Document ID: SEC-2010-1202-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-08-09T04:00Z

[Federal Register: August 9, 2010 (Volume 75, Number 152)]
[Notices]               
[Page 47863-47869]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09au10-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62621 File No. SR-FINRA-2010-034]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rule 4530 (Reporting Requirements) in the Consolidated FINRA 
Rulebook

July 30, 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 July 30, 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 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 3070 (Reporting Requirements) 
as FINRA Rule 4530 (Reporting Requirements) in the consolidated FINRA 
rulebook, subject to certain amendments, and to delete paragraphs (a) 
through (d) of Incorporated NYSE Rule 351 (Reporting Requirements) and 
Incorporated NYSE Rules 351.10 and 351.13. The proposed rule change 
also would add a supplementary material section to proposed FINRA Rule 
4530.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, on the Commission's Web site at http://
www.sec.gov, 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 NASD 
Rule 3070 as FINRA Rule 4530 in the Consolidated FINRA Rulebook, 
subject to certain amendments as described below. The proposed rule 
change also would delete paragraphs (a) through (d) of Incorporated 
NYSE Rule 351\4\ and NYSE Rules 351.10 and 351.13 from the Transitional 
Rulebook.\5\ Further, the proposed rule change would add a 
supplementary material section to proposed FINRA Rule 4530 as detailed 
below.
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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).
    \4\ For convenience, the Incorporated NYSE Rules are referred to 
as the NYSE Rules.
    \5\ NYSE Rule 351(e) and NYSE Rule Interpretation 351(e)/01 
(Reports of Investigation) govern trade investigation reporting 
requirements. NYSE Rules 351(f), 351.11 and 351.12 govern the annual 
attestation requirement of the research analyst conflict of interest 
rules. These provisions will be addressed as part of the supervision 
rules and research analyst conflict of interest rules, respectively. 
See Regulatory Notice 08-24 (May 2008) (Proposed Consolidated FINRA 
Rules Governing Supervision and Supervisory Controls) and Regulatory 
Notice 08-55 (October 2008) (FINRA Requests Comment on Proposed 
Research Registration and Conflict of Interest Rules).
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Background
    NASD Rule 3070 and NYSE Rule 351 require members to report to FINRA 
certain specified events (e.g., regulatory actions) and quarterly 
statistical and summary information regarding written customer 
complaints. FINRA uses the reported information for regulatory 
purposes. Among other things, the information assists FINRA to identify 
and investigate firms, offices and associated persons that may pose a 
regulatory risk.
Proposal
    FINRA proposes replacing NASD Rule 3070 and NYSE Rule 351 with a 
single

[[Page 47864]]

