Document ID: SEC-2010-0901-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-06-21T04:00Z

[Federal Register: June 21, 2010 (Volume 75, Number 118)]
[Notices]               
[Page 35105-35110]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21jn10-148]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62299; File No. SR-FINRA-2010-029]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rule 5141 (Sale of Securities in a Fixed Price Offering) in the 
Consolidated FINRA Rulebook

June 16, 2010.
    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 May 27, 2010, 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. 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 is proposing to adopt FINRA Rule 5141 (Sale of Securities in 
a Fixed Price Offering) in the consolidated FINRA rulebook and to 
delete NASD Rules 0120(h), 2730, 2740 and 2750, and NASD IM-2730, IM-
2740 and IM-2750.
    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
    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\3\ FINRA is proposing to adopt FINRA 
Rule 5141 (Sale of Securities in a Fixed Price Offering) in the 
consolidated FINRA rulebook and to delete NASD Rules 0120(h), 2730, 
2740 and 2750, and NASD IM-2730, IM-2740 and IM-2750.
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    \3\ The current FINRA rulebook consists of: (1) FINRA Rules; (2) 
NASD Rules; and (3) 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''). 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).
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    Proposed FINRA Rule 5141 is a new, consolidated rule intended to 
protect the integrity of fixed price offerings \4\ by ensuring that 
securities in such offerings are sold to the public at the stated 
public offering price or prices, thereby preventing an undisclosed 
better price. The proposed rule is based in part on, and replaces, the 
current fixed price offering rules (NASD Rules 0120(h), 2730, 2740 and 
2750 and associated Interpretive Materials (``IMs'') 2730, 2740 and 
2750).\5\ Like the current fixed

[[Page 35106]]

price offering rules, the proposed rule prohibits the grant of certain 
preferences (e.g., selling concessions, discounts, other allowances or 
various economic equivalents) in connection with fixed price offerings 
of securities.
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    \4\ NASD Rule 0120(h) defines the term ``fixed price offering'' 
to mean the offering of securities at a stated public offering price 
or prices, all or part of which securities are publicly offered in 
the United States or any territory thereof, whether or not 
registered under the Securities Act of 1933. The term does not 
include offerings of ``exempted securities'' or ``municipal 
securities'' as those terms are defined in Sections 3(a)(12) and 
3(a)(29), respectively, of the Securities Exchange Act or offerings 
of redeemable securities of investment companies registered pursuant 
to the Investment Company Act of 1940 which are offered at prices 
determined by the net asset value of the securities. The proposed 
rule change would incorporate the definition of ``fixed price 
offering'' into the proposed rule in substantially identical form. 
See proposed FINRA Rule 5141.04. See also Section (B) under this 
Item and Section (C) under Item II.C.
    \5\ The current fixed price offering rules are also known as the 
Papilsky rules because of the court decision with which they are 
commonly associated. See Papilsky v. Berndt, et al., No. 71 Civ. 
2534, 1976 U.S. Dist. LEXIS 14442 (S.D.N.Y., June 24, 1976). For 
more information regarding the background of NASD Rules 0120(h), 
2730, 2740 and 2750 and the associated IMs, see Notice to Members 
81-3 (February 1981) (Adoption of New Rules Concerning Securities 
Distribution Practices) (``Notice to Members 81-3''); see also 
Securities Exchange Act Release No. 17371 (December 12, 1980), 45 FR 
83707 (December 19, 1980) (Order Approving Proposed Rule Change; 
File No. SR-NASD-78-3).
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(A) Proposed FINRA Rule 5141
    Paragraph (a) of the proposed rule provides that no member or 
person associated with a member that participates in a selling 
syndicate or selling group \6\ or that acts as the single underwriter 
\7\ in connection with a fixed price offering may offer or grant, 
directly or indirectly, to any person \8\ or account that is not a 
member of the selling syndicate or selling group or that is a person or 
account other than the single underwriter \9\ any securities in the 
offering at a price below the stated public offering price (i.e., a 
``reduced price'').\10\
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    \6\ The terms ``selling group'' and ``selling syndicate'' are 
defined in NASD Rules 0120(p) and (q), respectively. (Other than to 
reflect the new conventions of the Consolidated FINRA Rulebook, 
FINRA does not propose to alter these two definitions, which will be 
addressed later in the rulebook consolidation process.)
