Document ID: SEC-2010-0060-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-01-12T05:00Z

[Federal Register: January 12, 2010 (Volume 75, Number 7)]
[Notices]               
[Page 1672-1674]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12ja10-95]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61302; File No. SR-FINRA-2009-095]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rule 3240 (Borrowing From or Lending to Customers) in the 
Consolidated FINRA Rulebook

January 6, 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 December 31, 2009, 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 NASD Rule 2370 (Borrowing From or 
Lending to Customers) as FINRA Rule 3240 (Borrowing From or Lending to 
Customers) in the Consolidated FINRA Rulebook \3\ with certain changes 
and to delete Incorporated NYSE Rules 352(e) (Limitations on Borrowing 
From or Lending to Customers), (f) (Loan Procedures) and (g). The 
proposed rule change also would add a Supplementary Material section 
regarding record retention requirements to proposed FINRA Rule 3240.
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    \3\ See supra note 4 and accompanying text.
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    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''),\4\ FINRA is proposing to adopt NASD 
Rule 2370 as FINRA Rule 3240 in the Consolidated FINRA Rulebook with 
certain changes as described below. The proposed rule change also would 
delete Incorporated NYSE Rules 352(e)

[[Page 1673]]

through (g) \5\ from the Transitional Rulebook.\6\ Further, the 
proposed rule change would add a Supplementary Material section 
regarding record retention requirements to proposed FINRA Rule 3240.
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    \4\ 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).
    \5\ For convenience, the Incorporated NYSE Rules are referred to 
as the NYSE Rules.
    \6\ NYSE Rules 352(a) through (d) were deleted as part of a 
prior rule change. See Securities Exchange Act Release No. 60701 
(September 21, 2009), 74 FR 49425 (September 28, 2009) (Order 
Approving File No. SR-FINRA-2009-014).
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Background
    The purpose of NASD Rule 2370, which became effective in November 
2003, is to give members the opportunity to evaluate the 
appropriateness of particular lending arrangements between their 
registered persons and customers, to the extent permitted by the 
member, and the potential for conflicts of interests between both the 
registered person and his or her customer and the registered person and 
the member with which he or she is associated.
    To that end, NASD Rule 2370 prohibits registered persons from 
borrowing money from or lending money to their customers (collectively 
referred to as ``lending arrangements'') unless certain conditions are 
met. More specifically, under Rule 2370, no registered person may 
borrow money from or lend money to his or her customer unless the firm 
has written procedures allowing such lending arrangements and (1) the 
customer is a member of the registered person's immediate family;\7\ 
(2) the customer is in the business of lending money; (3) the customer 
and the registered person are both registered persons of the same firm; 
(4) the lending arrangement is based on a personal relationship outside 
of the broker-customer relationship; or (5) the lending arrangement is 
based on a business relationship outside of the broker-customer 
relationship. In addition, with the exception of lending arrangements 
between immediate family members and lending arrangements between 
registered persons and customers in the business of lending money, 
FINRA members are required to pre-approve in writing the other lending 
arrangements described above.
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    \7\ NASD Rule 2370 defines the term ``immediate family'' to 
include parents, grandparents, mother-in-law or father-in-law, 
husband or wife, brother or sister, brother-in-law or sister-in-law, 
son-in-law or daughter-in-law, children, grandchildren, cousin, aunt 
or uncle, or niece or nephew, and any other person whom the 
registered person supports, directly or indirectly, to a material 
extent.
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    With respect to lending arrangements between immediate family 
members, a FINRA member's written procedures may indicate that the 
member permits such lending arrangements and that registered persons 
need not notify the member or receive member approval for such lending 
arrangements.
    With respect to lending arrangements between registered persons and 
customers in the business of lending money, a member's written 
procedures may indicate that registered persons are not required to 
notify the member or receive member approval for such lending 
arrangements, provided that such lending arrangements have been made on 
commercial terms that the customer generally makes available to members 
of the general public who are similarly situated as to need, purpose 
and creditworthiness.\8\ Further, the member need not investigate such 
lending arrangements, but may rely on the registered person's 
representation that the terms of the loan meet these standards.
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    \8\ The fact that a registered person can negotiate a better 
rate or terms for a loan that is not the product of the broker-
customer relationship would not vitiate the idea that the loan 
occurred on terms generally offered to the public. See Notice to 
Members 04-14 (March 2004).
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    It is important to note that members can choose to permit 
registered persons to borrow money from or lend money to their 
customers consistent with the requirements of the rule or prohibit the 
practice in whole or in part.
    NYSE Rules 352(e) through (g) also govern lending arrangements 
between registered persons and their customers. These provisions are 
substantially similar to the provisions of NASD Rule 2370, with one 
exception. NYSE Rule 352(f) provides an exception from the pre-approval 
requirements of the rule for loans totaling $100 or less between 
registered persons of the same firm.
Proposal
    FINRA proposes to adopt NASD Rule 2370 as FINRA Rule 3240 in the 
Consolidated FINRA Rulebook, subject to the following changes. FINRA 
proposes to amend paragraph (a) (Permissible Lending Arrangements; 
Conditions) of the rule to indicate more explicitly that such 
arrangements are subject to the procedural requirements set forth in 
paragraph (b) (Notification and Approval) of the rule. FINRA also 
proposes to amend paragraph (a)(2)(B) of the rule regarding permissible 
lending arrangements between registered persons and customers in the 
business of lending money to indicate more explicitly that such 
customers must be acting in the course of such business.
    Further, FINRA proposes to amend paragraph (b)(1) of the rule to 
require expressly that registered persons notify their member firms of 
the lending arrangements that require member pre-approval (FINRA is 
proposing this change for purposes of consistency with paragraphs 
(b)(2) and (3) of the rule, which provide that a registered person is 
not required either to notify the member or receive member approval for 
certain specified lending arrangements) and to clarify that any 
modifications to such lending arrangements (including any extension of 
the duration of such arrangements) are also subject to notification and 
member pre-approval.
    In addition, FINRA proposes to amend the definition of ``immediate 
family'' in paragraph (c) (Definition of Immediate Family) of the rule 
to replace the reference that the term ``includes'' the enumerated 
persons to reflect that the term ``means'' such persons. Finally, FINRA 
proposes to add Supplementary Material .01 (Record Retention) requiring 
that members preserve the written pre-approval required by the rule for 
at least three years after the date that the lending arrangement has 
terminated or for at least three years after the registered person's 
association with the member has terminated. FINRA proposes to delete 
NYSE Rules 352(e) through (g) as the provisions of the NYSE rules are 
substantially similar to NASD Rule 2370.
    FINRA will announce the implementation date of the proposed rule 
change in a Regulatory Notice to be published no later than 90 days 
following Commission approval. The implementation date will be no later 
than 180 days following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\9\ 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 will 
further the purposes of the Act by giving members the opportunity to 
evaluate the appropriateness of certain lending arrangements between 
their registered persons and others, to the extent permitted by a 
member, and the potential that these lending arrangements could create 
certain conflicts of interest.
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    \9\ 15 U.S.C. 78o-3(b)(6).

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[[Page 1674]]

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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2009-095 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-2009-095. 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 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-2009-095 and should be 
submitted on or before February 2, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
Florence E. Harmon,
Deputy Secretary.
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    \10\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2010-359 Filed 1-11-10; 8:45 am]
BILLING CODE 8011-01-P