Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices 553 

proposed rule’s impact on efficiency, competition, 

and capital formation. See 15 U.S.C. 78c(f). 

15 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3Exchange Act Release No. 73210 (Sept. 25, 

2014), 79 FR 59322 (Oct. 1, 2014) (Notice of Filing 

of a Proposed Rule Change to Adopt FINRA Rules 

0190 (Effective Date of Revocation, Cancellation, 

Expulsion, Suspension or Resignation) and 2040 

(Payments to Unregistered Persons) in the 

Consolidated FINRA Rulebook, and Amend FINRA 

Rule 8311 (Effect of a Suspension, Revocation, 

Cancellation, or Bar)) (‘‘Notice of Filing’’). The 

comment period closed on October 22, 2014. 

4William A. Jacobson, Clinical Professor of Law, 

Cornell Law School, and Director, Cornell 

Securities Law Clinic (Oct. 17, 2014) (‘‘Cornell’’); 

Peter J. Chepucavage, Esq., GC Plexus Consulting 

Group (Oct. 21, 2014) (‘‘Plexus’’); William Beatty, 

President, North American Securities 

Administrators Association and Washington 

Securities Commissioner (Oct. 22, 2014) 

(‘‘NASAA’’); Howard Spindel, Senior Managing 

Director, and Cassondra E. Joseph, Managing 

Director, Integrated Management Solutions USA 

LLC (Oct. 22, 2014) (‘‘IMS’’); Paul J. Tolley, Senior 

Vice President, Chief Compliance Officer, 

Commonwealth Financial Network (Oct. 22, 2014) 

(‘‘Commonwealth’’); Kevin Zambrowicz, Associate 

General Counsel & Managing Director, Securities 

Industry and Financial Markets Association (Oct. 

22, 2014) (‘‘SIFMA’’); and Catherine T. Dixon, 

Chair, Federal Regulation of Securities Committee, 

Business Law Section, American Bar Association 

(Nov. 5, 2014) (‘‘ABA’’). 

5Letter from Kosha K. Dalal, Associate Vice 

President and Associate General Counsel, FINRA to 

Katherine England, Assistant Director, Division of 

Trading and Markets, Securities and Exchange 

Commission, dated Nov. 10, 2014. 

At any time within 60 days of the 

filing of the proposed rule change, the 

Commission summarily may 

temporarily suspend such rule change if 

it appears to the Commission that such 

action is necessary or appropriate in the 

public interest, for the protection of 

investors, or otherwise in furtherance of 

the purposes of the Act. If the 

Commission takes such action, the 

Commission shall institute proceedings 

to determine whether the proposed rule 

should be approved or disapproved. 

IV. 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 email to rule-comments@

sec.gov. Please include File Number SR– 

NYSEArca–2014–141 on the subject 

line. 

Paper Comments 

• Send paper comments in triplicate 

to Brent J. Fields, Secretary, Securities 

and Exchange Commission, 100 F Street 

NE., Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–NYSEArca–2014–141. This 

file number should be included on the 

subject line if email 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 

10:00 a.m. and 3:00 p.m. Copies of such 

filing also will be available for 

inspection and copying at the principal 

office of the Exchange. 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– 

NYSEArca–2014–141, and should be 

submitted on or before January 27, 2015. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.15

Brent J. Fields, 

Secretary. 

[FR Doc. 2014–30899 Filed 1–5–15; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73954; File No. SR–FINRA– 

2014–037] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving 

Proposed Rule Change to FINRA Rules 

0190 (Effective Date of Revocation, 

Cancellation, Expulsion, Suspension 

or Resignation) and 2040 (Payments to 

Unregistered Persons) in the 

Consolidated FINRA Rulebook, and 

Amend FINRA Rule 8311 (Effect of a 

Suspension, Revocation, Cancellation, 

or Bar) 

December 30, 2014. 

I. Introduction 

On September 10, 2014, Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) filed with the Securities and 

Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and 

Rule 19b–4 thereunder,2 a proposed rule 

change to streamline provisions of 

NASD Rule 2410 (Net Prices to Persons 

Not in Investment Banking or Securities 

Business), NASD Rule 2420 (Dealing 

with Non-Members), NASD IM–2420–1 

(Transactions Between Members and 

Non-Members), NASD IM–2420–2 

(Continuing Commissions Policy), 

Incorporated NYSE Rule 353 (Rebates 

and Compensation), Incorporated NYSE 

Rule Interpretation 345(a)(i)/01 

(Compensation to Non-Registered 

Persons) and Incorporated NYSE Rule 

Interpretation 345(a)(i)/02 

(Compensation Paid for Advisory 

Solicitations), which would be deleted 

from the current FINRA rulebook. The 

proposed rule change would also adopt 

the requirements of NASD Rule 1060(b) 

(Persons Exempt from Registration) and 

Incorporated NYSE Rule Interpretation 

345(a)(i)/03 (Compensation to NonRegistered Foreign Persons Acting as 

Finders), as FINRA Rule 2040(c) 

(Nonregistered Foreign Finders) in the 

consolidated FINRA rulebook without 

material change. In addition, the 

proposed rule change would amend 

FINRA Rule 8311 (Effect of a 

Suspension, Revocation, Cancellation, 

or Bar), add new Supplementary 

Material .01 (Remuneration Accrued 

Prior to Effective Date of Sanction or 

Disqualification), and adopt the 

requirements of NASD IM–2420–1(a) 

(Non-members of the Association), as 

FINRA Rule 0190 (Effective Date of 

Revocation, Cancellation, Expulsion, 

Suspension or Resignation). 

The proposed rule change was 

published for comment in the Federal 

Register on October 1, 2014.3 The 

Commission received seven comment 

letters in response to the Notice of 

Filing.4 On November 10, 2014, FINRA 

extended the time period in which the 

Commission must approve the proposed 

rule change, disapprove the proposed 

rule change, or institute proceedings to 

determine whether to approve or 

disapprove the proposed rule change to 

December 30, 2014.5 On December 23, 


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6Letter from Kosha K. Dalal, Associate Vice 

President and Associate General Counsel, FINRA to 

Brent J. Fields, Secretary, Securities and Exchange 

Commission, dated Dec. 23, 2014 (‘‘FINRA 

Response’’). 

7The current FINRA rulebook consists of (1) 

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

incorporated from NYSE (‘‘Incorporated NYSE 

Rules’’). 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. 

8See Maloney Act of 1938, Pub. L. 75–719, 52 

Stat. 1070, which added Section 15A of the 

Exchange Act to provide for the establishment of 

national securities associations with authority, 

subject to SEC review, to supervise the over-thecounter securities market and promulgate rules 

governing voluntary membership of broker-dealers. 

9Section 15A(e)(1) of the Exchange Act states that 

‘‘[t]he rules of a registered securities association 

may provide that no member thereof shall deal with 

any nonmember professional (as defined in 

paragraph (2) of this subsection) except at the same 

prices, for the same commissions or fees, and on the 

same terms and conditions as are by such member 

accorded to the general public.’’ Section 15A(e)(2) 

of the Exchange Act defines ‘‘nonmember 

professional’’ as ‘‘(A) with respect to transactions in 

securities other than municipal securities, any 

registered broker or dealer who is not a member of 

a registered securities association, except such a 

broker or dealer who deals exclusively in 

commercial paper, bankers’ acceptances, and 

commercial bills, and (B) with respect to 

transactions in municipal securities, any municipal 

securities dealer (other than a bank or division or 

department of a bank) who is not a member of any 

registered securities association and any municipal 

securities broker who is not a member of any such 

association.’’ The legislative reports from Congress 

on this provision state that exclusion from 

membership would in effect be a form of economic 

sanction on such non-members. See S. Rep. No. 