    \7\ In response to commenter suggestion, FINRA has revised the 
proposed rule to clarify that it applies to any member acting as the 
single underwriter in an offering. See Section (A) under Item II.C; 
see also proposed FINRA Rules 5141(a), 5141.02 and 5141.03.
    \8\ NASD Rule 0120(n) defines ``person'' to include any natural 
person, partnership, corporation, association, or other legal 
entity. Other than to reflect the new conventions of the 
Consolidated FINRA Rulebook, FINRA does not propose to alter this 
definition, which will be addressed later in the rulebook 
consolidation process.
    \9\ Proposed FINRA Rule 5141(a) is based in part on NASD Rule 
2740(a), which provides, among other things, that in connection with 
the sale of securities which are part of a fixed price offering a 
member may not grant or receive selling concessions, discounts, or 
other allowances except as consideration for services rendered in 
distribution and may not grant such concessions, discounts or other 
allowances to anyone other than a broker or dealer actually engaged 
in the investment banking or securities business. FINRA believes 
that it serves the interest of clarity for the new, consolidated 
rule to specify that its requirements apply to members of the 
selling syndicate or selling group, as those terms are defined under 
the FINRA rulebook, or the member acting as the single underwriter, 
as applicable.
    \10\ As discussed below, proposed FINRA Rule 5141.01 defines the 
term ``reduced price'' for purposes of the proposed rule.
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    Proposed FINRA Rule 5141(a) further provides that, subject to the 
requirements of FINRA Rule 5130,\11\ a member of a selling syndicate or 
selling group, or a member that acts as the single underwriter, is 
permitted to sell securities in the offering to an affiliated person, 
provided the member does not sell the securities to the affiliated 
person at a reduced price as set forth under proposed FINRA Rule 
5141.01.\12\ The requirements of the proposed rule would apply until 
the termination of the offering or until a member, having made a bona 
fide public offering of the securities, is unable to continue selling 
such securities at the stated public offering price.\13\
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    \11\ FINRA Rule 5130 (former NASD Rule 2790) addresses 
restrictions on the purchase and sale of initial equity public 
offerings. The rule generally prohibits sales to and purchases by a 
broker-dealer and accounts in which a broker-dealer has a beneficial 
interest.
    \12\ The proposed rule change eliminates the general prohibition 
on transactions with related persons as set forth in current NASD 
Rule 2750 (subject, as already discussed, to the requirements of 
FINRA Rule 5130). FINRA believes that the new, consolidated rule 
serves the core purpose of the fixed price offering rules because it 
prohibits the conferring of a reduced price on a person or account 
that is not a member of the selling syndicate or selling group or 
that is a person or account other than the single underwriter, 
regardless of whether they are an affiliated person. Accordingly, 
the new rule would render Rule 2750's general prohibition on related 
person transactions redundant. See Section (B) under this Item.
    \13\ The proposed rule provides that, for purposes of the rule, 
securities in a fixed price offering shall be presumed salable if 
the securities immediately trade in the secondary market at a price 
or prices which are above the stated public offering price. This is 
based in part on NASD Rule 2750(d), which provides among other 
things that a member or a related person of a member is ``presumed 
not to have made a bona fide public offering * * * if the securities 
being offered immediately trade in the secondary market at a price 
or prices which are at or above the public offering price.'' FINRA 
believes that the standard set forth in the proposed rule is clear 
and easily applied. See Section (F) under Item II.C. FINRA notes 
that the proposed rule does not attempt to define ``bona fide public 
offering'' per se because the term ``bona fide'' speaks for itself 
and, as noted in current IM-2750, any such determination must rest 
on the basis of all relevant facts and circumstances.
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    Proposed FINRA Rule 5141(b) provides that nothing in the proposed 
rule shall prohibit the purchase and sale of securities in a fixed 
price offering between members of the selling syndicate or selling 
group.\14\
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    \14\ FINRA believes that it serves the interest of regulatory 
clarity for the new, consolidated rule to provide that the rule does 
not prohibit this aspect of the underwriting process.
