing to publish or 

circulate, any notice, circular, 

advertisement, newspaper article, 

investment service, or communication 

of any kind which purports to report 

any transaction as a purchase or sale of, 

or purports to quote the bid or asked 

price for, any security unless the 

member believes that the transaction or 

quotation was bona fide. FINRA Rule 

5220 (Offers at Stated Prices) prohibits 

members from making an offer to buy 

from or sell to any person any security 

at a stated price unless the member is 

prepared to purchase or sell at that price 

and under the conditions stated at the 

time of the offer to buy or sell. 

Moreover, the use of fictitious 

transactions by a member or associated 

person to manipulate the market would 

also violate FINRA’s rules regarding just 

and equitable principles of trade 

(FINRA Rule 2010) and fraud (FINRA 

Rule 2020).17

NYSE Rule Interpretation 405/04 

(Accounts in which Member 

Organizations have an Interest) 

discusses requirements regarding 

transactions initiated ‘‘on the Floor’’ for 

an account in which a member 

organization has an interest. The 

interpretation is directed to the NYSE 

marketplace. Section 11(a) of the 

Exchange Act and the rules thereunder 

also address trading by members of 

exchanges, brokers and dealers. 

For the reasons discussed above, 

FINRA believes NYSE Rule 405(1) 

through (3), NYSE Supplementary 

Material 405.10 through .30, and NYSE 

Rule Interpretations 405/01 through/04 

are no longer necessary. They will be 

eliminated from the current FINRA 

rulebook upon Commission approval 

and implementation by FINRA of this 

proposed rule change. 

B. Proposed FINRA Rule 2111 

The proposed suitability obligation in 

FINRA Rule 2111 would require a 

broker-dealer or associated person to 

have ‘‘a reasonable basis to believe that 

a recommended transaction or 

investment strategy involving a security 

or securities is suitable for the customer 

* * *.’’ 18 This assessment would need 

to be ‘‘based on the information obtained 

through the reasonable diligence of the 

member or associated person to 

ascertain the customer’s investment 

profile[,]’’ which ‘‘includes, but is not 

limited to, the customer’s age, other 

investments, financial situation and 

needs, tax status, investment objectives, 

investment experience, investment time 

horizon, liquidity needs, risk tolerance, 

and any other information the customer 

may disclose to the member or 

associated person in connection with 

such recommendation.’’ 19

The proposed rule would explicitly 

cover a recommended investment 

strategy. Although FINRA generally 

intends the term ‘‘strategy’’ to be 

interpreted broadly, the proposed 

supplementary material would exclude 

the following communications from the 

coverage of Rule 2111 as long as they do 

not include (standing alone or in 

combination with other 

communications) a recommendation of 

a particular security or securities: 

• General financial and investment 

information, including (i) basic 

investment concepts, such as risk and 

return, diversification, dollar cost 

averaging, compounded return, and tax 

deferred investment, (ii) historic 

differences in the return of asset classes 

(e.g., equities, bonds, or cash) based on 

standard market indices, (iii) effects of 

inflation, (iv) estimates of future 

retirement income needs, and (v) 

assessment of a customer’s investment 

profile; 

• Descriptive information about an 

employer-sponsored retirement or 

benefit plan, participation in the plan, 

the benefits of plan participation, and 

the investment options available under 

the plan; 

• Asset allocation models that are (i) 

based on generally accepted investment 

theory, (ii) accompanied by disclosures 

of all material facts and assumptions 

that may affect a reasonable investor’s 

assessment of the asset allocation model 

or any report generated by such model, 

and (iii) in compliance with NASD 

Interpretative Material (‘‘IM’’) 2210–6 

(Requirements for the Use of Investment 

Analysis Tools) if the asset allocation 

model is an ‘‘investment analysis tool’’ 

covered by NASD IM–2210–6; 20 and 

• Interactive investment materials 

that incorporate the above.21

The proposal also would codify 

interpretations of the three main 

suitability obligations, listed below: 

• Reasonable basis (members must 

have reasonable grounds to believe, 

based on reasonable diligence, that a 

recommendation is suitable for at least 

some investors); 

