Federal Register / Vol. 74, No. 14 / Friday, January 23, 2009 / Notices 4271 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 58905 

(November 6, 2008), 73 FR 67237 (November 13, 

2008) (SR–FINRA–2008–054) (notice). 

4The current FINRA rulebook includes, in 

addition to FINRA Rules, (1) NASD Rules and (2) 

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’’). 

For more information about the rulebook 

consolidation process, see FINRA Information 

Notice, March 12, 2008 (Rulebook Consolidation 

Process). 

5 Incorporated NYSE Rule Interpretation 401/01 

includes aspects similar to IM–2110–4. FINRA 

deleted that Interpretation as part of an earlier filing 

to transfer NASD Rule 2110 (Standards of 

Commercial Honor and Principles of Trade) and 

2120 (Use of Manipulative, Deceptive or Other 

Fraudulent Devices) to the Consolidated FINRA 

Rulebook, as the conduct addressed in the 

Interpretation is subsumed by those rules. See 

Securities Exchange Act Release No. 58643 

(September 24, 2008) 73 FR 57174 (October 1, 2008) 

(Order Approving SR–FINRA–2008–028). 

6Letter from Amal Aly, Managing Director and 

Associate General Counsel, Securities Industry and 

Financial Markets Association (‘‘SIFMA’’), 

December 5, 2008; Letter from Peter C. 

Chepucavage, General Counsel, Plexus Consulting, 

LLC, January 12, 2009. 

less than six years from the date of such 

determination, the first two years in an 

easily accessible place. 

For the Commission, by the Division of 

Investment Management, under delegated 

authority. 

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–1299 Filed 1–22–09; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59254; File No. SR–FINRA– 

2008–054] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving 

Proposed Rule Change To Adopt 

FINRA Rule 5280 (Trading Ahead of 

Research Reports) in the Consolidated 

FINRA Rulebook 

January 15, 2009. 

I. Introduction 

On October 29, 2008, the Financial 

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 (‘‘Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change to adopt NASD Interpretive 

Material 2110–4 (Trading Ahead of 

Research Reports) as a FINRA rule, 

subject to certain amendments. The 

proposed rule change was published for 

comment in the Federal Register on 

November 6, 2008.3 The Commission 

received two comment letters in 

response to the proposed rule change. 

This order approves the proposed rule 

change. 

II. Description of the Proposed Rule 

Change 

As part of the process of developing 

the new consolidated rulebook 

(‘‘Consolidated FINRA Rulebook’’),4

FINRA proposed to adopt in the 

Consolidated FINRA Rulebook NASD 

Interpretive Material (‘‘IM’’) 2110–4 

(Trading Ahead of Research Reports) 

with certain modifications. 

IM–2110–4 states that it is conduct 

inconsistent with just and equitable 

principles of trade for a member to 

establish or adjust an inventory position 

in an exchange-listed security traded 

over-the-counter or a derivative of such 

security in anticipation of the issuance 

of a research report on that security. The 

IM further recommends—but does not 

require—that firms establish policies 

and procedures to develop and 

implement effective internal controls to 

isolate specific information within 

research and other relevant departments 

so as to prevent the trading department 

from utilizing advance knowledge of the 

issuance of research reports. Those 

members that choose not to establish 

such procedures bear the burden to 

show that changes in inventory 

positions in advance of research reports 

were not purposeful.5

The proposed rule change would 

amend the IM in three respects. First, it 

would extend the application of the IM 

to cover inventory positions with 

respect to any security—including 

debt—or derivative thereof, irrespective 

of whether the security is exchangelisted. FINRA believes the purpose of 

the IM—to prevent the manipulation of 

the supply of a security for the benefit 

of a firm and to the detriment of 

investors—applies equally to inventory 

positions in non-exchange-listed 

securities. 

