Document ID: SEC-2008-1140-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-08-15T04:00Z

[Federal Register: August 15, 2008 (Volume 73, Number 159)]
[Notices]               
[Page 47991-47994]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15au08-100]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58333; File No. SR-FINRA-2008-032]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rules 2350 Through 2359 (Regarding Trading in Index Warrants, 
Currency Index Warrants, and Currency Warrants), FINRA Rule 2360 
(Options), and FINRA Rule 2370 (Security Futures) in the Consolidated 
FINRA Rulebook

August 8, 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 29, 2008, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by FINRA. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA proposes to adopt NASD Rules 2840 through 2853 regarding 
Trading in Index Warrants, Currency Index Warrants, and Currency 
Warrants, 2860 (Options), and 2865 (Security Futures) as FINRA Rules in 
the consolidated FINRA rulebook (``Consolidated FINRA

[[Page 47992]]

Rulebook''),\3\ and to delete the corresponding provisions in 
Incorporated NYSE Rules 414 (Index and Currency Warrants), 424 (Report 
of Options), and the 700 Series (Option Rules). The proposed rule 
change would renumber NASD Rules 2840 through 2853 as FINRA Rules 2350 
through 2359, NASD Rule 2860 as FINRA Rule 2360, and NASD Rule 2865 as 
FINRA Rule 2370 in the Consolidated FINRA rulebook. The text of the 
proposed rule change is available at FINRA, the Commission's Public 
Reference Room, and http://www.finra.org.
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    \3\ The current FINRA rulebook consists of two sets of rules: 
(1) NASD Rules and (2) rules incorporated from NYSE (``Incorporated 
NYSE Rules'') (together referred to as the ``Transitional 
Rulebook''). The Incorporated NYSE Rules apply only to those members 
of FINRA that are also members of the NYSE (``Dual Members''). Dual 
Members also must comply with NASD Rules. For more information about 
the rulebook consolidation process, see FINRA Information Notice, 
March 12, 2008 (Rulebook Consolidation Process).
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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
    FINRA states that as part of the process of developing the new 
Consolidated FINRA Rulebook, FINRA is proposing to adopt, with minor 
changes described below: (1) NASD Rules 2840 through 2853 (regarding 
Trading in Index Warrants, Currency Index Warrants, and Currency 
Warrants) as FINRA Rules 2350 through 2359; (2) NASD Rule 2860 
(Options) as FINRA Rule 2360; and (3) NASD Rule 2865 (Security Futures) 
as FINRA Rule 2370.
    FINRA states that warrants, options, and security futures rules 
were adopted to address the specific risks that pertain to these 
derivative securities, and implement provisions of the federal 
securities laws and Commission rules.\4\ These rules include, among 
other things, provisions requiring specific disclosure documents, 
additional diligence in approving the opening of accounts, and specific 
requirements for confirmations, account statements, suitability, 
recordkeeping, and reporting. The rules also contain provisions 
imposing limits on the size of an options or warrant position and on 
the number of options contracts or warrants that can be exercised 
during a fixed period.
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    \4\ For example, Rule 9b-1(d) under the Act requires a broker-
dealer to furnish a customer with a copy of the options disclosure 
document before accepting an options order from a customer.
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Warrant Rules
    FINRA proposes to adopt NASD rules on index warrants, currency 
index warrants, and currency warrants, NASD Rules 2840 through 2853, as 
FINRA Rules 2350 through 2359, in substantially the form they exist 
today. The proposed rule change would reorganize certain requirements, 
grouping them along similar subject matter lines, by combining the 
statement of general applicability and definitions into a single rule 
(FINRA Rule 2351), and creating a single rule addressing position and 
exercise limits and liquidations (FINRA Rule 2359).
Options Rule
    As further described below, FINRA proposes to adopt NASD Rule 2860 
