Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Notices 4487 

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

2 17 CFR 240.19b–4. 

3Amendment No. 2 to SR–FINRA–2008–020. 

This amendment replaced and superseded the 

original filing submitted to the SEC on September 

11, 2008. Amendment No. 1, which was filed on 

December 22, 2008, was withdrawn on January 7, 

2009. 

4Franklin Ross, Inc., NASD No. E072004001501 

(settled April 2006), summarized in NASD Notice 

Disciplinary Actions, p. 1 (May 2006); Capital 

Growth Financial, LLC, NASD No. E072003099001 

(settled February 2006), summarized in NASD 

Notice Disciplinary Actions, p. 1 (April 2006); Craig 

& Associates, NASD No. E3B2003026801 (settled 

August 2005), summarized in NASD Notice 

Disciplinary Actions, p. D6 (October 2005); Online 

Brokerage Services, Inc., NASD No. C8A050021 

(settled March 2005), summarized in NASD Notice 

Disciplinary Actions, p. D5 (May 2005); IAR 

Securities/Legend Merchant Group, NASD No. 

C10030058 (settled July 2004), summarized in 

NASD Notice Disciplinary Actions, p. D1 (July 

2004); Shelman Securities Corp., NASD No. 

C06030013 (settled December 2003), summarized in 

NASD Notice Disciplinary Actions, p. D1 (February 

2004); Neil Brooks, NASD No. C06030009 (settled 

June 2003), summarized in NASD Press Release, 

NASD Files Three Enforcement Actions for 

Fraudulent Hedge Fund Offerings (August 18, 

2003); Dep’t of Enforcement v. L.H. Ross & Co., Inc., 

Complaint No. CAF040056 (Hearing Panel decision 

January 15, 2005); Dep’t of Enforcement v. Win 

Capital Corp., Complaint No. CLI030013 (Hearing 

Panel decision August 6, 2004). In addition to these 

cases, FINRA has numerous ongoing investigations 

involving MPOs. 

5FINRA Rule 5110 and NASD Rules 2720 and 

2810 govern member participation in public 

offerings of securities. 

6Members would remain subject to other FINRA 

rules that govern a member’s participation in the 

offer and sale of a security, including FINRA Rules 

2010 and 2020 and NASD Rule 2310. Members also 

are subject to the anti-fraud provisions of the 

federal securities laws, including Sections 10(b), 11, 

12 and 17 of the Exchange Act. 

7The following is a list of persons and entities 

submitting comment letters in response to NTM 07– 

27: Letter from Timothy P. Selby for Alston & Bird 

LLP dated July 20, 2007 (Alston & Bird letter); 

Letter from Keith F. Higgins for American Bar 

Association Committee on Federal Regulation of 

Continued 

the quarterly period ending September 

30, 2004, filed on April 6, 2006. 

The Commission is of the opinion that 

the public interest and the protection of 

investors require a suspension of trading 

in the securities of BBJ Technologies. 

Therefore, it is ordered, pursuant to 

Section 12(k) of the Securities Exchange 

Act of 1934, that trading in BBJ 

Technologies securities is suspended for 

the period from 9:30 a.m. EST on 

January 22, 2009, through 11:59 p.m. 

EST on February 4, 2009. 

By the Commission. 

Jill M. Peterson, 

Assistant Secretary. 

[FR Doc. E9–1691 Filed 1–22–09; 4:15 pm] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59262; File No. SR–FINRA– 

2008–020] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of 

Proposed Rule Change and 

Amendment No. 2 Thereto Relating to 

Private Placements of Securities 

Issued by Members 

January 16, 2009. 

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

Securities Exchange Act of 1934 (‘‘Act’’ 

or ‘‘Exchange Act’’) 1 and Rule 19b–4 

thereunder,2 notice is hereby given that 

on September 11, 2008, Financial 

Industry Regulatory Authority, Inc. 