Second, the proposed rule change 

would apply the rule only to 

circumstances where a member 

establishes or adjusts its inventory 

based on non-public advance 

knowledge of the content or timing of a 

research report in that security. As such, 

it would not be a violation of the rule 

for a member to increase or decrease 

inventory of a security based on 

publicly available information regarding 

the likely timing of a research report. By 

way of example, when a member’s 

trading desk adjusts an inventory 

position in anticipation of a research 

report because of a publicly discernible 

trend that a member’s report tends to 

follow an earnings announcement, the 

prohibitions of the rule would not be 

triggered. However, having knowledge 

of a publicly discernible trend is not a 

viable alternative basis for the member’s 

trading desk to adjust its inventory 

position when the trading desk is also 

the recipient of non-public advance 

knowledge of the content or timing of a 

research report in that security. 

Finally, the proposal would eliminate 

the option to establish internal controls 

to manage the flow of information 

between the research and trading 

departments and instead mandate that 

firms establish policies and procedures 

reasonably designed to restrict or limit 

the information flow between research 

department personnel, or other persons 

with knowledge of the content or timing 

of a research report, and trading 

department personnel, so as to prevent 

trading department personnel from 

utilizing non-public advance knowledge 

of the issuance or content of a research 

report for the benefit of the member or 

any other person. 

FINRA believes that a member should 

have an affirmative obligation to manage 

conflicts of interest in its trading of 

securities. Moreover, this approach is 

more consistent with existing and 

proposed rules regarding supervision 

and the requirements of NASD Rule 

2711 and NYSE Rule 472 to eliminate 

conflicts involving the publication and 

distribution of research reports. 

III. Comments 

The SEC received two comment 

letters.6 The commenters’ concerns, as 

well as FINRA’s responses are discussed 

below. 

The first comment letter expressed 

general support for the proposed rule 

change, but requested a few 

clarifications. First, the commenter 

sought clarification that the term 

‘‘research report’’ in the proposed rule 

change has the same definition as that 

in NASD Rule 2711(a)(9). The latter 

defines research report as ‘‘any written 

(including electronic) communication 

that includes an analysis of equity 

securities of individual companies or 

industries, and that provides 

information sufficient upon which to 

base an investment decision.’’ Rule 

2711(a) also includes several exceptions 

to the definition, among them 

communications limited to 

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4272 Federal Register / Vol. 74, No. 14 / Friday, January 23, 2009 / Notices 

7See Letter from Philip Shaikun, Associate Vice 

President and Associate General Counsel, FINRA, 

January 2, 2008. 

8See, FINRA NTM 08–55, October 2008. 9 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). 

10 15 U.S.C. 78o–3(b)(6). 

11See supra note 4. 

12 15 U.S.C. 78s(b)(2). 

13 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(3)(A)(ii). 

4 17 CFR 240.19b–4(f)(2). 

commentaries on economic, political or 

market conditions. 

FINRA responded that the term 

‘‘research report’’ in the proposed rule 

change is intended to be much broader 

than that in NASD Rule 2711(a)(9) and 

is meant to cover adjustments to 

inventory positions based on non-public 

knowledge of the content or timing of 

both debt and equity research.7 The 

proposed rule change differs in 

objective from NASD Rule 2711(a)(9) 

and is intended to ‘‘enhance investor 

protection and market integrity by 

deterring member firms from 

improperly accumulating or otherwise 

altering investor positions in securities’’ 

based on non-public advance 

knowledge of the content or timing of a 

research report in those securities. 

FINRA interprets the term research 

report in proposed FINRA Rule 5280 to 

cover any written information from the 

research department that a reasonable 

person would expect to result in a 

transaction based on that information. 

Thus, to the extent a reasonable person 

would expect that a communication 

containing market commentary would 

result in a transaction in a particular 

security or securities, a member could 

not establish or adjust its inventory in 

those securities based on non-public 

advance knowledge of that 

communication or the timing of its 

public release. Based on these reasons, 

FINRA declined the commenter’s 

additional request that the proposal be 

narrowed to cover only those actions 

taken by a member firm to adjust its 

inventory based upon advance nonpublic knowledge of material 

investment conclusions, such as ratings 

or price targets. 

