Document ID: SEC-2009-1440-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt NASD Rules 2360 and 2361 Into the Consolidated Rulebook as FINRA Rules 2130 and 2270
Posted Date: 2009-10-08T04:00Z

[Federal Register: October 8, 2009 (Volume 74, Number 194)]
[Notices]               
[Page 51886-51888]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08oc09-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60754; File No. SR-FINRA-2009-059]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt NASD 
Rules 2360 and 2361 Into the Consolidated Rulebook as FINRA Rules 2130 
and 2270

October 2, 2009.
    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 9, 2009, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') a proposed rule change to adopt NASD Rule 2360 
(Approval Procedures for Day-Trading Accounts) as FINRA Rule 2130 and 
to adopt NASD Rule 2361 (Day-Trading Risk Disclosure Statement) as 
FINRA Rule 2270 in the consolidated FINRA rulebook, with minor changes, 
as described in Items I, II, and III below, which Items substantially 
have been 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

    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

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
    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\3\ FINRA is proposing to adopt NASD 
Rules 2360 and 2361 in the consolidated FINRA rulebook with minor 
changes, as FINRA Rules 2130 and 2270 respectively.
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    \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 Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
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    NASD Rules 2360 and 2361 focus on members' obligations to disclose 
to non-institutional customers \4\ the basic risks of engaging in a 
``day-trading strategy'' and to assess the appropriateness of day-
trading strategies for such customers. The rules define a ``day-trading 
strategy'' as ``an overall trading strategy characterized by the 
regular transmission by a customer of intra-day orders to effect both 
purchase and sale transactions in the same security or securities.'' 
\5\ NASD Rule 2360 creates an obligation on members that promote a day-
trading strategy regarding account-opening approval procedures for non-
institutional customers. NASD Rule 2361 creates an obligation on such 
members to disclose to non-institutional customers the unique risks of 
engaging in a day-trading strategy.
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    \4\ For purposes of these rules, the term ``non-institutional 
customer'' means a customer that does not qualify as an 
``institutional account'' under NASD Rule 3110(c)(4). See NASD Rule 
2360(f); NASD Rule 2361(d). FINRA is proposing to adopt NASD Rule 
3110(c)(4) as FINRA Rule 4512(c). See Regulatory Notice 08-25 (May 
2008).
    \5\ See NASD Rule 2360(e); NASD Rule 2361(c).
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    NASD Rule 2360 prohibits a member promoting a day-trading strategy 
from opening an account for a non-institutional customer unless, prior 
to opening the account, the member has furnished the customer with a 
risk disclosure statement (as described in NASD Rule 2361) and has 
either (1) approved the customer's account for a day-trading strategy 
and prepared a record setting forth the basis for the

[[Page 51887]]