• Customer specific (members must 

have reasonable grounds to believe a 

recommendation is suitable for the 

particular investor at issue); and 

• Quantitative (members must have a 

reasonable basis to believe the number 

of transactions recommended to a 

customer within a certain period is not 

excessive).22

In addition, the proposal would 

modify the institutional-customer 

exemption by focusing on whether there 

is a reasonable basis to believe that the 

institutional customer is capable of 

evaluating investment risks 

independently, both in general and with 

regard to particular transactions and 

investment strategies,23 and is 

exercising independent judgment in 

evaluating recommendations.24 The 

proposal would require institutional 

customers to affirmatively indicate that 

they are exercising independent 

judgment,25 and would harmonize the 

definition of institutional customer in 

the suitability rule with the definition of 

‘‘institutional account’’ in NASD Rule 

3110(c)(4).26

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71482 Federal Register / Vol. 75, No. 225 / Tuesday, November 23, 2010 / Notices 

Exchange Act Release No. 63181 (October 26, 2010), 

75 FR 67155 (November 1, 2010). 

27See Proposed Rule 2111(a). 

28See Exchange Act Rule 15g–1 through 15g–9. 

29See Section 10(b) of the Act; FINRA Rule 2020. 

30See Proposed Rule 2111(a). 

31See Proposed Rule 2111.05. 

32See Proposed Rule 2111.06. 

33See Proposed Rule 2111.01. 

34See, e.g., Robert L. Gardner, 52 S.E.C. 343, 344 

n.1 (1995), aff’d, 89 F.3d 845 (9th Cir. 1996) (table 

format); Keith L. DeSanto, 52 S.E.C. 316, 317 n.1 

(1995), aff’d, 101 F.3d 108 (2d Cir. 1996) (table 

format); Jonathan G. Ornstein, 51 S.E.C. 135, 137 

(1992); Dep’t of Enforcement v. Griffith, No. 

C01040025, 2006 NASD Discip. LEXIS 30, at *11– 

12 (NAC Dec. 29, 2006); Dep’t of Enforcement v. 

Puma, No. C10000122, 2003 NASD Discip. LEXIS 

22, at *12 n.6 (NAC Aug. 11, 2003). 

35See supra, note 5. 

36See supra, note 6. 

37See supra, note 7. 

38See TIAA–CREF Letter, CAI Letter, Schwab 

Letter, SIFMA Letter, TD Ameritrade Letter, and FSI 

Letter. 

39See Black-Gross Letter. 

40FINRA notes as well that the suitability rule is 

only one of many FINRA business-conduct rules 

with which broker-dealers and their associated 

persons must comply. Many FINRA rules prohibit, 

limit, or require disclosure of conflicts of interest. 

Broker-dealers and their associated persons, for 

instance, must comply with just and equitable 

principles of trade, standards for communications 

with the public, order-handling requirements, fairpricing standards, and various disclosure 

obligations regarding research, trading, 

compensation, margin, and certain sales and 

distribution activity, among others, in addition to 

suitability obligations. 

41 75 FR 51310, at 51314 (Aug. 19, 2010) and 75 

FR 52562, 52567 (Aug. 26, 2010) citing SEC Release 

Nos. IC–22579, IA–1623, S7–24–95, 1997 SEC 

LEXIS 673, at *26 (Mar. 24, 1997) (Status of 

Investment Advisory Programs under the 

Investment Company Act of 1940). See also 

Shearson, Hammill & Co., 42 S.E.C. 811 (1965) 

(finding willful violations of Section 206 of the 

Advisers Act when investment adviser made 

unsuitable recommendations). 

Finally, the suitability proposal 

would eliminate or modify a number of 

the IMs associated with the existing 

suitability rule because they are no 

longer necessary. Some of these IMs 

would be unnecessary in light of the 

proposed changes to the scope of the 

suitability rule (e.g., the proposed rule 

text would capture ‘‘strategies’’ currently 

referenced in IM–2310–3),27 and others 

would be redundant because they 

identify conduct explicitly covered by 

other rules (e.g., inappropriate sale of 

penny stocks referenced in IM–2310–1 

is covered by the Commission’s penny 

stock rules,28 while fraudulent conduct 

identified in IM–2310–2 is covered by 

Exchange Act and FINRA anti-fraud 

provisions 29). 