rule, proposed FINRA Rule 4530, in the Consolidated FINRA Rulebook. 
FINRA Rule 4530 is based in large part on NASD Rule 3070, taking into 
account certain requirements under NYSE Rule 351. The proposed rule 
also includes a supplementary material section that contains certain 
clarifications and definitions as well as codifications of existing 
staff guidance. More specifically, FINRA is proposing the following 
changes.
a. Reporting Deadline (Proposed FINRA Rule 4530(a))
    FINRA Rule 4530(a) consolidates the requirement (currently in NASD 
Rules 3070(a)(1), (a)(9) and (b)) that a firm report an event after the 
firm ``knows or should have known'' of the existence of the event. 
Consistent with the requirements of NYSE Rule 351, FINRA Rule 4530(a) 
also extends the time period for reporting any of the events specified 
in paragraph (a) of the proposed rule to no later than 30 calendar days 
after the firm knows or should have known of the existence of the event 
(rather than the 10 business days currently provided under NASD Rule 
3070(b)). The proposed 30-calendar-day reporting deadline also is 
consistent with the reporting deadline for disclosing information on 
the Forms BD (Uniform Application for Broker-Dealer Registration), U4 
(Uniform Application for Securities Industry Registration or Transfer) 
and U5 (Uniform Termination Notice for Securities Industry 
Registration) (collectively referred to as the ``Uniform Forms'').
b. External Findings (Proposed FINRA Rule 4530(a)(1)(A))
    NASD Rule 3070(a)(1) requires that a firm report whenever the firm 
or an associated person of the firm has been found to have violated any 
provision of any securities law or regulation, ``any'' rule or standard 
of conduct of ``any'' governmental agency, self-regulatory organization 
(``SRO''), or financial business or professional organization, or 
engaged in conduct that is inconsistent with just and equitable 
principles of trade. This provision requires firms to report findings 
of violations by an external body.
    FINRA Rule 4530(a)(1)(A) generally retains the requirement under 
NASD Rule 3070(a)(1), though it limits the scope of reportable findings 
of violation by an external body to violations of any securities-, 
insurance-, commodities-, financial- or investment-related laws, rules, 
regulations or standards of conduct of any domestic or foreign 
regulatory body, SRO or business or professional organization. FINRA 
believes that limiting the scope of the rule to violations of any 
securities-, insurance-, commodities-, financial- or investment-related 
laws, rules, regulations or standards of conduct of any domestic or 
foreign regulatory body, SRO or business or professional organization 
will make it more effective and relevant to FINRA's program, as well as 
enhance firms' ability to more accurately report such information. For 
similar reasons, FINRA has eliminated the requirement that firms report 
any and all findings that amount to violations of just and equitable 
principles of trade. However, for instance, firms would continue to 
report a finding of violation of an SRO's just and equitable principles 
of trade rule, such as FINRA Rule 2010.
c. Civil Litigation or Arbitration; Other Claims for Damages (Proposed 
FINRA Rule 4530(a)(1)(G))
    FINRA Rule 4530(a)(1)(G) merges for simplification the reporting 
provisions, currently in NASD Rules 3070(a)(7) and (a)(8) and NYSE 
Rules 351(a)(7) and (a)(8), pertaining to (1) any securities- or 
commodities-related civil litigation or arbitration; and (2) any claim 
for damages by a customer or broker-dealer, disposed of by judgment, 
award or settlement for certain monetary thresholds. In addition, the 
proposed rule extends the provision relating to civil litigation or 
arbitration matters to include the reporting of any ``insurance'' civil 
litigation or arbitration that is ``financial related.'' Further, the 
proposed rule clarifies that firms are required to report any claim for 
damages by a customer or broker-dealer that is ``financial'' or 
``transactional'' in nature. FINRA believes that transactional claims 
by customers, including contractual disputes, are relevant to its 
programs since they may reveal misconduct, such as an impermissible 
customer loan.
d. Statutory Disqualifications (Proposed FINRA Rule 4530(a)(1)(H))
    Consistent with NYSE Rule 351(a)(9), FINRA Rule 4530(a)(1)(H) 
requires a firm to report whenever the firm itself is subject to a 
``statutory disqualification'' and clarifies that a firm is required to 
report whenever an associated person of the firm is subject to a 
``statutory disqualification.'' The proposed rule also replaces the 
requirement in NASD Rule 3070(a)(9) and NYSE Rule 351(a)(9) to report 
whenever a firm or an associated person of the firm ``is associated in 
any business or financial activity'' with a person subject to a 
``statutory disqualification'' with a requirement to report whenever 
the firm or an associated person of the firm ``is involved in the sale 
of any financial instrument, the provision of any investment advice or 
the financing of any such activities'' with a person subject to a 
``statutory disqualification.'' FINRA believes that this change 
provides greater clarity as to the scope of the provision.
e. Internal Disciplinary Actions Against Associated Persons (Proposed 
FINRA Rule 4530(a)(2))
    Similar to NASD Rule 3070(a)(10) and NYSE Rule 351(a)(10), FINRA 
Rule 4530(a)(2) continues to require a firm to report certain 
disciplinary actions taken by the firm against its associated persons. 
However, the proposed rule clarifies that any such disciplinary action 
involving the withholding of compensation or of any other remuneration 
(not just commissions) in excess of $2,500 is a reportable event.
f. Internal Conclusions (Proposed FINRA Rules 4530(b) and 4530.01)
    NYSE Rule 351(a)(1) requires that a firm report whenever it or its 
associated persons have violated any provision of any securities law or 
regulation, ``any'' agreement with or rule or standard of conduct of 
``any'' governmental agency, SRO, or business or professional 
organization, or engaged in conduct that is inconsistent with just and 
equitable principles of trade or detrimental to the interests or 
welfare of the NYSE. This provision requires firms to report their 
internal conclusions of the enumerated violative conduct.
    FINRA Rule 4530(b) generally incorporates the requirement under 
NYSE Rule 351(a)(1) and provides that a firm is required to report to 
FINRA no later than 30 calendar days after the firm has concluded, or 
reasonably should have concluded, on its own that an associated person 
of the firm or the firm itself has engaged in violative conduct.\6\ 
However, the proposed rule limits the scope of reportable violative 
conduct to violations of any securities-, insurance-, commodities-, 
financial- or investment-related laws, rules, regulations or standards 
of conduct of

