Document ID: SEC-2009-1381-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change To Adopt FINRA Rule 2150 (Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts) in the Consolidated FINRA Rulebook
Posted Date: 2009-09-28T04:00Z

[Federal Register: September 28, 2009 (Volume 74, Number 186)]
[Notices]               
[Page 49425-49426]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28se09-113]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60701; File No. SR-FINRA-2009-014]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Adopt FINRA 
Rule 2150 (Improper Use of Customers' Securities or Funds; Prohibition 
Against Guarantees and Sharing in Accounts) in the Consolidated FINRA 
Rulebook

September 21, 2009.

I. Introduction

    On March 24, 2009, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'' or ``Exchange'') 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 as part of the process of 
developing a new consolidated rulebook (the ``Consolidated FINRA 
Rulebook'').\3\ FINRA proposed to adopt NASD Rules 2330(a), 2330(e) and 
2330(f) as FINRA Rules 2150(a), 2150(b) and 2150(c), respectively, in 
the Consolidated FINRA Rulebook, with certain changes as described 
below.\4\ Proposed FINRA Rule 2150 also would take into account certain 
provisions of NYSE Rule 352. In addition, proposed FINRA Rule 2150 
includes a ``Supplementary Material'' section that contains certain 
clarifications and codifications of existing staff guidance. FINRA 
further proposed to delete NYSE Rule 352 (with the exception of 
paragraphs (e), (f) and (g)) \5\ from the Transitional Rulebook. The 
proposed rule change was published for public comment in the Federal 
Register on June 24, 2009.\6\ The Commission received no comment 
letters regarding proposed rule change. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \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 FINRA Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
    \4\ Other provisions that set forth certain financial and 
operational requirements, including, NASD Rules 2330(b) (General 
Provisions), 2330(c) (Authorization to Lend), 2330(d) (Segregation 
and Identification of Securities) and Interpretive Material 2330 
(Segregation of Customers' Securities) would remain in the 
Transitional Rulebook to be addressed as part of a later phase of 
the consolidation process.
    \5\ NYSE Rules 352(e), 352(f) and 352(g) govern borrowing from 
or lending to customers. These provisions generally are equivalent 
to the provisions of NASD Rule 2370 (Borrowing From or Lending to 
Customers). NASD Rule 2370 and the corresponding NYSE provisions 
would remain in the Transitional Rulebook to be addressed as part of 
a later phase of the rulebook consolidation process.
    \6\ Securities Exchange Act Release No. 60135 (June 18, 2009), 
74 FR 30198 (``Notice'').
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II. Description of the Proposal

    FINRA proposed to adopt certain paragraphs, as specified below, of 
NASD Rule 2330 (Customers' Securities or Funds) as FINRA Rule 2150 
(Improper Use of Customers' Securities or Funds; Prohibition Against 
Guarantees and Sharing in Accounts) in the Consolidated FINRA Rulebook 
taking into account certain provisions of Incorporated NYSE Rule 352 
(Guarantees, Sharing in Accounts, and Loan Arrangements) \7\ and to 
delete NYSE Rule 352, with the exception of NYSE Rules 352(e) 
(Limitations on Borrowing From or Lending to Customers), 352(f) (Loan 
Procedures) and 352(g).
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    \7\ For convenience, Incorporated NYSE Rule 352 is hereinafter 
referred to as ``NYSE Rule 352.''
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    The proposed rule change would renumber NASD Rule 2330(a) (Improper 
Use) as FINRA Rule 2150(a) (Improper Use), NASD Rule 2330(e) 
(Prohibition Against Guarantees) as FINRA Rule 2150(b) (Prohibition 
Against Guarantees) and NASD Rule 2330(f) (Sharing in Accounts; Extent 
Permissible) as FINRA Rule 2150(c) (Sharing in Accounts; Extent 
Permissible) in the consolidated FINRA rulebook. The proposed rule 
change also would add a ``Supplementary Material'' section to proposed 
FINRA Rule 2150 that contains certain clarifications and codifications 
of existing staff guidance.