Other IM provisions would be 

incorporated in some form into the 

proposed rule or the supplementary 

material to the proposed rule. For 

example, the exemption in IM–2310–3 

dealing with institutional customers has 

been modified and would be included 

in the text of proposed FINRA Rule 

2111.30 In addition, the explication of 

the three main suitability obligations in 

IM–2310–2 and IM–2310–3 has been 

consolidated into a single discussion in 

the proposed rule’s supplementary 

material.31 Similarly, the proposed 

rule’s supplementary material would 

include a modified form of the current 

requirement in IM–2310–2 that a 

member refrain from recommending 

purchases beyond a customer’s 

capability.32 The supplementary 

material also would incorporate the 

discussions in IM–2310–2 and IM– 

2310–3 regarding the significance of the 

suitability rule in promoting fair dealing 

with customers and ethical sales 

practices.33

The only type of misconduct 

identified in the IMs that is neither 

explicitly covered by other rules nor 

incorporated in some form into the 

proposed new suitability rule is 

unauthorized trading, currently 

discussed in IM–2310–2. However, it is 

well settled that unauthorized trading 

violates just and equitable principles of 

trade under FINRA Rule 2010 

(previously NASD Rule 2110).34

Consequently, the elimination of the 

discussion of unauthorized trading in 

the IMs following the suitability rule 

does not alter the longstanding view 

that unauthorized trading is serious 

misconduct and clearly violates 

FINRA’s rules. 

FINRA will announce the 

implementation date of the proposed 

rule change in a Regulatory Notice to be 

published no later than 60 days 

following Commission approval. The 

implementation date will be no later 

than 270 days following publication of 

the Regulatory Notice announcing 

Commission approval. 

III. Summary of Comments and 

FINRA’s Response 

As stated previously, the Commission 

received 22 comments in response to 

the proposed rule change,35 and FINRA 

responded to the comments both by 

letter 36 and by filing an amendment to 

the proposed rule change to address 

certain comments.37 Although 

commenters raised numerous 

suitability-related issues that FINRA 

previously addressed in its original rule 

filing with the Commission, a few 

commenters identified new suitabilityrelated concerns regarding the proposed 

rule change, and some persuaded 

FINRA to amend the proposal. A 

discussion of those comments and 

FINRA’s response follows. 

Request for Indeterminate Delay of the 

Proposal 

• Comments 

Six commenters argued that FINRA’s 

proposed rule changes should not be 

acted on until after policymakers (e.g., 

Congress, the Commission, and/or 

FINRA) determine whether brokerdealers must comply with fiduciary 

obligations.38 In particular, these 

commenters cited the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act of 2010 (‘‘Dodd-Frank’’), which, 

among other things, requires the SEC to 

study the standards of care brokerdealers and investment advisers must 

adhere to when dealing with clients 

(including a fiduciary duty). These 

commenters advocated postponing 

FINRA’s proposed rule changes until 

the parameters of any SEC rulemaking 

resulting from the study are clear. Other 

commenters strongly opposed any 

delay, citing the importance of FINRA’s 

proposal to investor protection.39

• FINRA’s Response 

FINRA stated that its proposal 

generally maintains the core features of 

its current ‘‘know your customer’’ and 

suitability rules. FINRA also indicated 

that the proposed changes to those rules 

would provide greater protection to 

investors and greater certainty to brokerdealers by streamlining various 

provisions to focus on critical 

obligations that are not covered by other 

rules and by codifying in one place 

significant interpretations of key 

requirements. 

FINRA also expressed the view that 

nothing in Dodd-Frank argues for the 

discontinuance of these important salespractice obligations or the weakening of 

investor protection generally. FINRA 

stated that the suitability obligations in 

proposed Rule 2111 would not be 

inconsistent with a fiduciary duty if 

broker-dealers become subject to that 

duty at some future date.40 In addition, 

FINRA noted that the suitability and 

‘‘know your customer’’ standards are a 

material part of a fiduciary duty in the 

context of advice or recommendations. 