[[Page 47865]]

any domestic or foreign regulatory body or SRO.
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    \6\ Proposed FINRA Rule 4530(b) was originally proposed as FINRA 
Rule 4530(a)(3) in Regulatory Notice 08-71 (discussed in Item II.C. 
of this filing). As discussed above, proposed FINRA Rule 4530(a) 
requires a firm to report an event after the firm ``knows or should 
have known'' of the existence of the event. To clarify the standard 
applicable to a firm's internal conclusion of violation, FINRA is 
proposing to re-designate paragraph (a)(3) as paragraph (b) of FINRA 
Rule 4530 and require a firm to report where it has concluded or 
reasonably should have concluded that the firm or an associated 
person has engaged in the enumerated violative conduct.
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    Additionally, FINRA Rule 4530.01 excludes from the reporting 
requirement an isolated violation by the firm or an associated person 
of the firm that can be reasonably viewed as a ministerial violation of 
the applicable rules that did not result in customer harm and was 
remedied promptly upon discovery. Thus, for example, if a firm 
discovers a few corporate accounts that, due to a ministerial lapse, do 
not have a record identifying the person(s) authorized to transact 
business on behalf of the accounts and upon discovering the problem 
promptly updates the accounts with the required information, it would 
not be considered a reportable event for purposes of proposed FINRA 
Rule 4530(b). Conversely, if there is a wholesale failure by a firm to 
maintain such information, it would be considered a reportable event 
for purposes of the proposed rule.
    Further, if a firm disciplines an associated person in the manner 
described in FINRA Rule 4530(a)(2), FINRA Rule 4530.01 requires the 
firm to report the event under paragraph (a)(2), rather than paragraph 
(b) of the proposed rule.
g. Domestic and Foreign Actions and Actions By a Regulatory Body 
(Proposed FINRA Rules 4530(a)(1)(A), (C), (D), (F) and 4530.04)
    Currently, both NASD Rule 3070 and NYSE Rule 351 make frequent 
reference to, for example, ``any'' regulatory or self-regulatory body, 
without denoting that it includes both domestic and foreign regulators. 
FINRA Rules 4530(a)(1)(A), (C), (D) and (F) clarify that they apply to 
both domestic and foreign actions and that they apply to actions by a 
``regulatory body.'' FINRA Rule 4530.04 defines the term ``regulatory 
body'' as governmental regulatory bodies and authorized non-
governmental regulatory bodies, such as the Financial Services 
Authority.
h. Reporting Obligation (Proposed FINRA Rule 4530(e))
    NASD Rule 3070(d) provides that compliance with NASD Rule 3070 does 
not relieve a firm or an associated person from certain other 
obligations, such as the requirement to disclose information on the 
Uniform Forms, as applicable.
    FINRA Rule 4530(e) continues the requirement of NASD Rule 3070(d). 
The proposed rule also clarifies that a firm has an obligation to 
report the specified events (FINRA Rules 4530(a) and (b)) and quarterly 
statistical and summary information regarding written customer 
complaints (FINRA Rule 4530(d)), regardless of whether such information 
is reported or disclosed pursuant to any other rule or requirement, 
including the requirements of the Forms BD or U4. However, the proposed 
rule provides that a firm is not required to report an event otherwise 
required to be reported under FINRA Rules 4530(a) or (b) if the firm 
discloses the event on the Form U5, consistent with the requirements of 
that form. While information disclosed on the Forms BD and U4 are not 
subject to this exception at this time, FINRA will work toward the goal 
of eliminating duplicative reporting of information disclosed on those 
forms.
i. Elimination of the Exemption for Dual Members Subject to Another 
SRO's Rule
    NASD Rule 3070(e) provides an exemption for firms subject to 
substantially similar reporting requirements of another SRO. This 
provision is intended to exempt Dual Members subject to the reporting 