as FINRA Rule 2360 with minor modifications to: (1) Delete obsolete 
definitions; (2) change all references to ``Registered Options and 
Security Futures Principal'' to ``Registered Options Principal;'' (3) 
permit a Limited Principal-General Securities Sales Supervisor to 
approve the opening of an options account; (4) modify the confirmation 
disclosure requirements consistent with recent changes to the equity 
confirmation disclosure requirements; (5) incorporate NASD 
Interpretative Materials 2860-1 and 2860-2 into the rule text or as 
Supplementary Material; and (6) codify as Supplementary Material the 
provisions in NASD Notice to Members 07-03 (``Notice 07-03'') regarding 
control relationships.
    First, FINRA proposes to delete extraneous definitions from the 
options rule, many of which became obsolete once the provisions in the 
options rule pertaining to NASDAQ options were deleted following the 
separation of NASDAQ from NASD.\5\
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    \5\ See Securities Exchange Act Release No. 54084 (June 30, 
2006), 71 FR 38935 (July 10, 2006) (SR-NASD-2005-087) (approving 
amendments to the NASD's Rules following Nasdaq's operation as a 
national securities exchange for Nasdaq UTP Plan securities).
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    Second, FINRA proposes to change the term ``Registered Options and 
Security Futures Principal'' to ``Registered Options Principal.'' \6\ 
The term Registered Options Principal (``ROP'') was recently changed to 
Registered Options and Security Futures Principal (``ROSFP'').\7\ 
However, FINRA believes that the change to ROSFP has generated 
confusion among the members and believes that reverting to ROP will 
alleviate these issues. In addition, FINRA believes using the term ROP 
would promote consistency with the rules of the options exchanges all 
of which use the term ROP. FINRA notes that the change to the principal 
title does not affect the qualifications needed to supervise options or 
security futures.\8\
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    \6\ Upon approval of the proposed rule change, FINRA intends to 
make conforming changes in an immediately effective rule filing to 
NASD Rule 1022 and IM-1022-1 to change the term ``Registered Options 
and Security Futures Principal'' to ``Registered Options 
Principal.'' In addition, FINRA plans to make the same conforming 
change to NASD Rule 2220 as part of SR-FINRA-2008-013.
    \7\ See Securities Exchange Act Release No. 57775 (May 5, 2008), 
73 FR 26453 (May 9, 2008) (SR-FINRA-2007-035).
    \8\ In order to supervise security futures, an individual must 
successfully pass the Series 4 examination and complete a firm-
element continuing education program on security futures. See NASD 
Notice to Members 02-73 (November 2002) (SEC Approves New Rules and 
Rule Amendments Concerning Security Futures). Individuals 
supervising only options are not required to complete a firm-element 
continuing education program on security futures.
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    Third, FINRA proposes greater flexibility in the area of account 
approval in FINRA Rule 2360(b)(16)(B) to allow a Limited Principal-
General Securities Sales Supervisor (Series 9/10)--in addition to a ROP 
(Series 4)--to approve the opening of an options account. FINRA 
believes that the proposed rule change is consistent with CBOE Rule 9.7 
(Opening of Accounts) which permits a Series 9/10 qualified individual 
serving as a branch manager to approve the opening of an options 
account.\9\ Under NASD Rule 2860, a Series 9/10 may supervise options 
trading activity, but may not approve the opening of an options 
account. FINRA believes that individuals who have passed the Series 9/
10 examination are sufficiently qualified to review and approve the 
opening of an options account.
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    \9\ See also CBOE Rule 9.2 and Interpretation .01 and .02 
(specifying the qualification requirements for individuals 
designated as Registered Options Principals).
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    Fourth, consistent with recent changes in the listed equity 
markets, FINRA proposes, in adopting FINRA Rule 2360(b)(12), to 
eliminate the current requirement that an options confirmation specify 
the exchange(s)