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    Proposed FINRA Rule 5141.01 defines the term ``reduced price.'' The 
proposed rule provides that, for purposes of the rule, ``reduced 
price'' includes, without limitation, any offer or grant of any selling 
concession, discount or other allowance, credit, rebate, reduction of 
any fee (including any advisory or service fee), any sale of products 
or services at prices below reasonable commercially available rates for 
similar products and services (except for research, which, as discussed 
below, is subject to proposed FINRA Rule 5141.02), or any purchase of 
or arrangement to purchase securities from the person or account at 
more than their fair market price in exchange for securities in the 
offering.\15\ FINRA notes that the proposed rule's approach of setting 
forth a definition for the term ``reduced price'' is new and is 
designed, like the current fixed price offering rules, to prohibit in 
comprehensive terms the direct or indirect offering of various economic 
equivalents of a price below the stated public offering price. For 
example, under the proposed definition of ``reduced price'' the 
practice of overtrading--addressed under current NASD Rule 2730 \16\--
is prohibited. Similarly, under the proposed definition improper 
underwriting recapture--addressed under current NASD Rule 2740 \17\--
would also be prohibited.
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    \15\ The proposed rule defines ``fair market price'' to refer 
generally to a price or range of prices at which a buyer and a 
seller, each unrelated to the other, would purchase the securities 
in the ordinary course of business in transactions that are of 
similar size and similar characteristics and are independent of any 
other transaction. FINRA believes that this standard, based in part 
on current NASD Rule 2730(b)(2), is straightforward and easily 
applied. For further discussion, see Section (E) under Item II.C. 
Similarly, FINRA believes that the standard ``reasonable 
commercially available rates for similar products and services''--
new for purposes of the proposed rule--is clear and effective. 
Lastly, FINRA notes that the proposed definition of ``fair market 
price'' is solely for purposes of proposed FINRA Rule 5141 and is 
not intended to affect any other provisions with respect to pricing 
that are set forth in FINRA rules.
    \16\ When Rule 2730 was adopted in its current form--then 
designated as Section 8 of Article III of the Rules of Fair 
Practice--FINRA explained: ``An overtrade occurs when, as part of a 
swap, a dealer pays more for securities purchased from an 
institution than their fair market price. It also occurs if the 
member acting as agent charges less than a normal commission. In 
either event, the net effect of what the customer receives is a 
discount from the public offering price and is therefore 
prohibited.'' See Notice to Members 81-3.
    \17\ In Notice to Members 81-3, FINRA explained that Rule 2740, 
then designated as Section 24 of Article III of the Rules of Fair 
Practice, ``serves the twofold function of promoting the securities 
distribution process and assuring that the selling concession, 
discount or other allowance offered to professional broker/dealers 
to facilitate the distribution of securities to investors is given, 
consistent with the representations made to the public in 
prospectuses, only to persons who are entitled to it. Thus, the 
section prohibits the surreptitious and unfair discriminatory 
granting of a discount to select investors who are in a position to 
take advantage of various recapture devices.''
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    Proposed FINRA Rule 5141.02 is based generally on NASD Rules 
2740(a)(1) and (b) and IM-2740 and preserves the allowance permitted 
under those rules with respect to research services. Specifically, the 
proposed rule provides that nothing in the new rule prohibits a member 
or

[[Page 35107]]

person associated with a member that participates in a selling 
syndicate or selling group, or that acts as the single underwriter, 
from selling securities in the offering to a person or account to which 
it has provided or will provide research, provided the person or 
account pays the stated public offering price for the securities and 
the research is provided pursuant to \18\ the requirements of Section 
28(e) of the Act.\19\ The proposed rule provides, like current NASD 
Rule 2740(b) and IM-2740, that investment management or investment 
discretionary services are not research. The proposed rule further 
requires that any product or service provided by a member or person 
associated with a member that does not qualify as research must not 
confer a reduced price as set forth in proposed FINRA Rule 5141.01.
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    \18\ FINRA has made a minor revision to proposed FINRA Rule 
5141.02 so as to clarify that research, in order to qualify under 
the proposed rule, must be provided pursuant to the cited Securities 
Exchange Act provision. See Regulatory Notice 09-45 (Fixed Price 
Offerings) (August 2009).
    \19\ FINRA notes that proposed FINRA Rule 5141.02 serves the 
interest of regulatory clarity by articulating the allowance for 
research in straightforward and streamlined fashion.
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    Proposed FINRA Rule 5141.03 is new and provides that transactions 
between a member of a selling syndicate or selling group, or between a 
single underwriter, and an affiliated person that are part of the 
normal and ordinary course of business and are unrelated to the sale or 
purchase of securities in a fixed price offering shall not be deemed to 
confer a reduced price under the rule.\20\
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    \20\ FINRA believes that this provision is a useful 
clarification that would generally protect ordinary-course business 
transactions between members of a selling syndicate or selling 
group, or between a single underwriter, and affiliates from being 
deemed transactions that confer a reduced price (so long as such 
transactions are unrelated to the sale or purchase of securities in 
a fixed price offering). See Section (D) under Item II.C.