requirements of NYSE Rule 351. The proposed rule change eliminates this 
exemption since FINRA proposes creating a single rule and deleting the 
applicable reporting requirements of NYSE Rule 351 (as noted below). 
Accordingly, all FINRA members will be subject to FINRA Rule 4530.
j. Filing of Related Documents With FINRA (Proposed FINRA Rule 4530(f))
    NASD Rule 3070(f) requires a firm to file copies of certain 
criminal and civil complaints and arbitration claims with FINRA, 
including copies of (1) any complaint in which the firm is named as a 
defendant or respondent in any securities- or commodities-related 
private civil litigation; and (2) any securities- or commodities-
related arbitration claim filed against the firm in any forum other 
than FINRA Dispute Resolution. Consistent with FINRA Rule 4530(a)(1)(G) 
discussed above, FINRA Rule 4530(f) extends the filing requirement to 
copies of any ``insurance'' civil litigation or arbitration that is 
``financial related.''
k. Additional Supplementary Material (Proposed FINRA Rules 4530.02, 
.03, .05, .06, .07 and .08)
    In addition to the supplementary material discussed above (FINRA 
Rules 4530.01 and .04), FINRA proposes adding the following 
supplementary material:
     FINRA Rule 4530.02 clarifies the distinction between a 
firm's internal conclusion of violative conduct and a finding of 
violative conduct by an external body, such as a court, domestic or 
foreign regulatory body, SRO or business or professional organization;
     FINRA Rule 4530.03 defines the term ``found'' as used in 
FINRA Rule 4530(a)(1)(A) generally consistent with the definition of 
the term in the Uniform Forms, and clarifies that the term also 
includes any formal finding (regardless of whether the finding will be 
appealed), but that it does not include a minor rule violation 
involving a fine of $2,500 or less;
     FINRA Rule 4530.05 clarifies that for purposes of FINRA 
Rules 4530(a) and (b), firms should not report a single event under 
more than one paragraph or subparagraph, but that they may be required 
to report related events under more than one paragraph or subparagraph.
     FINRA Rule 4530.06 clarifies that when calculating the 
monetary thresholds for reporting civil litigations, arbitrations or 
claims for damages for purposes of FINRA Rule 4530(a)(1)(G), firms must 
include any attorneys fees and interest in the total amount. The 
proposed rule also codifies existing staff guidance regarding the 
calculation of the monetary thresholds when the parties are subject to 
``joint and several'' liability (i.e., if the parties are subject to 
``joint and several'' liability, each party is separately liable for 
the aggregate amount); \7\
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    \7\ See Notice to Members 96-85 (December 1996) (Customer 
Complaint Reporting Rule Update).
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     FINRA Rule 4530.07 clarifies that for purposes of FINRA 
Rules 4530(a), (b) and (d), firms should report an event relating to a 
former associated person if the event occurred while the individual was 
associated with the member; and
     FINRA Rule 4530.08 codifies existing staff guidance 
regarding a firm's obligation to report quarterly statistical and 
summary information with respect to written customer complaints 
alleging theft or misappropriation of funds or securities, or 
forgery.\8\
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    \8\ See Notice to Members 96-85.
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l. Provisions Transferring With Non-Substantive Changes (Proposed FINRA 
Rules 4530(a)(1)(B), (a)(1)(E), (d) and (g))
    FINRA proposes to transfer into FINRA Rule 4530 with non-
substantive changes the provisions of NASD Rules 3070(a)(2), (a)(5), 
(c) and (g).
m. NYSE Provisions Proposed for Deletion
    FINRA proposes to delete paragraphs (a) through (d) of NYSE Rule 
351 and NYSE Rules 351.10 and 351.13 relating to the reporting of 
specified events and quarterly statistical and summary information 
regarding written customer