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

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

filed with the Securities and Exchange 

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

and amended on January 7, 2009,3 the 

proposed rule change as described in 

Items I, II, and III below, which Items 

have been substantially prepared by 

FINRA. 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 

FINRA is proposing to adopt new 

FINRA Rule 5122 (‘‘Rule’’). This 

proposed rule change would require a 

member that engages in a private 

placement of unregistered securities 

issued by the member or a control entity 

to (1) Disclose to investors in a private 

placement memorandum, term sheet or 

other offering document the intended 

use of offering proceeds and the offering 

expenses, (2) file such offering 

document with FINRA, and (3) commit 

that at least 85 percent of the offering 

proceeds will be used for business 

purposes, which shall not include 

offering costs, discounts, commissions 

and any other cash or non-cash sales 

incentives. 

Amendment No. 2 to SR–FINRA– 

2008–020 makes minor changes to the 

original filing filed on September 11, 

2008. The proposed rule change 

replaces and supersedes the proposed 

rule change filed on September 11, 2008 

in its entirety, except with regard to 

Exhibit 2, NASD Notice to Members 07– 

27 and comments received in response 

to NASD Notice to Members 07–27. 

The text of the proposed rule change 

is available on FINRA’s Web site at 

http://www.finra.org, at the principal 

office of FINRA 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, 

FINRA 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. FINRA 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 

Background and Discussion 

FINRA is proposing new FINRA Rule 

5122 in response to problems identified 

in connection with private placements 

by members of their own securities or 

those of a control entity (referred to as 

‘‘Member Private Offerings’’ or 

‘‘MPOs’’). In recent years, FINRA has 

investigated and brought numerous 

enforcement cases concerning abuses in 

connection with MPOs.4 Among the 

allegations in these cases were that 

members failed to provide written 

offering documents to investors, or 

provided offering documents that 

contained misleading, incorrect or 

selective disclosure, such as omissions 

and misrepresentations regarding selling 

compensation and the use of offering 

proceeds. In addition, as part of its 

examination program, FINRA conducted 

a non-public sweep of firms that had 

engaged in MPOs and found widespread 

problems. The MPO sweep revealed that 

in some cases, offering proceeds were 

used for individual bonuses, sales 

contest awards, commissions in excess 

of 20 percent, or other undisclosed 

compensation. 

Inasmuch as MPOs are private 

placements, they are not subject to 

existing FINRA rules governing 

underwriting terms and arrangements 

and conflicts of interest by members in 

public offerings.5 This proposed rule 

change is intended to provide investor 

protections for MPOs that are similar to 

the protections provided by NASD Rule 

2720 for public offerings by members.6

In response to concerns about MPOs, 

in June 2007, FINRA issued Notice to 

Members 07–27 (‘‘NTM 07–27’’) 

soliciting comment on a proposed new 

rule regarding MPOs (then numbered 

Proposed Rule 2721). FINRA received 

sixteen comment letters in response to 

NTM 07–27.7 The comments were 

4488 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Notices 

Securities dated July 20, 2007 (ABA letter); Letter 

from Todd Anders dated July 13, 2007 (Anders 

letter); Letter from Neville Golvala for ChoiceTrade 

dated July 19, 2007 (ChoiceTrade letter); Letter from 

Stephen E. Roth, et al of Sutherland, Asbill & 

Brennan, LLP for the Committee of Annuity 

Insurers dated July 20, 2007 (CAI letter); Letter from 

Peter J Chepucavage for the International 

Association of Small Broker-Dealers and Advisors 

dated July 20, 2007 (IASBDA letter); Letter from 

Alan Z. Engel for LEC Investment Corp. dated June 

14, 2007 (LEC letter); Letter from Daniel T. McHugh 

for Lombard Securities Inc. dated July 20, 2007 

(Lombard letter); Letter from Dexter M. Johnson for 

Mallon & Johnson, P.C. dated July 19, 2007 (Mallon 

& Johnson letter); Letter from John G. Gaine for 

Managed Funds Association dated July 20, 2007 

(MFA letter); Letter from Curtis N. Sorrells for MGL 

Consulting Corp. dated July 20, 2007 (MGL letter); 

