Document ID: SEC-2008-1559-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-11-19T05:00Z

[Federal Register: November 19, 2008 (Volume 73, Number 224)]
[Notices]               
[Page 69696-69699]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19no08-123]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58932; File No. SR-FINRA-2008-032]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval to a Proposed Rule Change, as Modified by 
Amendment No. 1, 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

November 12, 2008.

I. Introduction

    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''), 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 Rules 2840 through 2853 regarding 
Trading in Index Warrants, Currency Index Warrants, and Currency 
Warrants, 2860 (Options), and 2865 (Security Futures) as FINRA Rules 
2350 through 2359, 2360, and 2370, respectively, in the consolidated 
FINRA rulebook (``Consolidated FINRA Rulebook''), 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 was published for comment in the 
Federal Register on August 15, 2008.\3\ The Commission received one 
comment letter on the proposed rule change.\4\ FINRA filed Amendment 
No. 1 to the proposed rule change on October 8, 2008.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 58333 (August 8, 
2008), 73 FR 47991 (``Notice'').
    \4\ See letter to Florence E. Harmon, Acting Secretary, 
Commission, from Melissa MacGregor, Vice President and Assistant 
General Counsel, Securities Industry and Financial Markets 
Association (``SIFMA'') dated September 4, 2008 (``SIFMA Letter'').
    \5\ In Amendment No. 1, FINRA responded to issues raised in the 
SIFMA Letter. In that regard, FINRA proposed to amend FINRA Rule 
2360(b)(18) to allow a Limited Principal-General Securities Sales 
Supervisor to accept the discretionary options account.
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II. Description

    FINRA proposes 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.
    Warrants, options, and security futures rules were adopted by FINRA 
to address the specific risks that pertain to these derivative 
securities, and to implement provisions of the federal securities laws 
and Commission rules.\6\ 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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    \6\ 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. 17 CFR 
240.9b-1(d).
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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

    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

[[Page 69697]]

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.\7\
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    \7\ See Notice, supra note 3, for a discussion of these proposed 
revisions.
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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. In particular, FINRA proposes to update the 
provisions regarding discretionary accounts to conform to recent rule 
amendments made to the options rule.\8\ Under the proposed rule change, 
each firm must designate specific principals qualified to supervise 
security futures activities to review discretionary accounts.\9\ 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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    \8\ See Securities Exchange Act Release No. 57775 (May 5, 2008), 
73 FR 26453 (May 9, 2008) (SR-FINRA-2007-035) (``Release No. 34-
57775'').
    \9\ As provided in NASD Rule 1022(f)(5), any Registered Options 
Principal 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.\10\
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    \10\ See Release No. 34-57775, supra note 8, relating to recent 
changes to FINRA's options rule.
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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: 
\11\ 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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    \11\ FINRA advises that, 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 will announce the implementation date of the proposed rule 
change in a Regulatory Notice to be published no later than 60 days 
following Commission approval.

III. Discussion and Commission's Findings

    After careful review of the proposed rule change, and the comment 
letter and FINRA's response, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
association.\12\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\13\ 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.
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    \12\ 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).
    \13\ 15 U.S.C. 78o-3(b)(6).
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    The Commission notes that the warrant rules (NASD Rules 2840 
through 2853) and the security futures rule (NASD Rule 2865) are being 
incorporated into the Consolidated FINRA Rulebook in substantially the 
same form that exists today, with only minor changes to improve the 
organization of the rules and to ensure parallel treatment of options 
and security futures. NASD Rule 2860 also will be incorporated into the 
Consolidated FINRA Rulebook in substantially the same form that exists 
today, except for 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) allow a Limited Principal-General Securities 
Sales Supervisor (Series 9/10) in addition to a Registered Options 
Principal (Series 4) to accept the discretionary options account; (5) 
modify the confirmation disclosure requirements consistent with recent 
changes to the equity confirmation disclosure requirements; \14\ (6) 
incorporate NASD Interpretative Materials 2860-1 and 2860-2 into the 
rule text or as Supplementary Material; and (7) codify as Supplementary 
Material the provisions in NASD Notice to Members 07-03 (``Notice 07-
03'') regarding control relationships. Lastly, Incorporated NYSE Rules 
414, 424, 700, 705, 707, 709, 720-728, 730, 732, 780-781, 791 are being 
deleted because the substance of these rules is addressed in the 
proposed FINRA Rules.
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    \14\ See Securities Exchange Act Release No. 58814 (October 20, 
2008), 73 FR 63527 (October 24, 2008) (SR-Amex-2008-53).
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    SIFMA submitted a comment letter that generally supported the 
proposal, but requested one change and one clarification in the area of 
options discretionary accounts. The proposed rule, as is the case today 
in NASD Rule 2860(b)(18), requires that a Registered Options Principal, 
other than the Registered Options Principal who accepted the account, 
review the acceptance of each discretionary account to determine that 
the Registered Options Principal accepting the account had a reasonable 
basis for believing that the customer was able to understand and bear 
the risk of the strategies or