1455 and H. R. Rep. No 2307, 75th Cong., 3rd Sess. 

(1938). 

10Section 15(b)(8) of the Exchange Act provides 

that ‘‘[i]t shall be unlawful for any registered broker 

or dealer to effect any transaction in, or induce or 

attempt to induce the purchase or sale of, any 

security (other than commercial paper, bankers’ 

acceptances, or commercial bills), unless such 

broker or dealer is a member of a securities 

association registered pursuant to Section 15A of 

this title or effects transactions in securities solely 

on a national securities exchange of which it is a 

member.’’ 

11See Regulatory Notice 09–69 (December 2009). 

2014, FINRA filed a letter responding to 

these comments.6

This order approves the proposed rule 

change. 

II. Description of the Proposed Rule 

As part of the process of developing 

a new consolidated rulebook 

(‘‘Consolidated FINRA Rulebook’’),7

FINRA is proposing to adopt FINRA 

Rule 2040 (Payments to Unregistered 

Persons) regarding the payment of 

transaction-based compensation by 

members to unregistered persons, and 

Supplementary Material .01 (Reasonable 

Support for Determination of 

Compliance with Section 15(a) of the 

Exchange Act). The proposed rule 

change would streamline provisions of 

NASD Rule 2410 (Net Prices to Persons 

Not in Investment Banking or Securities 

Business), NASD Rule 2420 (Dealing 

with Non-Members), NASD IM–2420–1 

(Transactions Between Members and 

Non-Members), NASD IM–2420–2 

(Continuing Commissions Policy), 

NYSE Rule 353 (Rebates and 

Compensation), NYSE Rule 

Interpretation 345(a)(i)/01 

(Compensation to Non-Registered 

Persons) and NYSE Rule Interpretation 

345(a)(i)/02 (Compensation Paid for 

Advisory Solicitations), which would be 

deleted from the current FINRA 

rulebook. The proposed rule change also 

would adopt the requirements of NASD 

Rule 1060(b) (Persons Exempt from 

Registration) and NYSE Rule 

Interpretation 345(a)(i)/03 

(Compensation to Non-Registered 

Foreign Persons Acting as Finders), as 

FINRA Rule 2040(c) (Nonregistered 

Foreign Finders) in the Consolidated 

FINRA Rulebook without material 

change. In addition, the proposed rule 

change would amend FINRA Rule 8311 

(Effect of a Suspension, Revocation, 

Cancellation, or Bar), add new 

Supplementary Material .01 

(Remuneration Accrued Prior to 

Effective Date of Sanction or 

Disqualification), and adopt the 

requirements of NASD IM–2420–1(a) 

(Non-members of the Association), as 

FINRA Rule 0190 (Effective Date of 

Revocation, Cancellation, Expulsion, 

Suspension or Resignation). 

A. Background 

NASD Rule 1060(b) (Persons Exempt 

from Registration), NASD Rule 2410 

(Net Prices to Persons Not in Investment 

Banking or Securities Business), NASD 

Rule 2420 (Dealing with Non-Members), 

NASD IM–2420–1 (Transactions 

Between Members and Non-Members), 

and NASD IM–2420–2 (Continuing 

Commissions Policy) (collectively, the 

‘‘NASD Non-Member Rules’’) govern 

payments by members to unregistered 

persons. The NASD Non-Member Rules 

(other than NASD Rule 1060(b)) were 

developed in an era when a registered 

broker-dealer could engage in an overthe-counter securities business and elect 

not to be a member of a registered 

securities association.8 An original 

purpose of the NASD Non-Member 

Rules was to encourage non-members to 

become members by generally 

prohibiting members from providing 

commissions or discounts/concessions 

to non-members.9 Since the adoption of 

the NASD Non-Member Rules, the laws 

governing broker-dealers have changed, 

and today virtually all broker-dealers 

doing business with the public are 

FINRA members.10

As a result, FINRA generally has 

interpreted the provisions of the NASD 

Non-Member Rules, through 

interpretive letters and other guidance, 

to prohibit the payment of commissions 

or fees derived from a securities 

transaction to any non-member that may 

be acting as an unregistered brokerdealer. Section 15(a)(1) of the Exchange 

Act generally requires any broker-dealer 

effecting transactions in securities to be 

registered with the SEC. FINRA has 

refrained from providing interpretive 

guidance on whether a person is acting 

as an unregistered broker-dealer, as the 

authority to interpret Section 15(a) of 

the Exchange Act rests with the SEC. 

Registration as a broker-dealer provides 

a framework of rules to regulate the 

conduct of persons who receive 

transaction-based compensation, the 

receipt of which can create potential 

incentives for abusive sales practices. 

SEC guidance states that receipt of 

securities transaction-based 

compensation is an indication that a 

person is engaged in the securities 

business and that such person generally 

should be registered as a broker-dealer. 

B. Proposed FINRA Rule 2040 

FINRA is proposing to adopt new 

FINRA Rule 2040 (Payments to 

Unregistered Persons), which eliminates 

the current NASD Non-Member Rules 

and related NYSE Non-Member Rules 

(discussed further below) and replaces 

them with a more straightforward rule. 

The proposed rule expressly aligns with 

Section 15(a) of the Exchange Act and 

its related guidance to determine 

whether registration as a broker-dealer 

is required for certain persons to receive 

transaction-related compensation. As 

further discussed in Item II.C. below, 

the proposed rule change was published 

for comment in Regulatory Notice 09– 

69.11 FINRA received seven comment 

letters. A significant number of the 

commenters expressed concern 

regarding the potential regulatory 

burden of obtaining SEC no-action 

letters to determine whether particular 

activities would require registration of 

persons as broker-dealers under Section 

15(a) of the Exchange Act, and the 

proposed deletion of NASD Rule 

1060(b) and NYSE Rule Interpretation 

345(a)(i)/03 relating to payments to 

foreign finders. In an effort to respond 

to these concerns, FINRA is proposing 

to adopt Supplementary Material .01 


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12See FINRA Interpretative Letters issued under 

NASD Rule 2420: Letter to Richard Schultz, Triad 

Securities Corp., dated December 28, 2007; Letter to 

Jonathan K. Lagemann, Esq., Law Offices of 

Jonathan Kord Lagemann, dated June 27, 2001; 

Letter to Jay Adams Knight, Esq., Musick, Peeler & 

Garrett LLP, dated March 8, 2001; and Letter to 

Michael R. Miller, Esq., Kunkel Miller & Hament, 

dated May 31, 2000 (available at http:// 

www.finra.org/Industry/Regulation/Guidance/ 

InterpretiveLetters/ConductRules/index.htm). 

13See FINRA Interpretative Letters issued under 

NASD IM–2420–2: Letter to Name Not Public, dated 

November 27, 2012; Letter to Ted A. Troutman, 

Esquire, Muir & Troutman, dated February 4, 2002; 

Letter to Joe Tully, Commonwealth Financial 

Network, dated August 9, 2001; and Letter to Peter 

D. Koffer, Esq, Twenty-First Securities Corporation, 

dated January 21, 2000 (available at http:// 

www.finra.org/Industry/Regulation/Guidance/ 

InterpretiveLetters/ConductRules/index.htm). 