[[Page 47866]]

complaints as these provisions are substantially similar to proposed 
FINRA Rule 4530, otherwise incorporated as described above, rendered 
obsolete by the approach reflected in the proposed rule, or addressed 
by other rules.
    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 240 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 enhancing FINRA's ability to detect 
and investigate violative conduct.
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    \9\ 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 Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    In November 2008, FINRA published Regulatory Notice 08-71 
soliciting comment on a proposal relating to the FINRA reporting 
requirements. FINRA received 21 comment letters in response to the 
Notice,\10\ which are discussed below.\11\ A copy of the Notice is 
attached as Exhibit 2a. A list of the comment letters received in 
response to the Notice is attached as Exhibit 2b. Copies of the comment 
letters received in response to the Notice are attached as Exhibit 
2c.\12\
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    \10\ See Letter from Puplava Securities, Inc., dated December 4, 
2008 (``Puplava''); letter from Committee of Annuity Insurers, dated 
December 29, 2008 (``CAI''); letter from Cutter & Company, Inc., 
dated December 29, 2008 (``Cutter''); letter from Farmers Financial 
Solutions, LLC, dated December 29, 2008 (``Farmers''); letter from 
National Association of Independent Broker-Dealers, Inc., dated 
December 29, 2008 (``NAIBD''); letter from GBS Financial Corp., 
dated December 30, 2008 (``GBS''); letter from Goodwin Browning & 
Luna Securities, dated December 30, 2008 (``Goodwin''); letter from 
OmniCap, LLC, dated December 30, 2008 (``OmniCap''); letter from 
Pointe Capital, Inc., dated December 30, 2008 (``Pointe''); letter 
from R.F. Lafferty & Co., Inc., dated December 30, 2008 
(``Lafferty''); letter from Wachovia Securities, LLC, dated December 
30, 2008 (``Wachovia''); letter from Financial Telesis, Inc., dated 
January 5, 2009 (``Telesis''); letter from Askar Corp., dated 
January 6, 2009 (``Askar''); letter from Investment Company 
Institute, dated January 15, 2009 (``ICI''); letter from 
Northwestern Mutual Investment Services, LLC, dated January 15, 2009 
(``Northwestern''); letter from Charles Schwab & Co., Inc., dated 
January 16, 2009 (``Schwab''); letter from Financial Services 
Institute, Inc., dated January 16, 2009 (``FSI''); letter from 
National Society of Compliance Professionals, Inc., dated January 
16, 2009 (``NSCP''); letter from PFS Investments, Inc., dated 
January 16, 2009 (``PFS''); letter from the Securities Industry and 
Financial Markets Association, dated January 16, 2009 (``SIFMA''); 
and letter from State Farm VP Management Corp., dated January 16, 
2009 (``State Farm'').
    \11\ Askar, GBS, Goodwin, Lafferty, OmniCap, Pointe and Telesis 
support NAIBD's comments. Northwestern submitted its own comments, 
but it also supports FSI's comments.
    \12\ The Commission notes that these documents are attached to 
the filing, not to this notice.
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1. Reporting Deadline (Proposed FINRA Rule 4530(a))
    As discussed above, the proposed rule requires that a firm report 
an event after the firm ``knows or should have known'' of the existence 
of the event. One commenter argues that the ``should have known'' 
standard is too demanding.\13\ The purpose of the ``should have known'' 
standard is to ensure that members do not intentionally avoid becoming 
aware of a reportable event.\14\ FINRA does not believe that this 
standard, which has been a part of NASD Rule 3070 since its adoption, 
is too demanding.
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    \13\ NSCP.