Letter from Thomas W. Sexton for the National 

Futures Association dated July 20, 2007 (NFA 

letter); Letter from Michael S. Sackheim and David 

A. Form for the New York City Bar Committee of 

Futures and Derivatives Regulation dated July 10, 

2007 (NYC Bar letter); Letter from Joseph A. Fillip, 

Jr. for PFG Distribution Co. dated July 19, 2007 

(PFG letter); Letter from Mary Kuan for Securities 

Industry and Financial Markets Association dated 

July 27, 2007 (SIFMA letter); and Letter from Bill 

Keisler for Stephens Inc. dated July 20, 2007 

(Stephens letter). 

8See MFA letter; CAI letter; Alston & Bird letter. 

9See Anders letter; Mallon & Johnson letter; 

ChoiceTrade letter; ABA letter; SIFMA letter. 

FINRA does not agree with SIFMA that the 

potential for abuses in connection with private 

offerings by non-members is a reason to abandon 

the proposed rule change. The FINRA staff believes 

that offerings by members raise unique conflicts 

that require the protections of the proposed rule 

change. FINRA also disagrees with SIFMA’s 

contention that they do not have legal authority to 

adopt the proposed rule change. 

10See Alston & Bird letter; ABA letter; LEC letter; 

Mallon & Johnson letter; MFA letter; MGL letter; 

PFG letter; SIFMA letter. 

11See ABA letter; SIFMA letter. 

12FINRA added language regarding ‘‘other noncorporate legal entities’’ based on commenters’ 

suggestions to clarify that control would extend to 

entities other than corporations or partnerships. See 

ABA letter; SIFMA letter. 

13See Alston & Bird letter; ABA letter; LEC letter; 

MFA letter; MGL letter; NYC Bar letter; SIFMA 

letter. 

14 Given that FINRA is not imposing limits on 

selling compensation as it does in other rules, they 

do not believe it is necessary to provide a detailed 

definition of ‘‘selling compensation’’ as urged by 

SIFMA. FINRA believes that the term ‘‘selling 

compensation’’ for purposes of a disclosure 

requirement is sufficiently clear. 

15See SIFMA letter. 

16See ABA letter. 

varied. Some commenters expressed 

support for the intent of the proposed 

rule, but voiced concerns about its 

breadth and scope; 8 others questioned 

the benefit or necessity of the proposed 

rule.9 Most comment letters also 

suggested edits to the proposed rule.10

In the discussion below, FINRA 

discusses the comments and note areas 

that differ significantly from the Rule as 

previously proposed in NTM 07–27. 

Definitions 

The proposed rule change states that 

no member or associated person may 

offer or sell any security in a MPO 

unless certain conditions are met. The 

proposed rule change uses the term 

‘‘MPO’’ as ‘‘a private placement of 

unregistered securities issued by a 

member or control entity.’’ The 

proposed rule further defines two of the 

terms in the definition of MPO: ‘‘private 

placement’’ and ‘‘control entity.’’ In 

response to one comment,11 FINRA has 

defined the term ‘‘private placement’’ to 

be ‘‘a non-public offering of securities 

conducted in reliance on an available 

exemption from registration under the 

Securities Act.’’ 

The proposed rule change defines the 

term ‘‘control entity’’ as ‘‘any entity that 

controls or is under common control 

with a member, or that is controlled by 

a member or its associated persons.’’ 

