[Federal Register Volume 74, Number 166 (Friday, August 28, 2009)]
[Notices]
[Pages 44410-44412]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-20704]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60534; File No. SR-FINRA-2009-036]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval to a Proposed Rule Change, as Modified by 
Amendment No. 1, To Adopt FINRA Rules 2124 (Net Transactions With 
Customers), 2220 (Options Communications), 4370 (Business Continuity 
Plans and Emergency Contact Information) and 5250 (Payment for Market 
Making) in the Consolidated FINRA Rulebook

August 19, 2009.

I. Introduction

    On May 21, 2009, the Financial Industry Regulatory Authority, Inc 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')), filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt NASD Rules 2220 (Options Communications), 
2441 (Net Transactions with Customers), 2460 (Payment for Market 
Making), 3510 (Business Continuity Plans) and 3520 (Emergency Contact 
Information) as FINRA Rules in the consolidated FINRA rulebook 
(``Consolidated FINRA Rulebook''). The proposed rule change would 
renumber NASD Rule 2220 as FINRA Rule 2220, NASD Rule 2441 as FINRA 
Rule 2124, and NASD Rule 2460 as FINRA Rule 5250 and would combine NASD 
Rules 3510 and 3520 as FINRA Rule 4370 in the consolidated FINRA 
Rulebook. The proposed rule change was published for comment in the 
Federal Register on June 15, 2009.\3\ The Commission received one 
comment letter on the proposed rule change.\4\ FINRA submitted a letter 
responding to the commenter \5\ and on July 24, 2009, filed Amendment 
No. 1 to the proposed rule change.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 60066 (June 8, 
2009), 74 FR 28308 (``Notice'').
    \4\ See letter from Pamela Ziermann, Dougherty and Company LLC 
to Elizabeth M. Murphy, Secretary, Commission, dated June 30, 2009 
(``Dougherty Letter'').
    \5\ See letter from Patricia Albrecht, Assistant General 
Counsel, FINRA, to Elizabeth M. Murphy, Secretary, Commission, dates 
July 24, 2009.
    \6\ In Amendment No. 1, FINRA would revise proposed FINRA Rule 
4370 to require that only one of a member's two designated emergency 
contact persons must be a member of senior management and a 
registered principal of the firm.
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II. Discussion and Commission Findings

    After careful review of the proposed rule change, the comment 
letter, and FINRA's response, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
association.\7\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\8\ which 
requires, among other things, that FINRA rules must be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and in general to protect investors 
and the public interest.
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    \7\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78o-3(b)(6).

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[[Page 44411]]

A. Proposed FINRA Rule 2220

    FINRA is proposing to adopt NASD Rule 2220 (Options Communications) 
without substantive change into the Consolidated FINRA Rulebook as 
FINRA Rule 2220. NASD Rule 2220 sets forth a member's obligations with 
respect to its options communications with the public. In 2008, the 
Commission approved FINRA's proposed revisions to NASD Rule 2220 to 
make it more consistent with FINRA's general rules on communications 
with the public and the options communications rules of other self-
regulatory organizations (``SROs'').\9\ The amended rule became 
effective on March 4, 2009.\10\ As amended, NASD Rule 2220, among other 
things: (1) Uses, to the extent appropriate, the same terminology and 
definitions as in FINRA's general rules on communications with the 
public; (2) makes the requirements for principal review of 
correspondence concerning options the same as for correspondence 
generally; and (3) updates the standards on the content of 
communications that precede the delivery of the options disclosure 
document (ODD). The Commission believes that it is appropriate to 
transfer NASD Rule 2220 into the Consolidated FINRA Rulebook as FINRA 
Rule 2220 with the non-substantive changes proposed by FINRA.
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    \9\ See Securities Exchange Act Release No. 58738 (October 6, 
2008), 73 FR 60371 (October 10, 2008) (order approving File No. SR-
FINRA-2008-013).
    \10\ See Regulatory Notice 08-73 (December 2008) (SEC Approves 
Amendments to NASD Rule 2220 to Update the Standards for Options 
Communications). There is no longer a comparable Incorporated NYSE 
Rule. FINRA previously deleted substantially similar Incorporated 
NYSE Rule 791 (Communications to Customers) as part of a rule change 
that, among other things, reduced regulatory duplication for Dual 
Members during the interim period before the completion of the 
Consolidated FINRA Rulebook. See Securities Exchange Act Release No. 
58533 (September 12, 2008), 73 FR 54652 (September 22, 2008) (order 
approving File No. SR-FINRA-2008-036).
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B. Proposed FINRA Rule 2124