[[Page 47993]]

upon which the option transaction was executed.\10\
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    \10\ See Securities Exchange Act Release No. 57045 (December 27, 
2007) 73 FR 529 (January 3, 2008) (SR-FINRA 2007-037). See also 
FINRA Regulatory Notice 07-65, Amendments to NYSE Rule 409(f): FINRA 
Amends NYSE Rule 409(f) (Statements of Accounts to Customers) to 
Eliminate the Requirement to Include the Name of the Securities 
Market on which a Transaction is Effected (December 2007).
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    Fifth, FINRA proposes to relocate the illustrations of position 
limit calculations in NASD IM-2860-1 (Position Limits) to Supplementary 
Material .01 of FINRA Rule 2360 and incorporate the provisions from 
NASD IM-2860-2 (Diligence in Opening Options Accounts) pertaining to 
opening of options accounts into FINRA Rule 2360(b)(16)(B) and 
(b)(16)(C).\11\
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    \11\ Provisions regarding verification of a customer's 
background and financial information have transferred unchanged to 
FINRA Rule 2360(b)(16)(C). Members are reminded that they can only 
recommend transactions for the purchase or sale (writing) of option 
contracts if they have reasonable grounds for believing, at the time 
of making the recommendation based on any information known by the 
member or associated person, that the recommended transaction is not 
unsuitable for the customer. See NASD Rule 2860(b)(19).
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    Sixth, FINRA proposes to codify as Supplementary Material .02 to 
FINRA Rule 2360 the provisions in Notice 07-03 pertaining to control 
relationships, which are explicitly incorporated in NASD Rule 
2860(b)(3)(A)(vii)b.2.B.i. Notice 07-03 sets forth the conditions under 
which FINRA will deem that no control relationship exists between 
affiliates and between separate and distinct trading units within the 
same entity. FINRA believes that adding the relevant provisions of 
Notice 07-03 as Supplementary Material will make the rule more self-
contained and easier to follow.
Security Futures Rule
    FINRA proposes to adopt NASD Rule 2865 as FINRA Rule 2370 with 
minor changes to preserve the general parallel treatment of options and 
security futures.\12\ In particular, FINRA proposes to update the 
provisions regarding discretionary accounts to conform to recent rule 
amendments made to the options rule.\13\ Under the proposed rule 
change, each firm must designate specific principals qualified to 
supervise security futures activities to review discretionary 
accounts.\14\ A principal other than the principal who accepted the 
account would review the acceptance of each discretionary account to 
determine that the principal accepting the account had a reasonable 
basis for believing that the customer was able to understand and bear 
the risks of the strategies or transactions proposed and must maintain 
a record of the basis for such determination.
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    \12\ One of the underpinnings of the Commodity Futures 
Modernization Act of 2000 is that the regulation of security futures 
should be comparable to the regulation of options. In approving NASD 
Rule 2865 (Securities Futures), the Commission stated: ``The system 
of joint regulation of security futures established by the Commodity 
Futures Modernization Act is intended to prevent competitive 
advantages from arising solely out of differences between securities 
regulation and futures regulation. * * * The Commission believes 
that the rule change should promote just and equitable principles of 
trade by preventing regulatory disparities from occurring between 
options and security futures.'' Securities Exchange Act Release No. 
46663 (October 15, 2002), 67 FR 64944 (October 22, 2002) (SR-NASD-
2002-40) (approving NASD Rules 1022, 1032, 2210, 3010, 3370, IM-
1022-1, and IM-1022-2, 2865, and IM-2210-7).
    \13\ See Securities Exchange Act Release No. 57775 (May 5, 
2008), 73 FR 26453 (May 9, 2008) (SR-FINRA-2007-035).
    \14\ As provided in NASD Rule 1022(f)(5), any ROP that 
supervises security futures products must complete a firm-element 
continuing education program that addresses security futures and a 
principal's responsibilities for supervising such products.
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    To mirror recent changes to the options rule, the proposed rule 
change would eliminate the requirement that discretionary orders be 
approved on the day of entry by a principal qualified to supervise 
security futures activities if a firm uses computerized surveillance 
tools. Discretionary orders for firms using computerized surveillance 
tools instead may be reviewed in accordance with the member firm's 
written supervisory procedures. Firms that do not use computerized 
surveillance tools must, as they do today, establish and implement 
procedures requiring principals qualified to supervise security futures 
activities who have been designated to review discretionary accounts to 
approve and initial each discretionary order on the day entered.\15\
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    \15\ See supra note 13.
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    Finally, FINRA proposes to limit the duration of the time and price 
discretionary authority to the end of the business day on which the 
customer granted such discretion, absent specific written contrary 
indication signed and dated by the customer. This limitation would not 
apply to discretion exercised in an institutional account, as defined 
in NASD Rule 3110(c)(4), pursuant to Good-Till-Canceled instructions 
issued on a ``not held'' basis. The proposed rule change would require 
that any exercise of time and price discretion be reflected on the 
order ticket. These changes mirror the limitations to discretionary 
authority provided in NASD Rule 2510(d) and the options rule.
Deleted Rules
    FINRA proposes to delete the following Incorporated NYSE Rules as 
the substance of such rules is addressed in the proposed FINRA rules: 
\16\ Incorporated NYSE Rules 414 (Index and Currency Warrants); 424 
(Reports of Options); 700 (Applicability, Definitions and References); 
704 (Position Limits); 705 (Exercise Limits); 707 (Liquidation of 
Positions); 709 (Other Restrictions on Exchange Option Transactions and 
Exercises); 720 (Registration of Options Principals); 721 (Opening of 
Accounts); 722 (Supervision of Accounts); 723 (Suitability); 724 
(Discretionary Accounts); 725 (Confirmations); 726 (Delivery of Options 
Disclosure Document and Prospectus); 727 (Transactions with Issuers); 
728 (Restricted Stock); 730 (Statement of Accounts); 732 (Customer 
Complaints); 780 (Exercise of Option Contracts); 781 (Allocation of 
Exercise Assignment Notices); and 791 (Communications to Customers).
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    \16\ FINRA states that, moreover, in several instances, the 
Incorporated NYSE Rules are no longer applicable by their own terms 
as the NYSE no longer trades options.
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    FINRA would announce the implementation date of the proposed rule 
change in a Regulatory Notice to be published no later than 60 days 
following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\17\ 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. The proposed rule change makes minor changes to rules 
that have proven effective in meeting the statutory mandates. Moreover, 
as described in the proposed rule change, certain amended provisions 
seek to conform FINRA rules to existing provisions of other self-
regulatory organizations or are consistent with other rule changes. 
FINRA believes that the proposed rules promote the public interest and 
protect investors who invest in and trade these derivative products.
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    \17\ 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

[[Page 47994]]

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

    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 rule-comments@sec.gov. Please include 
File Number SR-FINRA-2008-032 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-2008-032. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2008-032 and should be 
submitted on or before September 5, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-18897 Filed 8-14-08; 8:45 am]

BILLING CODE 8010-01-P