The term ‘‘control’’ is defined as ‘‘a 

beneficial interest, as defined in Rule 

5130(i)(1), of more than 50 percent of 

the outstanding voting securities of a 

corporation, or the right to more than 50 

percent of the distributable profits or 

losses of a partnership or other noncorporate legal entity.’’ 12 The power to 

direct the management or policies of a 

corporation or partnership alone (e.g., a 

general partner)—absent meeting the 

majority ownership or right to the 

majority of profits—would not 

constitute ‘‘control’’ as defined in 

proposed FINRA Rule 5122. For 

purposes of this definition, entities may 

calculate the percentage of control using 

a ‘‘flow through’’ concept, by looking 

through ownership levels to calculate 

the total percentage of control. For 

example, if broker-dealer ABC owns 50 

percent of corporation DEF that in turn 

holds a 60 percent interest in 

corporation GHI, and ABC is engaged in 

a private offering of GHI, ABC would 

have a 30 percent interest in GHI (50 

percent of 60 percent), and thus GHI 

would not be considered a control entity 

under this definition. 

FINRA also reaffirms, as stated in 

NTM 07–27, that performance and 

management fees earned by a general 

partner would not be included in the 

determination of partnership profit or 

loss percentages. However, if such 

performance and management fees are 

subsequently re-invested in the 

partnership, thereby increasing the 

general partner’s ownership interest, 

then such interests would be considered 

in determining whether the partnership 

is a control entity. 

In response to several comments 

advocating that the timing for 

determining control take place at the 

conclusion rather than the 

commencement of an offering,13 FINRA 

has revised the definition of control to 

be determined immediately after the 

closing of an offering. The definition 

also clarifies that, in the case of multiple 

closings, control will be determined 

immediately after each closing. If an 

offering is intended to raise sufficient 

funds such that the member would not 

control the entity under the control 

standard, but fails to raise sufficient 

funds, the member must promptly come 

into compliance with the Rule, 

including providing the required 

disclosures to investors and filings with 

FINRA’s Corporate Financing 

Department (‘‘Department’’). 

Disclosure Requirements 

The proposed rule change would 

require that a member provide a written 

offering document to each prospective 

investor in an MPO, whether accredited 

or not, and that the offering document 

disclose the intended use of offering 

proceeds as well as offering expenses 

and selling compensation.14 If the 

offering has a private placement 

memorandum or term sheet, then such 

memorandum or term sheet must be 

provided to each prospective investor 

and must contain these disclosures. If 

the offering does not have a private 

placement memorandum or term sheet, 

then the member must prepare an 

offering document that discloses the 

intended use of offering proceeds as 

well as offering expenses and selling 

compensation. The Rule is not meant to 

require a particular form of disclosure; 

to emphasize this point, FINRA 

proposes to issue Supplemental 

Material 5122.01, which would note 

that nothing in the Rule shall require a 

member to prepare a private placement 

memorandum that meets the additional 

requirements of Securities Act Rule 502. 

FINRA believes that every investor in 

an MPO should receive basic 

information concerning the offering. 

FINRA also believes that none of the 

disclosures required in the proposed 

rule change would conflict with 

requirements under federal or state 

securities laws.15

In response to comments,16 the 

proposed rule change eliminates the 

previously proposed requirements to 

disclose risk factors and ‘‘any other 

information necessary to ensure that 

required information is not misleading.’’ 

One commenter was concerned that 

requiring disclosure of these items 

could lead to an inconsistent scheme of 

regulation in interpreting the 

application of the federal securities laws 

to private placements if FINRA’s 

expectation of what should be disclosed 

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Notices 4489 

17See ABA letter. 

18See ABA letter; Mallon & Johnson letter; 

SIFMA letter. 

19See 5122(d). This confidential treatment 

provision is similar to that provided in Rule 

5110(b)(3). 

20As noted supra, and in NTM 07–27, neither 

FINRA nor the Department would issue a ‘‘no 

objections opinion’’ regarding any offering 

document filed with the Department. However, if 

FINRA subsequently determined that disclosures in 

the offering document appeared to be incomplete, 

inaccurate or misleading, FINRA could make 

further inquiries. The filing requirement also could 

facilitate the creation of a confidential Department 

database on MPO activity that would be used in 

connection with the member examination process. 

21See NYC Bar letter; SIFMA letter. 

22See Mallon & Johnson letter. 

23See IASBDA letter; Mallon & Johnson letter; 

ABA letter; SIFMA letter. 