14See SEC No-Action Letter to the Securities 

Industry and Financial Markets Association, 2008 

SEC No-Act. LEXIS 695, November 20, 2008. The 

letter provides that ‘‘[t]he retiring representative 

must sever association with the Firm and with any 

municipal securities dealer, government securities 

dealer, investment adviser or investment company 

affiliates (except as may be required to maintain any 

licenses or registrations required by any state) and, 

is not permitted to be associated with any other 

broker, dealer, municipal securities dealer, 

government securities dealer, investment adviser or 

investment company, during the term of his or her 

agreement. The retiring representative also may not 

be associated with any bank, insurance company or 

insurance agency (affiliated with the Firm or 

otherwise) during the term of his or her agreement 

if the retiring representative’s activities relate to 

effecting transactions in securities.’’ See also SEC 

No-Action Letter to Amy Lee, Chief Compliance 

Officer, Co-CEO, Packerland Brokerage Services, 

2013 SEC No-Act. LEXIS 237, March 18, 2013. 

15See supra note 14. 

16See supra note 11. 

(Reasonable Support for Determination 

of Compliance with Section 15(a) of the 

Exchange Act) to proposed FINRA Rule 

2040 to provide guidance to members 

regarding the manner in which they can 

reasonably support a determination that 

an unregistered person is not required to 

be registered under Section 15(a) of the 

Exchange Act by reason of receiving 

payments from the member and the 

activities related thereto. FINRA is also 

proposing to retain NASD Rule 1060(b) 

and NYSE Rule Interpretation 345(a)(i)/ 

03 relating to foreign finders as 

proposed FINRA Rule 2040(c). The 

proposed rule sets forth the following 

requirements: 

• Payments to Unregistered Persons 

FINRA is proposing to adopt new 

FINRA Rule 2040(a), which prohibits 

members or associated persons from, 

directly or indirectly, paying any 

compensation, fees, concessions, 

discounts, commissions or other 

allowances to: 

(1) Any person that is not registered 

as a broker-dealer under Section 15(a) of 

the Exchange Act but, by reason of 

receipt of any such payments and the 

activities related thereto, is required to 

be so registered under applicable federal 

securities laws and Exchange Act rules 

and regulations; or 

(2) any appropriately registered 

associated person, unless such payment 

complies with all applicable federal 

securities laws, FINRA rules and 

Exchange Act rules and regulations. 

The proposed change would make the 

rule consistent with FINRA staff 

interpretations under NASD Rule 2420 

and SEC rules and regulations under 

Section 15(a) of the Exchange Act.12

Under the proposal, persons would look 

to SEC rules and regulations to 

determine whether the activities in 

question require registration as a brokerdealer under Section 15(a) of the 

Exchange Act. Persons may also rely on 

related published guidance issued by 

the SEC or its staff in the form of 

releases, no-action letters or 

interpretations. The proposal would 

align the rule with SEC staff guidance 

that states that receipt of securities 

transaction-based compensation is an 

indication that a person is engaged in 

the securities business and that such 

person generally should be registered as 

a broker-dealer. The proposed change 

also prohibits payments to appropriately 

registered associated persons unless 

such payments comply with applicable 

federal securities laws, FINRA rules and 

Exchange Act rules and regulations. 

FINRA is proposing to adopt 

Supplementary Material .01 (Reasonable 

Support for Determination of 

Compliance with Section 15(a) of the 

Exchange Act) to proposed FINRA Rule 

2040 to provide guidance to members. 

In applying the proposed rule, FINRA 

will expect members to determine that 

their proposed activities would not 

require the recipient of the payments to 

register as a broker-dealer and to 

reasonably support such determination. 

Members that are uncertain as to 

whether an unregistered person may be 

required to be registered under Section 

15(a) of the Exchange Act by reason of 

receiving payments from the member 

and the activities related thereto can 

derive support for their determination 

by, among other things, (1) reasonably 

relying on previously published 

releases, no-action letters or 

interpretations from the Commission or 

Commission staff that apply to their 

facts and circumstances; (2) seeking a 

no-action letter from the Commission 

staff; or (3) obtaining a legal opinion 

from independent, reputable U.S. 

licensed counsel knowledgeable in the 

area. The member’s determination must 

be reasonable under the circumstances 

and should be reviewed periodically if 

payments to the unregistered person are 

ongoing in nature. In addition, a 

member must maintain books and 

records that reflect the member’s 

determination. 

• Retiring Representatives 

FINRA is also proposing to adopt new 

FINRA Rule 2040(b), which codifies 

existing FINRA staff guidance on the 

payment by members of continuing 

commissions to retiring registered 

representatives.13 The proposal permits 

members to pay continuing 

commissions to retiring registered 

representatives of the member, after 

they cease to be associated with the 

member, that are derived from accounts 

held for continuing customers of the 

retiring registered representative 

regardless of whether customer funds or 

securities are added to the accounts 

during the period of retirement, 

provided that: (1) A bona fide contract 

between the member and the retiring 

registered representative providing for 

the payments was entered into in good 

faith while the person was a registered 

representative of the member and such 

contract, among other things, prohibits 

the retiring registered representative 

from soliciting new business, opening 

new accounts or servicing the accounts 

generating the continuing commission 

payments; and (2) the arrangement 

complies with applicable federal 

securities laws and SEA rules and 

regulations. 

The proposal defines the term 

‘‘retiring registered representative’’ to 

mean an individual who retires from a 

member (including as a result of a total 

disability) and leaves the securities 

industry.14 In the case of death of the 

retiring registered representative, the 

retiring registered representative’s 

beneficiary designated in the written 

contract or the retiring registered 

representative’s estate if no beneficiary 

is so designated may be the beneficiary 

of the respective member’s agreement 

with the deceased representative. 

FINRA believes this proposal is 

consistent with staff guidance on the 

payment of compensation to retiring 

representatives.15

• Nonregistered Foreign Finders 

In light of comments raised in 

response to Regulatory Notice 09–69, 

FINRA is proposing to transfer NASD 

Rule 1060(b) (Persons Exempt from 

Registration) and NYSE Rule 

Interpretation 345(a)(i)/03 

(Compensation to Non-Registered 

Foreign Persons Acting as Finders) with 

minor technical changes into the 

Consolidated FINRA Rulebook as 

FINRA Rule 2040(c).16 As approved by 

the SEC in 1993 and 1995, respectively, 

NYSE Rule Interpretation 345(a)(i)/03 

and NASD Rule 1060(b) are largely 


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17See Securities Exchange Act Release No. 32431 

(June 8, 1993), 58 FR 33128 (June 15, 1993) (Order 

Approving File No. SR–NYSE–92–33 Relating to an 

Interpretation to NYSE Rule 345 (Employees— 

Registration, Approval, Records)) (‘‘SEC Approval 

Order of NYSE Rule 345 Interpretation’’). See also 

Securities Exchange Act Release No. 35361 

(February 13, 1995), 60 FR 9417 (February 17, 1995) 

(Order Approving File No. SR–NASD–94–51) (‘‘SEC 

Foreign Finders Approval Order’’). 

18See supra note 13. 

19See Securities Exchange Act Release No. 34941 

(November 4, 1994), 59 FR 56102 (November 10, 

1994) (Notice of Filing of File No. SR–NASD–94– 

51). See also SEC Approval Order of NYSE Rule 345 

Interpretation. 

20See SEC Foreign Finders Approval Order. 