    FINRA is proposing to adopt NASD Rule 2441 (Net Transactions with 
Customers) without substantive change into the Consolidated FINRA 
Rulebook as FINRA Rule 2124. NASD Rule 2441 requires members to provide 
disclosure and obtain consent when trading on a ``net'' basis with 
customers.\11\ The Commission approved NASD Rule 2441 in 2006.\12\ With 
respect to non-institutional customers, the member must obtain the 
customer's written consent on an order-by-order basis prior to 
executing the transaction and such consent must evidence the customer's 
understanding of the terms and conditions of the order. With respect to 
institutional customers, a member must obtain the customer's consent 
prior to executing the transaction and such consent may be obtained by 
either: (1) Use of a negative consent letter; (2) oral disclosure and 
consent on an order-by-order basis; or (3) written consent on an order-
by-order basis. The Commission believes that it is appropriate to 
transfer NASD Rule 2441 into the Consolidated FINRA Rulebook as FINRA 
Rule 2124 with the non-substantive changes proposed by FINRA.
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    \11\ A ``net'' transaction is a principal transaction in which a 
market maker, after having received an order to buy (sell) an equity 
security, purchases (sells) the equity security at one price (from 
(to) another broker-dealer or another customer) and then sells to 
(buys from) the customer at a different price.
    \12\ See Securities Exchange Act Release No. 54088 (June 30, 
2006), 71 FR 38950 (July 10, 2006) (order approving File No. SR-
NASD-2004-135).
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C. Proposed FINRA Rule 5250

    FINRA is proposing to adopt NASD Rule 2460 (Payment for Market 
Making) without substantive change into the Consolidated FINRA Rulebook 
as FINRA Rule 5250. The Commission approved NASD Rule 2460 in 1997.\13\ 
NASD Rule 2460 prohibits any payments by an issuer or an issuer's 
affiliates and promoters, directly or indirectly, to a member or person 
associated with a member for publishing a quotation, acting as a market 
maker, or submitting an application in connection therewith. The rule 
contains two exceptions that permit a member to accept: (1) Payment for 
bona fide services, including, but not limited to, investment banking 
services; and (2) reimbursement for registration or listing fees. The 
Commission believes that it is appropriate to transfer NASD Rule 2460 
into the Consolidated FINRA Rulebook as FINRA Rule 5250 with the non-
substantive changes proposed by FINRA.
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    \13\ See Securities Exchange Act Release No. 38812 (July 3, 
1997), 62 FR 37105 (July 10, 1997) (order approving File No. SR-
NASD-97-29).
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D. Proposed FINRA Rule 4370