24See IASBDA letter; Mallon & Johnson letter; 

ABA letter. 

25See NYC Bar letter. 

26Members’ offerings of subordinated loans are 

subject to an alternative disclosure regime. In 2002, 

Continued 

differed from the expectations of the 

SEC and the courts.17 While FINRA has 

omitted these disclosures from the 

proposed rule change, they specifically 

request comment on their decision to 

exclude such disclosures. 

Filing Requirements 

The proposed rule change would 

require that a member file a private 

placement memorandum, term sheet or 

other offering document with the 

Department at or prior to the first time 

such document is provided to any 

prospective investor. Any amendments 

or exhibits to the offering document also 

must be filed by the member with the 

Department within ten days of being 

provided to any investor or prospective 

investor. The filing requirement is 

intended to allow the Department to 

identify those offering documents that 

are deficient ‘‘on their face’’ from the 

other requirements of the proposed rule 

change. Notably, the filing requirement 

in the proposed rule change differs from 

that in Rule 5110 (Corporate Financing 

Rule) in that the Department would not 

review the offering and issue a ‘‘noobjections’’ letter before a member may 

commence the offering. 

FINRA affirms, in response to 

concerns raised in the comment 

letters,18 that information filed with the 

Department pursuant to FINRA Rule 

5122 would be subject to confidential 

treatment. FINRA has included a 

provision in the proposed rule change 

explicitly clarifying this position.19 The 

Department plans to develop a Webbased filing system that would allow for 

the filing to be deemed filed upon 

submission.20 In addition, the proposed 

rule change would not impose any 

additional requirements regarding filing 

of advertisements or sales materials, 

which would continue to be governed 

by NASD Rule 2210.21

One commenter suggested that a 

member’s filing of Form D pursuant to 

Securities Act Regulation D should 

provide sufficient information to 

FINRA.22 FINRA staff disagrees. For 

example, FINRA notes that the 

information in Form D does not include 

information on a wide variety of 

expenses or applications of proceeds, 

nor does Form D require that such 

information is contained in the offering 

documents. 

Use of Offering Proceeds 

Proposed Rule 5122(b)(3) would 

require that each time an MPO is closed 

at least 85 percent of the offering 

proceeds raised be used for business 

purposes, which would not include 

offering costs, discounts, commissions 

or any other cash or non-cash sales 

incentives. The use of offering proceeds 

also must be consistent with the 

disclosures to investors, as described 

above. This requirement was created to 

address the abuses where members or 

control entities used substantial 

amounts of offering proceeds for selling 

compensation and related party 

benefits, rather than business purposes. 

The proposed rule change does not limit 

the total amount of underwriting 

compensation. Rather, under the 

proposed rule change, offering and other 

expenses of the MPO could exceed a 

value greater than 15 percent of the 

offering proceeds, but no more than 15 

percent of the money raised from 

investors in the private placement could 

be used to pay these expenses. FINRA 

notes the 15 percent figure is consistent 

with the limitation of offering fees and 

expenses, including compensation, in 

NASD Rule 2810 (Direct Participation 

Programs), and the North American 

Securities Administrators Association 

(‘‘NASAA’’) guidelines with respect to 

public offerings subject to state 

regulation. 

Some commenters expressed concern 

that the 85 percent limit was arbitrary 

or unnecessary 23 and should be 

reduced or eliminated to allow 

flexibility for management in MPOs.24

FINRA believes that when a member 

engages in a private placement of its 

own securities or those of a control 

entity, investors should be assured that, 

at a minimum, 85 percent of the 

proceeds of the offering are dedicated to 

business purposes. FINRA recognizes 

that changing the business purpose or 

use of proceeds in an offering may in 

some instances benefit investors, and 

remind members that the member may 

change its use of proceeds, provided it 

makes appropriate disclosure to 

investors and files the amended offering 

document with the Department. 