FINRA notes that the scope of permissible activities 

and associated regulatory requirements differ 

between foreign finders and foreign associates, who 

are registered persons of the member. See also 

NASD Rule 1100 (Foreign Associates). 

identical provisions and provide that 

members and persons associated with a 

member may pay transaction-related 

compensation to nonregistered foreign 

finders, based upon the business of 

customers such persons direct to 

members, subject to identified 

conditions. FINRA is proposing nonsubstantive, technical changes to the 

proposed rule text to make it easier to 

read. Specifically, proposed FINRA Rule 

2040(c) would provide that a member 

may pay to a nonregistered foreign 

finder (the ‘‘finder’’) transaction-related 

compensation based upon the business 

of customers the finder directs to the 

member if the following conditions are 

met (‘‘foreign finders exception’’): 

(1) The member has assured itself that 

the finder who will receive the 

compensation is not required to register 

in the United States as a broker-dealer 

nor is subject to a disqualification as 

defined in Article III, Section 4 of 

FINRA’s By-Laws, and has further 

assured itself that the compensation 

arrangement does not violate applicable 

foreign law; 

(2) The finder is a foreign national 

(not a U.S. citizen) or foreign entity 

domiciled abroad; 

(3) the customers are foreign nationals 

(not U.S. citizens) or foreign entities 

domiciled abroad transacting business 

in either foreign or U.S. securities; 

(4) customers receive a descriptive 

document, similar to that required by 

Rule 206(4)–3(b) of the Investment 

Advisers Act of 1940 (‘‘Investment 

Advisers Act’’), that discloses what 

compensation is being paid to finders; 

(5) customers provide written 

acknowledgment to the member of the 

existence of the compensation 

arrangement and such acknowledgment 

is retained and made available for 

inspection by FINRA; 

(6) records reflecting payments to 

finders are maintained on the member’s 

books, and actual agreements between 

the member and the finder are available 

for inspection by FINRA; and 

(7) the confirmation of each 

transaction indicates that a referral or 

finders fee is being paid pursuant to an 

agreement. 

The rule provides that if all the 

conditions set forth in the rule are 

satisfied, members can pay transactionrelated compensation to nonregistered 

foreign finders based on the business of 

non-U.S. customers that finders refer to 

members. Specifically, the rule permits 

compensation to ‘‘be made on an 

ongoing basis and tied to such variables 

as the level of business generated or 

assets under control, notwithstanding 

the fact that the foreign finders’ sole 

involvement would be the initial 

referral to a member.’’ 17 The SEC 

Foreign Finders Approval Order states 

that ‘‘[t]he provision was intended to 

give members the opportunity to 

enhance their competitive position in 

foreign countries where new accounts 

are frequently opened on a referral basis 

with ongoing compensation for such 

referral.’’ 18

Proposed FINRA Rule 2040(c) would 

have the same scope as the current rule 

and continue to allow ongoing 

transaction-based payments to 

nonregistered foreign finders under the 

limited circumstances set forth in the 

current rule. As in the current rule, 

‘‘[w]hile the foreign finders’ sole 

involvement would be the initial referral 

to a member or member organization [of 

non-U.S. customers to the firm], 

compensation could be made on an 

ongoing basis and tied to such variables 

as the level of business generated or 

assets under control. All accounts 

referred by such foreign finders would 

be carried on the books of the 

member.’’ 19 Similar to NASD Rule 

1060(b), any activities beyond the initial 

referral of non-U.S. customers and 

payment of transaction-based 

compensation for any such activities 

would not be within the permissible 

scope of the foreign finders exception as 

set forth in proposed FINRA Rule 

2040(c). Based solely on its activities in 

compliance with proposed FINRA Rule 

2040(c), the foreign finder would not be 

considered an associated person of the 

member. However, unless otherwise 

permitted by the federal securities laws 

or FINRA rules, a person who receives 

commissions or other transaction-based 

compensation in connection with 

securities transactions generally has to 

be a registered broker-dealer or an 

appropriately registered associated 

person of a broker-dealer who is 

supervised by a broker-dealer. Members 

that engage foreign finders would be 

required to have reasonable procedures 

that appropriately address the limited 

scope of activities permissible under 

such arrangements.20

C. Amendments to FINRA Rule 8311 

• FINRA Rule 8311 

FINRA is proposing amendments to 

FINRA Rule 8311 to eliminate 

duplicative provisions in NASD IM– 

2420–2 and to clarify the scope of the 

rule on payments by members to 

persons subject to suspension, 

revocation, cancellation, bar (each a 

‘‘sanction’’) or other disqualification. 

The proposed rule provides that if a 

person is subject to a sanction or other 

disqualification, a member may not 

allow such person to be associated with 

it in any capacity that is inconsistent 

with the sanction imposed or 

disqualified status, including a clerical 

or ministerial capacity. The proposed 

rule further provides that a member may 

not pay or credit to any person subject 

to a sanction or disqualification, during 

the period of the sanction or 

disqualification or any period thereafter, 

any salary, commission, profit, or any 

other remuneration that the person 

might accrue, not just earn, during the 

period of the sanction or 

disqualification. However, a member 

may make payments or credits to a 

person subject to a sanction that are 

consistent with the scope of activities 

permitted under the sanction where the 

sanction solely limits an associated 

person from conducting specified 

activities (such as a suspension from 

acting in a principal capacity) or to a 

disqualified person that has been 

approved (or is otherwise permitted 

pursuant to FINRA rules and the federal 

securities laws) to associate with a 

member. 

Specifically, the proposal clarifies 

that: 

(1) Other disqualifications, not just 

suspensions, revocations, cancellations 

or bars, are subject to the rule (and the 

rule is not limited to orders issued by 

FINRA or the SEC); 

(2) a member may not allow a person 

subject to a sanction or disqualification 

to ‘‘be’’ associated with such member in 

any capacity that is inconsistent with 

the sanction imposed or disqualified 

status, including a clerical or ministerial 

capacity, not simply ‘‘remain’’ 

associated as provided in the current 

rule; 

(3) a member may not pay any 

remuneration to a person subject to a 

sanction or disqualification, not just 

payments that result directly or 

indirectly from any securities 

transaction; and 


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(4) the rule applies to any salary, 

commission, profit or remuneration that 

the associated person might ‘‘accrue,’’ 

not just ‘‘earn’’ during the period of a 

sanction or disqualification, not just 

suspension. 

FINRA is also proposing to add a new 

paragraph to the rule that would 

expressly permit a member to pay to any 

person subject to a sanction or 

disqualification any remuneration 

pursuant to an insurance or medical 

plan, indemnity agreement relating to 

legal fees, or as required by an 

arbitration award or court judgment. 

FINRA believes that these exceptions 

strike the correct balance by permitting 

certain key payments. 

• Proposed Supplementary Material 

.01 

In addition, FINRA is proposing to 

add new Supplementary Material .01 

(Remuneration Accrued Prior to 

Effective Date of Sanction or 

Disqualification) that relates to 

commissions accrued by a person prior 

to the effective date of a sanction or 

disqualification. The proposed 

supplementary material would permit a 

member to pay a person that is subject 

to a sanction or disqualification 

remuneration that the member can 

evidence accrued to the person prior to 

the effective date of the sanction or 

disqualification. However, a member 

may not pay any remuneration that 

accrued to the person that relates to or 

results from the activity giving rise to 

the sanction or disqualification, and any 

such payment or credit must comply 

with applicable federal securities laws. 

FINRA believes that adopting this new 

provision is necessary to address 

questions by the industry on a member’s 

ability to pay commissions and other 

remuneration that was accrued by the 

person prior to a sanction or 

disqualification going into effect. FINRA 

also believes the supplementary 

material, together with the proposed 

amendments discussed above, clarify 

that a member may not pay trail 

commissions to a person that may 

accrue during the period of the sanction 

or disqualification; rather, the member 

can only make such payments where the 

member can evidence that they accrued 

to the person prior to the effective date 

of the sanction or disqualification. 