In response to similar comments 

made with respect to FINRA’s NTM 09– 

25, FINRA quoted a Commission release 

that noted ‘‘investment advisers under 

the Advisers Act’’ that have fiduciary 

duties ‘‘owe their clients the duty to 

provide only suitable investment advice 

* * *. To fulfill this suitability 

obligation, an investment adviser must 

make a reasonable determination that 

the investment advice provided is 

suitable for the client based on the 

client’s financial situation and 

investment objectives.’’ 41 FINRA also 

cited another Commission release that 

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42 75 FR 51310, at 51314 (Aug. 19, 2010) and 75 

FR 52562, 52567 (Aug. 26, 2010) citing Investment 

Advisers Act Release No. 1406, 1994 SEC LEXIS 

797, at *4 (Mar. 16, 1994) (Suitability of Investment 

Advice Provided by Investment Advisers). 

43See Black-Gross Letter. 

44See SIFMA Letter. 

45See SIFMA Letter. 

46 Id. 

47See, e.g., Proposed Rule 2090 (replacing the 

term ‘‘due diligence’’ with ‘‘reasonable diligence’’); 

Supplementary Material .04 (Customer’s Investment 

Profile) to Proposed Rule 2111 (using the terms 

‘‘reasonable basis’’ and ‘‘reasonable diligence’’); 

Supplementary Material .05 (Components of 

Suitability Obligations) to Proposed Rule 2111 

(replacing the term ‘‘adequate due diligence’’ with 

the term ‘‘reasonable diligence’’ and replacing the 

term ‘‘reasonable grounds’’ with the term 

‘‘reasonable basis’’); Supplementary Material .06 

(Customer’s Financial Ability) to Proposed Rule 

2111 (replacing the term ‘‘reasonable expectation’’ 

with the term ‘‘reasonable basis’’). 

48The Supplementary Material regarding 

reasonable-basis suitability now contains the 

following expanded discussion of the term 

‘‘reasonable diligence’’: ‘‘A member’s or associated 

person’s reasonable diligence must provide the 

member or associated person with an 

understanding of the potential risks and rewards 

associated with the recommended security or 

strategy. The lack of such an understanding when 

recommending a security or strategy violates the 

suitability rule.’’ 

49See Schwab Letter, CAI Letter, SIFMA Letter, 

TD Ameritrade Letter, and TIAA–CREF Letter. 

50See CAI Letter, TD Ameritrade Letter, and 

TIAA–CREF Letter. 

51See Schwab Letter, CAI Letter, SIFMA Letter, 

TD Ameritrade Letter, and TIAA–CREF Letter. 

52See FSI Letter. 

53Supplementary Material .04 to Proposed 

FINRA Rule 2111 would provide, ‘‘.04 Customer’s 

Investment Profile. A member or associated person 

shall make a recommendation covered by this Rule 

only if, among other things, the member or 

associated person has sufficient information about 

the customer to have a reasonable basis to believe 

that the recommendation is suitable for that 

customer. The factors delineated in Rule 2111(a) 

regarding a customer’s investment profile generally 

are relevant to a determination regarding whether 

a recommendation is suitable for a particular 

customer, although the level of importance of each 

factor may vary depending on the facts and 

circumstances of the particular case. A member or 

associated person shall use reasonable diligence to 

obtain and analyze all of the factors delineated in 

Rule 2111(a) unless the member or associated 

person has a reasonable basis to believe, 

documented with specificity, that one or more of 

the factors are not relevant components of a 

customer’s investment profile in light of the facts 

and circumstances of the particular case.’’ 

