Document ID: SEC-2008-1101-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc
Posted Date: 2008-08-07T04:00Z

[Federal Register: August 7, 2008 (Volume 73, Number 153)]
[Notices]               
[Page 46111-46112]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07au08-115]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58263; File No. SR-FINRA-2008-042]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change Relating to Amendments to Portfolio Margin

July 30, 2008.
    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 July 25, 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'') the proposed rule change as described in Items I, 
II, and III below, which Items have been substantially prepared by 
FINRA. FINRA has designated the proposed rule change as ``constituting 
a stated policy, practice, or interpretation with respect to the 
meaning, administration, or enforcement of an existing rule'' under 
Section 19(b)(3)(A)(i) of the Act \3\ and Rule 19b-4(f)(1) 
thereunder,\4\ which renders the proposal effective upon receipt of 
this filing by the Commission. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to codify FINRA's interpretation of the 
portfolio margin program set forth in NASD Rule 2520(g) and 
Incorporated NYSE Rule 431(g) \5\ regarding (1) monitoring concentrated 
equity positions and (2) timing of day trading margin calls. The text 
of the proposed rule change is available at http://www.finra.org, the 
principal offices of FINRA, and the Commission's Public Reference Room.
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    \5\ The current FINRA rulebook consists of two sets of rules: 
(1) NASD Rules and (2) rules incorporated from NYSE (``Incorporated 
NYSE Rules''). While the NASD Rules generally apply to all FINRA 
members, the Incorporated NYSE Rules apply only to members of both 
FINRA and the NYSE, referred to as Dual Members.
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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
    On February 12, 2007, FINRA (then known as NASD) filed SR-NASD-
2007-013 for immediate effectiveness to establish a portfolio margin 
pilot program that permits member firms to elect to margin certain 
products according to a prescribed portfolio margin methodology.\6\ The 
portfolio margin pilot program is substantially similar to margin rule 
amendments by the NYSE and the Chicago Board Options Exchange 
(``CBOE''), which were approved by the Commission.\7\ Consistent with 
the amended NYSE and CBOE portfolio margin programs, the pilot, as 
proposed in SR-NASD-2007-013, started on April 2, 2007 and ended on 
July 31, 2007. The pilot program was extended for a one-year period to 
July 31, 2008, also consistent with the NYSE and CBOE portfolio margin 
programs.\8\ Concurrently with this proposed rule change and consistent 
with the CBOE, FINRA proposes to make the portfolio margin pilot 
program contained in NASD Rule 2520(g) and Incorporated NYSE Rule 
431(g) permanent.\9\
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    \6\ See Exchange Act Release No. 55471 (March 14, 2007), 72 FR 
13149 (March 20, 2007) (Notice of Filing and Immediate Effectiveness 
of SR-NASD-2007-013).
    \7\ See Exchange Act Release No. 54918 (December 12, 2006), 71 
FR 75790 (December 18, 2006) (SR-NYSE-2006-13, relating to further 
amendments to the NYSE's portfolio margin pilot program); Exchange 
Act Release No. 54125 (July 11, 2006), 71 FR 40766 (July 18, 2006) 
(SR-NYSE-2005-93, relating to amendments to the NYSE's portfolio 
margin pilot program); Exchange Act Release No. 52031 (July 14, 
2005) 70 FR 42130 (July 21, 2005) (SR-NYSE-2002-19, relating to the 
NYSE's original portfolio margin pilot). See also Exchange Act 
Release No. 54919 (December 12, 2006), 71 FR 75781 (December 18, 
2006) (SR-CBOE-2006-14, relating to amendments to the CBOE's 
portfolio margin pilot); Exchange Act Release No. 52032 (July 14, 
2005) 70 FR 42118 (July 21, 2005) (SR-CBOE-2002-03, relating to the 
CBOE's original portfolio margin pilot).
    \8\ See Exchange Act Release No. 56108 (July 19, 2007) 72 FR 
41375 (July 27, 2007) (Notice of Filing and Immediate Effectiveness 
of SR-NASD-2007-045). See also Exchange Act Release No. 56107 (July 
19, 2007) 72 FR 41377 (July 27, 2007) (Notice of Filing and 
Immediate Effectiveness of SR-NYSE-2007-56, relating to extension of 
the NYSE portfolio margin pilot program to July 31, 2008) and 
Exchange Act Release No. 56109 (July 19, 2007) 72 FR 41365 (July 27, 
2007) (Notice of Filing and Immediate Effectiveness of SR-CBOE-2007-
75, relating to extension of the CBOE portfolio margin pilot program 
to July 31, 2008).
    \9\ See SR-FINRA-2008-041 and SR-CBOE-2008-73.
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    FINRA proposes to codify FINRA's interpretation of NASD Rule 
2520(g) and Incorporated NYSE Rule 431(g) regarding (1) monitoring 
concentrated equity positions and (2) timing of day trading margin 
calls.
Concentrated Equity Positions
    NASD Rule 2520(g)(1) and Incorporated NYSE Rule 431(g)(1) outline 
various procedural guidelines that firms are required to meet in order 
to offer portfolio margin to customers. FINRA has issued guidance in 
the form of frequently asked questions regarding its expectation that, 
among other things, firms develop reports that identify a concentration 
of any individual security in both individual portfolio margin accounts 
and across all portfolio margin accounts.\10\ FINRA proposes to codify 
this requirement in NASD Rule 2520(g)(1)(I) and Incorporated NYSE Rule 
431(g)(1)(I) because FINRA believes it is an essential component in 
monitoring the risk to broker-dealers that offer portfolio margin to 
customers. FINRA expects that firms impose a higher maintenance margin 
requirement on any identified concentrated positions.
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    \10\ See http://www.finra.org/RulesRegulation/
PublicationsGuidance/p038849.
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Day Trading
    NASD Rule 2520(g)(13) and Incorporated NYSE Rule 431(g)(13) require 
firms to monitor accounts that do not maintain $5 million minimum 
equity to ensure that the day trading requirements pursuant to NASD 
Rule 2520(f)(8)(B) and Incorporated NYSE Rule 431(f)(8)(B) are applied. 
Pursuant