    \14\ See also Securities Exchange Act Release No. 35956 (July 
11, 1995), 60 FR 36838 (July 18, 1995) (Notice of File No. SR-NASD-
95-16).
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2. External Findings (Proposed FINRA Rule 4530(a)(1)(A))
    Several commenters argue that the proposed rule, including the 
requirement to report external findings relating to ``insurance'' 
matters, is too expansive and unduly burdensome.\15\ As noted above, 
the proposed rule actually limits the scope of current reportable 
external findings and requires firms to report external findings 
related to the financial services industry (i.e., securities, 
insurance, commodities, financial or investment related). Additionally, 
the requirement to report matters related to the financial services 
industry, such as ``insurance'' and ``commodities'' matters, is 
consistent with other provisions of the current rules. This information 
assists FINRA in identifying and investigating firms, offices and 
associated persons that may pose a regulatory risk. Some of these 
commenters are also concerned that the proposed rule may reach the 
activities of affiliates.\16\ Similar to NASD Rule 3070, the proposed 
rule is limited to findings against a firm or an associated person of 
the firm.
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    \15\ FSI, NAIBD, Northwestern, NSCP and State Farm.
    \16\ FSI, Northwestern and NSCP.
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    Some commenters believe that the proposed term ``business or 
professional organization'' is overly broad and vague compared to the 
current term ``financial business or professional organization.'' \17\ 
The proposed rule requires firms to report a business or professional 
organization's findings of violations relating to securities, 
insurance, commodities, financial or investment-related matters. For 
instance, a finding of violation of the Code of Professional Conduct of 
the American Institute of Certified Public Accountants is an example of 
the type of finding by a business or professional organization that is 
reportable under the proposed rule.
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    \17\ NAIBD, NSCP and Wachovia.
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3. Civil Litigation or Arbitration; Other Claims for Damages (Proposed 
FINRA Rule 4530(a)(1)(G))
    As originally proposed in Regulatory Notice 08-71, the rule 
required members to report any insurance-related civil litigation or 
arbitration. The purpose of this proposed change was to make the 
provision consistent with other provisions of NASD Rule 3070 and NYSE 
Rule 351 that require the reporting of regulatory matters relating to 
insurance. Several commenters argued that the proposed requirement will 
result in voluminous reporting regarding insurance matters completely 
unrelated to securities activities (e.g., auto and health).\18\ In 
response, FINRA has revised the proposed rule to require the reporting 
of any ``insurance'' civil litigation or arbitration that is 
``financial related.'' One of these commenters also argued that the 
requirement to report ``any other claim for damages'' by a customer or 
broker-dealer is too expansive since it may require the reporting of a 
wide array of matters (e.g., family grievances).\19\ In response to 
this comment, FINRA has revised the proposed rule to require the 
reporting of any claim for damages by a customer or broker-dealer that 
is ``financial'' or ``transactional'' in nature.
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    \18\ CAI, Cutter, Farmers, FSI, NSCP, Schwab and State Farm.
    \19\ Cutter.
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    One commenter asks that FINRA clarify that matters reportable under 
the proposed rule continue to be subject to the current dollar 
thresholds for