[[Page 69698]]

transactions proposed.\15\ SIFMA believes that discretionary options 
accounts ``are subject to sufficient supervisory scrutiny and the 
additional requirement of a second approval is unnecessary to protect 
investors'' in light of the frequent supervisory review of the activity 
in the account by a Registered Options Principal who is not exercising 
the discretionary authority.\16\ In the event that FINRA believes that 
a second approval is necessary, SIFMA ``strongly urges'' that FINRA 
permit the acceptance of the discretionary account, as well as the 
review of the acceptance of the discretionary account, to be performed 
by either a Registered Options Principal (Series 4) or a Limited 
Principal-General Securities Sales Supervisor (Series 9/10).\17\ 
Lastly, SIFMA requested clarification in FINRA Rule 2360(b)(18) that 
the frequent supervisory review by a Registered Options Principal who 
is not exercising the discretionary authority may be performed by a 
Limited Principal-General Securities Sales Supervisor (Series 9/10) in 
addition to a Registered Options Principal (Series 4).\18\
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    \15\ See proposed FINRA Rule 2360(b)(18)(A)(ii).
    \16\ See SIFMA Letter at 2, supra note 4.
    \17\ Id.
    \18\ Id.
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    In response to the SIFMA Letter, FINRA filed Amendment No. 1 to the 
proposed rule change.\19\ In Amendment No. 1, FINRA noted that SIFMA 
commented on provisions that were the subject of recent amendments as 
part of FINRA's overall revisions to options supervision. According to 
FINRA, the proposed rule change simply moves into the FINRA 
consolidated rulebook the current NASD provisions, which are generally 
consistent across the options exchanges.\20\ FINRA disagreed with 
SIFMA's assertion that review of the acceptance of a discretionary 
options account is ``unnecessary to protect investors.'' FINRA stated 
that it continues to believe that heightened supervision in the form of 
requiring a review of the acceptance of a discretionary options account 
is both appropriate and necessary.\21\ FINRA noted however, that 
consistent with the rules of the CBOE,\22\ it proposes to amend FINRA 
Rule 2360(b)(18) to permit greater flexibility and allow a Limited 
Principal-General Securities Sales Supervisor (Series 9/10) in addition 
to a Registered Options Principal (Series 4) to accept the 
discretionary options account.\23\ FINRA believed, consistent with the 
CBOE provision, that the review of the acceptance of a discretionary 
options account must be performed by a Registered Options Principal 
(Series 4). Similarly, FINRA believed that the ``frequent appropriate 
supervisory review by a Registered Options Principal who is not 
exercising the discretionary authority'' should be performed by a 
Registered Options Principal (Series 4).\24\
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    \19\ See Amendment No. 1, supra note 5.
    \20\ As examples of discretionary options accounts rules on 
other exchanges, FINRA pointed to Chicago Board Options Exchange 
(``CBOE'') Rule 9.10, American Stock Exchange Rule 924, NASDAQ OMX 
PHLX Rule 1027, and Boston Options Exchange Chapter XI Section 12. 
FINRA also noted that the International Securities Exchange has 
filed a proposed rule change (SR-ISE-2008-21) with the Commission to 
make conforming changes to its Rule 611 (Discretionary Accounts).
    \21\ See Amendment No. 1, supra note 5, at 4.
    \22\ Interpretations and Policies .02 to CBOE Rule 9.2 specifies 
that the review of the acceptance of a discretionary account must be 
performed by a Series 4 qualified individual. See Securities 
Exchange Act Release No. 56971 (December 14, 2007), 72 FR 72804 
(December 21, 2007) (SR-CBOE-2007-106).
    \23\ See Amendment No. 1, supra note 5, at 4.
    \24\ Id.
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    The Commission believes that the proposed rule change to 
incorporate rules relating to warrants, options, and security futures 
into the Consolidated FINRA Rulebook and to delete corresponding NYSE 
Incorporated Rules is appropriate. In addition the Commission believes 
that the revision to the proposed rule text and the clarification 
contained in Amendment No. 1 appropriately address the issues raised in 
the SIFMA Letter.
    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\25\ for approving the proposed rule change, as modified, prior 
to the thirtieth day after the date of publication of notice in the 
Federal Register. FINRA's proposed changes, with the exception of the 
proposed revisions contained in Amendment No. 1, were published for 
comment by the Commission. The Commission believes that the proposed 
changes to FINRA Rule 2360 that are part of Amendment No. 1 are 
consistent with Interpretations and Policies .02 to CBOE Rule 9.2, 
which was published for comment and approved by the Commission.\26\ 
Accordingly, the Commission finds that there is good cause, consistent 
with Section 6(b)(5) of the Act,\27\ to approve the proposed rule 
change, as modified by Amendment No. 1, on an accelerated basis.
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ See Securities Exchange Act Release Nos. 56492 (September 
21, 2007), 72 FR 54952 (September 27, 2007) (SR-CBOE-2007-106); and 
56971 (December 14, 2007), 72 FR 72804 (December 21, 2007) (SR-CBOE-
2007-106).
    \27\ 15 U.S.C. 78s(b)(5).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 1, 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 December 10, 2008.

[[Page 69699]]

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change (SR-FINRA-2008-032), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-27425 Filed 11-18-08; 8:45 am]

BILLING CODE 8011-01-P