Document ID: SEC-2008-1328-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-10-01T04:00Z

[Federal Register: October 1, 2008 (Volume 73, Number 191)]
[Notices]               
[Page 57177-57179]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01oc08-135]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58648; File No. SR-FINRA-2008-044]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
the Supervision of Market Letters

September 25, 2008.
    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 September 4, 2008, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been substantially 
prepared by FINRA.\3\ 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.
    \3\ Items include non-substantive edits discussed during a 
September 24, 2008 telephone call between Philip Shaikun, Associate 
Vice President and Associate General Counsel, FINRA; Haimera Workie, 
Branch Chief, Office of Chief Counsel, Division of Trading and 
Markets, SEC; and Timothy Cornell, Attorney, Office of Chief 
Counsel, Division of Trading and Markets, SEC.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend NASD Rules 2210 (Communications with 
the Public) and 2211 (Institutional Sales Material and Correspondence) 
and Incorporated New York Stock Exchange (``NYSE'') Rule 472 
(Communications with the Public) to address the supervision of market 
letters.\4\ Among other things, the proposed rule change would amend 
the definition of ``sales literature'' in NASD Rule 2210 to exclude 
market letters that qualify as ``correspondence'' and would define 
``correspondence'' in NASD Rule 2211 to include market letters 
distributed by a member to one or more of its existing retail customers 
and fewer than 25 prospective retail customers within any 30 calendar-
day period.
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    \4\ The FINRA rulebook currently includes (1) NASD Rules and (2) 
rules incorporated from NYSE (``Incorporated NYSE Rules''). While 
the NASD Rules generally apply to all FINRA members, the 
Incorporated NYSE Rules apply only to members of both FINRA and the 
NYSE, referred to as Dual Members.
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    Below is the text of the proposed rule change. Proposed new 
language is underlined; proposed deletions are in brackets.
* * * * *
NASD Rules
2200. COMMUNICATIONS WITH CUSTOMERS AND THE PUBLIC
2210. Communications with the Public
    (a) Definitions. For purposes of this Rule and any interpretation 
thereof, ``communications with the public'' consist of:
    (1) No Change.
    (2) ``Sales Literature.'' Any written or electronic communication, 
other than an advertisement, independently prepared reprint, 
institutional sales material and correspondence, that is generally 
distributed or made generally available to customers or the public, 
including circulars, research reports, [market letters,] performance 
reports or summaries, form letters, telemarketing scripts, seminar 
texts, reprints (that are not independently prepared reprints) or 
excerpts of any other advertisement, sales literature or published 
article, and press releases concerning a member's products or services.
    (3) through (6) No Change.
    (b) through (e) No Change.
* * * * *
2211. Institutional Sales Material and Correspondence
    (a) Definitions
    For purposes of Rule 2210, this Rule, and any interpretation 
thereof:
    (1) ``Correspondence'' consists of any written letter or electronic 
mail message and any market letter distributed by a member to:
    (A) one or more of its existing retail customers; and
    (B) fewer than 25 prospective retail customers within any 30 
calendar-day period.
    (2) through (4) No Change.
    (5) ``Market Letter'' means any written communication excepted from 
the definition of ``research report'' pursuant to Rule 2711(a)(9)(A).
    (b) through (e) No Change.
* * * * *

[[Page 57178]]

Incorporated NYSE Rules
Rule 472. Communications with the Public
    (a) Approval of Communications and Research Reports
    (1) Each advertisement, [market letter,] sales literature or other 
similar type of communication which is generally distributed or made 
available by a member organization to customers or the public must be 
approved in advance by an allied member, supervisory analyst, or 
qualified person designated under the provisions of Rule 342(b)(1).
    (2) No Change.
    (b) through (m) No Change.
* * * Supplementary Material: * * *
    .10 Definitions
    (1) through (3) No Change.
    (4) Market letter[s]. ``Market letter[s]'' [are]is defined as[, but 
are not limited to, any written comments on market conditions, 
individual securities, or other investment vehicles that are not 
defined as research reports. They may also include ``follow-ups'' to 
research reports and articles prepared by member organizations which 
appear in newspapers and periodicals.] any written communication 
excepted from the definition of ``research report'' pursuant to Rule 
472.10(2)(a).
    (5) No Change.
    .20 through .140 No Change.
* * * * *