D. Adoption of New General Standard— 

FINRA Rule 0190 

In addition, FINRA is proposing to 

adopt a new general standard, proposed 

FINRA Rule 0190 (Effective Date of 

Revocation, Cancellation, Expulsion, 

Suspension or Resignation), that is 

based largely on provisions of NASD 

IM–2420–1(a) and would provide that a 

member will be treated as a nonmember of FINRA from the effective 

date of any order or notice from FINRA 

or the SEC issuing a revocation, 

cancellation, expulsion or suspension of 

its membership. In the case of 

suspension, a member will be 

automatically reinstated to membership 

in FINRA at the termination of the 

suspension period. 

E. NASD and NYSE Rules To Be Deleted 

FINRA proposes to eliminate the 

following NASD and NYSE Rules and 

related interpretations because FINRA 

believes that proposed FINRA Rule 2040 

simplifies and clarifies the meaning of 

such rules consistent with Section 15(a) 

of the Exchange Act. Specifically, NASD 

Rule 2410, NASD Rule 2420, NASD IM– 

2420–1, NASD IM–2420–2, NYSE Rule 

353, NYSE Rule Interpretation 345(a)(i)/ 

01 and NYSE Rule Interpretation 

345(a)(i)/02 will be consolidated into 

proposed FINRA Rule 2040, providing 

members with one concise rule that 

outlines the applicable requirements for 

payments to non-members. 

• NASD Rule 2410 

NASD Rule 2410 (Net Prices to 

Persons Not in Investment Banking and 

Securities Business) prohibits payments 

or concessions by members to ‘‘any 

person not actually engaged in the 

investment banking or securities 

business.’’ 

• NASD Rule 2420 

NASD Rule 2420 (Dealing with NonMembers) generally prohibits members 

from dealing with, or making payments 

to, non-member broker-dealers, except 

at the same prices, fees or concessions 

offered to the general public. NASD 

Rule 2420(b) specifically prohibits 

members from joining any non-member 

broker-dealer syndicate or group in 

connection with the sale of securities. 

NASD Rule 2420(c) provides that 

members may pay concessions and fees 

to a non-member broker or dealer in a 

foreign country who is not eligible for 

membership, provided the member 

obtains an agreement from such foreign 

broker or dealer in making sales of 

securities within the United States that 

such foreign broker or dealer will act in 

accordance with the general 

requirements of the rule to prohibit the 

payment of concessions or discounts to 

non-members that are not allowed to the 

general public. NASD Rule 2420(d) 

provides restrictions on payments by or 

to persons that have been suspended or 

expelled. 

• NASD IM–2420–1 

NASD IM–2420–1 (Transactions 

between Members and Non-Members) 

provides certain exemptions from the 

general prohibition on arrangements 

with non-members set forth in NASD 

Rule 2420. For example, the rule 

provides exemptions for arrangements 

with certain non-members relating to 

transactions in ‘‘exempted securities,’’ 

or transactions on a national securities 

exchange. The rule further clarifies that 

a firm that is suspended or expelled 

from FINRA membership, or whose 

registration is revoked by the SEC, is to 

be considered a non-member for 

purposes of the rule. 

• NASD IM–2420–2 

NASD IM–2420–2 (Continuing 

Commissions Policy) allows members to 

pay continuing commissions to former 

registered representatives after they 

cease to be employed by a member, if, 

among other things, a bona fide contract 

between the member and the registered 

representative calling for the payments 

was entered into in good faith while the 

person was a registered representative of 

the employing member. The rule states 

that such contracts cannot permit the 

solicitation of new business or the 

opening of new accounts by persons 

who are not registered, and must 

conform with all applicable laws and 

regulations. The rule also provides that 

NASD Rule 2830(c) (Investment 

Company Securities, Conditions for 

Discounts to Dealers) should not be 

interpreted to require a sales agreement 

for a dealer to receive commissions on 

direct payments by clients or automatic 

dividend reinvestments. The rule 

further contains a prohibition on the 

payment of any kind by a member to 

any person who is not eligible for 

FINRA membership or eligible to be 

associated with a member because of 

any disqualification, such as revocation, 

expulsion or suspension that is still in 

effect. The rule recognizes the validity 

of contracts entered into in good faith to 

allow retired representatives to receive 

continuing compensation on their 

accounts or to designate a widow or 

other beneficiary; however, the rule 

states that members are not required to 

enter into such contracts and FINRA 

will not specify the terms of such 

contracts. 

• NYSE Rule 353 

NYSE Rule 353 (Rebates and 

Compensation) prohibits a member, 

principal executive, registered 

representative or officer from, directly 

or indirectly, rebating to any person any 

part of the compensation he receives 

from the solicitation of orders for the 

purchase or sale of securities or other 

similar instruments for the accounts of 

customers of the member, or pay such 

compensation, or any part thereof, as a 

bonus, commission, fee or other 

consideration for business sought or 

procured for him or for any other 


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21See note 4, supra. 

22SIFMA, NASAA, Cornell and ABA. 

23SIFMA. 

24NASAA. 

25 Id. 

26Commonwealth. 

27 Id. (citing SEC v. Kramer, 778 F. Supp. 2nd 

1320 (M.D. Fla. 2011) and SEC v. John J. Bravata, 

et al., Civil Action No. 09–cv–12950 (E.D. Mich.) 

(Lawson, J.). 

28Commonwealth. 

29 Id. 

30FINRA Response at 4. 

31 Id. 

32See Paul Anka, SEC No-Action Letter (available 

July 24, 1991). See also Muni Auction Inc., SEC NoAction Letter (available March 13, 2000) and Bond 

Globe, Inc., SEC No-Action Letter (available 

February 6, 2001). 

33FINRA Response at 4. 

34 Id. 

35SIFMA, ABA and IMS. 

36NASAA. 

37 Id. 

38FINRA Response at 4. 

39SIFMA. 

40 IMS, Plexus and Commonwealth. 

41Cornell. 

member. NYSE Rule 353(b) further 

provides that a member, principal 

executive, registered representative or 

officer cannot be compensated for 

business done by or through his 

employer after the termination of his 

employment except as may be permitted 

by the NYSE. 

• NYSE Rule Interpretations 

345(a)(i)/01 and/02 

NYSE Rule Interpretation 345(a)(i)/01 

(Compensation to Non-Registered 

Persons) prohibits a member from 

paying to nonregistered persons 

compensation based upon the business 

of customers they direct to the member 

if such compensation is, among other 

things, formulated as a direct percentage 

of commissions generated and is other 

than on an isolated basis. 

NYSE Rule Interpretation 345(a)(i)/02 

(Compensation Paid for Advisory 

Solicitations) provides that a member 

that is also registered with the SEC as 

an investment adviser may enter into 

arrangements that comply with Rule 

206(4)–3 (Cash Payments for Client 

Solicitations) of the Investment 

Advisers Act. 

III. Description of Comments on the 

Proposal and FINRA’s Response 

As noted above, the Commission 

received seven comment letters in 

response to the Notice of Filing.21 Four 

commenters generally supported 

FINRA’s efforts to consolidate and 

streamline rules relating to payments to 

unregistered persons.22 Several 

commenters suggested changes to the 

proposed rules, which are discussed 

further below. 

