Document ID: SEC-2009-1833-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed RuleChange To Repeal NASD Rules 2760 and 2780, Incorporated NYSE Rules 2B and 411, and the Interpretation to Incorporated NYSE Rule 411(a)(ii)(5) as Part of the Process of Developing the Consolidated FINRA Rulebook
Posted Date: 2009-12-29T05:00Z

[Federal Register: December 29, 2009 (Volume 74, Number 248)]
[Notices]               
[Page 68889-68893]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29de09-138]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61211; File No. SR-FINRA-2009-087]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Repeal 
NASD Rules 2760 and 2780, Incorporated NYSE Rules 2B and 411, and the 
Interpretation to Incorporated NYSE Rule 411(a)(ii)(5) as Part of the 
Process of Developing the Consolidated FINRA Rulebook

December 18, 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 December 4, 2009, Financial Industry Regulatory

[[Page 68890]]

Authority, Inc. (``FINRA'') 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 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 repeal NASD Rule 2760 (Offerings ``At the 
Market''), NASD Rule 2780 (Solicitation of Purchases on an Exchange to 
Facilitate a Distribution of Securities), Incorporated NYSE Rule 2B (No 
Affiliation between Exchange and any Member Organization), Incorporated 
NYSE Rule 411 (Erroneous Reports) and the Interpretation to 
Incorporated NYSE Rule 411(a)(ii)(5) as part of the process of 
developing a consolidated FINRA rulebook.
    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 repeal NASD 
Rule 2760 (Offerings ``At the Market''), NASD Rule 2780 (Solicitation 
of Purchases on an Exchange to Facilitate a Distribution of 
Securities), Incorporated NYSE Rule 2B (No Affiliation between Exchange 
and any Member Organization), Incorporated NYSE Rule 411 (Erroneous 
Reports) and the Interpretation to Incorporated NYSE Rule 
411(a)(ii)(5).\4\ The proposed rule change is described in detail 
below. NASD Rule 2760 (Offerings ``At the Market'')
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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).
    \4\ For convenience, Incorporated NYSE Rules generally are 
referred to as NYSE Rules.
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    NASD Rule 2760 provides that a member who is participating or who 
is otherwise financially interested in the primary or secondary 
distribution of any security which is not admitted to trading on a 
national securities exchange shall make no representation that such 
security is being offered to a customer ``at the market'' or at a price 
related to the market price, unless the member knows or has reasonable 
grounds to believe that a market for such security exists other than 
that made, created, or controlled by the member, or by any person for 
whom he is acting or with whom he is associated in such distribution, 
or by any person controlled by, controlling or under common control 
with the member.
    When Rule 2760 was adopted,\5\ its requirements duplicated those 
set forth in the SEC's early version of SEA Rule 15c1-8 (designated at 
the time of its adoption as Rule MC8).\6\ Today, SEA Rule 15c1-8 is 
identical to its predecessor Rule MC8 except that it also applies to 
municipal securities dealers.\7\ NASD Rule 2760 remains unchanged since 
its inception.
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    \5\ Rule 2760, formerly designated as Section 16 in Article III 
of the Rules of Fair Practice, was adopted in 1939 as part of 
FINRA's original rulebook. See Certificate of Incorporation and By-
Laws, Rules of Fair Practice and Code of Procedure for Handling 
Trade Practice Complaints of National Association of Securities 
Dealers, Inc. (August 8, 1939).
    \6\ See Securities Exchange Act Release No. 1330 (August 4, 
1937).
    \7\ See Securities Exchange Act Release No. 12468 (May 20, 
1976), 41 FR 22820 (June 7, 1976) (Regulation of Municipal 
Securities Professionals and Transactions in Municipal Securities). 
FINRA Rule 0150(b) (Application of Rules to Exempted Securities 
Except Municipal Securities) provides that FINRA's rules do not 
apply to transactions in, and business activities relating to, 
municipal securities.
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    FINRA is proposing to delete NASD Rule 2760 from the FINRA rulebook 
because it duplicates SEA Rule 15c1-8. SEA Rule 15c1-8 explicitly makes 
it a manipulative, deceptive, or other fraudulent device or contrivance 
under Section 15(c) of the Exchange Act for a broker or dealer or 
municipal securities dealer who is participating or otherwise 
financially interested in the primary or secondary distribution of any 
security which is not admitted to trading on a national securities 
exchange to make a representation to a customer that a security is 
being offered ``at the market'' unless certain conditions (identical to 
those required by NASD Rule 2760) are satisfied. FINRA believes the SEA 
rule appropriately protects investors without duplication by NASD Rule 
2760. Therefore, FINRA considers the transfer of NASD Rule 2760 to the 
Consolidated FINRA Rulebook to be unnecessary.
NASD Rule 2780 (Solicitation of Purchases on an Exchange to Facilitate 
a Distribution of Securities)
    NASD Rule 2780 became effective in 1939, and its text has not been 
changed since its adoption. The rule essentially incorporated verbatim 
into the NASD rulebook SEA Rule 10b-2 (formerly Rule GB2), which was 
adopted by the SEC in 1937 to ``eliminate the practice of stimulating 
exchange activity in securities which are the subject of 
distribution.'' \8\
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    \8\ See Securities Exchange Act Release No. 1330 (August 4, 
1937).
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    The rule prohibits a member that participates or is otherwise 
financially interested in a primary or secondary distribution of a 
security from paying or offering to pay compensation to another person 
for soliciting a purchase of any security of the issuer on a national 
securities exchange or for purchasing any such security for an account 
other than that of the member. The rule further prohibits a member from 
(1) selling or offering to sell or deliver such security where the 
member engaged in the aforementioned prohibited conduct or (2) causing 
the purchase or sale of such security by engaging in the prohibited 
conduct. Finally, the rule does not apply to any salary paid by a 
member to a person whose ordinary duties include the solicitation of 
orders on a national securities exchange, as long as the salary 
represents ordinary compensation and is not paid in whole or in part 
for the inducement of a purchase or sale of the security that is 
subject to the distribution of which the member is participating or 
financially interested.
    The SEC rescinded SEA Rule 10b-2 in 1993 finding, among other 
things, that it was duplicative of other provisions of the federal 
securities laws that more effectively address manipulative practices. 
More specifically, the SEC noted that the general antifraud provisions, 
including Section 17(a) of the Securities Act and Sections 9(a), 10(b) 
and 15(c) of the Exchange Act and

