Document ID: SEC-2011-0732-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-05-23T04:00Z

[Federal Register Volume 76, Number 99 (Monday, May 23, 2011)]
[Notices]
[Pages 29808-29809]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-12620]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64512; File No. SR-FINRA-2011-017]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Accelerated Approval of a Proposed Rule 
Change To Amend FINRA Rule 5131 (New Issue Allocations and 
Distributions)

May 18, 2011.

I. Introduction

    On April 26, 2011, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') 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 to amend FINRA Rule 5131 (New Issue Allocations 
and Distributions) to simplify the spinning provision in that Rule and 
to delay the implementation date of paragraphs (b) and (d)(4) under 
that Rule. This proposal was published for comment in the Federal 
Register on April 29, 2011.\3\ The Commission received no comments 
regarding the proposal.\4\ This order approves this proposed rule 
change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 64341 (Apr. 26, 2011), 
76 FR 24076 (Apr. 29, 2011) (SR-FINRA-2011-017).
    \4\ The Commission received one comment whose caption indicated 
that it was filed in response to this proposal, but whose substance 
was directed to another proposal by the Commission. See comment 
letter submitted by Nancy DeTine, dated April 29, 2011.
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II. Description of the Proposed Rule Change

    On November 29, 2010, FINRA issued Regulatory Notice 10-60 
announcing Commission approval of SR-NASD-2003-140 \5\ and designating 
the effective date of new Rule 5131 (the ``Rule'') as May 27, 2011.\6\
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    \5\ See Securities Exchange Act Release No. 63010 (September 29, 
2010), 75 FR 61541 (October 5, 2010) (Order Approving File No. SR-
NASD-2003-140).
    \6\ See Regulatory Notice 10-60 (November 2010) (Approval of New 
Issue Rule).
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    Paragraph (b) of the Rule (Spinning), implements a recommendation 
from the IPO Advisory Committee Report \7\ to prohibit spinning--i.e., 
an underwriter's allocation of IPO shares to directors or executives of 
investment banking clients in exchange for receipt of investment 
banking business. The primary means by which the Rule prohibits 
spinning is through a series of prophylactic prohibitions on the 
allocation of new issues. Specifically, the Rule prohibits allocations 
of a new issue to any account in which an executive officer or director 
of a public company or a covered non-public company, or a person 
materially supported by such executive officer or director, has a 
beneficial interest: (A) If the company is currently an investment 
banking services client of the member or the member has received 
compensation from the company for investment banking services in the 
past 12 months; (B) if the person responsible for making the allocation 
decision knows or has reason to know that the member intends to 
provide, or expects to be retained by the company for, investment 
banking services within the next 3 months; or (C) on the express or 
implied condition that such executive officer or director, on behalf of 
the company, will retain the member for the performance of future 
investment banking services.
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    \7\ NYSE/NASD IPO Advisory Committee Report and Recommendations 
(May 2003). http://ww.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p010373.pdf.
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    Paragraph (b)(1) requires that members establish, maintain, and 
enforce policies and procedures reasonably designed to ensure that 
investment banking personnel have no involvement or influence, directly 
or indirectly, in the new issue allocation decisions of the member. 
Because the term ``investment banking personnel'' is not defined in the 
Rule, members have raised concern that, if the term is read co-
extensively with the definition of ``investment banking services,'' 
certain necessary functions traditionally performed by syndicate 
personnel would be prohibited. In light of this unintended consequence, 
FINRA proposes to delete paragraph (b)(1). FINRA believes that benefits 
of the anti-spinning provisions can be attained without this particular 
provision

[[Page 29809]]

inasmuch as firms currently are required to have written policies and 
procedures with respect to the spinning prohibitions in paragraph 
(b)(2) pursuant to NASD Rule 3010.
    In addition, upon further discussions with member firms regarding 
the steps necessary to prepare for compliance with the spinning 
provisions,\8\ FINRA proposes to delay the implementation date of 
paragraph (b), as amended, until September 26, 2011.
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    \8\ For example, members have requested additional time to: (1) 
Create additional forms, account documents and other measures of 
obtaining information from clients necessary to assess eligibility 
for new issue allocations under the new Rule; (2) build systems and 
surveillance infrastructure to ensure appropriate blocks of 
allocations; and (3) develop appropriate compliance policies and 
procedures and training materials on the new policies and 
procedures.
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    Paragraph (d)(4) of the Rule (Market Orders) prohibits members from 
accepting any market order for the purchase of shares of a new issue in 
the secondary market prior to the commencement of trading of such 
shares in the secondary market. Members have requested additional time 
to develop a process for reliably identifying new issues and to modify 
their order handling systems to prevent the acceptance of market orders 
in new issue shares in contravention of the Rule. Accordingly, FINRA 
proposes to delay the implementation date of paragraph (d)(4) until 
September 26, 2011.
    FINRA represented that these proposed rule changes would be 
effective on the date of Commission approval.

III. Discussion and Findings

    After careful review, the Commission finds that the proposed rule 
change to amend FINRA Rule 5131 is consistent with the requirements of 
the Act, and the rules and regulations thereunder that are applicable 
to a national securities association.\9\ In particular, the Commission 
finds that the proposed rule change is consistent with the provisions 
of Section 15A(b)(6) of the Act,\10\ which requires, among other 
things, that FINRA 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. The proposed rule change reflects the concern that the 
Rule, as written, would prohibit certain necessary functions 
traditionally performed by syndicate personnel. To respond to this 
concern, the Rule simplifies FINRA members' obligations with respect to 
Rule 5131, thereby aiding member compliance efforts and helping to 
maintain investor confidence in the capital markets. Further, delay of 
the implementation date of paragraphs (b) and (d)(4) until September 
26, 2011 will enable FINRA members to develop a process for reliably 
identifying new issues and to modify their order handling systems to 
prevent the acceptance of market orders in new issue shares in 
contravention of the Rule.
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    \9\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78o-3(b)(6).
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    In addition, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Exchange Act,\11\ for approving the proposed rule 
change on an accelerated basis. Without accelerated approval the Rule 
would take effect on May 27, 2011, even though the Commission is 
approving delaying the effective date of the Rule until September 26, 
2011. Moreover, accelerated approval is appropriate because the 
proposed rule changes are minor and do not raise material or novel 
issues. Accordingly, the Commission finds that good cause exists for 
approving the rule change on an accelerated basis.
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    \11\ 15 U.S.C. 78s(b)(2).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (File No. SR-FINRA-2011-017) be, 
and hereby is, approved on an accelerated basis.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-12620 Filed 5-20-11; 8:45 am]
BILLING CODE 8011-01-P