One commenter requested that, when 

an issuer plans a series of MPOs, the 

issuer should be allowed to calculate 

the 85 percent limit at the end of the 

series.25 FINRA believes, however, that 

the limit should apply to each MPO in 

order to assure investors that at least 85 

percent of each offering in a series is 

dedicated to the business purposes 

described in that offering’s offering 

document. As a result, FINRA has 

clarified that the 85 percent limit 

applies to each MPO. 

Proposed Exemptions 

Proposed Rule 5122 would include a 

number of exemptions for sales to 

institutional purchasers because the 

staff’s findings did not reveal abuse visa`-vis such purchasers, who are generally 

sophisticated and able to conduct 

appropriate due diligence prior to 

making an investment. Specifically, the 

proposed Rule would exempt MPOs 

sold solely to the following: 

• Institutional accounts, as defined in 

NASD Rule 3110(c)(4); 

• Qualified purchasers, as defined in 

Section 2(a)(51)(A) of the Investment 

Company Act; 

• Qualified institutional buyers, as 

defined in Securities Act Rule 144A; 

• Investment companies, as defined 

in Section 3 of the Investment Company 

Act; 

• An entity composed exclusively of 

qualified institutional buyers, as defined 

in Securities Act Rule 144A; and 

• Banks, as defined in Section 3(a)(2) 

of the Securities Act. 

In addition, the proposed rule change 

excludes the following types of 

offerings, which do not raise the 

concerns identified in the sweep or 

enforcement actions: 

• Offerings of exempted securities, as 

defined by Section 3(a)(12) of the 

Exchange Act; 

• Offerings made pursuant to 

Securities Act Rule 144A or SEC 

Regulation S; 

• Offerings in which a member acts 

primarily in a wholesaling capacity (i.e., 

it intends, as evidenced by a selling 

agreement, to sell through its affiliate 

broker-dealers, less than 20% of the 

securities in the offering); 

• Offerings of exempted securities 

with short term maturities under 

Section 3(a)(3) of the Securities Act; 

• Offerings of subordinated loans 

under SEA Rule 15c3–1, Appendix D; 26

4490 Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Notices 

the SEC approved a rule change to require, as part 

of a subordination agreement, the execution of a 

Subordination Agreement Investor Disclosure 

Document. See Exchange Act Release No. 45954 

(May 17, 2002), 67 FR 36281 (May 23, 2002); see 

also Notice to Members 02–32 (June 2002). 

27See Lombard letter; ABA letter; MGL letter; 

NYC Bar letter; MFA letter; NFA letter; Alston & 

Bird letter; Anders letter; PFG letter; CAI letter; 

ChoiceTrade letter; Mallon & Johnson letter; SIFMA 

letter. 

28Accordingly, FINRA notes that in connection 

with this proposed Rule, they do not plan to 

recommend amending NASD Rule 0116 or the List 

of NASD Conduct Rules and Interpretive Materials 

that apply to Exempted Securities. See CAI letter. 

29See NYC Bar letter; MFA letter; NFA letter; 

Alston & Bird letter; SIFMA letter. 

30See CAI letter; PFG letter. 

31See, e.g., NASD Rule 2820. 

32See MGL letter; SIFMA letter. 

33See Mallon & Johnson letter. 

34See SIFMA letter. 

35See Stephens letter; see also Lombard letter. 

36See ChoiceTrade letter; PFG letter; SIFMA 

letter. 

37See, e.g., Securities Act Release No. 8828 (Aug. 

3, 2007), 72 FR 45116 (Aug. 10, 2007); Securities 

Act Release No. 8766 (Dec. 27, 2006), 72 FR 400 

(Jan. 4, 2007). 

38See ABA letter; SIFMA letter. 

39See MFA letter. 

40See Anders letter; ABA letter. 

41See SIFMA letter. 

42 15 U.S.C. 78o–3(b)(6). 

