Document ID: SEC-2007-1396-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2007-10-05T04:00Z

[Federal Register: October 5, 2007 (Volume 72, Number 193)]
[Notices]               
[Page 57081-57083]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05oc07-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56585; File No. SR-FINRA-2007-008]

 
Self-Regulatory Organizations: Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Amending the Definition of Office of Supervisory Jurisdiction in NASD 
Rule 3010(g)(1) To Exempt Locations That Solely Conduct Final Approval 
of Research Reports

October 1, 2007
    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 30, 2007, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a the National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially 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 amend the definition of Office of Supervisory 
Jurisdiction (``OSJ'') in NASD Rule 3010(g)(1) to exempt locations that 
solely conduct final approval of research reports. The text of the 
proposed rule change is available at FINRA, the Commission's Public 
Reference Room, and http://www.finra.org.

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 3010(g)(1) defines OSJ to mean any office of a member at 
which any one or more of the following functions takes place: (a) Order 
execution and/or market making; (b) structuring of public offerings or 
private placements; (c) maintaining custody of customers' funds and/or 
securities; (d) final acceptance (approval) of new accounts on behalf 
of the member; (e) review and endorsement of customer orders, pursuant 
to paragraph (d) above; (f) final approval of advertising or sales 
literature for use by persons associated with the member, pursuant to 
NASD Rule 2210(b)(1); or (g) responsibility for supervising the 
activities of persons associated with the member at one or more other 
branch offices of the member.
    In July 2006, amendments to the branch office definition under NASD 
Rule 3010(g)(2) went into effect (``Uniform Branch Office 
Definition'').\3\ The Uniform Branch Office Definition was developed 
collectively by FINRA (then known as NASD), the New York Stock Exchange 
(``NYSE'') and the North American Securities Administrators Association 
(``NASAA'') to establish a broad national standard. In conjunction with 
the new Uniform Branch Office Definition, a new Form BR was introduced 
to provide a more efficient, standardized method for members to 
register branch office locations.
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    \3\ See Securities Exchange Act Release No. 52403 (September 9, 
2005), 70 FR 54782 (September 16, 2005) (SR-NASD-2003-104) (order 
approving Uniform Branch Office Definition).
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    Although FINRA (then NASD) and NYSE sought to adopt consistent 
interpretations of the new Uniform Branch Office Definition, there are 
nevertheless different classifications of a location where final 
approval by a principal of research reports occurs. Under NASD rules, 
final review of advertising or sales literature (which includes 
research reports) makes a location an OSJ, and therefore a branch 
office. The NYSE rules, however, do not include an OSJ definition,\4\ 
and NYSE stated in Information Memo 06-13 that it deems a location 
where a member stations a Series 16 qualified supervisory analyst 
solely to review research reports as a ``non-sales location,'' which is 
an express exclusion from the Uniform Branch Office Definition.\5\ 
Because of the definition of OSJ set forth in NASD Rule 3010(g)(1), 
FINRA cannot classify such locations as ``non-sales locations'' under 
NASD rules.\6\
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    \4\ See NYSE Rule 342 (Offices--Approval, Supervision and 
Control), which contains the Uniform Branch Office Definition.
    \5\ See NYSE Information Memo 06-13 (March 22, 2006) (Joint 
Interpretive Guidance from NYSE and NASD Relating to the Uniform 
Branch Office Definition, Question and Answer 5).
    \6\ The FINRA rulebook currently consists of both NASD rules and 
certain NYSE rules that FINRA has incorporated, including NYSE Rule 
342 (Offices--Approval, Supervision and Control). The incorporated 
NYSE rules apply solely to members of FINRA that are also members of 
NYSE on or after July 30, 2007, referred to as ``Dual Members.'' 
Dual Members also must comply with NASD rules.
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    This inconsistency led an NYSE/NASD rule harmonization industry 
committee to recommend that FINRA consider eliminating the OSJ 
definition to prevent such locations from being treated differently 
under NASD and NYSE rules. As a result, FINRA published Notice to 
Members 07-12 in February 2007 seeking comment on a rule harmonization 
proposal to eliminate the definition of OSJ from the NASD manual. In 
its place, FINRA proposed to adopt express definitions for the terms 
``supervisory branch office,'' ``limited supervisory branch office,'' 
``non-supervisory branch office,'' and ``non-branch location.'' \7\
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    \7\ FINRA also sought comment in Notice to Members 07-12 on a 
proposal to amend NASD Rule 2711 to define the term ``initial public 
offering'' consistent with the definition of such term in NYSE Rule 
472.
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    FINRA received twenty comments on the original proposal set forth 
in its Notice to Members 07-12. After reviewing the commenters' 
concerns, FINRA has determined not to move forward with the broad 
proposal to eliminate the definition of OSJ and adopt new 
classifications for office locations. Instead, consistent with many 
commenters' recommendation, FINRA is proposing a more streamlined 
proposal to amend the definition of OSJ in the NASD rules to exclude 
locations that solely conduct final approval of research reports, 
thereby enabling FINRA to deem such locations to be