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
    NASD Rule 2210 (Communications with the Public) requires a 
registered principal of a member to approve prior to use any item of 
sales literature. The term ``sales literature'' does not include any 
item distributed or made available only to institutional investors.\5\
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    \5\ Pursuant to NASD Rule 2211(a)(2), communications of any kind 
sent only to institutional investors (as defined in NASD Rule 
2211(a)(3)) are considered to be ``institutional sales material.'' 
NASD Rule 2210 does not require approval of institutional sales 
material by a registered principal prior to use. However, 
institutional sales material remains subject to the supervision and 
review requirements of NASD Rule 2211(b)(1)(B).
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    ``Sales literature'' includes ``market letters.'' Incorporated NYSE 
Rule 472 similarly requires a qualified person to approve in advance of 
distribution any market letter, but contains no exception for market 
letters sent only to institutional investors. FINRA is concerned that 
the pre-approval requirements may, in some circumstances, inhibit the 
flow of information to traders and other investors who base their 
investment decisions on timely market analysis.
    To address this concern, the proposed rule change would amend the 
definition of ``sales literature'' in NASD Rule 2210 to exclude market 
letters that qualify as a ``correspondence'' and further would amend 
``correspondence'' in NASD Rule 2211 to include market letters (as well 
as any written letter or electronic mail message) distributed by a 
member to one or more of its existing retail customers and fewer than 
25 prospective retail customers within any 30 calendar-day period. 
Pursuant to NASD Rule 2211(b)(1)(A), correspondence does not require 
approval by a registered principal prior to use, unless such 
correspondence is distributed to 25 or more existing retail customers 
within any 30 calendar-day period and makes a financial or investment 
recommendation or otherwise promotes a product or service of the 
member. The proposed rule change also would amend Incorporated NYSE 
Rule 472 to eliminate the requirement that a qualified person approve 
market letters in advance of distribution.
    Thus, under the proposed rule change, all FINRA members would be 
permitted under FINRA rules to distribute market letters to 
institutional investors (as defined in NASD Rule 2211(a)(3)) without 
requiring prior approval by a registered principal or qualified person. 
In addition, under the proposed rules, a member also could distribute 
without prior approval by a registered principal a market letter that 
is sent only to existing retail customers and fewer than 25 prospective 
retail customers within a 30 calendar-day period. However, if the 
market letter both (1) is sent to 25 or more existing retail customers 
and (2) makes a financial or investment recommendation or otherwise 
promotes a product or service of the member, prior principal approval 
would be required. In addition, similar to the manner in which other 
forms of correspondence (i.e., written letters and electronic mail 
messages) are addressed by NASD Rules 2210 and 2211, if a market letter 
were sent to 25 or more prospective retail customers within a 30-
calendar day period, the market letter would fall within the definition 
of sales literature and have to be supervised as such, including 
approval by a registered principal prior to use.
    As correspondence, market letters would remain subject to the 
supervision and review requirements of NASD Rule 3010, which requires 
each firm to establish written procedures that are appropriate to its 
business, size, structure and customers for the review of outgoing 
correspondence. If these procedures do not require review of all 
correspondence prior to use or distribution, they must provide for the 
education and training of associated persons as to the firm's 
procedures governing correspondence, documentation of such education 
and training, and surveillance and follow-up to ensure that such 
procedures are implemented and adhered to.\6\
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    \6\ See also Incorporated NYSE Rule 342. FINRA has proposed to 
amend the current requirements governing the supervision and review 
of correspondence. See Regulatory Notice 08-24 (May 2008) (Proposed 
Consolidated FINRA Rules Governing Supervision and Supervisory 
Controls). That proposal, if adopted, would reorganize the 
supervision rules and codify existing guidance with respect to the 
supervision and review of correspondence. Thus, FINRA does not 
anticipate any significant changes to the supervision standards on 
which the proposed rule change is predicated.
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    The proposed changes would allow firms to distribute most market 
letters in a timely manner without requiring a registered principal to 
review each market letter prior to distribution, but would maintain 
investor protection by requiring firms to review such correspondence in 
accordance with mandated supervisory policies and procedures.
    The proposal also would create a new definition of the term 
``market letter'' in NASD Rule 2211--and modify the existing definition 
in Incorporated NYSE Rule 472--to mean any communication specifically 
excepted from the definition of ``research report'' under NASD Rule 
2711(a)(9)(A) and Incorporated NYSE Rule 472.10(2)(a), respectively. 
This exception consists of:
     Discussions of broad-based indices;
     Commentaries on economic, political or market conditions;

[[Page 57179]]

     Technical analyses concerning the demand and supply for a 
sector, index or industry based on trading volume and price;
     Statistical summaries of multiple companies' financial 
data, including listings of current ratings;
     Recommendations regarding increasing or decreasing 
holdings in particular industries or sectors; and
     Notices of ratings or price target changes (subject to 
certain disclosure requirements).
    FINRA proposes to define market letters by reference to an 
exception from the definition of ``research report'' under NASD Rule 
2711 and Incorporated NYSE Rule 472 to make clear that a firm may not 
supervise as correspondence communications that fall within the 
definition of ``research report.'' The proposed rule change would, 
however, increase a firm's flexibility in supervising market letter 
communications that do not qualify as research reports.
    FINRA would announce the implementation date of the proposed rule 
change in a Regulatory Notice to be published no later than 60 days 
following Commission approval. The implementation date would be the 
date FINRA publishes 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,\7\ 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. The proposed amendment would allow firms to distribute 
market letters in a timely and expedient manner, while still requiring 
firms to review and supervise these communications to ensure that they 
are fair, balanced and not misleading.
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    \7\ 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 would 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-2008-044 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-2008-044. 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-2008-044 and should be 
submitted on or before October 22, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-23047 Filed 9-30-08; 8:45 am]

BILLING CODE 8011-01-P