Document ID: SEC-2010-1671-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-11-01T04:00Z

[Federal Register: November 1, 2010 (Volume 75, Number 210)]
[Notices]               
[Page 67155-67162]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01no10-71]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63181; File No. SR-FINRA-2010-052]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rules Regarding Books and Records in the Consolidated FINRA 
Rulebook

October 26, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``SEA'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on October 20, 2010, 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 and II 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 adopt certain paragraphs, as specified below, 
of NASD Rule 3110 (Books and Records), subject to certain amendments, 
as FINRA Rules in the consolidated FINRA rulebook and to adopt 
Incorporated NYSE Rule Interpretations 410/01 (Pre-Time Stamping) and 
410/02 (Allocations of Block Orders), subject to certain amendments, as 
FINRA Rules in the consolidated FINRA rulebook.
    The proposed rule change would delete NASD IM-3110 (Customer 
Account Information) and Incorporated NYSE Rule 410 (Records of 
Orders). In addition, the proposed rule change would delete 
Incorporated NYSE Rule 440 (Books and Records), with the exception of 
Incorporated NYSE Rules 440.10 (Periodic Security Counts, 
Verifications, Comparisons, etc.) and 440.20 (Identification of 
Suspense Accounts and Assignment of Responsibility for General Ledger 
Accounts) and NYSE Rule Interpretation 440.20/01 (Suspense Accounts).
    The proposed rule change would renumber NASD Rule 3110(a) 
(Requirements) as FINRA Rule 4511 (General Requirements), NASD Rule 
3110(c) (Customer Account Information) as FINRA Rule 4512 (Customer 
Account Information), NASD Rules 3110(d) (Record of Written Complaints) 
and 3110(e) (``Complaint'' Defined) as FINRA Rule 4513 (Records of 
Written Customer Complaints), NASD Rule 3110(f) (Requirements When 
Using Predispute Arbitration Agreements for Customers Accounts) as 
FINRA Rule 2268 (Requirements When Using Predispute Arbitration 
Agreements for Customer Accounts), NASD Rule 3110(g) (Negotiable 
Instruments Drawn From A Customer's Account) as FINRA Rule 4514 
(Authorization Records for Negotiable Instruments Drawn From a 
Customer's Account), NASD Rule 3110(h) (Order Audit Trail System Record 
Keeping Requirements) as paragraph (a)(4) of FINRA Rule 7440 (Recording 
of Order Information) and NASD Rule 3110(j) (Changes in Account Name or 
Designation) as FINRA Rule 4515 (Approval and Documentation of Changes 
in Account Name or Designation) in the consolidated FINRA rulebook. The 
proposed rule change also would renumber NYSE Rule Interpretation 410/
01 as FINRA Rule 5340 (Pre-Time Stamping) and NYSE Rule Interpretation 
410/02 as FINRA Rule 4515.01 (Allocations of Orders Made by Investment 
Advisers).
    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
Background
    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\3\ FINRA is proposing to adopt NASD 
Rules 3110(a), 3110(c), 3110(d) and (e), 3110(f), 3110(g), 3110(h) and 
3110(j) as FINRA Rules 4511, 4512, 4513, 2268, 4514, 7440(a)(4) and 
4515, respectively, in the Consolidated FINRA Rulebook, with certain 
changes as described below.\4\ FINRA also is proposing to adopt 
Incorporated NYSE Rule Interpretations 410/01 and 410/02 as FINRA Rules 
5340 and 4515.01,\5\ respectively, in the Consolidated FINRA 
Rulebook.\6\ FINRA is proposing to delete NASD IM-3110 and NYSE Rules 
410 and 440, provided, however, NYSE Rules 440.10 and 440.20 and NYSE 
Rule Interpretation 440.20/01 are being

[[Page 67156]]

addressed as part of a separate proposal.\7\
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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\ NASD Rule 3110(b) (Marking of Customer Order Tickets) 
requires that members indicate on the order ticket for each 
transaction in a non-exchange-listed security the name of each 
dealer contacted and the quotations received to determine the best 
inter-dealer market as required by NASD Rule 2320(g) (commonly 
referred to as the ``Three Quote Rule''), unless the member can 
establish and document its reliance on the exclusions to the Three 
Quote Rule. FINRA is proposing to replace NASD Rule 3110(b) with a 
more general documentation requirement in the supplementary material 
to proposed FINRA Rule 5310. See Regulatory Notice 08-80 (December 
2008) (Proposed FINRA Rule Addressing Best Execution). NASD Rule 
3110(i) (Holding of Customer Mail) specifies the circumstances under 
which members may hold mail for a customer. FINRA is proposing that 
NASD Rule 3110(i) be rewritten as a standalone rule and relocated to 
the supervision section of the Consolidated FINRA Rulebook. See 
Regulatory Notice 08-24 (May 2008) (Proposed Consolidated FINRA 
Rules Governing Supervision and Supervisory Controls).