[[Page 68891]]

Rule 10b-5 thereunder proscribe manipulative practices effected on and 
off exchanges, and had been found to apply to the practices covered by 
SEA Rule 10b-2.\9\ The SEC also noted in particular that SEA Rule 10b-6 
addressed the manipulative activity covered by SEA Rule 10b-2. SEA Rule 
10b-6 was the predecessor to current Regulation M. That regulation, 
among other things, prohibits underwriters, broker-dealers and other 
distribution participants, during a restricted period prior to the 
completion of their participation in a distribution of securities, from 
directly or indirectly bidding for, purchasing, or attempting to induce 
any person to bid for or purchase the offered security absent an 
available exception. Regulation M is designed to prohibit activities 
that could artificially influence the market for the offered security, 
including for example, supporting an IPO price by creating the 
perception of scarcity of IPO stock or creating the perception of 
aftermarket demand. Thus, FINRA believes that the conduct covered by 
Regulation M and NASD Rule 2780 are very similar.
    In considering the provisions of NASD Rule 2780 today, FINRA sees 
no significant utility to the rule in light of the applicable federal 
securities laws and FINRA Rules 2010 (Standards of Commercial Honor and 
Principles of Trade) and 2020 (Use of Manipulative, Deceptive or Other 
Fraudulent Devices). Because the manipulative conduct contemplated by 
NASD Rule 2780 can be reached by Regulation M, the federal securities 
laws referenced above and FINRA Rules 2010 and 2020, FINRA proposes 
that the provisions of NASD Rule 2780 not be adopted into the 
Consolidated FINRA Rulebook and be deleted. NYSE Rule 2B (No 
Affiliation between Exchange and any Member Organization)
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    \9\ See Securities Exchange Act Release No. 32100 (April 2, 
1993), 58 FR 18145 (April 8, 1993).
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    NYSE Rule 2B was adopted as part of the merger between the NYSE and 
Archipelago Holdings, Inc. The rule provides that, without prior SEC 
approval, the Exchange or any entity with which it is affiliated shall 
not, directly or indirectly, acquire or maintain an ownership interest 
in a member organization. In addition, the rule states that a member 
organization shall not be or become an affiliate \10\ of the Exchange, 
or an affiliate of any affiliate of the Exchange; provided, however, 
that, if a director of an affiliate of a member organization serves as 
a director of NYSE Euronext, this fact shall not cause such member 
organization to be an affiliate of the Exchange, or an affiliate of an 
affiliate of the Exchange. The rule further provides that nothing in 
the rule shall prohibit a member organization from acquiring or holding 
an equity interest in NYSE Euronext that is permitted by the ownership 
limitations contained in the certificate of incorporation of NYSE 
Euronext.\11\ There is no comparable NASD rule.
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    \10\ The rule provides that the term ``affiliate'' shall have 
the meaning specified in SEA Rule 12b-2. See 17 CFR 240.12b-2.
    \11\ See Securities Exchange Act Release No. 55293 (February 14, 
2007), 72 FR 8033 (February 22, 2007) (Approval Order; File No. 
NYSE-2006-120) (Amendments to Rule 2B relating to the combination of 
NYSE Group, Inc. and Euronext N.V.).
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    The rule was adopted to address concerns by the SEC regarding the 
potential for unfair competition and conflicts of interest between an 
exchange's self-regulatory obligations and its commercial interests 
that could exist if an exchange were to otherwise become affiliated 
with one of its members, as well as the potential for unfair 
competitive advantage that the affiliated member could have by virtue 
of informational or operational advantages, or the ability to receive 
preferential treatment.\12\
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    \12\ See Securities Exchange Act Release No. 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (Approval Order; File No. SR-