explained that ‘‘[i]nvestment advisers 

are fiduciaries who owe their clients a 

series of duties, one of which is the duty 

to provide only suitable investment 

advice.’’ 42

As to timing, FINRA maintained that 

improvements to investor protection 

and clarification of broker-dealer 

obligations should not be postponed 

indefinitely simply because there could 

potentially be a rule that may address 

similar issues at a future time. FINRA 

indicated that delay also would be 

problematic because it would amount to 

an open-ended postponement of the 

important benefits to customers and 

broker-dealers noted above. As some 

commenters noted, Dodd-Frank does 

not require that the Commission engage 

in rulemaking at the end of its study 

and, even if the Commission proposes a 

rule, there is no timetable for doing so.43

Proposed FINRA Rule 2090 

• Comments 

One commenter expressed concern 

regarding FINRA’s proposed elimination 

of Supplementary Material .20 to NYSE 

Rule 405, which references the 

applicability of NYSE Rule 382 

(Carrying Agreements) and the 

allocation of responsibility between 

introducing and carrying firms.44

• FINRA’s Response 

FINRA stated that because NASD Rule 

3230 (Clearing Agreements), which 

generally would be applicable, similarly 

covers allocation issues between 

introducing and carrying firms, 

reference to NYSE Rule 382 is both 

outdated and unnecessary. 

Proposed FINRA Rule 2111—Consistent 

Terminology and Expanded 

Explanation of Key Terms 

• Comments 

One commenter suggested that FINRA 

should maintain a standard approach to 

the terminology used in the rule.45 The 

commenter gave as an example the use 

of ‘‘reasonable basis’’ in one section and 

‘‘reasonable grounds’’ in another. The 

commenter also noted that the rule uses 

both ‘‘reasonable diligence’’ and 

‘‘adequate due diligence.’’ Another 

commenter asked FINRA to provide 

greater clarity in Supplementary 

Material regarding the terms 

‘‘investment profile’’ and ‘‘reasonable 

diligence.’’ 46

• FINRA’s Response 

In response to this and other 

comments, FINRA filed Amendment 

No. 1, which amended the proposal to 

use more consistent terminology, where 

possible, and to provide more detailed 

explanations regarding key terms or 

responsibilities. As amended, the rule 

would consistently use the term 

‘‘reasonable basis’’ rather than also using 

‘‘reasonable grounds’’ and ‘‘reasonable 

expectations,’’ and the term ‘‘reasonable 

diligence’’ instead of also using ‘‘due 

diligence’’ and ‘‘adequate diligence.’’ 47

In addition, Amendment No. 1 amends 

the proposal to add expanded 

discussions regarding a ‘‘customer’s 

investment profile’’ (see discussion 

below of new Supplementary Material 

.04—Customer’s Investment Profile) and 

the ‘‘reasonable diligence’’ standards in 

the context of a customer’s investment 

profile (see below) and reasonable-basis 

suitability.48

Proposed FINRA Rule 2111— 

Information Gathering 

• Comments 

Some commenters took issue with 

various aspects of the proposal’s 

information-gathering requirements. 

Several commenters stated that 

obtaining each specified category of 

information is not warranted on every 

occasion.49 Some asked that FINRA 

build flexibility into the rule so that a 

firm would not have to collect 

information if it was irrelevant based on 

the particular facts and circumstances.50

Alternatively, these commenters 

requested that FINRA establish an 

effective date for the new rule that 

recognizes the difficulty associated with 

developing, modifying, and 

implementing forms and systems to 

request and capture the proposed new 

categories of information.51

One commenter maintained that 

factors such as a customer’s investment 

experience, time horizon, and risk 

tolerance should be considered when 

reviewing a customer’s portfolio as a 

whole, and not individual trades.52 In 

this commenter’s view, requiring 

consideration of such factors on a tradeby-trade basis would prevent customers 

from creating a diverse portfolio made 

up of securities with different levels of 

liquidity, risk, and time horizons. 

• FINRA’s Response 

FINRA noted that the factors it added 

to the rule are subsets of broader 

categories of information identified in 

the current suitability rule, and that case 

law and regulatory notices have long 

stressed the significance of these factors 

to a suitability analysis. In response to 

those comments requesting flexibility 

regarding the type of information that 

firms must seek to obtain and comments 

requesting more guidance on what is 

required, FINRA proposed in 

Amendment No. 1 to add 

Supplementary Material .04 to FINRA 

Rule 2111.53 FINRA believes proposed 

Supplementary Material .04 would 

provide flexibility regarding the type of 

information that firms must seek to 

obtain and analyze in connection with 

a recommendation under the proposed 

rule. However, because FINRA believes 

the factors discussed in Rule 2111(a) 

