Document ID: SEC-2010-1223-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-08-11T04:00Z

[Federal Register: August 11, 2010 (Volume 75, Number 154)]
[Notices]               
[Page 48731-48733]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11au10-98]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62655; File No. SR-FINRA-2010-042]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rule 4160 (Verification of Assets)

August 5, 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 August 4, 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 and 
II, 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 FINRA Rule 4160 (Verification of 
Assets). The proposed rule provides that a member, when notified by 
FINRA, may not continue to custody or retain record ownership of 
assets, at a non-member financial institution, which, upon FINRA 
staff's request, fails promptly to provide FINRA with written 
verification of assets maintained by the member at

[[Page 48732]]

such financial institution. The proposed rule change also would add a 
supplementary material section to the new rule.
    The text of the proposed rule change is below. Proposed new 
language is underlined.
* * * * *

4000. FINANCIAL AND OPERATIONAL RULES

4100. FINANCIAL CONDITION

* * * * *

4160. Verification of Assets

    A member, when notified by FINRA, may not continue to custody or 
retain record ownership of assets, whether such assets are proprietary 
or customer assets, at a financial institution that is not a member of 
FINRA, which, upon FINRA staff's request, fails promptly to provide 
FINRA with written verification of assets maintained by the member at 
such financial institution.
       Supplementary Material: ------------
    .01 Asset Transfers. Any member required to transfer its 
proprietary and/or customer assets pursuant to this Rule shall effect 
such transfer within a reasonable period of time.
    .02 Member Obligations Under SEA Rule 15c3-3. Nothing in this Rule 
shall be construed as altering in any manner a member's obligations 
under SEA Rule 15c3-3.
* * * * *

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
    FINRA is proposing a rule designed to ensure that FINRA can 
independently verify assets maintained by a member at a non-member 
financial institution. While FINRA currently may request such 
independent verification, it generally cannot compel a financial 
institution that is not a member to comply with the request because 
FINRA's rules apply only to members. This inability to obtain such 
information directly from a non-member financial institution may limit 
FINRA's ability to effectively detect fraud and protect investors.
    To address these jurisdictional constraints, FINRA is proposing a 
rule providing that a member, when notified by FINRA, may not continue 
to custody or retain record ownership of assets, whether such assets 
are proprietary or customer assets, at a non-member financial 
institution, which, upon FINRA staff's request, fails promptly \3\ to 
provide FINRA with written verification of assets maintained by the 
member at such financial institution. FINRA believes there would be 
significant incentive on the part of non-member financial institutions 
to promptly comply with staff requests for asset verification in order 
to continue to retain members' proprietary or customer assets. 
Similarly, members would seek to assure that non-member financial 
institutions maintaining their proprietary or customer assets comply 
with such requests to avoid having to transfer assets to another 
institution. At this time, FINRA is not proposing to require a member 
to enter into a written contract with a non-member financial 
institution maintaining its proprietary or customer assets that would 
obligate the institution to comply with FINRA staff's requests for 
verification; however, FINRA would strongly encourage a member to enter 
into such a contract. A non-member financial institution that has a 
written contractual obligation with a member but still refuses to 
provide FINRA with prompt written verification may be in breach of 
contract, and the member could seek appropriate remedies against the 
institution. The proposed rule, however, would preclude the member from 
continuing to maintain assets at that financial institution and require 
the member to transfer the assets to another financial institution. In 
this regard, FINRA is mindful of the potential challenges of an asset 
transfer, and is proposing to adopt Supplementary Material .01 (Asset 
Transfers), providing that any member required to transfer its 
proprietary and/or customer assets pursuant to the proposed rule shall 
effect such transfer within a reasonable period of time.
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    \3\ The proposed rule does not define the term ``promptly,'' 
which would be assessed based on the particular facts and 
circumstances.
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    Additionally, FINRA is proposing to adopt Supplementary Material 
.02 (Member Obligations Under SEA Rule 15c3-3) to clarify that nothing 
in the proposed rule shall be construed as altering in any manner a 
member's obligations under SEA Rule 15c3-3.
    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 60 days following 
Commission approval. The effective date will be no later than 30 days 
following publication of the Regulatory Notice announcing 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,\4\ 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 is 
consistent with the provisions of the Act noted above in that 
independent verification will further strengthen FINRA's ability to 
effectively detect fraud and protect investors.
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    \4\ 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

    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 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

[[Page 48733]]

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-2010-042 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-2010-042. 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 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-2010-042 
and should be submitted on or before September 1, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-19750 Filed 8-10-10; 8:45 am]
BILLING CODE 8010-01-P