Document ID: SEC-2008-1351-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-10-02T04:00Z

[Federal Register: October 2, 2008 (Volume 73, Number 192)]
[Notices]               
[Page 57395-57397]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02oc08-123]                         

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SECURITIES AND EXCHANGE COMMISSION

Release No. 34-58661; File No. SR-FINRA-2008-030]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Adopt FINRA 
Rule 3130 (Annual Certification of Compliance and Supervisory 
Processes) in the Consolidated FINRA Rulebook

 September 26, 2008.

I. Introduction

    On June 18, 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''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt NASD Rule 3013 (Annual Certification of 
Compliance and Supervisory Processes) and IM-3013 (Annual Compliance 
and Supervision Certification) as a FINRA rule in the consolidated 
FINRA rulebook (``Consolidated FINRA Rulebook'') \3\ without material 
change, and to delete the corresponding provisions in Incorporated NYSE 
Rule 342.30 and NYSE Rule Interpretations 311(b)(5)/04 through /05 and 
342.30(d)/01 through (e)/01.\4\ The proposed rule change would renumber 
NASD Rule 3013 and IM-3013 as FINRA Rule 3130 in the Consolidated FINRA 
Rulebook. The proposed rule change was published for comment in the 
Federal

[[Page 57396]]

Register on July 15, 2008.\5\ The Commission received two comment 
letters in response to the proposed rule change.\6\ This order approves 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See infra note 7 for discussion about the Consolidated FINRA 
Rulebook.
    \4\ See infra note 7 regarding ``Incorporated NYSE Rules.''
    \5\ See Securities Exchange Act Release No. 358118 (July 8, 
2008); 73 FR 40647 (July 15, 2008) (``notice'').
    \6\ See letters from Amal Aly, Managing Director and Associate 
General Counsel, Securities Industry and Financial Markets 
Association (``SIFMA'') to Florence Harmon, Acting Secretary, 
Commission, dated August 4, 2008 (``SIFMA Letter''), and letter from 
Christine LaBastille, Managing Director, Integrated Management 
Solutions (``IMS'') to Secretary, Commission, dated August 5, 2008 
(``IMS Letter'').
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II. Description of the Proposed Rule Change

    As part of the process of developing the new consolidated rulebook 
(the ``Consolidated FINRA Rulebook''),\7\ FINRA proposed to adopt NASD 
Rule 3013 (Annual Certification of Compliance and Supervisory 
Processes) and IM-3013 (Annual Compliance and Supervision 
Certification) as a FINRA rule without material change and, delete the 
corresponding provisions in Incorporated NYSE Rule 342.30 and NYSE Rule 
Interpretations 311(b)(5)/04 through /05 and 342.30(d)/01 through (e)/
01. The proposed rule change would renumber NASD Rule 3013 and IM-3013 
as FINRA Rule 3130 in the Consolidated FINRA Rulebook.
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    \7\ 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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    Currently, NASD Rule 3013 and Incorporated NYSE Rule 342 require 
each member to designate one or more principals to serve as a chief 
compliance officer (``CCO''). These Rules further require that the 
chief executive officer(s) (``CEO'') certify annually that the member 
has in place processes to establish, maintain, review, modify and test 
policies and procedures reasonably designed to achieve compliance with 
applicable NASD (or NYSE) rules and federal securities laws and 
regulations. The certification includes not only a statement that the 
member has in place certain compliance processes, but also that the 
CEO(s) has conducted one or more meetings with the CCO(s) in the 
preceding 12 months to discuss the processes. Incorporated NYSE Rule 
342 and NASD IM-3013 explain that the mandated meetings between the 
CEO(s) and CCO(s) must include a discussion of the member's compliance 
efforts to date and identify and address significant compliance 
problems and plans for emerging business areas. NASD IM-3013 contains 
additional guidance, including setting forth the expertise that is 
expected of a CCO. The same expertise requirements are also found in 
Incorporated NYSE Rule Interpretation 342.30.
    There currently are four differences between the NASD and NYSE 
rules. First, NASD IM-3013 requires that the member provide to its 
board of directors and audit committees (or equivalent bodies) the 
report that evidences the processes to which the CEO(s) certifies 
either prior to execution of the certification or at the earlier of 
their next scheduled meetings or within 45 days of certification. The 
Incorporated NYSE rules require submission of the report to those 
bodies prior to certification. FINRA does not intend to require the 
board of directors or audit committee to review or consider the report 
as a condition to the CEO executing the certification; rather, FINRA 
intends the provision to ensure that those governing bodies remain 
informed of this aspect of the member's compliance system in the 
context of their overall responsibility for governance and internal 
controls of the member for which they serve. Accordingly, the proposed 
rule change would maintain the NASD rule requirements.
    Second, the current rules differ in the certification deadline. 
Incorporated NYSE Rule 342.30 requires certification as part of the 
submission of a member's annual compliance report, which is due by 
April 1 of each year. NASD Rule 3013 requires certification not later 
than the anniversary of the prior year's certification. And while NASD 
allowed members to execute their first certification no later than 
April 1, 2006, to accommodate Dual Members, many FINRA-only firms 
executed their first certification earlier than that and thus have 
differing anniversary dates. Moreover, new members are required to 
execute their first certification within a year of approval for 
membership; therefore some firms necessarily are on a cycle that does 
not correspond to April 1. The proposed rule change would maintain the 
NASD rule deadline to provide firms the flexibility to certify on a 
schedule that meets with their organizational structure and procedures. 
Firms that have certified on April 1 of each year could continue to do 
so on that date.
    Third, Incorporated NYSE Rule 342.30 requires that the member 
submit its certification to the Exchange, whereas the NASD rule 
requires only that the certification be maintained for inspection. 
FINRA believes the submission of the certification creates an 
unnecessary--albeit small--additional burden on members with no 
attendant benefits to FINRA's examination program. Therefore, the 
proposed rule change would retain the NASD requirement that the 
certifications be kept for inspection by members.
    Finally, while both rules permit designation of multiple CCOs 
subject to certain conditions, Incorporated NYSE Rule Interpretation 
311(b)(5) requires Exchange approval of the allocation of supervisory 
responsibilities between those CCOs. By comparison, the NASD rules rely 
on the business judgment of the member and require only that the member 
define and document the areas of responsibility allocated to each CCO. 
FINRA believes the NASD approach is more appropriate, and therefore the 
proposed rule change would not adopt the approval requirement into the 
new rule in the Consolidated FINRA Rulebook.