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    Proposed FINRA Rule 5141.04 incorporates the current definition of 
``fixed price offering'' as set forth in current NASD Rule 0120(h) with 
only minor changes, primarily to reflect the new conventions of the 
Consolidated FINRA Rulebook.\21\
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    \21\ See note 4.
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    Lastly, proposed FINRA Rule 5141.05 is new and clarifies that a 
member that is an investment adviser may exempt securities that are 
purchased as part of a fixed price offering from the calculation of 
annual or periodic asset-based fees that the member charges a customer, 
provided the exemption is part of the member's normal and ordinary 
course of business with the customer and is not in connection with an 
offering.
(B) Deletion of NASD Rules 2730, 2740, 2750 and 0120(h) and Associated 
IMs 2730, 2740 and 2750
    As noted above, proposed FINRA Rule 5141 is a new, consolidated 
rule that is based in part on, and replaces, the current fixed price 
offering rules (NASD Rules 2730, 2740, 2750 and 0120(h) and associated 
IMs 2730, 2740 and 2750). Following are the specific requirements set 
forth in the current fixed price offering rules that would be deleted 
as rendered redundant or obsolete by the new, consolidated rule:
NASD Rule 2730 and IM-2730
     NASD Rule 2730(a) generally prohibits overtrading by 
providing that a member engaged in a fixed price offering, who 
purchases or arranges the purchase of securities taken in trade, must 
purchase the securities at a fair market price at the time of purchase 
or act as agent in the sale of such securities and charge a normal 
commission. NASD Rule 2730(b) defines the terms ``taken in trade,'' 
``fair market price'' and ``normal commission.'' NASD Rule 2730(c) sets 
forth certain criteria as to what constitutes the fair market price of 
securities taken in trade.\22\ FINRA proposes to delete NASD Rules 
2730(a) through (c) and the corresponding provisions under IM-2730 
because proposed FINRA Rule 5141(a) and the definitions of ``reduced 
price'' and ``fair market price'' set forth in proposed FINRA Rule 
5141.01 serve the purposes of the NASD provisions in more 
straightforward and streamlined fashion and accordingly render them 
obsolete.\23\
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    \22\ Corresponding interpretive material in the first paragraph 
of IM-2730 addresses in detail, for compliance purposes, a ``safe 
harbor'' for certain transactions in securities with respect to the 
fair market price requirements. Corresponding interpretive materials 
under ``Presumption of Noncompliance,'' ``No Presumptions'' and 
``Fair Market Price at the Time of Purchase,'' all under IM-2730, 
address additional fair market price-related criteria.
    \23\ See notes 15 and 16 and accompanying text.
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     NASD Rule 2730(d) addresses how bid and offer quotations 
for transactions subject to Rule 2730 must be obtained.\24\ FINRA 
proposes to delete NASD Rule 2730(d) and the corresponding provisions 
under IM-2730 because they are rendered obsolete in view of FINRA's 
proposed deletion of the other portions of NASD Rule 2730.
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    \24\ The quotations requirements set forth in NASD Rule 2730(d) 
are further elaborated by corresponding interpretive material under 
``Quotations'' under IM-2730.
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     NASD Rule 2730(e) imposes certain recordkeeping 
requirements. Among other things, the rule requires a member who 
purchases a security taken in trade to keep adequate records to 
demonstrate compliance with the rule and to preserve the records for at 
least 24 months after the transaction.\25\ FINRA proposes to delete 
NASD Rule 2730(e) and the corresponding provisions under IM-2730 
because they are rendered obsolete in light of FINRA's proposed 
deletion of the other portions of Rule 2730 and in light of members' 
supervisory and transactional recordkeeping obligations under FINRA and 
SEC rules.\26\
NASD Rule 2740 and IM-2740
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    \25\ Corresponding interpretive material under ``Adequate 
Records'' under IM-2730 sets forth additional requirements with 
respect to recordkeeping.
    \26\ The Commission staff remind FINRA members of their 
recordkeeping obligations under Rules 17a-3 and 17a-4 under the Act.