    FINRA is proposing to adopt NASD Rule 3510 (Business Continuity 
Plans) and NASD Rule 3520 (Emergency Contact Information) into the 
Consolidated FINRA Rulebook and combine the rules as FINRA Rule 4370 
(Business Continuity Plans and Emergency Contact Information). NASD 
Rule 3510 requires members to create and maintain a written business 
continuity plan identifying procedures relating to an emergency or 
significant business disruption and enumerates the minimum elements 
that a member's business continuity plan must address, to the extent 
those elements are applicable and necessary to the member's business. 
NASD Rule 3510 further requires members to update their business 
continuity plans upon any material change and, at a minimum, conduct an 
annual review of their plans. Each member also must disclose to its 
customers how its business continuity plan addresses the possibility of 
a future significant business disruption and how the member plans to 
respond to events of varying scope. Each member must make this 
disclosure, at a minimum, in writing to customers at account opening, 
by posting it on the member's Web site (if the member maintains a Web 
site), and by mailing it to customers upon request.
    NASD Rule 3510 is one part of the NASD Rule 3500 Series (Emergency 
Preparedness), which requires members to establish emergency 
preparedness plans and procedures. NASD Rule 3520, which comprises the 
remainder of the NASD Rule 3500 Series, requires members to designate 
two emergency contact persons and provide this information to FINRA via 
electronic process.\14\
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    \14\ There is no longer a comparable Incorporated NYSE Rule to 
NASD Rules 3510 and 3520. FINRA previously deleted from the 
Transitional Rulebook NYSE Rule 446 (Business Continuity and 
Contingency Plans), which contained substantially similar 
requirements as the two NASD rules, as part of the rule change to 
reduce regulatory duplication for Dual Members during the period 
before completion of the Consolidated FINRA Rulebook. See Securities 
Exchange Act Release No. 58533 (September 12, 2008), 73 FR 54652 
(September 22, 2008) (order approving File No. SR-FINRA-2008-036).
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    The Dougherty Letter generally supported the proposal, but 
recommended one change in the area of emergency contact information. 
The proposed rule, as is the case today in NASD Rule 3510, originally 
required that each member report to FINRA two emergency contact persons 
and that each person be a member of senior management and a registered 
principal of the firm.\15\ The Dougherty Letter stated that ``[t]here 
may be situations where perhaps the best contact person may not be a 
registered principal but rather a Financial and Operations Principal or 
a technology manager.'' \16\ The Dougherty Letter emphasized that the 
``purpose of this rule is for FINRA to be able to contact individuals 
for business continuity purposes.'' \17\ The commenter pointed out that 
``the person most knowledgeable on computer

[[Page 44412]]

systems and business continuity issues may be someone other than a 
registered principal.'' \18\
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    \15\ See proposed FINRA Rule 4370.
    \16\ See Dougherty Letter, supra note 4.
    \17\ Id.
    \18\ Id.
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    In response, FINRA proposes to revise FINRA Rule 4370 to require 
that only one of a member's two designated emergency contact persons 
must be a member of senior management and a registered principal of the 
firm.\19\ The proposed rule change, however, would require that someone 
designated as a second emergency contact person who is not a registered 
principal must be a member of senior management who has knowledge of 
the member's business operations.\20\ The proposed rule change also 
would clarify that each emergency contact person must be an associated 
person of the member.\21\ In addition, FINRA proposes to amend FINRA 
Rule 4370 to codify existing guidance that in the case of a member with 
only one associated person (e.g., a sole proprietorship without any 
other associated persons), the second emergency contact person may be 
an individual, either registered with another firm or nonregistered, 
who has knowledge of the member's business operations, such as the 
member's attorney, accountant, or clearing firm contact.\22\ The 
Commission believes that transferring and combining NASD Rules 3510 and 
3520 into the Consolidated FINRA Rulebook will help ensure that members 
are prepared in the event of a significant business disruption.
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    \19\ See Amendment No. 1, supra note 6.
    \20\ Id.
    \21\ Id.
    \22\ Id.
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    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\23\ for approving the proposed rule change, as modified, prior 
to the thirtieth day after the date of publication of notice in the 
Federal Register. FINRA's proposed changes, with the exception of the 
proposed revisions contained in Amendment No. 1, were published for 
comment by the Commission.\24\ The Commission believes that Amendment 
No. 1 provides greater clarity regarding the designation of emergency 
contact persons and is consistent with a purpose of this rule, which is 
to provide FINRA with a means to contact a member in the event of a 
significant business disruption.
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    \23\ 15 U.S.C. 78s(b)(2).
    \24\ FINRA noted that it proposes to announce the implementation 
date of the proposed rule change in a Regulatory Notice to be 
published no later than 90 days following Commission approval.
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    Accordingly, the Commission finds that there is good cause, 
consistent with Section 15A(b)(6) of the Act,\25\ to approve the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
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    \25\ 15 U.S.C. 78o-3(b)(6).
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 1, is consistent with the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#9ceee9f0f9b1fff3f1f1f9f2e8efdceff9ffb2fbf3ea"><span class="__cf_email__" data-cfemail="443631282169272b2929212a3037043721276a232b32">[email protected]</span></a>. Please include 
File Number SR-FINRA-2009-036 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2009-036. 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 inspection 
and copying 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 the 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-2009-036 and should be 
submitted on or before September 18, 2009.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-FINRA-2009-036), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-20704 Filed 8-27-09; 8:45 am]
BILLING CODE 8010-01-P


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