III. Comment Letters

    The Commission received two comment letters on the proposal,\8\ to 
which FINRA responded to in a letter to the Commission.\9\ The first 
commenter generally supported the proposal but disagreed with the 
deletion of the April 1 certification deadline contained in 
Incorporated NYSE Rule 342.30.\10\ In this commenter's view, adopting 
the NASD rule requiring certification no later than on the anniversary 
date of the previous year's certification could make the process less 
predictable and potentially more cumbersome for member firms. 
Specifically, the commenter indicated that for larger firms, the annual 
deadline would ``inject uncertainty as to when the entire report and 
process should commence each year'' and that ``the time period covered 
by the report and certification will be constantly shifting.'' \11\ As 
an alternative, the commenter suggested either: (1) Retaining the April 
1 deadline of Incorporated NYSE rule 342.30 or; (2) amending the 
proposed rule to allow member firms to effect annual certifications no 
later than three weeks after the anniversary date of the previous 
year's certification, but in no event later than April 1.
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    \8\ See supra note 6.
    \9\ See letter from Philip Shaikun, Associate Vice President and 
Associate General Counsel, FINRA to Florence E. Harmon, Acting 
Secretary, Commission, dated September 4, 2008 (``FINRA Letter'').
    \10\ SIFMA Letter.
    \11\ SIFMA Letter.

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[[Page 57397]]

    FINRA responded that under the proposed rule change, firms that 
previously certified on or near April 1 may continue to do so, so long 
as the certification is executed no later than the anniversary of the 
prior year's certification.\12\ Furthermore, FINRA indicated that the 
commenter's concern appears to result from the mistaken assumption that 
firms that are members of both FINRA and the NYSE must couple the CEO 
certification with the annual compliance report that is required to be 
submitted each year on April 1 under Incorporated NYSE Rule 342.30. 
FINRA stated that a firm may choose to time the process of the CEO 
certification so that it coincides with the Annual Compliance Report 
requirement, but that the proposed rule change does not compel this 
outcome, thus giving a firm flexibility as to when the certification 
process begins and ends. In addition, FINRA indicated that the 
commenter did not adequately consider the needs of FINRA-only firms 
that have chosen a cycle other than April 1 that better meets their 
organizational structure and procedures.\13\
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    \12\ FINRA Letter.
    \13\ Id.
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    The second commenter asserted that NASD Rule 3013 is unworkable and 
ineffectual for small FINRA member firms and urged FINRA to adopt a 
small firm exemption as part of the proposal.\14\ The commenter stated 
that the provision requiring the CEO and CCO to meet to discuss and 
review elements related to the certification is unworkable for small 
firms when the CEO and CCO are the same person. FINRA indicated that it 
expects that a person who is both CEO and CCO of a firm will 
contemplate the required topics of the meeting and document that he or 
she has reviewed those matters.\15\
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    \14\ IMS Letter. IMS also commented on the requirements of NASD 
Rule 3012, which is not part of the proposal.
    \15\ FINRA Letter.
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IV. Discussion and Findings

    After careful review of the proposed rule change, the comment 
letters and FINRA's response to the comment letters, the Commission 
finds that the proposed rule change is consistent with the requirements 
of the Act, and the rules and regulations thereunder that are 
applicable to national securities associations,\16\ and in particular, 
Section 15A(b)(6) of the Act,\17\ which requires among other things, 
that FINRA rules 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 
Commission believes that it is reasonable for FINRA to adopt NASD Rule 
3013 and IM-3013 as FINRA Rule 3130 in the Consolidated FINRA Rulebook 
because they have previously been found to meet statutory 
requirements.\18\
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    \16\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition and capital 
formation. See 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78o-3(b)(6).
    \18\ See e.g. Securities Exchange Act Release No. 53509 (March 
17, 2006), 71 FR 15238 (March 27, 2006) (SR-NASD-2006-036) (order 
approving rule change to IM-3013 finding that the proposed change 
furthered investor protection goals and provided clarity regarding 
application of the rule); Securities Exchange Act Release No. 56285 
(August 17, 2007), 72 FR 48715 (August 24, 2007) (SR-NASD-2007-049) 
(order approving rule change to NASD Rule 3013 and IM-3013 finding 
that the proposed changes decreased the likelihood of fraud and 
manipulative acts in addition to increasing investor protection).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-FINRA-2008-030) be, and it hereby is, 
approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-23197 Filed 10-1-08; 8:45 am]

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