• Offerings of ‘‘variable contracts,’’ as 

defined in NASD Rule 2820(b)(2); 

• Offerings of modified guaranteed 

annuity contracts and modified 

guaranteed life insurance policies, as 

referred to in Rule 5110(b)(8)(E); 

• Offerings of securities of a 

commodity pool operated by a 

commodity pool operator, as defined 

under Section 1a(5) of the Commodity 

Exchange Act; 

• Offerings of equity and credit 

derivatives, including OTC options, 

provided that the derivative is not based 

principally on the member or any of its 

control entities; and 

• Offerings filed with the Department 

under Rule 5110 or NASD Rules 2720 or 

2810. 

Finally, the proposed rule change also 

would exempt MPOs in which investors 

would be expected to have access to 

sufficient information about the issuer 

and its securities in addition to the 

information provided by the member 

conducting the MPO. These exemptions 

include: 

• Offerings of unregistered 

investment grade rated debt and 

preferred securities; 

• Offerings to employees and 

affiliates of the issuer or its control 

entities; and 

• Offerings of securities issued in 

conversions, stock splits and 

restructuring transactions executed by 

an already existing investor without the 

need for additional consideration or 

investments on the part of the investor. 

This list of exemptions is largely 

based on the exemptions previously 

proposed in NTM 07–27, with a few 

additions and clarifications in response 

to comments.27 FINRA clarified that 

exempted securities, as defined by 

Section 3(a)(12) of the Exchange Act, 

would not be subject to the Rule.28 In 

addition, FINRA proposes an exemption 

for commodity pools 29 in view of the 

oversight and regulation performed by 

the National Futures Association and 

the Commodity Futures Trading 

Commission. FINRA also clarified that 

variable contracts and other life 

insurance products 30 would be 

excluded, because the offer and sale of 

these types of offerings are already 

subject to existing FINRA rules.31

FINRA also proposes an exemption for 

member private offerings that are filed 

with the Department under Rule 5110 or 

NASD Rules 2720 or 2810. 

In addition, FINRA clarified aspects 

of other previously proposed 

exemptions. FINRA clarified that their 

intent regarding the exemption for 

wholesalers is to provide an exemption 

for those that do not primarily engage in 

direct selling to investors.32 FINRA also 

clarified that offerings of securities 

issued in conversions, stock splits and 

restructuring transactions that are 

executed by an already-existing investor 

without the need for additional 

consideration or investment on the part 

of the investor would be exempt.33

FINRA also noted that equity and 

credit derivatives, such as OTC options, 

would be exempt, provided that the 

derivative is not based principally on 

the member or any of its control 

entities.34 As a technical matter, the 

issuer of an equity or credit derivative 

is the member firm, and thus would 

make such offering an MPO. However, 

where the security offered is not based 

principally on the member or any of its 

control entities (e.g., an OTC option on 

MSFT), FINRA does not believe such 

sale should be subject to the provisions 

of the proposed rule change. On the 

other hand, if the derivative is based 

principally on the member or a control 

entity (e.g., an OTC option overlying the 

member), then the sale of such security 

should be treated as an MPO and subject 

to the requirements of the proposed rule 

change. 

Finally, FINRA clarified that the 

exemption for employees and affiliates 

of issuers would apply to employees 

and affiliates of control entities as well, 

because these persons are expected to 

have access to a level of information 

about the securities of the issuer similar 

to employees and affiliates of the issuer 

itself.35

Based on the comment letters,36

FINRA also reconsidered whether 

offerings to accredited investors should 

be exempt. However, FINRA continues 

to believe that an exemption for 

offerings made to accredited investors 

would not be in the public interest due 

to the generally low thresholds for 

meeting the definition of the term 

‘‘accredited investor.’’ FINRA notes that 

the SEC has recently proposed clarifying 

and modernizing its ‘‘accredited 

investor’’ standard due to concerns that 

the definition is overbroad.37

Additionally, it is FINRA’s view that 

financial products offered by a public 

reporting company,38 an investment 

fund 39 or a state or federal bank affiliate 

of a FINRA member 40 should not be 

excluded based solely on their status as 

a reporting company, a fund or a bank. 