A. Improper Use of Customers' Securities or Funds (Proposed FINRA Rule 
2150(a))

    NASD Rule 2330(a) prohibits members and associated persons from 
making improper use of a customer's securities or funds. The improper 
use of customer securities or funds threatens the fundamental 
relationship between a broker and a customer and undermines the 
integrity of the securities industry. FINRA proposed to adopt NASD Rule 
2330(a) as FINRA Rule 2150(a) in the Consolidated FINRA Rulebook 
without changes.

B. Prohibition Against Guarantees (Proposed FINRA Rule 2150(b))

    NASD Rule 2330(e) prohibits members and their associated persons 
from guaranteeing a customer against loss in connection with any 
securities transaction or in any securities account of the customer. 
The reason for the prohibition is that such guarantees create the 
expectation that the customer is insulated from market risk intrinsic 
in securities ownership and may induce the customer to engage in a 
securities transaction that is not otherwise appropriate for the 
customer.
    FINRA proposed to adopt NASD Rule 2330(e) as FINRA Rule 2150(b) in 
the Consolidated FINRA Rulebook without changes and delete NYSE Rule 
352(a) (Prohibitions Against Guarantees) because its provisions are 
substantially similar to proposed FINRA Rule 2150(b).

C. Sharing in Accounts (Proposed FINRA Rule 2150(c))

    NASD Rule 2330(f) prohibits members and associated persons from 
sharing in the profits or losses in a customer's account except under 
certain limited conditions specified in the Rule.
    FINRA proposed to adopt NASD Rule 2330(f) as FINRA Rule 2150(c) in 
the Consolidated FINRA Rulebook, with only minor changes.
    FINRA proposed to delete NYSE Rules 352(b), (c) and (d) as they are 
substantially similar to proposed FINRA Rule 2150(c) or are otherwise 
incorporated as part of the supplementary material to proposed FINRA 
Rule 2150.

[[Page 49426]]

D. Proposed Supplementary Material

    In addition, FINRA proposed to add a ``Supplementary Material'' 
section to proposed FINRA Rule 2150 that would:
     Codify existing staff guidance clarifying that a 
``guarantee'' extended to all holders of a particular security by an 
issuer as part of that security generally would not be subject to the 
prohibition against guarantees and that a permissible sharing 
arrangement remains subject to other applicable FINRA rules;
     Clarify that the rule does not preclude a member from 
determining on an after-the-fact basis, to reimburse a customer for 
transaction losses, provided however that the member shall comply with 
all reporting requirements that may be applicable to such payment; \8\
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    \8\ Associated persons would not similarly be permitted to 
reimburse their customers for losses under the rule given the 
concern that such payments may conceal individual misconduct.
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     Consistent with NYSE Rule 352(c), clarify that the rule 
does not preclude a member from correcting a bona fide error; and
     Clarify that the required written authorization(s) shall 
be preserved for a period of at least six years after the date the 
account is closed, which is consistent with the retention period under 
the SEA for similar records.
    FINRA stated in its proposal that it intends to announce the 
implementation date of the proposed rule change in a Regulatory Notice 
to be published no later than 90 days following Commission approval.

III. Discussion

    After careful review, 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.\9\ In particular, the Commission believes the proposal is 
consistent with the requirements of Section 15A(b)(6) of the Act,\10\ 
which requires, among other things, that the Association's rules 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. Further, the Commission 
believes it is appropriate to transfer these NASD Rules into the FINRA 
Consolidated Rulebook, with the changes specified, and to delete the 
noted NYSE Rules as proposed because the proposal will protect 
investors against potential misconduct.
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    \9\ In approving this rule proposal, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78o-3(b)(6).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-FINRA-2009-014) is approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-23307 Filed 9-25-09; 8:45 am]

BILLING CODE 8010-01-P