Document ID: SEC-2010-1545-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-10-13T04:00Z

[Federal Register: October 13, 2010 (Volume 75, Number 197)]
[Notices]               
[Page 62911-62913]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13oc10-118]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63044; File No. SR-FINRA-2010-042]

 
 Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, Relating to FINRA Rule 4160 (Verification of Assets)

October 5, 2010.

I. Introduction

    On August 4, 2010, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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 that 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 such financial 
institutions. The proposed rule change was published for comment in the 
Federal Register on August 11, 2010.\3\ The Commission received one 
comment on the proposed rule change.\4\ On October 1, 2010, FINRA 
responded to the comments and filed Amendment No. 1 to the proposed 
rule change.\5\ The Commission is publishing this notice and order to 
solicit comments on Amendment No. 1 and to approve the proposed rule 
change, as modified by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 62655 (August 5, 
2010), 75 FR 48731 (August 11, 2010).
    \4\ See Letter from Howard Spindel, Senior Managing Director, 
and Cassondra E. Joseph, Managing Director, Integrated Management 
Solutions USA LLC, dated August 30, 2010 (``IMS letter'').
    \5\ See Amendment No. 1 dated October 1, 2010 (``Amendment No. 
1''). The text of Amendment No. 1 is available on FINRA's Web site 
at http://www.finra.org, at the principal office of FINRA, and on 
the Commission's Web site, http://www.sec.gov/rules/sro.shtml.
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II. Description of Proposed Rule Change, as Modified by Amendment No. 1

    FINRA has proposed 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 such financial 
institution. The proposed rule change also would add a supplementary 
material section to the new rule.
    FINRA proposes new paragraph (b) in its Amendment No. 1. Paragraph 
(b)(1) expressly excludes from the rule proprietary assets of members 
that are treated as non-allowable assets pursuant to Rule 15c3-1 under 
the Act. Paragraph (b)(2) provides that the rule would not apply in 
instances where FINRA determines that there is no other available 
independent custody or record ownership of the assets. Amendment No. 1 
would also designate the original rule text as paragraph (a). Finally, 
the Supplementary Material remains unchanged by Amendment No. 1.
    The text of the proposed rule change, as modified by Amendment No. 
1, is below. Proposed new language is underlined.
* * * * *

4000. FINANCIAL AND OPERATIONAL RULES

4100. FINANCIAL CONDITION

* * * * *

4160. Verification of Assets

    (a) A member, when notified by FINRA, may not continue to custody 
or retain record ownership of assets, whether such assets are 
proprietary or

[[Page 62912]]

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.
    (b) The Rule shall not apply:
    (1) to proprietary assets of members that are treated as non-
allowable assets under SEA Rule 15c3-1; or
    (2) in instances where FINRA determines that there is no 
independent custody or record ownership of the assets.

   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.
* * * * *

III. Summary of Comment Letters and FINRA's Response

    The Commission received one comment to the proposed rule change.\6\ 
The commenter opposed the proposal and asserted that the harm 
outweighed any benefit of the proposed rule. Specifically, the 
commenter indicated that certain assets are hard to verify and that the 
proposed rule failed to differentiate among different types of 
assets.\7\ The commenter suggested, among other things, that FINRA not 
apply the rule to proprietary assets that are not allowable for net 
capital purposes. The commenter further raised concerns that the 
proposed rule would create an unwarranted burden on members, because it 
fails to address instances where a particular asset cannot be relocated 
from its country of origin or readily moved to another financial 
institution.\8\ Additionally, the commenter asserted that the rule 
``indirectly extends the extraterritorial application of the U.S. 
securities laws,'' and that compliance with the rule may violate 
foreign law. Finally, the commenter believed that instead of adopting 
the proposed rule, FINRA should look at other asset verification 
options and suggested the alternatives of conducting a study regarding 
the necessity of the proposed rule or establishing a separate bureau 
that would verify customers' statements against the books and records 
of their broker-dealers.\9\
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    \6\ IMS letter.
    \7\ Id.
    \8\ Id.
    \9\ Id.
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    FINRA filed Amendment No. 1 and responded to the comments. 
Amendment No. 1 specifically addresses the commenter's suggestion that 
the rule should not apply to proprietary assets of members that are not 
allowable for net capital purposes. Accordingly, FINRA is proposing new 
paragraph (b)(1) of the rule, which would expressly exclude from the 
rule proprietary assets of members that are treated as non-allowable 
assets pursuant to Rule 15c3-1 of the Act. Moreover, in response to the 
commenter's concerns regarding the application of the proposed rule to 
assets that cannot be relocated to another financial institution, such 
as many limited partnership or hedge fund investments, FINRA is 
proposing new paragraph (b)(2) of the rule, which provides that the 
rule would not apply in instances where FINRA determines that there is 
no independent custody or record ownership of the assets.

IV. Discussion and Commission Findings

    After carefully considering the proposal, as modified by Amendment 
No. 1, the comments, and FINRA's response, the Commission finds that 
the proposed rule change is consistent with the requirements of the 
Act, and the rules and regulations thereunder that are applicable to a 
national securities association.\10\ In particular, the Commission 
finds that the proposal is consistent with Section 6(b)(5) of the 
Act,\11\ which requires, among other things, that the rules of an 
exchange be designed to promote just and equitable principles of trade, 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, protect investors 
and the public interest. The proposed rule change is consistent with 
FINRA's statutory obligations under the Act to protect investors and 
the public interest because it would enhance FINRA's ability to verify 
assets at a financial institution which is not a member of FINRA.
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    \10\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that FINRA adequately addressed the 
concerns raised by the commenter. The rule language in Amendment No. 1 
specifically excludes proprietary assets that are not allowable for net 
capital purposes. It also adequately addresses the commenter's concerns 
regarding the application of the proposed rule to assets that cannot be 
relocated to another financial institution, by adding paragraph (b)(2) 
of the rule clarifies that the rule would not apply in instances where 
FINRA determines that there is no other independent custody or record 
ownership of the assets. The Commission believes the proposed rule, as 
modified by Amendment No. 1, further strengthens FINRA's ability to 
effectively detect fraud and protect investors.

V. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act \12\ for approving the proposed rule change, as modified by 
Amendment No. 1 thereto, prior to the 30th day after publication of 
Amendment No. 1 in the Federal Register. The changes proposed in 
Amendment No. 1 respond to specific concerns raised by the commenter 
and do not raise novel regulatory concerns. In particular, Amendment 
No. 1 further clarifies the scope of the asset verification rule, which 
serves to protect the capital structure of members and to safeguard the 
custody of customer assets.
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    \12\ 15 U.S.C. 78s(b)(2).
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    Accordingly, the Commission finds that good cause exists to approve 
the proposal, as modified by Amendment No. 1, on an accelerated basis.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether Amendment No. 1 
to 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

[[Page 62913]]

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 November 3, 2010.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-FINRA-2010-042), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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    \13\ 15 U.S.C. 78(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-25623 Filed 10-12-10; 8:45 am]
BILLING CODE 8011-01-P