[[Page 47867]]

reporting ($15,000 for associated persons; $25,000 for firms).\20\ In 
response to this comment, FINRA has revised the proposed rule to 
clarify this point.
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    \20\ State Farm.
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    Several commenters suggest that the current dollar thresholds for 
reporting are too low and outdated.\21\ FINRA believes that the current 
dollar thresholds continue to be consistent with the purposes of the 
rule. In addition, the $15,000 reporting threshold for an associated 
person is consistent with the Forms U4 and U5 current reporting 
thresholds.
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    \21\ CAI, FSI and NSCP.
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4. Statutory Disqualifications (Proposed FINRA Rule 4530(a)(1)(H))
    As noted above, the proposed rule replaces the current requirement 
to report whenever a firm or an associated person of the firm ``is 
associated in any business or financial activity'' with a person 
subject to a ``statutory disqualification'' with a requirement to 
report whenever the firm or an associated person of the firm ``is 
involved in the sale of any financial instrument, the provision of any 
investment advice or the financing of any such activities'' with a 
person subject to a ``statutory disqualification.'' Two commenters ask 
whether the term ``investment advice'' in the proposed rule refers to 
advisory activities and suggest that the inclusion of such activities 
broadens the scope of NASD Rule 3070(a)(9) and NYSE Rule 351(a)(9).\22\ 
FINRA notes that advisory activities are covered under the current 
rules (i.e., considered a ``financial activity'') and will continue to 
be covered under the proposed rule. One of these commenters also 
requests that FINRA Rule 4530(a)(1)(H) include the phrase ``knows or 
should have known,'' which is currently in NASD Rule 3070(a)(9).\23\ As 
discussed above, FINRA is proposing to consolidate in a single 
paragraph, FINRA Rule 4530(a), the various references to the ``knows or 
should have known'' standard.
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    \22\ Cutter and NAIBD.
    \23\ NAIBD.
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5. Internal Disciplinary Actions Against Associated Persons (Proposed 
FINRA Rule 4530(a)(2))
    Several commenters suggest that the current $2,500 threshold for 
reporting internal disciplinary actions is too low and outdated.\24\ 
FINRA believes that the current dollar threshold continues to be 
consistent with the purposes of the rule.
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    \24\ CAI, FSI and NSCP.
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6. Internal Conclusions (Proposed FINRA Rules 4530(b) and 4530.01)
    Several commenters believe that the proposed provisions are 
unnecessary, unduly burdensome, overly broad and costly.\25\ These 
commenters also argue that the provisions are vague and too subjective 
and that certain terms, such as ``the member has concluded,'' 
``isolated'' and ``ministerial,'' need further clarification. For 
instance, one commenter asks whether internal conclusions that are 
equivalent to minor rule violations will have to be reported.\26\ One 
commenter recommends that the proposal exclude either a ``ministerial'' 
or ``non-material'' violation.\27\ One commenter suggests that the 
requirement be limited to those matters that result in ``material 
customer harm.'' \28\ Another commenter recommends that the requirement 
be limited to matters that result in ``customer harm.'' \29\ Some of 
these commenters also suggest that if FINRA opts to retain the proposed 
requirement, it adopt the reporting standard set forth in NYSE 
Information Memorandum 06-11, which provides that if a firm determines 
not to impose discipline against an individual, the firm need only 
report any recidivist or ongoing violative conduct by the 
individual.\30\ NYSE Information Memorandum 06-11 also provides that a 
firm need only report systemic firm failures involving numerous 
customers, multiple errors or significant dollar amounts, as well as 
violative conduct by the firm or its employees that has widespread or 
potential widespread impact to the firm, its customers or the industry.
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    \25\ CAI, FSI, ICI, Northwestern, NSCP, PFS, Schwab, SIFMA and 
State Farm.
    \26\ Schwab.
    \27\ ICI.
    \28\ Northwestern.
    \29\ FSI.
    \30\ FSI, NSCP, PFS, Schwab and SIFMA.
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    FINRA believes that the standard set forth in Information 
Memorandum 06-11 is too narrow. However, in response to the comments, 
FINRA has provided an example in Item II.A. of this filing of the types 
of reportable and non-reportable matters.
    One commenter suggests that the proposed requirement be limited to 
conclusions reached at a senior level.\31\ Another commenter requests 
that FINRA clarify that a settlement with a customer does not create 
the presumption that a reportable violation has occurred.\32\ 
Additionally, one commenter asks whether internal audit findings are 
deemed internal conclusions.\33\ FINRA believes that a firm is free to 
determine the level of seniority required of an associated person in 
making a determination of a reportable internal conclusion; however, it 
will not be a defense to a failure to report such conduct that it was 
of a nature that did not merit consideration by a person of such 
seniority. With respect to settlements, it is not the fact that a firm 
has settled a matter that makes it a reportable event under FINRA Rule 
4530(b), rather it is whether the firm has reached an internal 
conclusion or reasonably should have reached an internal conclusion 
that the firm or an associated person has engaged in the enumerated 
violative conduct.\34\ Regarding internal audit findings, FINRA 
believes that the existence of such findings creates a strong 
presumption that the matter is reportable, but that any particular 
finding is eligible to be viewed by the firm as non-reportable (i.e., 
an isolated, ministerial violation that did not result in customer harm 
and was remedied promptly upon discovery).
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    \31\ CAI.
    \32\ PFS.
    \33\ NSCP.
    \34\ Firms should note that certain settlements will have to be 
reported based on other reporting requirements (e.g., FINRA Rule 
4530(a)(1)(G)).
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    Further, two commenters believe that matters subject to a firm's 
internal review process as required under other rules (e.g., FINRA Rule 
3130 (Annual Certification of Compliance and Supervisory Processes)) 
should be excluded from the proposed requirement.\35\ FINRA believes 
that firms have an obligation to meet each of their regulatory 
requirements (including the requirements of FINRA Rule 3130) and that 
the obligation to meet a regulatory requirement is not superseded based 
on compliance with other regulatory requirements.
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    \35\ CAI and ICI.
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    Additionally, some commenters suggest that the proposed requirement 
may have a chilling effect on a firm's willingness to reach such 
conclusions or that reporting such information, which may lack 
qualified or total immunity, may result in defamation suits.\36\ 
Without opining on the issues raised by these commenters, FINRA 
questions the collateral effects posited by the commenters given the 
use of the information for FINRA internal examination and enforcement 
purposes and that, in any event, FINRA believes that the goals of 
customer protection and market integrity necessitate the reporting of 
such conduct to FINRA.
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    \36\ CAI, FSI and Schwab.