A. Proposed FINRA Rule 2040(a) and 

the Focus on Receipt of Transaction 

Based Compensation 

One commenter stated that it supports 

proposed Rule 2040(a) but seeks clarity 

on proposed Supplementary Material 

.01 (Reasonable Support for 

Determination of Compliance with 

Section 15(a) of the Exchange Act), 

which is discussed in detail in Section 

III.D. below.23 One commenter 

expressed concern that, without a clear 

regulatory framework in place, the 

receipt of transaction-based 

compensation will lead to abusive 

practices.24 As such, the commenter 

believed that registration should be 

required for individuals that receive 

transaction-based compensation because 

‘‘such registration is integral to the 

regulation of firms and individuals . . . 

and exceptions to this principle should 

be rare, and when implemented they 

should be highly prescriptive.’’ 25

One commenter disagreed with 

FINRA’s focus on the ‘‘receipt of 

transaction-based compensation’’ as the 

main factor for determining whether 

registration as a broker-dealer is 

required.26 The commenter specifically 

cited recent case law pointing to other 

factors.27 The commenter stated that 

FINRA should consider all of the 

relevant factors before FINRA and the 

SEC adopt any new rule by which a firm 

can determine whether a person must 

register in accordance with Section 

15(a) of the Exchange Act.28 The 

commenter suggested that FINRA either 

withdraw the proposed rule change or 

make substantial modifications to it to 

address these concerns.29

FINRA disagrees that the proposed 

rule focuses only on the receipt of 

transaction-based compensation as the 

determinative factor for who is required 

to register as a broker-dealer under the 

Exchange Act.30 FINRA states that while 

the proposed rule change does 

specifically include ‘‘receipt of any such 

payments,’’ as a factor, the proposed 

text also expressly includes ‘‘and the 

activities related thereto.’’ 31 FINRA 

recognizes that SEC guidance in this 

area provides that certain activities may 

be deemed (alone or in combination) to 

confer ‘‘broker’’ status,32 and the receipt 

of transaction-based compensation 

coupled with these activities may trigger 

the requirement to register as a brokerdealer under the Exchange Act.33 FINRA 

believes the proposed rule change is 

consistent with current SEC rules and 

guidance.34

B. Proposed FINRA Rule 2040(b)— 

Retiring Representatives 

Three commenters supported FINRA’s 

proposed creation of a concise 

regulatory framework regarding the 

payment of continuing commissions to 

retiring registered representatives by 

member firms and noted that the 

proposed rule effectively consolidates 

existing guidance.35 In contrast, one 

commenter stated that the proposal 

should be more explicit on the 

restrictions surrounding continuing 

compensation that can be paid to retired 

representatives.36 The commenter noted 

that FINRA makes reference to and 

asserts a similarity between its current 

proposal and the prior SEC no-action 

letter issued to SIFMA on the topic, but 

NASAA believed that the staff guidance 

contains a more detailed discussion of 

the topic.37 While the proposed rule 

does not expressly list each condition 

set forth in prior SEC no-action letters, 

FINRA believes that the proposed rule 

change incorporates the prior guidance 

issued by the SEC staff by expressly 

requiring that any proposed 

arrangement with a retiring 

representative must comply with federal 

securities laws and Exchange Act rules 

and regulations.38

C. Proposed FINRA Rule 2040(c)—Non 

Registered Foreign Finders 

1. Support for Retaining NASD Rule 

1060(b) 

In Regulatory Notice 09–69, FINRA 

had initially proposed to delete NASD 

Rule 1060(b) because it believed the 

activity should be governed by the 

general requirements of proposed 

FINRA Rule 2040(a). However, based on 

the comments received in response to 

Regulatory Notice 09–69, FINRA 

proposed to transfer NASD Rule 1060(b) 

unchanged into the consolidated FINRA 

rulebook. One commenter largely 

supported the proposed rule change, but 

seeks clarification of certain language.39

Three commenters expressed concern 

that FINRA missed the opportunity to 

provide much needed clarity in the area 

of foreign finders and the compensation 

they can be paid.40 One commenter 

expressed concern that proposed Rule 

2040(c) and Supplementary Material .01 

‘‘create overly broad and vaguely 

defined safe havens for nonregistered 

individuals that receive payments 

related to securities transactions.’’ 41

2. Clarification That Foreign Finder 

Under Rule 2040(c) Is Not a ‘‘Person 

Associated With a Member’’ 

One commenter urged FINRA to 

clarify that a foreign finder is not a 

‘‘person associated with a member,’’ as 

that term is defined under the FINRA 


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42ABA. 

43 Id. 

44Cornell. 

45 Id. 

46ABA. 

47 Id. 

48 IMS. 49 Id. 50SIFMA and ABA. 51 Id. 52SIFMA. 53ABA. 54 Id. 55SIFMA. 

56 Id. 

57 Id. 

58 Id. 

59Plexus. 

60 Id. 

61 Id. 

62FINRA Response at 7. 

63 Id. 

64 Id. 

By-Laws.42 The commenter expressed 

concern that by relocating this 

provision, which is currently contained 

in NASD Rule 1060(b) to new FINRA 

Rule 2040, FINRA may not have fully 

incorporated existing guidance and may 

have ‘‘changed the character of the 

provision from a registration ‘safe 

harbor’ to a prescriptive rule that sets 

forth the only permissible basis on 

which transaction-based compensation 

may be paid to a foreign finder.’’ 43

3. Proposed Changes to Rule Text 

One commenter recommended that 

proposed Rule 2040(c)(1) be amended to 

eliminate the use of a subjective 

‘‘assurance’’ standard by revising the 

language to read: ‘‘the finder who will 

receive the compensation is not 

required to register in the United States 

as a broker dealer nor is subject to 

disqualification as defined in Article III, 

Section 4 of FINRA’s By-Laws, and the 

compensation arrangement does not 

violate applicable foreign law.’’ 44 The 

commenter stated that the ‘‘assurance’’ 

standard is unacceptably subjective 

because it depends on a specific 

member’s knowledge, resources, and 

discretion and institutional investment 

firms may be able to hire outside 

counsel to determine whether a given 

transaction would violate foreign law, 

whereas a smaller firm may perform its 

own research and (incorrectly) conclude 

that the same transaction does not 

violate foreign law.45

One commenter suggested that 

proposed Rule 2040(c)(2) and (3) should 

be amended to permit members to focus 

on the residency, instead of the 

citizenship, of customers as this 

provides a ‘‘brighter and more 

enforceable line for all concerned and 

that the Commission has recognized 

residency as a better policy guide for the 

proper application of the broker-dealer 

registration requirements, except in very 

limited circumstances.’’ 46 The 

commenter believed that the 

requirements in the proposed rule 

change that finders not be U.S. citizens 

and customers be foreign nationals (not 

U.S. citizens) impose an undue 

burden.47

One commenter stated that the 

conditions a firm must satisfy to rely on 

proposed Rule 2040(c) (e.g., determining 

whether the finder is not required to 

register as a U.S. broker-dealer and not 

subject to a disqualification under 

FINRA’s By-Laws, the compensation 

arrangement does not violate applicable 

foreign law, etc.) will increase 

compliance costs for firms, particularly 

when outside counsel has to be 

retained.48 In addition, the commenter 

noted that the additional disclosure 

requirements and recordkeeping 

requirements would be costly for firms, 

especially for small firms.49

3. Scope of Foreign Finders Proposal Is 

Not Comprehensive 

Two commenters expressed concern 

that the scope of the proposed rule 

change appears to be too restrictive.50

Both commenters stated that as a result 

of language in the Proposing Release 

that proposed Rule 2040(c) permits 

compensation when the foreign finder’s 

sole involvement is the initial referral to 

the member, any activities beyond the 

initial referral of non-U.S. customers 

and payment of transaction-based 

compensation for any such activities 

‘‘would not be within the permissible 

scope of the foreign finders exception as 

set forth in proposed FINRA Rule 

2040(c).’’ 51

One commenter stated that the 

Existing Nonregistered Foreign Finder 

Rules include NASD Rule 1060(b) and 

NYSE Rule Interpretation 345(a)(i)/03 as 

a safe harbor, not as an exclusive means 

of compliance with the Existing 

Nonregistered Foreign Finder Rules, and 

requested that the proposed rule 

language be clarified with the use of the 

phrase ‘‘unless otherwise permitted by 

the federal securities laws or FINRA 

rules,’’ because there may be other 

permissible activities, beyond the initial 

referral, that would be within the 

permissible scope of the foreign finders 

exception.52 One commenter 

recommended that FINRA clarify the 

proposed rule text to permit the 

payment of compensation to foreign 

finders so long as the activities of the 

foreign finder are otherwise permitted.53

The commenter also argued that the 

inclusion of the word ‘‘sole’’ in the 

Proposing Release is unnecessarily 

restrictive and anti-competitive.54

One commenter requested additional 

guidance to assist in the implementation 

and operation of proposed Rule 

2040(c).55 Specifically, the commenter 

noted that proposed Rule 2040(c)(4) 