    \5\ For convenience, the Incorporated NYSE Rules are referred to 
as the NYSE Rules.
    \6\ NYSE Rule Interpretation 410(a)(ii)(5)/01 was deleted as 
part of a prior rule change. See Securities Exchange Act Release No. 
61473 (February 2, 2010), 75 FR 6422 (February 9, 2010) (Order 
Approving File No. SR-FINRA-2009-087).
    \7\ See Regulatory Notice 09-03 (January 2009) (Proposed 
Consolidated FINRA Rules Governing Financial Responsibility and 
Operational Requirements).
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    Current NASD Rules and NYSE Rules require members to make and 
preserve certain books and records to evidence compliance with Federal 
securities laws and FINRA and SEC rules, as well as to enable FINRA and 
SEC staffs to conduct effective examinations. Based in large part on 
the current rules, the proposed rule change would rewrite the FINRA 
books and records rules with three goals in view:
     To streamline the rules to make them as clear as possible;
     To group the requirements along similar subject matter 
lines to make finding them a more intuitive process and to provide 
members with a better understanding of the regulatory scheme; and
     To eliminate those requirements contained in the current 
rules that have become obsolete or otherwise duplicative.
Proposed Amendments
    FINRA proposes the following amendments to the books and records 
rules.
a. General Requirements (Proposed FINRA Rule 4511)
    Currently, there are two general recordkeeping rules in effect 
under NASD Rules and NYSE Rules. NASD Rule 3110(a) addresses the 
general obligation of members under all applicable laws, rules, 
regulations, statements of policy, NASD Rules and SEA Rule 17a-3 to 
make and preserve books and records, including the obligation to 
preserve such books and records in formats and media and for retention 
periods that comply with SEA Rule 17a-4. NYSE Rule 440 also sets forth 
the general obligation of members to make and preserve books and 
records.\8\
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    \8\ In addition, NYSE Rules 440.10 and 440.20 and NYSE Rule 
Interpretation 440.20/01 set forth financial and operational 
recordkeeping requirements for which there are no equivalent NASD 
Rules.
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    NYSE Rule 410 is a separate NYSE recordkeeping rule for which there 
is no comparable NASD Rule.\9\ NYSE Rule 410, in main part, requires 
members to make and preserve specific records for every order received 
(either orally or in writing) and every order entered into the NYSE's 
Off-Hours Trading Facility.\10\ NYSE Rule 410 also permits the NYSE to 
waive the rule's recordkeeping requirements under exceptional 
circumstances upon written request.
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    \9\ Previously, NYSE Rule 410 applied only to orders transmitted 
or carried to the NYSE Trading Floor (``Floor''), but was amended in 
2004 to apply to all orders sent to any marketplace, not just those 
carried or transmitted to the Floor. See NYSE Information Memo 04-38 
(July 26, 2004) (Amendments to NYSE Rules 342, 401, 408 and 410 
Relating to Supervision and Internal Controls).
    \10\ The ``Off-Hours Trading Facility'' is the NYSE facility 
that permits members to effect securities transactions on the NYSE 
pursuant to the NYSE Rule 900 Series. See NYSE Rule 900(e)(v).
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    FINRA Rule 4511 streamlines, and replaces, the language of NASD 
Rule 3110(a) to clarify that members are obligated to make and preserve 
books and records as required under the FINRA rules, the Act and the 
applicable SEA rules.\11\ Additionally, the proposed rule requires 
members to preserve for a period of at least six years those FINRA 
books and records for which there is no specified retention period 
under the FINRA Rules or applicable SEA rules. The proposed rule also 
clarifies that members are required to preserve the books and records 
required to be made pursuant to the FINRA Rules in a format and media 
that complies with SEA Rule 17a-4.
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    \11\ As proposed in Regulatory Notice 08-25 (discussed in Item 5 
of this filing), FINRA Rule 4511 would have required members to make 
and preserve books and records as required under FINRA rules, 
Section 17(a) of the Act and the applicable associated SEA rules; 
however, FINRA has modified proposed FINRA Rule 4511 to eliminate 
the specific reference to Section 17(a) of the Act given that 
certain SEA recordkeeping requirements are located outside of 
Section 17(a).
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    FINRA proposes to delete the general recordkeeping provisions of 
NYSE Rule 440 because its provisions are substantially similar to FINRA 
Rule 4511. As noted above, NYSE Rules 440.10 and 440.20 and NYSE Rule 
Interpretation 440.20/01 are being addressed as part of a separate 
proposal.