generally are relevant (and often crucial) 

to a suitability analysis, the proposed 

rule would require firms to document 

with specificity their reasonable basis 

for believing that a factor is not relevant 

in order to be relieved of the obligation 

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54FINRA noted that the efforts of a firm that seeks 

but does not obtain information about a particular 

factor (as opposed to a situation where the firm 

does not attempt to obtain the information about a 

particular factor) would be judged by the 

‘‘reasonable diligence’’ standard. FINRA also noted 

that, when customer information is unavailable 

despite a firm’s reasonable diligence in seeking to 

obtain the information, the firm must carefully 

consider whether it has sufficient customer 

information to properly evaluate the suitability of 

a recommendation to the customer. However, 

FINRA noted further that if the firm used 

reasonable diligence, the absence of some customer 

information that is not critical to the analysis based 

on the facts and circumstances of the particular 

situation generally would not preclude a 

recommendation from being viewed as suitable as 

long as the broker had obtained and analyzed other 

customer information that provided the broker with 

a reasonable basis to believe that the 

recommendation was suitable for that customer. 

FINRA Response, note 19. 

55See e.g., Notice to Members 01–23 (Apr., 2001) 

(‘‘[A] broker-dealer cannot disclaim away its 

suitability obligations * * *.’’) Supplementary 

Material .02 to Proposed FINRA Rule 2111 reads 

‘‘.02 Disclaimers. A member or associated person 

cannot disclaim any responsibilities under the 

suitability rule.’’ 

56This statement was confirmed in a telephone 

conversation between James Wrona, Associate Vice 

President and Associate General Counsel, FINRA, 

and Bonnie Gauch, Special Counsel, Division of 

Trading and Markets, Commission, on November 

15, 2010. 

57See Brewer Letter, Catalano Letter, Estell Letter, 

Ilgenfritz Letter, Jacobson Letter, Krosschell Letter, 

Layne Letter, Mougey Letter, Neuman Letter, PIABA 

Letter, and Van Kampen Letter. 

58Exchange Act Release No. 62718 (Aug. 13, 

2010), 75 FR 51310, at 51316 (Aug. 19, 2010) and 

Exchange Act Release No. 62718A (Aug. 20, 2010), 

75 FR 52562, at 52568 (Aug. 26, 2010) (‘‘The term 

‘‘strategy,’’ moreover, would cover explicit 

recommendations to hold a security or securities.’’) 

FINRA further stated that the rule would not cover 

implicit recommendations to hold a security or 

securities. 

59 Id. 

60See SIFMA Letter. Rule 144A deals with the 

application of Section 5 of the Securities Act to 

private resales of securities to institutions. It does 

not limit the application of the antifraud or other 

provisions of the federal securities laws. 

61See SIFMA Letter. 

62 Id. 

to seek to obtain information about that 

factor.54

FINRA stated that proposed 

Supplementary Material .04 also led to 

the addition of new Supplementary 

Material .02 to proposed Rule 2111 that 

reiterates FINRA’s longstanding position 

that firms and their associated persons 

cannot disclaim any obligations under 

the suitability rule.55 Among other 

things, Supplementary Material .02 

would clarify that firms and their 

associated persons cannot disclaim their 

obligation to use reasonable diligence to 

obtain and analyze relevant customer 

information. 

Finally, FINRA indicated that it 

disagrees with the premise that a 

recommendation–by-recommendation 

analysis precludes consideration of a 

customer’s investment portfolio. FINRA 

contended that although its suitability 

rule requires a recommendation-byrecommendation analysis, the current 

and proposed suitability rules explicitly 

permit the suitability analysis of a 

particular transaction to be performed 

within the context of the investor’s 

other security holdings or investments. 