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     NASD Rule 2740(a) generally provides that in connection 
with a fixed price offering, selling concessions, discounts or other 
allowances may only be paid to brokers or dealers actually engaged in 
the investment banking or securities business and only as consideration 
for services rendered in distribution.\27\ Rule 2740(a)(1) provides 
that nothing in the rule prohibits a member from selling securities in 
a fixed price offering to any person or account to whom the member has 
provided, or will provide, bona fide research, if the purchaser pays 
the stated public offering price for the securities. Rule 2740(a)(2) 
provides that nothing in the rule prohibits a member from selling 
securities in a fixed price offering that the member owns to any person 
at any net price which may be fixed by the member unless prevented by 
agreement. FINRA proposes to delete NASD Rules 2740(a), (a)(1) and 
(a)(2) and the corresponding provisions under IM-2740 because proposed 
FINRA Rules 5141(a), 5141.01 and 5141.02, in combination, achieve the 
purpose of the NASD provisions and accordingly render them 
obsolete.\28\
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    \27\ Corresponding interpretive material in the first four 
paragraphs of IM-2740 provide further elaboration of requirements 
with respect to the term ``services in distribution'' and related 
issues.
    \28\ See notes 9 and 17 and accompanying text.
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     NASD Rule 2740(b) defines ``bona fide research'' to mean 
advice, rendered either directly or through publications or writings, 
as to the value of securities, the advisability of investing in, 
purchasing, or selling securities, and the availability of securities 
or purchasers or sellers of securities, or analyses and reports 
concerning issuers, industries, securities, economic factors and 
trends, portfolio strategy, and performance of

[[Page 35108]]

accounts.\29\ Rule 2740(b) and the interpretive material under ``Bona 
Fide Research Exclusion'' under IM-2740 further provide that investment 
management or investment discretionary services are not bona fide 
research. FINRA proposes to delete NASD Rule 2740(b) and the 
corresponding provisions under IM-2740 because proposed FINRA Rule 
5141.02 serves the purpose of the NASD provisions in more 
straightforward and streamlined fashion and accordingly renders them 
obsolete.\30\
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    \29\ Corresponding interpretive material under ``Bona Fide 
Research Exclusion'' under IM-2740 provides that the definition of 
``bona fide research'' is ``substantially the same'' as the 
definition of research that is set forth under Securities Exchange 
Act Section 28(e)(3), and incorporates by reference Commission 
guidance as to the circumstances when the exclusion for bona fide 
research is available. The ``Bona Fide Research Exclusion'' 
interpretive material further reiterates that investment management 
or investment discretionary services are not bona fide research. 
Additional corresponding interpretive material under ``Indirect 
Discounts'' under IM-2740 addresses products or services that fail 
to qualify as bona fide research.
    \30\ See notes 18 and 19 and accompanying text.
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     NASD Rule 2740(c) requires a member who grants a selling 
concession, discount or other allowance to another person to obtain a 
written agreement from that person that he or she will comply with Rule 
2740. If a member grants a selling concession, discount or other 
allowance to a non-member broker or dealer in a foreign country, the 
rule requires that the member must obtain from that non-member an 
agreement that it will comply with NASD Rules 2730 and 2750 (in 
addition to Rule 2740) as if the non-member were a member, and that the 
non-member will comply with NASD Rule 2420 as that rule applies to a 
non-member broker-dealer in a foreign country. FINRA proposes to delete 
NASD Rule 2740(c) because it is sufficient to apply the requirements of 
the new, consolidated rule to FINRA members. The relationships between 
foreign non-members and their customers are beyond the scope of the 
proposed rule change.\31\ FINRA notes that the requirements of proposed 
FINRA Rule 5141 would apply to members--and would reach any reduced 
prices that members offer or grant to non-members--regardless of 
whether agreements to comply with rules are obtained.\32\
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    \31\ Underwriting terms in foreign jurisdictions vary 
considerably, as do applicable regulatory requirements.
    \32\ For further discussion see Section (G) under Item II.C. 
FINRA notes that NASD Rule 2420 is being addressed separately as 
part of the rulebook consolidation process. See Regulatory Notice 
09-69 (FINRA Requests Comment on Proposed Consolidated FINRA Rule 
Governing Payments to Unregistered Persons) (December 2009).