FINRA’s belief is that, as a general 

matter, exemptions are best tailored 

based on the type of securities offered 

or the type (and sophistication) of the 

purchaser rather than the type of offeror. 

FINRA also declines to exempt offerings 

that contribute below a specified level 

of a member’s net worth (e.g., 5%), to 

create a categorical exemption for all 

exempted securities under Section 3(a) 

of the Securities Act, or to expand the 

exemption for securities with short term 

maturities under Section 3(a)(3) of the 

Securities Act to include all securities 

with a maturity of nine months or less.41

As a practical matter, however, many of 

these products would be exempt 

because they meet one of the other 

exemptions enumerated in the Rule. 

Implementation and Compliance 

FINRA will announce the 

implementation date of the proposed 

rule change in a Regulatory Notice to be 

published no later than 60 days 

following Commission approval. The 

implementation date will be 30 days 

following publication of the Regulatory 

Notice announcing Commission 

approval, but will not apply 

retroactively to any offerings that have 

already commenced selling efforts. 

2. Statutory Basis 

FINRA believes that the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Act,42 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. FINRA believes the 

proposed rule change will provide 

important investor protections in 

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Notices 4491 

43 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3 17 CFR 240.19b–4(f)(6). 

4 17 CFR 240.19b–4(f)(6)(iv). 

connection with private placements of 

securities by members and control 

entities. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

FINRA does not believe that the 

proposed rule change will result in any 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

The proposed rule change was 

published in Notice to Members 07–27 

(June 2007). Sixteen comments were 

received in response to Notice to 

Members 07–27. A copy of Notice to 

Members 07–27 is attached as Exhibit 2a 

to this rule filing. A list of the comment 

letters received in response to Notice to 

Members 07–27 is attached as Exhibit 2b 

to this rule filing. Copies of the 

comment letters received in response to 

Notice to Members 07–27 are attached 

as Exhibit 2c to this rule filing. The 

comments are summarized above. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 35 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) by order approve such proposed 

rule change, or 

(B) institute proceedings to determine 

whether the proposed rule change 

should be 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 e-mail to rulecomments@sec.gov. Please include File 

Number SR–FINRA–2008–020 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–FINRA–2008–020. 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 such filing also will be 

available for inspection and copying at 

the principal office of FINRA. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–FINRA–2008–020 and 

should be submitted on or before 

February 17, 2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.43

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–1466 Filed 1–23–09; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59259; File No. SR–BX– 

2009–003] 

Self-Regulatory Organizations; 

NASDAQ OMX BX, Inc.; Notice of Filing 

and Immediate Effectiveness of 

Proposed Rule Change To Establish a 

Post-Only Order 

January 15, 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 January 

14, 2009, NASDAQ OMX BX, Inc. (the 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I and II 

below, which Items have been 

substantially prepared by the Exchange. 

The Exchange has filed this proposal 

pursuant to Exchange Act Rule 19b– 

4(f)(6) 3 and requests that the 

Commission waive the 30-day preoperative waiting period contained in 

Exchange Act Rule 19b–4(f)(6)(iii).4 If 

such waiver is granted by the 

Commission, this rule proposal, which 

is effective upon filing with the 

Commission, shall become immediately 

operative. 

I. Self-Regulatory Organization’s 

Statement of the Terms of the Substance 

of the Proposed Rule Change 

The Exchange proposes to establish a 

Post-Only Order. 

The text of the proposed rule change 

is below. Proposed new language is in 

italics. 

* * * * * 

4751. Definitions 

(a)–(e) No change. 

(f) No change. 

(1)–(8) No change. 

(9) ‘‘Post-Only Orders’’ are orders that 

if, at the time of entry, would lock an 

order on the System, the order will be 

re-priced and displayed by the System 

to one minimum price increment (i.e., 

$0.01 or $0.0001) below the current low 

offer (for bids) or above the current best 

bid (for offers). 

(g)–(j) No change. 

* * * * *