In fact, they requires that firms make 

reasonable efforts to gather and analyze 

information regarding a customer’s 

other securities holdings as part of its 

suitability review.56

Proposed Rule 2111— 

Recommendations To Hold Securities 

• Comments 

Several commenters urged FINRA to 

clarify in the rule that the rule covers 

explicit recommendations to hold a 

security or securities.57

• FINRA’s Response 

FINRA indicated that it previously 

had stated that eliminating in the 

proposed rule the reference to 

‘‘purchase, sale or exchange’’ used in the 

current rule and adding in the proposed 

rule the term ‘‘strategy’’ meant that the 

proposed rule would cover explicit 

recommendations to hold a security or 

securities.58 FINRA explained that the 

rule recognizes that customers may rely 

on members’ and associated persons’ 

investment expertise and knowledge, 

and it is thus appropriate to hold 

members and associated persons 

responsible for the recommendations 

that they make to customers, regardless 

of whether those recommendations 

result in transactions or generate 

transaction-based compensation.59

For purposes of clarity, Amendment 

No. 1 would amend Supplementary 

Material .03 to state that investment 

strategies would include, among other 

things, an explicit recommendation to 

hold a security or securities. 

Proposed Rule 2111—Institutional 

Customers 

• Comments 

One commenter requested that FINRA 

exempt from the ‘‘affirmative indication’’ 

requirement of proposed Rule 2111(b) 

those institutional investors that qualify 

as qualified institutional buyers (‘‘QIBs’’) 

for purposes of Rule 144A under the 

Securities Act of 1933 (the ‘‘Securities 

Act’’).60 That commenter argued that 

‘‘[QIBs] are among the most 

sophisticated counterparties in the 

institutional marketplace, and member 

firms already have well established 

suitability procedures for these 

customers that reflect their level of 

sophistication.’’ 

The same commenter also suggested 

that FINRA expand the coverage of 

proposed Rule 2111(b) so that, in 

addition to meeting its customerspecific suitability obligation, a member 

firm also meets its quantitative 

suitability obligation if the conditions in 

Rule 2111(b)(1) and (2) are satisfied.61

That commenter stated that imposing a 

quantitative suitability obligation in the 

institutional delivery-versus-payment/ 

receipt-versus-payment context makes 

little sense. The commenter also stated 

that, because business institutions 

typically have their own internal 

portfolio managers, handle custody 

away from the broker-dealer and 

execute trades with multiple firms, no 

single broker-dealer would see all of an 

institution’s trades or its entire 

investment portfolio, and thus no single 

broker-dealer would be in a position to 

determine whether the institution’s 

transactions are so excessive or frequent 

as to constitute churning. 

In addition, this commenter requested 

that FINRA modify the sentence in 

proposed Supplementary Material .05 

providing that ‘‘[w]ith respect to having 

to indicate affirmatively that it is 

exercising independent judgment in 

evaluating the member’s or associated 

person’s recommendations, an 

institutional customer may indicate that 

it is exercising independent judgment 

on a trade-by-trade basis, on an assetclass-by-asset-class basis, or in terms of 

all potential transactions for its 

account.’’ 62 The commenter believed 

this sentence was confusing and subject 

to varying interpretations. The 

commenter stated that it believed that 

‘‘the intent of Supplementary Material 

.05 is to clarify that proposed Rule 

2111(b)(2) allows member firms to 

establish and document a clear 

understanding of the institutional 

customer’s independence at the outset 

of the relationship—that is, at the time 

of account opening,’’ and that if the 

intent were not as it believed, the 

sentence would ‘‘fundamentally alter the 

operation of the institutional markets 

and could have a negative impact on 

execution quality.’’ 

• FINRA’s Response 

FINRA stated, with respect to the 

comment that FINRA should exempt 

firms from the requirement to obtain an 

‘‘affirmative indication’’ from QIBs, that 

it does not believe that a monetary 

threshold, whatever the amount or 

context, is an adequate substitute for the 

proposed requirement that the 

institutional customer affirmatively 

acknowledge that it is exercising 

independent judgment as part of the 

determination that an exemption from 

customer-specific suitability applies. 

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63 In approving this proposal, the Commission has 

considered the proposed rules’ impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 17c(f). 64 15 U.S.C. 78o–3(b)(6). 65 15 U.S.C. 78s(b)(2). 

66 Id. 

67 17 CFR 200.30–3(a)(12). 

