Document ID: SEC-2008-0005-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-01-03T05:00Z

[Federal Register: January 3, 2008 (Volume 73, Number 2)]
[Notices]               
[Page 529-531]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03ja08-62]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57045; File No. SR-FINRA-2007-037]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change Relating to Amendments to FINRA's New York Stock 
Exchange Rule 409(f)

December 27, 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 December 21, 2007, the 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'') the proposed rule change as described in Items I, 
II, and III below, which Items have been substantially prepared by 
FINRA. FINRA has designated the proposed rule change as constituting a 
``non-controversial'' rule change pursuant to Section 19(b)(3)(A) of 
the Act \3\ and Rule 19b-4(f)(6) \4\ thereunder, which renders the 
proposal effective upon receipt of this filing by the Commission. 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 New York Stock Exchange (``NYSE'') Rule 
409(f), to delete the requirement that certain confirmations and 
reports include the name of the securities market on which a 
transaction is effected. Below is the text of the proposed rule change. 
Proposed new language is in italics; proposed deletions are in 
brackets.
* * * * *

Rule 409. Statements of Accounts to Customers

    (a) through (e) No change.
    (f) Confirmation of all transactions (including those made ``over-
the-counter'' and on other exchanges) in securities admitted to 
dealings on the Exchange, sent by members or member organizations to 
their customers, shall [indicate]clearly set forth with a suitable 
legend the settlement date of each transaction[ and bear the name of 
the securities market on which the transaction was made]. This 
requirement also applies to confirmations or reports from an 
organization to a correspondent, but does not apply to reports made by 
floor brokers to the member organization from whom the orders were 
received.
    [All confirmations shall contain a suitable legend clearly setting 
forth all required information.]
    (g) No change.
* * * * *

[[Page 530]]

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
    NYSE Rule 409(f) requires that confirmations of all transactions 
(including those made over-the-counter and on other exchanges) in 
securities admitted to dealings on the NYSE, and sent by FINRA members 
that are also members of NYSE (``Dual Members'') to their customers, 
indicate the settlement date of the transaction and the name of the 
securities market on which the transaction was effected.\5\ This 
requirement also applies to confirmations or reports from an 
organization to a correspondent, but does not apply to reports made by 
floor brokers to the member organization from which the orders were 
received.
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    \5\ FINRA incorporated NYSE Rule 409(f) into its interim 
rulebook; however, the incorporated NYSE rules, including NYSE Rule 
409(f), apply solely to Dual Members. See Securities Exchange Act 
Release No. 56147 (July 26, 2007), 72 FR 42166 (August 1, 2007) 
(Notice of Filing and Order Granting Accelerated Approval of SR-
NASD-2007-054).
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    Following the SEC's adoption of Regulation NMS, an increasing 
number of orders, or portions of orders, routed to a given market for 
execution are rerouted to other markets that, at that time, display a 
better quotation. This process, which often is necessary due to the 
requirements of the Order Protection Rule under Regulation NMS, may 
lead to relatively small orders receiving executions in multiple market 
centers.\6\ This has created an operational challenge for Dual Members 
to capture the name of the market of execution on a timely basis for 
inclusion on the transaction confirmation as required by NYSE Rule 
409(f). As a result of this challenge, on March 20, 2007, NYSE granted 
its member organizations temporary relief from the requirement that 
confirmations and correspondent reports include the securities market 
on which the transaction was effected.\7\ The temporary relief, which 
expired on September 30, 2007, was extended by FINRA and by NYSE until 
January 1, 2008.\8\ In extending the relief, both FINRA and NYSE stated 
that they would continue to reassess the utility of NYSE Rule 409(f) in 
the current regulatory environment.
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    \6\ The Order Protection Rule requires trading centers, 
including broker-dealers that internally execute orders, to 
establish, maintain, and enforce written policies and procedures 
reasonably designed to protect against ``trade-throughs'' of 
protected quotations in NMS stocks. See 17 CFR 242.611(a).
    \7\ See NYSE Information Memo 07-28 (March 20, 2007).
    \8\ See FINRA Regulatory Notice 07-35 (August 2007); NYSE 
Information Memo 07-84 (August 2, 2007).
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    Under the duty of best execution, Dual Members are required to 
exercise diligence to obtain the best price when routing customer 
trades for execution,\9\ and Regulation NMS imposes disclosure 
obligations on broker-dealers regarding the handling of customer 
orders.\10\ In this regard, NASD Rule 2320 requires every FINRA member 
to employ reasonable diligence in ascertaining best execution in the 
execution of a transaction. As stated in NASD Notice to Members 01-22, 
members generally may execute such diligence on either a trade-by-trade 
basis or through the regular and rigorous review of the execution 
quality of various market centers. FINRA has concluded that in light of 
these existing best execution and disclosure requirements, the 
usefulness of including on a confirmation or correspondent report the 
securities market on which a transaction was effected does not outweigh 
the operational difficulties of capturing the information following the 
adoption of Regulation NMS. Consequently, the proposed rule change 
would delete from NYSE Rule 409(f) the requirement that confirmations 
and correspondent reports include the securities market on which the 
transaction was effected. Dual Members would, however, still be 
required to indicate the settlement date of each transaction on 
customer and correspondent confirmations and correspondent reports for 
all transactions (including those made over-the-counter and on other 
exchanges) in securities admitted to dealings on the NYSE.
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    \9\ See, e.g., Securities Exchange Act Release No. 51808 (June 
9, 2005), 70 FR 37496, 37537-38 (June 29, 2005) (discussing the duty 
of best execution in relation to Regulation NMS).
    \10\ SEC Rule 606(b) requires a broker-dealer to disclose to its 
customer upon request ``the identity of the venue to which the 
customer's orders were routed for execution in the six months prior 
to the request, whether the orders were directed orders or non-
directed orders, and the time of the transactions, if any, that 
resulted from such orders.'' See 17 CFR 242.606(b). SEC Rule 607 
requires a broker-dealer that acts as agent for a customer to 
disclose, in writing, upon opening a new account and on an annual 
basis thereafter, the firm's policies regarding receipt of payment 
for order flow and the firm's policies for determining where to 
route customer orders that are the subject of payment for order 
flow. See 17 CFR 242.607(a).
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    FINRA has filed the proposed rule change for immediate 
effectiveness. The operative date will be January 1, 2008.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\11\ 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 operational difficulties of 
including on a confirmation or correspondent report the securities 
market on which a transaction was effected outweigh the benefits of 
including the information in light of existing best execution and 
disclosure requirements.
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    \11\ 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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) thereunder.\13\ In accordance with Rule 19b-4,\14\ FINRA 
submitted written notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed

[[Page 531]]

rule change, at least five business days prior to the date of filing.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4.
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    FINRA has requested that the Commission waive the 30-day operative 
delay contained in Rule 19b-4(f)(6)(iii) \15\ under the Act based upon 
a representation that the temporary exemptive relief provided by FINRA 
and NYSE expires on January 1, 2008. In light of the foregoing, the 
Commission believes such waiver is consistent with the protection of 
investors and the public interest. Accordingly, the Commission 
designates the proposal to be effective upon filing with the Commission 
and operative on January 1, 2008.\16\
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    \15\ 17 CFR 240.19b-4(f)(6)(iii).
    \16\ For purposes only of waiving the 30-day operative delay of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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-2007-037 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-2007-037. 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-2007-037 and should be 
submitted on or before January 24, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-25508 Filed 1-2-08; 8:45 am]

BILLING CODE 8011-01-P