requires that ‘‘customers receive a 

descriptive document, similar to that 

required by Rule 206(4)–3(b) of the 

Investment Advisers Act, that discloses 

what compensation is being paid to 

finders.’’ 56 The commenter stated that 

investment advisers must disclose the 

additional amount that will be charged 

to the investment advisory fee (normally 

expressed as a percent of assets under 

management) and the differential 

attributable to the finder arrangement 

and, in general, the nature of fees 

between an investment adviser and its 

clients differ from the nature of fees 

between a broker-dealer and its 

customers.57 Therefore, the commenter 

believed that it would be useful to have 

examples of how the condition would 

operate.58

One commenter believed that the 

proposed rule would provide the SEC 

with an opportunity to provide clarity 

in the area of finders and, moreover, 

argued that allowing FINRA to adopt the 

SEC’s standard is not efficient.59 The 

commenter expressed concern about the 

certain staff guidance, in particular the 

Paul Anka SEC no-action letter, which 

it argued narrowed the issue to whether 

a transaction fee is paid.60 The 

commenter further stated that the 

industry believes it is safe to pay fixed 

fees to employees or finder/consultants 

and urged the Commission to provide 

clarity on the Paul Anka letter and the 

transaction fee test.61

4. FINRA Response 

FINRA responds that it has proposed 

to transfer NASD Rule 1060(b) 

unchanged into the consolidated 

rulebook in response to comments it 

received on Regulatory Notice 09–69.62

FINRA states that the proposed rule 

change does not seek to address all 

circumstances under which payments 

may be made by U.S. broker dealers to 

foreign finders.63 In addition, the 

proposed rule carries over a narrow safe 

harbor that permits a firm to pay ongoing compensation to a foreign finder 

under the conditions set forth in the 

provision.64 FINRA recognizes that the 

proposed rule change does not address 

all open issues with respect to the 

payment of transaction-based 

compensation to foreign finders, but 

believes that this type of comprehensive 

rulemaking or guidance is outside the 


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65 Id. 

66 Id. 

67FINRA Response at 8. 

68 Id. 

69 Id. 

70 Id. 

71See ABA, SIFMA, IMS and Cornell. 

72 Id. 

73 IMS. 

74ABA. 

75Cornell. 

76 IMS. 

77SIFMA. 

78 IMS, Commonwealth, and Plexus. 

79 IMS. 

80 Id. 

81NASAA. 

82Cornell. 

83 Id. 

84FINRA Response at 9. 

85FINRA Response at 9–10. 

86FINRA Response at 10. 

87 Id. 

scope of this proposal.65 To the extent 

that additional interpretive issues 

remain, FINRA plans to work with SEC 

staff on issuing related guidance, as 

appropriate.66

FINRA declines to amend the 

proposed rule text or provide examples 

as suggested by the commenters as it is 

not proposing to make any substantive 

changes to the provision.67 FINRA does 

not intend to change the meaning or 

scope of the proposed provision or its 

related guidance by relocating the 

provision from the Series 1000 rules of 

the NASD rulebook to the Series 2000 

rules of the FINRA rulebook. Similar to 

NASD Rule 1060(b) and NYSE Rule 

Interpretation 345(a)(i)/03, proposed 

Rule 2040(c) is not intended to be the 

only means by which a member may 

pay compensation to a foreign finder. 

FINRA states that members may rely on 

other applicable federal securities laws 

and regulations where the activities of a 

foreign finder go beyond the scope 

permitted by the proposed rule (e.g., the 

initial referral of a customer to the 

member).68

FINRA also reiterates that, as stated in 

the Proposing Release, based solely on 

its activities in compliance with 

proposed FINRA Rule 2040(c), the 

foreign finder would not be considered 

an associated person of the member.69

Further, FINRA believes the word 

‘‘solely’’ is critical and that any 

activities by the foreign finder beyond 

the initial referral of the customer 

would no longer allow a firm to rely on 

the ‘‘safe harbor’’ established by the 

proposed rule and may require 

registration under Section 15(a) of the 

Exchange Act or result in association 

with the member under the FINRA ByLaws.70 Therefore, FINRA maintains 

that the inclusion of this restriction is 

not new and has always been 

understood to be part of the provision. 

D. Proposed FINRA Rule Supplementary 

Material .01 (Reasonable Support for 

Determination of Compliance With 

Section 15(a) of the Exchange Act) 

1. Requests To Clarify Scope and Terms 

Four commenters had concern with 

the scope and requirements of proposed 

Supplementary Material .01.71

Specifically, these commenters 

expressed concern with the third prong 

of the proposed rule that allows a firm 

to obtain a ‘‘legal opinion’’ from 

independent and reputable U.S. 

licensed counsel.72 The commenters 

stated that seeking SEC no-action letters 

or opinions of ‘‘outside’’ ‘‘reputable’’ 

and ‘‘knowledgeable’’ counsel will be 

burdensome and costly, especially for 

small firms. One commenter argued 

that, among other burdens, the proposal 

would mean that in-house counsel is 

automatically disqualified from 

rendering such an opinion, even if that 

counsel is prepared and qualified, by 

reputation and knowledge, to issue an 

objective opinion.73 One commenter 

urged FINRA to provide greater 

flexibility in the range of measures that 

a member firm may rely on to 

‘‘reasonably support’’ its determination 

and suggested that proposed Rule 

2040(a)(3) be amended to provide that a 

member firm support its determination 

based on ‘‘advice of knowledgeable 

outside counsel’’ and make clear that 

the enumerated bases for determining 

that the necessary ‘‘reasonable support’’ 

exists are not exclusive.74

One commenter stated that 

determining whether counsel is 

‘‘reputable’’ or ‘‘knowledgeable in the 

area’’ depends on the market in which 

he or she practices and the member’s 

discretion and requested clarification as 

to whether ‘‘area’’ refers to geography or 

legal practice.75 One commenter stated 

that the concepts of ‘‘reputable’’ and 

‘‘knowledgeable’’ are subjective and the 

costs of implementing ‘‘these mandates 

are likely prohibitive and 

disproportionate to any economic 

benefit the firm might receive.’’ 76 One 

commenter requested further guidance 

to illustrate the standard ‘‘reasonable 

under the circumstances’’ as well as 

guidance on the expected frequency of 

the periodic review.77

2. Other Comments 

Three commenters believed that 

FINRA should provide greater clarity on 

when and under what circumstances 

payments to unregistered foreign finders 

are permitted.78 One commenter 

objected to the proposed rule arguing 

that, instead of providing clarity, FINRA 

has imposed five additional conditions 

by proposing Supplementary Material 

.01.79 The commenter further argued 

that FINRA did not address the impact 

of the proposed rule change on several 

activities that may be exempt from 

broker-dealer registration through SEC 

or FINRA guidance.80

One commenter asserted that the 

addition of this Supplementary Material 

.01 mitigates some of the concerns 

previously raised by them in response to 

Regulatory Notice 09–69, but they 

remain concerned with the complex 

issues surrounding the compensation of 

unregistered persons that they stated is 

largely unaddressed by the current 

proposal.81

One commenter stated that the 

‘‘reasonable reliance’’ standard in 

Supplementary Material .01 depends 

almost entirely on the judgment of 

broker-dealers that have a financial 

incentive to interpret materials 

broadly.82 Further, the commenter 

stated that although the Supplementary 

Material is intended to mitigate the 

burden of determining whether Section 

15(a) requires registration, the 

uncertainty of a ‘‘reasonable reliance’’ 