Second, the commenter requested that 

FINRA confirm that the requirement in 

subparagraph (b) of the proposal to 

establish, maintain and enforce certain 

policies and procedures is not meant to 

(1) limit or restrict communications 

between sales and trading personnel 

and research personnel concerning an 

analyst’s published views or (2) to 

require that such communications must 

be pre-cleared or monitored. 

FINRA responded that the proposed 

rule sets forth an unambiguous 

supervision standard that ‘‘a member 

must establish, maintain and enforce 

policies and procedures reasonably 

designed to restrict or limit the 

information flow between research 

department personnel, or others with 

knowledge of the content or timing of a 

research report, and trading department 

personnel, so as to prevent trading 

department personnel from utilizing 

non-public advance knowledge of the 

issuance or content of a research report 

for the benefit of the member or any 

other person.’’ FINRA views the 

supervisory standard in the proposal as 

purposefully flexible, to allow firms to 

tailor their policies and procedures to 

their size, structure, business model and 

compliance system. As such any 

number of specific policies and 

procedures may be appropriate to satisfy 

the standard. Thus, absent ambiguity in 

the standard, FINRA believes it 

inappropriate to opine on the adequacy 

of one or more elements of potentially 

many approaches that could satisfy the 

rule’s supervision requirement. 

The second comment letter expressed 

concern that while the proposed rule 

addresses that a broker-dealer cannot 

trade ahead of its own research report, 

the broker-dealer’s customers and 

potential customers should also be so 

prohibited and that all customers and 

potential customers should get the 

research report at the same time. 

Further, the commenter indicated that 

the issue of whether the public should 

simultaneously get such reports should 

be explored and addressed. Per 

discussion, FINRA noted that the 

commenter’s concerns are more 

appropriate to and are addressed in 

FINRA’s proposed ‘‘Research 

Registration and Conflict of Interest 

Rules.’’ 8

IV. Discussion and Findings 

After careful review of the proposed 

rule change, the comments 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.9 In particular, the 

Commission believes the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Act,10 which 

requires, among other things that FINRA 

rules must be designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and 

questionable principles of trade, and, in 

general, to protect investors and the 

public interest. The Commission 

believes that the proposed rule change 

will protect the investing public by 

preventing firms from utilizing nonpublic advance knowledge of the timing 

or content of a research report to benefit 

its own trading to the detriment of its 

customers. Moreover, the Commission 

believes the proposed rule change 

further would clarify and streamline 

NASD IM–2110–4 for adoption as a 

FINRA Rule in the Consolidated FINRA 

Rulebook.11 NASD IM–2110–4 has 

previously been found to meet the 

statutory requirements, and FINRA 

believes the rule has since proven 

effective in achieving statutory 

mandates. 

V. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,12 that the 

proposed rule change (SR–FINRA– 

2008–054) be, and hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.13

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–1298 Filed 1–22–09; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59243; File No. SR–Phlx– 

2008–86] 

Self-Regulatory Organizations; 

NASDAQ OMX PHLX, Inc.; Notice of 

Filing and Immediate Effectiveness of 

a Proposed Rule Change Relating to 

Amending the Phlx Fee Schedule 

January 13, 2009. 

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

Securities Exchange Act of 1934 

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

notice is hereby given that on December 

30, 2008, NASDAQ OMX PHLX, Inc. 

(‘‘Phlx’’ or ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I, II and III 

below, which Items have been 

substantially prepared by the Exchange. 

Phlx has designated this proposal as one 

establishing or changing a member due, 

fee, or other charge imposed under 

Section 19(b)(3)(A)(ii) of the Act 3 and 

Rule 19b–4(f)(2) thereunder,4 which 

renders the proposal effective upon 

filing with the Commission. The 

Commission is publishing this notice to 

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