NYSE-2005-77).
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    The NYSE has subsequently amended its version of Rule 2B in 
response to concerns by the SEC regarding certain other of its 
affiliate relationships.\13\ FINRA did not make conforming amendments 
to its version of Rule 2B since the NYSE's changes addressed specific 
arrangements between the NYSE and its affiliates in its capacity as an 
exchange.
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    \13\ See Securities Exchange Act Release No. 59011 (November 24, 
2008), 73 FR 73360 (December 2, 2008) (Approval Order; File No. SR-
NYSE-2008-122). See also e.g., Securities Exchange Act Release No. 
59281 (January 22, 2009), 74 FR 5014 (January 28, 2009) (Approval 
Order; File No. SR-NYSE-2008-120).
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    FINRA is proposing to delete NYSE Rule 2B from the FINRA rulebook. 
This rule specifically addresses relationships between the Exchange and 
its affiliates. The SEC's concerns regarding potential conflicts of 
interest and unfair competitive advantage in affiliate relationships 
between an exchange and a member are not applicable to FINRA because it 
does not operate as an exchange. As such, FINRA considers the transfer 
of NYSE Rule 2B to the Consolidated FINRA Rulebook to be unnecessary. 
NYSE Rule 411 (Erroneous Reports)
    NYSE Rule 411 addresses three separate issues. First, paragraph (a) 
of the rule addresses situations where a member has rendered a report 
that differs from the terms of an executed trade. Second, paragraph 
(b)(1) sets forth a member's obligations when handling separate odd-lot 
orders. Third, paragraph (b)(2) requires members to record securities 
transactions in accounts no later than settlement date. Each of these 
provisions is discussed separately below.
(1) NYSE Rule 411(a): Erroneous Reports
    NYSE Rule 411(a)(i) provides that the price and size of an ``actual 
auction market trade'' are binding, notwithstanding that the customer 
has received an erroneous report with respect to the terms of the 
trade.\14\ Because some customers may not want corrected reports 
offered by a member that has rendered an erroneous report, the rule 
includes two alternative approaches in cases where the wrong price and/
or size has been reported to the customer.\15\ Under the first 
alternative, the customer may take the actual terms of the auction 
market trade, and the trade clears and settles in accordance with the 
terms of the auction market trade. Under the second alternative, the 
customer may treat the terms of the erroneous report as though they 
were the terms of the actual auction market trade, provided certain 
conditions are met, and the member may treat the erroneous report as an 
erroneous trade, assuming any losses or paying any profit to the New 
York Stock Exchange Foundation.\16\ NYSE Rule 411(a)(iii) provides that 
a report is not binding and must be rescinded if an order was not 
actually executed but was erroneously reported as having been executed. 
An order that was executed, but was erroneously reported as not having 
been executed, is binding. Finally, NYSE Rule 411(a)(iv) includes a 
provision addressing erroneous reports by floor brokers involving ``not 
held'' orders.
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    \14\ See NYSE Information Memo 01-38 (November 6, 2001).
    \15\ NYSE members and member organizations must always accept a 
corrected report. See NYSE Information Memo 02-07 (February 5, 
2002).
    \16\ The NYSE has adopted an Interpretation to paragraph 
(a)(ii)(5) regarding the calculation of profits in these 
circumstances. Although the interpretation relates to NYSE Rule 
411(a)(ii)(5), this Interpretation appears in the Transitional 
Rulebook and in NYSE's Rulebook under NYSE Rule 410. FINRA is 
proposing to delete the Interpretation and not include it in the 
Consolidated FINRA Rulebook.
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(2) NYSE Rule 411(b)(1): ``Bunching'' Odd-Lot Orders
    NYSE Rule 411(b)(1) includes two separate provisions regarding the