    In addition, the proposed rule change would delete NYSE Rules 
410(a)(1)-(3) and (b) as the provisions' requirements are largely 
duplicative of the SEA recordkeeping requirements that are incorporated 
by reference into FINRA Rule 4511 \12\ or, in some instances, are 
directed at orders on an exchange facility. FINRA Rule 7440 (Recording 
of Order Information) also mandates recordkeeping requirements that are 
substantially similar to those in SEA Rules 17a-3 and 17a-4 for members 
that must report order information via FINRA's Order Audit Trail System 
(``OATS'') for over-the-counter (``OTC'') and Nasdaq equity 
securities.\13\
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    \12\ Specifically, SEA Rule 17a-3(a) sets forth detailed 
recordkeeping requirements for brokerage orders that include, among 
other required information, the order record information required by 
NYSE Rule 410. See SEA Rule 17a-3(a)(6)-(a)(8). Information required 
pursuant to SEA Rule 17a-3(a)(6) that goes beyond the recordkeeping 
requirements of NYSE Rule 410 includes, among other things, 
recording the price at which the order was executed, the account for 
which the order was entered, and the identity of each associated 
person, if any, responsible for the account. Additionally, SEA Rule 
17a-4(b)(1) prescribes the same record retention requirements as 
NYSE Rule 410.
    \13\ The FINRA Rule 7400 Series (Order Audit Trail System) 
requires members to capture, record, and report via OATS specific 
data elements related to the handling or execution of orders in OTC 
and Nasdaq equity securities, including recording all times of these 
events in hours, minutes, and seconds, and to synchronize their 
business clocks. FINRA is proposing to extend the recording and 
reporting requirements in the OATS rules to include all NMS stocks. 
See Securities Exchange Act Release No. 62739 (August 18, 2010), 75 
FR 52380 (August 25, 2010) (Notice of Filing of SR-FINRA-2010-044).
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b. Customer Account Information (Proposed FINRA Rule 4512)
    NASD Rule 3110(c)(1) requires that members maintain certain 
information relating to customer accounts, including, among other 
things, the signature of the registered representative introducing the 
account and signature of the member, partner, officer or manager who 
accepts the account. FINRA proposes to simplify this provision by 
instead requiring members to maintain the name of the associated 
person, if any, responsible for the account.\14\ As discussed in more 
detail below, the proposed rule change would require that where a 
member designates multiple individuals as being responsible for an 
account, the member maintain each of their names and a record 
indicating the scope of their responsibilities with respect to the 
account. The proposed rule change also would clarify that members 
maintain the signature of the partner, officer or manager denoting that 
the account has been accepted in accordance with the member's policies 
and procedures for acceptance of accounts.
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    \14\ Members would continue to be subject to any additional 
requirements imposed by SEA Rule 17a-3. For example, SEA Rule 17a-
3(a)(17) requires that for each account with a natural person, the 
account record must indicate whether it has been signed by the 
associated person (if any) responsible for the account. However, 
this requirement only applies to accounts for which the member is, 
or within the past 36 months has been, required to make a 
suitability determination under the Federal securities laws or the 
requirements of a self-regulatory organization of which it is a 
member.
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    NASD Rule 3110(c)(3) requires that for discretionary accounts, in 
addition to the requirements set forth in NASD Rules 3110(c)(1) and 
(2), members must: Obtain the signature of each person authorized to 
exercise discretion in the account; record the date such discretion is 
granted; and, in connection with exempted securities (other than 
municipals), record the age or approximate age of the customer. FINRA

[[Page 67157]]

proposes to simplify and clarify NASD Rule 3110(c)(3) in the following 
ways:
     Consistent with the SEA recordkeeping requirements, the 
rule would be amended to require members to maintain a record of the 
dated signature of each named, natural person authorized to exercise 
discretion in the account;
     The proposed rule change would delete the requirement to 
record the date discretion was granted \15\ and the requirement to 
record the age or approximate age of the customer in connection with 
exempted securities; \16\
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    \15\ Pursuant to NASD Rule 2510 (Discretionary Accounts), 
members would still be required to obtain the customer's prior 
written authorization. As part of the proposed changes to NASD Rule 
2510, FINRA is proposing to require members to obtain the customer's 
dated prior written authorization. See Regulatory Notice 09-63 
(November 2009) (Proposed Consolidated FINRA Rule Governing 
Discretionary Accounts and Transactions).
    \16\ This would be a conforming revision. The requirement that 
for discretionary accounts generally members must record the age or 
approximate age of the customer was eliminated effective in 1991. 
See Notice to Members 90-52 (August 1990) (SEC Approval of 
Amendments to Article III, Sections 2 and 21 (c) of the Rules of 
Fair Practice Re: Customer Account Information).