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[[Page 47868]]

7. Domestic and Foreign Actions and Actions By a Regulatory Body 
(Proposed FINRA Rules 4530(a)(1)(A), (C), (D), (F) and 4530.04)
    One commenter suggests that it may be too difficult to obtain 
information from foreign regulatory bodies.\37\ In general, firms 
should report the information in their custody, possession, or control 
or to which they have knowledge and provide an explanation in the 
appropriate reporting system fields of the information that they were 
unable to obtain due to circumstances beyond their control. In 
addition, as noted above, firms cannot intentionally avoid becoming 
aware of a reportable event.
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    \37\ NSCP.
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8. Quarterly Statistical and Summary Information Regarding Written 
Customer Complaints (Proposed FINRA Rule 4530(d))
    One commenter argues that the requirement to report quarterly 
statistical and summary information regarding written customer 
complaints, including e-mails, is unduly burdensome and wants to know 
how the data is used and how it benefits the industry.\38\ FINRA uses 
the reported information for its internal examination and enforcement 
purposes. Among other things, the information assists FINRA to identify 
and investigate firms, offices and associated persons that may pose a 
regulatory risk.
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    \38\ Puplava.
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    Additionally, in response to one commenter,\39\ FINRA wishes to 
clarify an interpretive position related to FINRA Rule 4530(c). In 
Notice to Members 96-85, FINRA (then NASD) stated that for purposes of 
reporting written customer complaints under NASD Rule 3070(c), the term 
``customer'' is defined as any person other than a broker-dealer with 
whom the member has engaged, or has sought to engage, in securities 
activities, therefore, it was intended to exclude non-securities 
products. A member is not required to report written complaints 
relating to non-securities products, but only to the extent that such 
complaints are not from customers that the member has engaged, or has 
sought to engage, in securities activities. However, if a member has 
engaged, or has sought to engage, in securities activities with a 
person, then any written complaint from that person is reportable under 
the proposed rule, regardless of whether it relates to non-securities 
products.\40\
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    \39\ Schwab.
    \40\ FINRA notes that the original proposal in Regulatory Notice 
08-71 included a provision reminding firms of their obligations 
under proposed FINRA Rule 3110(b)(5) to have procedures to capture, 
acknowledge and respond to all written (including electronic) 
customer complaints. Proposed FINRA Rule 3110(b)(5) is part of the 
proposed consolidated supervision rules. See Regulatory Notice 08-24 
(May 2008) (Proposed Consolidated FINRA Rules Governing Supervision 
and Supervisory Controls). FINRA will consider whether to re-propose 
the reference to FINRA Rule 3110(b)(5) at a later date.
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9. Reporting Obligation (Proposed FINRA Rule 4530(e))
    As originally proposed in Regulatory Notice 08-71, the rule 
required members to report an event under the rule regardless of 
whether the event was disclosed on the Forms BD, U4 or U5. Several 
commenters raised concerns regarding this obligation.\41\ FINRA has 
revised the proposed rule to provide that a firm is not required to 
report an event otherwise required to be reported under FINRA Rules 
4530(a) or (b) if the firm has disclosed the event on the Form U5, 
consistent with the requirements of that form. This exception to FINRA 
Rules 4530(a) and (b) only applies to information that has been 
disclosed on the Form U5. As noted above, FINRA will also work toward 
the goal of eliminating duplicative reporting of information disclosed 
on the Forms BD and U4.
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    \41\ CAI, Cutter, FSI, NAIBD, NSCP, Schwab and SIFMA.
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10. Filing of Related Documents with FINRA (Proposed FINRA Rule 
4530(f))
    As originally proposed in Regulatory Notice 08-71, the rule 
required members to file, in addition to report, any insurance-related 
civil litigation or arbitration. Several commenters argued that the 
proposed requirement will result in voluminous filings regarding 
insurance matters completely unrelated to securities activities.\42\ 
Consistent with the revisions to FINRA Rule 4530(a)(1)(G) discussed 
above, FINRA Rule 4530(f) has been revised to require the filing of 
copies of any ``insurance'' civil litigation complaint or arbitration 
claim that is ``financial related.''
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    \42\ CAI, Farmers, NSCP and State Farm.
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11. Calculation of Monetary Thresholds and Former Associated Persons 
(Proposed FINRA Rules 4530.06 and .07)
    Several commenters raise concerns regarding the inclusion of 
attorneys fees and interest when calculating the dollar thresholds for 
reporting civil litigations, arbitrations or other claims for 
damages.\43\ Based on FINRA's experience, some firms have considered 
structuring settlements using attorneys fees to avoid the dollar 
thresholds for reporting. The inclusion of attorneys fees and interest 
in the proposed rule is intended to address this concern. One commenter 
believes that ``joint and several'' liability should not be aggregated 
for purposes of the proposed rule.\44\ As noted above, since each party 
subject to ``joint and several'' liability is separately liable for the 
aggregate amount, the aggregate amount must be reported for each party. 
For instance, if two parties have ``joint and several'' liability for 
$40,000, the amount reported would be $40,000 for each party.
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    \43\ CAI, Cutter, FSI, NAIBD, Northwestern, NSCP, Schwab and 
SIFMA.
    \44\ Schwab.
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    Some commenters are also concerned that it may be too difficult to 
obtain information from former associated persons.\45\ As discussed 
above, in general, firms should report the information in their 
custody, possession, or control or to which they have knowledge and 
provide an explanation in the appropriate reporting system fields of 
the information that they were unable to obtain due to circumstances 
beyond their control, with the understanding that firms cannot 
intentionally avoid becoming aware of a reportable event.
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    \45\ CAI, FSI, Northwestern and NSCP.
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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 up to 90 days (i) as the 
Commission may designate 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.

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

[[Page 47869]]

Number SR-FINRA-2010-034 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-2010-034. 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 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-2010-034 
and should be submitted on or before August 30, 2010.
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    \46\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-19505 Filed 8-6-10; 8:45 am]
BILLING CODE 8010-01-P