With respect to the comment that 

FINRA should expand proposed Rule 

2111(b) to provide that a member firm 

meets both its customer specific 

obligation and its quantitative 

suitability obligation if it satisfies the 

conditions in Rule 2111(b)(1) and (2), 

FINRA stated that it is important that a 

firm not recommend an unsuitable 

number of transactions in those 

circumstances where it has control over 

an account. FINRA emphasized, 

however, that quantitative suitability 

generally would apply only with regard 

to that portion of an institutional 

customer’s portfolio that the firm 

controls and only with regard to the 

firm’s recommended transactions. 

Finally, with respect to the request for 

clarification of the sentence in 

Supplementary Material .05, FINRA 

stated that its intent was to allow an 

institutional investor to indicate that it 

is ‘‘exercising independent judgment on 

a trade-by-trade basis, on an asset-classby-asset-class basis, or in terms of all 

potential transactions for its account,’’ 

and that it believes the language of the 

Supplementary Material is clear. 

Further, FINRA indicated that if a 

broker-dealer believes that such action 

on a trade-by-trade basis would 

fundamentally change its operations, it 

can decide as a business matter to 

service only those institutional investors 

that are willing to make the affirmative 

indication in terms of all potential 

transactions for its account. 

IV. Discussion and Commission 

Findings 

After careful review of the proposed 

rule change, the comments received, 

and FINRA’s response to the comments, 

the Commission finds that the proposed 

rule change is consistent with the 

requirements of the Act, and the rules 

and regulations thereunder that are 

applicable to a national securities 

association.63 The Commission believes 

that the proposed rule change is 

consistent with the provisions of 

Section 15A(b)(6) of the Act 64 in that it 

is designed to prevent fraudulent or 

manipulative acts and practices, 

promote just and equitable principles of 

trade, and, in general, to protect 

investors and the public interest. 

Specifically, the Commission believes 

the proposed rule change is consistent 

with FINRA’s obligations under the 

Exchange Act to prevent fraudulent or 

manipulative acts and practices, and to 

promote just and equitable principles of 

trade, because the proposed rule would 

incorporate the NASD suitability rule 

and the NYSE ‘‘know your customer’’ 

rule into the FINRA consolidated 

rulebook. The suitability and ‘‘know 

your customer’’ obligations are critical to 

ensuring investor protection and fair 

dealing with customers. The proposed 

rule changes also would modify those 

rules to strengthen and clarify them, and 

incorporate into the rules certain settled 

interpretive guidance and case law. 

Additionally, the Commission 

believes that FINRA has adequately 

responded to commenters’ concerns 

both by its letter of October 21, 2010 

and its filing of Amendment No. 1. 

Amendment No. 1 would standardize 

the terminology used in the proposed 

rule change, provide additional 

clarification with respect to certain 

aspects of the proposed rule change, and 

provide broker-dealers with appropriate 

flexibility without impairing the rules’ 

investor protection goals. 

V. Accelerated Approval 

The Commission finds good cause, 

pursuant to Section 19(b)(2) of the 

Exchange Act,65 for approving the 

proposed rule change, as modified by 

Amendment No. 1, prior to the 30th day 

after publication of Amendment No. 1 

in the Federal Register. The changes 

proposed in Amendment No. 1 respond 

to specific concerns raised by 

commenters and do not raise any 

additional issues. In particular, 

Amendment No. 1 would standardize 

the terminology used in the proposed 

rule change, provide additional 

clarification with respect to certain 

aspects of the proposed rule change, and 

provide broker-dealers with appropriate 

flexibility without impairing the rule’s 

investor protection goals. 

Accordingly, the Commission finds 

that good cause exists to approve the 

proposal, as modified by Amendment 

No.1, on an accelerated basis. 

VI. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–FINRA–2010–039 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–FINRA–2010–039. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of such filing 

also will be available for inspection and 

copying at the principal office of 

FINRA. All comments received will be 

posted without change; the Commission 

does not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–FINRA–2010–039 and 

should be submitted on or before 

December 14, 2010. 

VII. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,66 that the 

proposed rule change (SR–FINRA– 

2008–039), as modified by Amendment 

No. 1, be, and hereby is, approved on an 

accelerated basis. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.67

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–29447 Filed 11–22–10; 8:45 am] 

BILLING CODE 8011–01–P 

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