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     NASD Rule 2740(d) requires a member that receives an order 
from any person designating another broker or dealer to receive credit 
for the sale to file reports with FINRA within thirty days after the 
end of each calendar quarter with respect to each fixed price offering 
that terminated during the quarter. The rule further specifies certain 
information the reports must contain. NASD Rule 2740(e) requires a 
member that is designated by its customer for the sale of securities to 
keep and maintain for twenty-four months records of information similar 
to that set forth in NASD Rule 2740(d). FINRA proposes to delete NASD 
Rules 2740(d) and (e) because they are rendered obsolete in light of 
the proposed deletion of the other portions of NASD Rule 2740 and in 
light of members' supervisory and transactional recordkeeping 
obligations under FINRA and SEC rules.\33\ Further, FINRA notes that 
its regulatory programs in connection with the proposed rule change 
will not require specific quarterly filings such as those currently 
required pursuant to NASD Rule 2740(d).
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    \33\ The Commission staff again remind FINRA members of their 
recordkeeping obligations under Rules 17a-3 and 17a-4 under the Act.
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NASD Rule 2750 and IM-2750
     NASD Rule 2750(a) provides that no member engaged in a 
fixed price offering of securities is permitted to sell the securities 
to, or place the securities with, any person or account which is a 
related person of the member, unless the related person is itself 
subject to the rule or is a non-member broker-dealer that has entered 
into the agreements required under Rule 2740(c). NASD Rules 2750(b) and 
(c) address criteria pertaining to the term ``related person.'' As 
discussed earlier, the proposed rule change would eliminate the 
prohibitions under Rule 2750(a), which FINRA believes would be 
redundant in light of the proposed rule's overall protections against 
the conferring of a reduced price.\34\ Accordingly, FINRA proposes to 
delete NASD Rule 2750(a), as well as Rules 2750(b) and (c), as the 
criteria pertaining to the term ``related person'' would be rendered 
obsolete.
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    \34\ See note 12 and accompanying text.
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     NASD Rule 2750(d) provides that the rule's prohibitions do 
not apply to the sale or placement of securities in a trading or 
investment account of a member or a related person of a member after 
the termination of the fixed price offering if the member or related 
person has made a bona fide public offering of the securities.\35\ 
FINRA proposes to delete NASD Rule 2750(d) and the corresponding 
provisions under IM-2750 because the provisions are obsolete in light 
of the proposed deletion of the other portions of Rule 2750.
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    \35\ NASD Rule 2750(d) and corresponding interpretive material 
in the second paragraph under IM-2750 further set forth certain 
provisions with respect to bona fide public offerings. See note 13 
and accompanying text.
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     The first paragraph of IM-2750 addresses certain 
conditions under which a member that acts or plans to act as a sponsor 
of a unit investment trust is deemed not to violate Rule 2750. FINRA 
proposes to delete the IM provisions because, again, they are obsolete 
in light of the proposed deletion of the other portions of NASD Rule 
2750.
    Lastly, as noted earlier in this filing, the proposed rule change 
would incorporate the definition of ``fixed price offering'' set forth 
in current NASD Rule 0120(h) into the proposed rule in substantially 
identical form.\36\ Accordingly, NASD Rule 0120(h) would be deleted.
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    \36\ See note 4.
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    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 90 days following 
Commission approval. The effective date will be no later than 180 days 
following publication of the Regulatory Notice announcing 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,\37\ 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 that the proposed rule change would 
further the purposes of the Act because, as part of the rulebook 
consolidation process, the proposed rule change will streamline and 
reorganize the existing rules that protect the integrity of fixed price 
offerings by ensuring that securities in such offerings are sold to the 
public at the stated public offering price or prices, thereby 
preventing an undisclosed better price. Further, the proposed rule 
change will provide greater regulatory clarity with respect to this 
area.
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    \37\ 15 U.S.C. 78o-3(b)(6).

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[[Page 35109]]

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 for comment in Regulatory 
Notice 09-45 (August 2009) (the ``Notice''). One comment was received 
in response to the Notice.\38\ A copy of the Notice is attached as 
Exhibit 2a. A copy of the comment letter received in response to the 
Notice is attached as Exhibit 2b.
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    \38\ Letter from Jeffrey W. Rubin, Chair, Committee on Federal 
Regulation of Securities, Section of Business Law, American Bar 
Association (``CFRS''), to Marcia E. Asquith, Corporate Secretary, 
FINRA, dated September 18, 2009.