[[Page 46112]]

to the day trading requirements, customers are permitted to engage in 
day trading provided they day trade within a specific dollar limit, 
referred to as the day trading buying power.\11\ Customers that day 
trade in excess of their day trading buying power are required to 
deposit additional funds and/or securities to meet a special 
maintenance margin deficiency, also referred to as a day trade margin 
call. In a strategy-based margin account, day trade margin calls are 
due within five business days.\12\ In a portfolio margin account, 
margin deficiencies are due within three business days.\13\ FINRA 
believes that day trade margin calls incurred in a portfolio margin 
account should also be met within three business days. The proposed 
rule change would amend NASD Rule 2520(g)(13) and Incorporated NYSE 
Rule 431(g)(13) to explicitly provide that day trade margin 
deficiencies are due within three business days.
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    \11\ ``Day-trading buying power'' is defined in NASD Rule 
2520(f)(8)(B)(iii) and Incorporated NYSE Rule 431(f)(8)(B)(iii) to 
mean the equity in the customer's account at the close of business 
of the previous day, less any maintenance margin requirement as 
prescribed in the rule, multiplied by four for equity securities.
    \12\ See NASD Rule 2520(f)(8)(C) and Incorporated NYSE Rule 
431(f)(8)(C).
    \13\ See NASD Rule 2520(g)(10)(A) and Incorporated NYSE Rule 
431(g)(10)(A).
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    FINRA has filed the proposed rule change for immediate 
effectiveness. The implementation date of the proposed rule change is 
August 1, 2008.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\14\ 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 it is in the public interest to codify 
its stated interpretation with respect to monitoring concentrated 
equity positions and the timing of day trading margin calls in the rule 
text.
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    \14\ 15 U.S.C. 78o-3(b)(6).
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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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change constitutes a stated 
policy, practice or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \15\ and paragraph 
(f)(1) of Rule 19b-4 thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(1).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate 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.

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 rule-comments@sec.gov. Please include 
File Number SR-FINRA-2008-042 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2008-042. 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-2008-042 and should be 
submitted on or before August 28, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-18238 Filed 8-6-08; 8:45 am]

BILLING CODE 8010-01-P