[[Page 57082]]

``non-sales locations.'' FINRA believes that the limited nature of such 
activity does not necessitate supervision of such a location as an OSJ, 
and that the revised proposal will further accomplish the goals of 
harmonization while minimizing the potential burdens on firms.
    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 the date of 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,\8\ 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 it will 
exempt locations that solely conduct final approval of research reports 
from being designated as OSJs because the limited nature of such 
activity does not necessitate supervision as an OSJ. Moreover, this 
would harmonize the designation of such locations under NASD rules with 
NYSE rules, which permit such locations to be deemed ``non-sales 
locations'' under the Uniform Branch Office Definition..
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    \8\ 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

    As discussed above, a broader version of the proposed rule change 
was published for comment in Notice to Members 07-12 (February 2007). 
Twenty comment letters were received in response. All commenters 
generally favored consolidation efforts that foster rule simplification 
and efforts to harmonize the application of the Uniform Branch Office 
Definition. However, of the 20 comment letters received with respect to 
the proposal in February of 2007, two supported the specific proposal 
to eliminate the definition of OSJ, and 18 generally were opposed to 
the proposal or requested additional exclusions from the Uniform Branch 
Office Definition.
    One commenter supporting the proposed amendments to NASD Rule 
3010(g) stated that it viewed the proposed amendments as a critical 
step in reducing regulatory inefficiency and unnecessary cost burdens 
to member firms. Moreover, the commenter stated that the proposed OSJ 
amendments were necessary to realize fully the underlying objectives of 
the Uniform Branch Office Definition. A second commenter supporting the 
proposal noted that locations where final approval of research reports 
occurs do not require the level of oversight of an OSJ.
    Those commenters opposing the OSJ proposal raised several key 
concerns: (1) Commenters were concerned that firms had devoted 
substantial resources and time in reclassifying locations and 
registering branch offices pursuant to the adoption of the Uniform 
Branch Office Definition and that subsequent reclassifications would be 
unduly burdensome; (2) commenters noted that the proposal would cause 
widespread and significant changes to the supervisory systems of firms 
by requiring new forms, training, updating of procedure manuals and 
other materials, etc.; (3) commenters, including NASAA, recommended 
that the two conflicting provisions of the NASD and NYSE rules be 
harmonized in a less cumbersome manner by amending the OSJ definition 
to exclude locations where final review of research reports occurs; and 
(4) commenters were concerned about inconsistency with the states that 
follow NASD's OSJ terminology. Some commenters also urged FINRA to 
consider additional exclusions from the Uniform Branch Office 
Definition, for example, for personal residences of certain mutual fund 
distributors that also are used to supervise the activities of 
wholesalers (associated persons) at another location.

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-2007-008 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2007-008. 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-2007-008 and should be 
submitted on or before October 26, 2007.

[[Page 57083]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-19673 Filed 10-4-07; 8:45 am]

BILLING CODE 8011-01-P