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(A) Single Underwriters
    CFRS suggested that proposed FINRA Rule 5141 should exclude from 
its coverage members that act as single underwriters rather than as 
members of a selling syndicate or selling group to distribute fixed 
price offerings of securities. In response, FINRA believes that 
permitting such an exclusion would seriously undermine the purposes of 
the proposed rule by eliminating a significant portion of offerings 
from its coverage. Accordingly, FINRA has revised the proposed rule to 
clarify that its requirements apply to members that act as single 
underwriters of fixed price offerings, not just members that are part 
of a selling syndicate or selling group.\39\
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    \39\ See proposed FINRA Rules 5141(a), 5141.02 and 5141.03. See 
also note 7.
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(B) Offer of Securities
    CFRS suggested that the proposed rule's prohibitions should not 
extend to an offer of securities at a reduced price as defined under 
the rule, but rather only to transactions that are consummated. Though 
CFRS acknowledged that members should not make offers to sell 
securities at reduced prices that would be prohibited under the rule, 
it suggested that extending the rule's prohibitions to such offers 
would place undue burdens on members' compliance programs. CFRS further 
suggested that improper offers do not harm customers, issuers or the 
public. FINRA rejects this view. FINRA believes that to condone a view 
that improper offers are not harmful so long as they do not result in 
consummated transactions would be highly deleterious to the public 
interest. Further, FINRA takes this occasion to remind members that 
monitoring personnel to ensure that they do not make improper offers is 
an important function of any member's compliance program. Accordingly, 
FINRA declines to make the suggested revision to the rule.
(C) Definition of Fixed Price Offering
    CFRS sought confirmation that the term ``fixed price offering'' as 
defined in proposed FINRA Rule 5141.04 permits multiple fixed prices in 
an offering of securities as explained in Notice to Members 81-3. In 
response, FINRA believes that the term ``price or prices'' as set forth 
in proposed FINRA Rule 5141.04, which is largely identical to current 
NASD Rule 0120(h), is clear that the rule does not by its terms 
prohibit multiple price offerings.
    CFRS further suggested that the definition of the term ``fixed 
price offering'' should be revised to specifically exclude offerings 
made pursuant to certain Securities Act provisions and regulations 
thereunder. CFRS suggested that the definition of ``fixed price 
offering'' should align with the definition of ``public offering'' as 
set forth in NASD Rule 2720(f)(11) (FINRA has addressed NASD Rule 2720 
in filing SR-FINRA-2010-026). In response, FINRA notes that CFRS has 
confused the differing purposes of the two rules. As a matter of 
investor protection with respect to any fixed price offering, proposed 
FINRA Rule 5141.04 is intended to reach any such offering at a stated 
public offering price or prices, all or part of which securities are 
publicly offered in the United States or any territory thereof, whether 
or not registered under the Securities Act. The scope of the proposed 
rule is different from that of NASD Rule 2720(f)(11) because the 
proposed rule regulates fixed price offerings, whether or not they are 
registered. Accordingly, FINRA declines to revise the proposed rule 
language.
(D) Sales to Affiliates
    CFRS suggested that the provision with respect to affiliated 
persons set forth in proposed FINRA Rule 5141(a) should be placed in a 
separate Supplementary Material. CFRS proposed language that would 
suggest the sole function of the provision is to remind members that 
they should comply with FINRA Rule 5130 when making sales to 
affiliates. FINRA disagrees. FINRA believes that the proposed rule text 
as written is clear and serves to expressly provide that members must 
not sell securities in a fixed price offering to an affiliated person 
at a reduced price under the rule.
    CFRS further suggests that proposed FINRA Rule 5141.03's provisions 
with respect to transactions with affiliated persons should be revised 
to expressly provide that such transactions are presumed to be 
unrelated to the sale or purchase of securities in a fixed price 
offering. FINRA disagrees. Such a presumption would undermine the 
rule's purpose, which, among other things, is intended to ensure that 
affiliate transactions are not employed as a device to confer an 
impermissible reduced price under the rule.