approval; or (2) obtained from the customer a written agreement stating 
that the customer does not intend to use the account to engage in a 
day-trading strategy. The rule further requires that, in order to 
approve a customer's account for a day-trading strategy, a member must 
have reasonable grounds to make a determination that a day-trading 
strategy is appropriate for the customer.\6\
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    \6\ In making such determination, the rule requires a member to 
exercise reasonable diligence to ascertain the essential facts 
relative to the customer, including investment objectives, 
investment and trading experience and knowledge, financial 
situation, tax status, employment status, marital status, number of 
dependents and age. See NASD Rule 2360(b).
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    NASD Rule 2361 requires members that promote a day-trading strategy 
to deliver to their non-institutional customers, prior to opening an 
account for such customers, a risk disclosure statement, as specified 
in paragraph (a) of the rule (the ``Disclosure Statement'').\7\ In 
addition, members that promote a day-trading strategy must post the 
Disclosure Statement on their Web sites in a clear and conspicuous 
manner. The Disclosure Statement includes seven specific points, 
described in more detail in the statement itself, addressing the 
following factors that a customer should consider before engaging in 
day-trading, as follows:
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    \7\ The rule provides that, in lieu of the disclosure statement 
specified in the rule, a member may use an alternative disclosure 
statement, provided that it is substantially similar to the 
specified disclosure statement and is approved by FINRA's 
Advertising Department prior to use. See NASD Rule 2361(b).
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    (1) Day trading can be extremely risky.
    (2) Be cautious of claims of large profits from day trading.
    (3) Day trading requires knowledge of securities markets.
    (4) Day trading requires knowledge of a firm's operations.
    (5) Day trading will generate substantial commissions, even if the 
per trade cost is low.
    (6) Day trading on margin or short selling may result in losses 
beyond your initial investment.
    (7) Potential registration requirements (i.e., persons providing 
investment advice for others or managing securities accounts for others 
may need to register as an investment adviser or broker or dealer; such 
activities also may trigger state registration requirements).
    Although these rules define ``day-trading strategy,'' neither 
defines ``promoting a day-trading strategy.'' NASD Rule 2360 does 
provide, however, that a firm will not be deemed to be ``promoting a 
day-trading strategy'' solely by engaging in the following activities:
    (1) promoting efficient execution services or lower execution costs 
based on multiple trades;
    (2) providing general investment research or advertising the high 
quality or prompt availability of such general research; and
    (3) Having a Web site that provides general financial information 
or news or that allows the multiple entry of intra-day purchases and 
sales of the same securities.\8\
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    \8\ See NASD Rule 2360(g).
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    Additional guidance regarding as to what constitutes ``promoting a 
day-trading strategy'' can be found in the SEC order approving the 
adoption of NASD Rule 2360 and 2361 (the ``2000 SEC Approval Order'') 
and FINRA's Notice announcing SEC approval of the rules (the ``2000 
FINRA Notice'').\9\ For example, the 2000 FINRA Notice provides:
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    \9\ See Securities Exchange Act Release No. 43021 (July 10, 
2000), 65 FR 44082 (July 17, 2000) (Approval Order; File No. SR-
NASD-99-41); Notice to Members 00-62 (September 2000) (announcing 
SEC approval of Rules 2360 and 2361).

    A member will be subject to the day-trading rules if it 
affirmatively promotes day-trading activities or strategies through 
advertising, training seminars, or direct outreach programs. For 
instance, a firm generally will be subject to the new rules if its 
advertisements address the benefits of day trading, rapid-fire 
trading, or momentum trading, or encourages persons to trade or 
profit like a professional trader. A firm also will be subject to 
the new rules if it promotes its day-trading services through a 
third party. Moreover, the fact that many of a firm's customers are 
engaging in a day-trading strategy will be relevant in determining 
whether a firm has promoted itself in this way.\10\
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    \10\ See 2000 FINRA Notice. See also 2000 SEC Approval Order, 65 
FR at 44082-83.

The 2000 SEC Approval Order and the 2000 FINRA Notice also state that a 
member may submit an advertisement to FINRA's Advertising Department 
for review and guidance on whether the content of the advertisement 
constitutes ``promoting a day-trading strategy'' for purposes of NASD 
Rules 2360 and 2361.\11\
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    \11\ See 2000 SEC Approval Order, 65 FR at 44083-44084; 2000 
FINRA Notice, at note 2.
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Proposed FINRA Rule 2130
    The proposed rule change would transfer NASD Rule 2360 with the 
following minor changes into the Consolidated FINRA Rulebook as FINRA 
Rule 2130. First, the proposed rule change would add Supplementary 
Material to clarify the concept of ``promoting a day-trading 
strategy,'' based on guidance provided in the 2000 FINRA Notice and the 
2000 SEC Approval Order, as follows:

.01 Promoting a Day-Trading Strategy

    (a) A member shall be deemed to be ``promoting a day-trading 
strategy'' if it affirmatively endorses a ``day-trading strategy,'' 
as defined in paragraph (e) of this Rule, through advertising, its 
Web site, training seminars or direct outreach programs. For 
example, a member generally shall be deemed to be ``promoting a day-
trading strategy'' if its advertisements address the benefits of day 
trading, rapid-fire trading, or momentum trading, or encourage 
persons to trade or profit like a professional trader. A member also 
shall be deemed to be ``promoting a day-trading strategy'' if it 
promotes its day-trading services through a third party. Moreover, 
the fact that many of a member's customers are engaging in a day-
trading strategy will be relevant in determining whether a member 
has promoted itself in this way.\12\
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    \12\ To enhance the readability of the rule, the proposed rule 
change would relocate paragraph (g) of Rule 2360 regarding those 
activities that would not constitute ``promoting a day-trading 
strategy,'' as paragraph (b) of this new Supplementary Material .01.

    Second, the proposed rule change would add Supplementary Material, 
based on guidance provided in the 2000 SEC Approval Order and the 2000 
FINRA Notice, to specifically provide that a member may submit 
advertising materials to FINRA's Advertising Department for review and 
guidance on whether the content of the advertisement constitutes 
``promoting a day-trading strategy,'' as follows:

.02 Review by FINRA's Advertising Department

    A member may submit its advertisements to FINRA's Advertising 
Department for review and guidance on whether the content of the 
advertisement constitutes ``promoting a day-trading strategy'' for 
purposes of this Rule.

    Third, the proposed rule change would add Supplementary Material to 
alert members of additional FINRA rules specifically addressing day-
trading, including the rule addressing the Disclosure Statement 
(further discussed below) and rules regarding margin requirements.\13\
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    \13\ See proposed Supplementary Material .03 to proposed FINRA 
Rule 2130.
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    Finally, the proposal would make minor changes to the rule to 
update cross-references and format.
Proposed FINRA Rule 2270
    The proposed rule change would transfer NASD Rule 2361 with the 
following minor changes into the Consolidated FINRA Rulebook as FINRA 
Rule 2270.

[[Page 51888]]

    First, the proposed rule change would slightly modify the rule's 
existing provisions regarding form of delivery of documents. Currently, 
the rule provides that the disclosure statements may be provided to 
individuals either ``in writing or electronically.'' Because in some 
circumstances electronic documents may be considered a form of 
``writing,'' the proposal would amend the rule to clarify that the 
documents may be provided ``in paper or electronic form.''
    Second, to comport with the proposed revisions to NASD Rule 2360, 
the proposed rule change would add a statement to FINRA Rule 2270 that 
the term ``promoting a day-trading strategy'' shall have the meaning as 
provided in FINRA Rule 2130.
    Third, the proposed rule change would add Supplementary Materials 
similar to those proposed to be added to FINRA Rule 2130, as discussed 
above, to specifically provide that a member may submit advertising 
materials to FINRA's Advertising Department for review and guidance on 
whether the content of the advertisement constitutes ``promoting a day-
trading strategy'' and to alert members of additional FINRA rules 
specifically addressing day-trading.\14\
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    \14\ See proposed Supplementary Material .01 and .02 to proposed 
FINRA Rule 2270.
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    Finally, the proposed rule change would make minor changes to the 
rule to update cross-references and format.
    FINRA 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.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\15\ 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 continues to believe that the required approval 
process for day-trading accounts serves to protect investors engaged in 
day-trading activities, and the requisite disclosures in the Disclosure 
Statement increase investors' understanding of the risks associated 
with day trading. FINRA believes that the proposed rule change will 
provide greater clarity regarding these requirements.
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    \15\ 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

    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-2009-059 on the subject line.

Paper Comments

     Send paper comments in triplicate to Florence E. Harmon, 
Deputy Secretary, Securities and Exchange Commission, 100 F Street, 
NE,. Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2009-059. 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-2009-059 and should be 
submitted on or before October 29, 2009.
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    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-24259 Filed 10-7-09; 8:45 am]

BILLING CODE 8011-01-P