[[Page 68892]]

aggregation of multiple odd-lot orders. First, the rule prohibits a 
member from combining orders given by different customers to buy or 
sell odd-lots of the same stock into a round-lot order without the 
prior approval of the customers. Second, the rule states that when a 
customer ``gives, either for his own account, for various accounts in 
which he has an actual monetary interest, or for accounts over which 
such person is exercising investment discretion, buy or sell odd-lot 
orders which aggregate 100 shares or more,'' the member may not accept 
the orders unless they are, as far as possible, consolidated into round 
lots, except that orders marked ``long'' need not be consolidated with 
selling orders marked ``short.'' An exception from the consolidation 
requirement is available once per trading day by a person exercising 
investment discretion over multiple accounts if the odd-lot orders, in 
the aggregate, total fewer than 300 shares.
(3) NYSE Rule 411(b)(2): Recording of Transactions in Accounts
    NYSE Rule 411(b)(2) requires that transactions in securities be 
recorded in accounts no later than settlement date. The rule originally 
was intended to ensure that interest was properly posted for each 
transaction and required that transactions be recorded and interest be 
computed as of settlement date.\17\ The NYSE amended the rule into its 
current form in 1982 to remove the language regarding the calculation 
of interest and to permit firms to record securities transactions at 
any time prior to settlement date.\18\
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    \17\ See Securities Exchange Act Release No. 18644 (April 14, 
1982), 47 FR 17701 (April 23, 1982) (Notice of Filing; File No. SR-
NYSE-82-7).
    \18\ See Securities Exchange Act Release No. 18778 (May 28, 
1982), 47 FR 24900 (June 8, 1982) (Approval Order; File No. SR-NYSE-
82-7).
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    FINRA is proposing not to incorporate NYSE Rule 411 or the 
Interpretation to NYSE Rule 411(a)(ii)(5) into the Consolidated FINRA 
Rulebook. The provisions in the rule related to erroneous reports are 
specific to the NYSE marketplace, and certain of the provisions relate 
solely to transactions by floor brokers. Paragraph (b)(1), which is 
related to the ``bunching'' of odd-lot orders, is similarly focused on 
the NYSE marketplace, which maintains a separate system for the 
execution of odd-lot orders.\19\ Because FINRA does not maintain a 
marketplace, a rule addressing the aggregation of orders for execution 
is unnecessary.\20\ Finally, FINRA is proposing that NYSE Rule 
411(b)(2) not be included in the Consolidated FINRA Rulebook because 
the rule is duplicative of existing SEC recordkeeping requirements and 
longstanding SEC guidance.\21\
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    \19\ See NYSE Rule 124 (Odd-Lot Orders). FINRA did not 
incorporate NYSE Rule 124 into the Transitional Rulebook because it 
is solely concerned with the NYSE marketplace.
    \20\ Although FINRA does not have a rule addressing the bunching 
of odd-lot orders, FINRA's trade reporting rules have separate 
reporting requirements for round-lot and odd-lot transactions. In 
addition, the aggregation of individual executions (both round-lot 
and odd-lot executions) for trade reporting purposes is prohibited. 
See, e.g., FINRA Rules 6282(f), 6380A(f), 6380B(h).
    \21\ See 17 CFR 240.17a-3(a)(3); see also Securities Exchange 
Act Release No. 10756 (April 26, 1974) (``Transactions involving the 
purchase and sale of securities should be posted to the customer's 
ledger accounts * * * no later than settlement date.'').
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    FINRA will 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,\22\ 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 would 
streamline and improve FINRA's rulebook by eliminating rules that are 
duplicative of federal rules and regulations and provisions that are 
specific to the NYSE and its marketplace.
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    \22\ 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-2009-087 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-2009-087. 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,\23\ 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 the 
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

[[Page 68893]]

information that you wish to make available publicly. All submissions 
should refer to File Number SR-FINRA-2009-087 and should be submitted 
on or before January 19, 2010.
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    \23\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov/.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-30784 Filed 12-28-09; 8:45 am]

BILLING CODE 8011-01-P