(E) Reduced Price
    CFRS made a number of suggestions with respect to the definition of 
``reduced price'' as set forth in proposed FINRA Rule 5141.01. CFRS 
requested that FINRA confirm that the proposed rule is not intended to 
nullify guidance that FINRA has previously published with respect to 
referral fees under NASD Rule 2420. In response, such confirmation is 
not called for in this filing, as the guidance cited by CFRS addresses 
Rule 2420, not the fixed price offering rules. CFRS suggested that 
proposed FINRA Rule 5141.05 should be revised so as to eliminate the 
provision that certain exemptions granted by investment advisers with 
respect to annual or periodic asset-based fees must not be in 
connection with an offering. FINRA disagrees. FINRA believes that it 
serves an important regulatory purpose to expressly provide that any 
such exemptions must be part of the member's ordinary course of 
business with the customer and not in connection with an offering. CFRS 
suggested language to establish an express presumption that credits, 
rebates, fee reductions and agreements for products and services that 
are part of member's normal and ordinary course of business would not 
be deemed to constitute a ``reduced price'' under the rule. Again, 
FINRA disagrees because adopting such a presumption would in effect 
permit the use of ``normal and ordinary'' business transactions to 
thwart the fundamental purposes of the rule. Accordingly, FINRA 
declines to accept the proffered language. Lastly, CFRS suggested that 
the proposed rule's definition of ``fair market price'' should not 
incorporate the concepts of unrelated parties and independence from any 
other transaction because the requirements do not provide any 
additional safeguards. FINRA disagrees. The concepts of unrelated 
parties and independence from any other transaction provide important 
standards for identifying whether a bona fide

[[Page 35110]]

economic transaction has occurred. Further, the proposed language is 
fundamentally consistent with the basic concepts underlying current 
NASD Rule 2730. Accordingly, FINRA declines to revise the proposed 
language as suggested.\40\
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    \40\ FINRA has made one minor revision to the proposed 
definition of ``fair market price'' not in connection with the 
comment. As published in the Notice, the proposed rule language 
would have specified ``a willing buyer and a willing seller.'' For 
the purpose of greater clarity, FINRA has deleted the word 
``willing.''
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(F) Under-Subscribed Offerings
    CFRS expressed concern that the proposed rule should not apply to 
under-subscribed (``sticky'') offerings. CFRS proposed exemptive 
language that generally would, in circumstances where all the 
securities in a fixed price offering cannot be sold at the stated 
offering price, permit a member to reduce the price of the remaining 
securities or to place the securities in the member's investment 
account or the account of an affiliated person. In response, FINRA 
appreciates CFRS's concern and has revised the proposed rule to provide 
that the rule's requirements shall apply until the termination of the 
offering or until a member, having made a bona fide public offering of 
the securities, is unable to continue selling such securities at the 
stated public offering price. As a matter of investor protection, FINRA 
has further revised the proposed rule to provide that, for purposes of 
the rule, securities in a fixed price offering shall be presumed 
salable if the securities immediately trade in the secondary market at 
a price or prices which are above the stated public offering price.\41\
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    \41\ FINRA notes that this standard is based in part on 
provisions in current NASD Rule 2750(d). See note 13 and 
accompanying text.
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    FINRA declines to adopt CFRS's proffered language with respect to 
placement of offered securities in a member's investment account or the 
account of an affiliated person. First, the rule as proposed is clear 
that it does not prohibit a member from selling securities in the 
offering to affiliated persons, subject to FINRA Rule 5130, provided 
the member does not sell the securities to such affiliated person at a 
reduced price under the rule. Second, as already discussed, the rule by 
its terms is also clear that it does not apply to circumstances where 
the offering has terminated or where the member, having made a bona 
fide public offering of the securities, is unable to continue selling 
the securities at the stated public offering price. Third, FINRA notes 
that the appropriateness of placing unsold shares in a member's 
investment account, and the subsequent resale of the shares, raises 
other potential issues under the federal securities laws or other FINRA 
rules and is beyond the scope of the proposed rule change.
(G) Written Agreement of Compliance
    CFRS sought confirmation that under the proposed rule members would 
no longer be required to obtain the written agreements required 
pursuant to current NASD Rule 2740(c) with respect to non-members. In 
response, FINRA notes that the proposed rule change eliminates NASD 
Rule 2740 in its entirety, including the requirement to obtain written 
agreements with non-members pursuant to paragraph (c) of that rule. The 
proposed rule by its terms regulates the activities of members. FINRA 
notes, however, that the proposed rule reaches any offer or grant of a 
reduced price under the rule to any person or account that is not a 
member of the selling syndicate or selling group (or, in the case of an 
offering with a single underwriter, to any person or account other than 
the single underwriter). Accordingly, the rule would reach reduced 
prices offered or granted to non-members as well as other members.

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-2010-029 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-2010-029. 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 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 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-2010-029 
and should be submitted on or before July 12, 2010.
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    \42\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-14967 Filed 6-18-10; 8:45 am]
BILLING CODE 8010-01-P