Document ID: SEC-2011-0598-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-04-29T04:00Z

[Federal Register Volume 76, Number 83 (Friday, April 29, 2011)]
[Notices]
[Pages 24076-24078]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-10447]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64341; File No. SR-FINRA-2011-017]

 Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend 
FINRA Rule 5131 (New Issue Allocations and Distributions)

April 26, 2011.
    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 April 18, 2011, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared substantially 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 amend FINRA Rule 5131 (New Issue Allocations 
and Distributions) to simplify the spinning provision and to delay the 
implementation date of paragraphs (b) and (d)(4).
    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
    On November 29, 2010, FINRA issued Regulatory Notice 10-60 
announcing

[[Page 24077]]

Commission approval of SR-NASD-2003-140 \3\ and designating the 
effective date of new Rule 5131 (the ``Rule'') as May 27, 2011.\4\
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    \3\ See Securities Exchange Act Release No. 63010 (September 29, 
2010), 75 FR 61541 (October 5, 2010) (Order Approving File No. SR-
NASD-2003-140).
    \4\ See Regulatory Notice 10-60 (November 2010) (Approval of New 
Issue Rule).
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A. Spinning

    Paragraph (b) of the Rule (Spinning), implements a recommendation 
from the IPO Advisory Committee Report \5\ to prohibit spinning--i.e., 
an underwriter's allocation of IPO shares to directors or executives of 
investment banking clients in exchange for receipt of investment 
banking business. The primary means by which the Rule prohibits 
spinning is through a series of prophylactic prohibitions on the 
allocation of new issues. Specifically, the Rule prohibits allocations 
of a new issue to any account in which an executive officer or director 
of a public company or a covered non-public company, or a person 
materially supported by such executive officer or director, has a 
beneficial interest: (A) If the company is currently an investment 
banking services client of the member or the member has received 
compensation from the company for investment banking services in the 
past 12 months; (B) if the person responsible for making the allocation 
decision knows or has reason to know that the member intends to 
provide, or expects to be retained by the company for, investment 
banking services within the next 3 months; or (C) on the express or 
implied condition that such executive officer or director, on behalf of 
the company, will retain the member for the performance of future 
investment banking services.
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    \5\ NYSE/NASD IPO Advisory Committee Report and Recommendations 
(May 2003). http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p010373.pdf.
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    Paragraph (b)(1) requires that members establish, maintain and 
enforce policies and procedures reasonably designed to ensure that 
investment banking personnel have no involvement or influence, directly 
or indirectly, in the new issue allocation decisions of the member. 
However, because the term ``investment banking personnel'' is not 
defined in the Rule, members have raised concern that, if the term is 
read co-extensively with the definition of ``investment banking 
services,'' certain necessary functions traditionally performed by 
syndicate personnel would be prohibited. In light of this unintended 
consequence, FINRA is proposing to delete paragraph (b)(1). FINRA 
believes that benefits of the anti-spinning provisions can be attained 
without this particular provision inasmuch as firms currently are 
required to have written policies and procedures with respect to the 
spinning prohibitions in paragraph (b)(2) pursuant to NASD Rule 3010.
    In addition, upon further discussions with member firms regarding 
the steps necessary to prepare for compliance with the spinning 
provisions,\6\ FINRA proposes to delay the implementation date of 
paragraph (b), as amended, until September 26, 2011.
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    \6\ For example, members have requested additional time to: (1) 
Create additional forms, account documents and other measures of 
obtaining information from clients necessary to assess eligibility 
for new issue allocations under the new Rule; (2) build systems and 
surveillance infrastructure to ensure appropriate blocks of 
allocations; and (3) develop appropriate compliance policies and 
procedures and training materials on the new policies and 
procedures.
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B. Market Orders

    Paragraph (d)(4) of the Rule (Market Orders) prohibits members from 
accepting any market order for the purchase of shares of a new issue in 
the secondary market prior to the commencement of trading of such 
shares in the secondary market. Members have requested additional time 
to develop a process for reliably identifying new issues and to modify 
their order handling systems to prevent the acceptance of market orders 
in new issue shares in contravention of the Rule. FINRA believes the 
Rule must carefully balance the investor protection concerns with needs 
of issuers in capital formation and market participants in price 
discovery. Accordingly, FINRA proposes to delay the implementation date 
of paragraph (d)(4) until September 26, 2011.
    The effective date of the proposed rule change will be the date of 
Commission approval. However, FINRA also is proposing to delay the 
implementation date of paragraphs (b) and (d)(4) until September 26, 
2011.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Exchange Act,\7\ which requires, 
among other things, that FINRA rules must be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest. FINRA believes the proposed rule change 
simplifies member obligations with respect to Rule 5131, thereby aiding 
member compliance efforts and helping to maintain investor confidence 
in the capital markets.
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    \7\ 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 Exchange 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 45 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 or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The Commission is considering granting accelerated approval of the 
proposed rule change at the end of a 15-day comment period.

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-2011-017 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-2011-017. This 
file number should be included on the

[[Page 24078]]

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 website 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-2011-017 and should be submitted on or before May 16, 2011.
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    \8\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-10447 Filed 4-28-11; 8:45 am]
BILLING CODE 8011-01-P