standard invites a much costlier 

alternative: private dispute resolution, 

administrative hearings, or litigation.83

3. FINRA’s Response 

FINRA states that it is proposing to 

adopt Supplementary Material .01 

because it recognizes the potential costs 

and burdens of obtaining a firm-specific, 

no-action letter from the SEC.84 The 

proposed supplementary material is 

intended to clarify that firms may rely 

on other means to demonstrate 

compliance and provides firms with the 

flexibility to rely on other options that 

may be less costly and time 

consuming.85

FINRA does not intend proposed 

Supplementary Material .01 to be an 

exhaustive list by which firms can make 

a reasonable determination.86 FINRA 

states that a legal opinion from 

independent, reputable U.S. licensed 

counsel knowledgeable in the area is not 

the only means available to firms. 

FINRA notes that firms may continue to 

rely on the advice of in-house counsel 

or foreign counsel under prong 1 that 

permits a firm to make a determination 

by ‘‘reasonably relying on previously 

published releases, no-action letters or 

interpretations from the Commission or 

Commission staff that apply to its facts 

and circumstances.’’ 87

FINRA declines to define how 

frequently a firm must review its 

determination under the proposed rule 


tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 80, No. 3 / Tuesday, January 6, 2015 / Notices 561 

88 Id. 

89 In approving the proposal, as amended, the 

Commission has considered the impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 

90 15 U.S.C. 78o–3(b)(6). 

91 15 U.S.C. 78s(b)(2). 

92 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3 ‘‘Best bid and offer’’ or ‘‘BBO’’ data is sometimes 

referred to as ‘‘top-of-book’’ data. Data with respect 

to executed trades is referred to as ‘‘last sale’’ data. 

because the review must be reasonable 

based on the nature and scope of the 

activity in question and therefore 

requires a factual review. FINRA 

believes, however, that an annual 

review for on-going payments generally 

would be reasonable, absent evidence of 

activities by the recipient of the 

payments that raise red flags.88

IV. Discussion and Commission 

Findings 

The Commission has carefully 

considered the proposal, the comments 

received, and FINRA’s responses to the 

comments. Based on its review of the 

record, the Commission finds that the 

proposal is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

a national securities association.89

In particular, the Commission finds 

that the proposed rule change is 

consistent with the provisions of 

Section 15A(b)(6) of the Act, which 

requires, among other things, that 

FINRA’s rules be designed to prevent 

fraudulent and manipulative acts and 

practices; promote just and equitable 

principles of trade; and, in general, 

protect investors and the public 

interest.90

The proposed rule change will clarify 

and streamline several NASD and NYSE 

rules relating to payments to 

unregistered persons for adoption as 

FINRA Rules in the new Consolidated 

FINRA Rulebook. Specifically, proposed 

FINRA Rule 2040(a) aligns with Section 

15(a) of the Exchange Act and its related 

guidance to determine whether 

registration as a broker-dealer is 

required for certain persons to receive 

transaction-related compensation; 

proposed FINRA Rule 2040(b) codifies 

existing FINRA guidance on the 

payment by members of continuing 

commissions to retiring registered 

representatives consistent with the 

Commission’s guidance in this area; and 

proposed FINRA Rule 2040(c) adopts 

the foreign finders provisions of NASD 

Rule 1060(b) and NYSE Rule 

Interpretation 345(a)(i)/03 with 

technical changes. The amendments to 

FINRA Rule 8311 eliminate duplicate 

provisions in NASD IM–2420–2 and 

clarify the scope of the rule on 

payments by members to persons 

subject to sanctions. Commenters’ 

suggestions that the SEC (or FINRA) 

provide additional guidance on 

‘‘finders’’ are outside the scope of this 

rule filing, and thus outside the scope 

of this order. 

V. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,91 that the 

proposed rule change (SR–FINRA– 

2014–037) be, and hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.92

Brent J. Fields, 

Secretary. 

[FR Doc. 2014–30892 Filed 1–5–15; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73956; File No. SR–C2– 

2014–029] 

Self-Regulatory Organizations; C2 

Options Exchange, Incorporated; 

Notice of Filing and Immediate 

Effectiveness of a Proposed Rule 

Change Relating to Fees for the C2 

Book Depth Data Feed and Certain 

Other C2 Real-Time Data Feeds 

December 30, 2014. 

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

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on December 

17, 2014, C2 Options Exchange, 

Incorporated (the ‘‘Exchange’’ or ‘‘C2’’) 

filed with the Securities and Exchange 

Commission (the ‘‘Commission’’) the 

proposed rule change as described in 

Items I, II, and III below, which Items 

have been prepared by the Exchange. 

The Commission is publishing this 

notice to solicit comments on the 

proposed rule change from interested 

persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

C2 Options Exchange, Incorporated 

(the ‘‘Exchange’’ or ‘‘C2’’) proposes to 

establish fees for the C2 Book Depth 

Data Feed and amend fees for certain 

other C2 real-time data feeds. The text 

of the proposed rule change is available 

on the Exchange’s Web site (http://

www.c2exchange.com/Legal/), at the 

Exchange’s Office of the Secretary, and 

at the Commission’s Public Reference 

Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

Exchange has prepared summaries, set 

forth in sections A, B, and C below, of 

the most significant aspects of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The purpose of the proposed rule 

change is to: (1) Establish fees for the C2 

Book Depth Data Feed; (2) amend fees 

for the C2 Complex Order Book (‘‘COB’’) 

Data Feed; and (3) establish fees for 

distribution of C2 data via a ‘‘Display 

Only Service’’ (as defined below). These 

data feeds are made available by C2’s 

affiliate Market Data Express, LLC 

(‘‘MDX’’). 

BBO, Book Depth and COB Data Feeds 

BBO Data Feed: The BBO Data Feed 

is a real-time, low latency data feed that 

includes the following content: (i) 

Outstanding quotes and standing orders 

at the best available price level on each 

side of the market, with aggregate size 

(‘‘BBO data’’), and last sale data 3; (ii) 

totals of customer versus non-customer 

contracts at the BBO, (iii) All-or-None 

contingency orders priced better than or 

equal to the BBO, (iv) BBO and last sale 

data for complex strategies (e.g., 

spreads, straddles, buy-writes, etc.); (v) 

expected opening price (‘‘EOP’’) and 

expected opening size (‘‘EOS’’) 

information that is disseminated prior to 

the opening of the market and during 

trading rotations, (vi) end-of-day 

(‘‘EOD’’) summary messages that are 

disseminated after the close of a trading 

session that include summary 

information about trading in C2 listed 

options (i.e., product name, opening 

price, high and low price during the 

trading session and last sale price), (vii) 

‘‘recap messages’’ that are disseminated 

during a trading session any time there 

is a change in the open, high, low or last 

sale price of a C2 listed option, as well 

as product name and total volume 


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