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     The rule would be amended to provide that its requirements 
do not apply to investment discretion granted by a customer as to the 
price at which or the time to execute an order given by the customer 
for the purchase or sale of a definite dollar amount or quantity of a 
specified security; and
     The proposed rule change would clarify that nothing in the 
rule shall be construed as allowing members to maintain discretionary 
accounts or exercise discretion in such accounts except to the extent 
permitted under the Federal securities laws.\17\
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    \17\ In 2005, the SEC adopted Rule 202(a)(11)-1 under the 
Investment Advisers Act of 1940 (``Advisers Act''), a principal 
purpose of which was to deem broker-dealers offering ``fee-based 
brokerage accounts'' not subject to the Advisers Act. Rule 
202(a)(11)-1 also included several interpretive positions regarding 
Advisers Act Section 202(a)(11)(C), including a provision that any 
account over which a broker-dealer exercises investment discretion 
(other than on a temporary or limited basis) is subject to the 
Advisers Act. In March 2007, Rule 202(a)(11)-1 was vacated. See 
Financial Planning Association v. SEC, 482 F.3d 481 (DC Cir. 2007). 
In September 2007, the SEC re-proposed its interpretive positions 
for comment, including the provision regarding the application of 
the Advisers Act to discretionary accounts. See Investment Advisers 
Act Release No. 2652 (September 24, 2007), 72 FR 55126 (September 
28, 2007) (Interpretive Rule Under the Advisers Act Affecting 
Broker-Dealers).
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    In addition, as discussed in more detail below, the proposed rule 
change would require that members obtain a ``manual'' dated signature 
of each named, natural person authorized to exercise discretion in the 
account.
    NASD Rule 3110(c)(4) sets forth the definition of ``institutional 
account'' for purposes of NASD Rule 3110 as well as for NASD Rules 2310 
(Recommendations to Customers (Suitability)) and 2510. FINRA proposes 
to amend this definition of ``institutional account'' to delete the 
cross-references to NASD Rules 2310 and 2510 because these rules 
already include cross-references to this definition.
    FINRA also proposes to amend NASD Rule 3110(c) to provide that with 
respect to accounts opened pursuant to prior NASD Rules (e.g., the 
January 1991 cut-off specified in NASD Rule 3110(c)), members will be 
permitted to continue maintaining the information required by those 
prior NASD Rules until such time as they update the account information 
in the course of their routine and customary business or as required by 
other applicable laws or rules.
    In addition, the proposed rule change would add supplementary 
material to:
     Clarify that required customer account records are subject 
to a six-year retention period;
     Remind members that they may be subject to additional 
recordkeeping requirements under the SEA (e.g., SEA Rule 17a-3(a)(17));
     Remind members of their obligation to comply with the 
requirements of FINRA Rule 2070 (Transactions Involving FINRA 
Employees); \18\ and
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    \18\ FINRA Rule 2070 plays a vital role in helping FINRA monitor 
whether employees are abiding by trading restrictions imposed by the 
FINRA Code of Conduct.
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     Provide general explanations of the terms ``maintain'' and 
``preserve'' for purposes of Rule 4512 only.
    The proposed rule change would renumber NASD Rule 3110(c) as FINRA 
Rule 4512. The remaining provisions of NASD Rule 3110(c) would be 
incorporated into FINRA Rule 4512 without material change.
    NASD IM-3110 includes cross-references to the requirements of 
certain other rules that may apply to customer accounts (such as SEA 
Rules 15g-1 through 15g-9 (the Penny Stock Rules)), and it includes a 
historical reference relating to accounts opened prior to January 1991. 
FINRA proposes to delete NASD IM-3110 because certain provisions are 
redundant and others are outdated.
c. Records of Written Customer Complaints (Proposed FINRA Rule 4513)
    NASD Rule 3110(d) addresses a member's obligation to preserve 
records of written customer complaints at each office of supervisory 
jurisdiction (``OSJ''). NASD Rule 3110(e) defines the term 
``complaint.'' Because the definition of ``complaint'' in NASD Rule 
3110(e) relates directly to the requirements of NASD Rule 3110(d), 
FINRA proposes to merge the two provisions into one rule for 
simplification. The proposed rule change would renumber NASD Rules 
3110(d) and (e) as FINRA Rule 4513.
    The proposed rule change also would clarify that the obligation to 
keep customer complaint records in each OSJ applies only to complaints 
that relate to that office, including complaints that relate to 
activities supervised from that office and would provide that members 
may maintain the required records at the OSJ or make them promptly 
available at such office upon FINRA's request.
    Currently, members are required to preserve customer complaint 
records for a period of at least three years.\19\ To take into account 
FINRA's four-year routine examination cycle for certain members, the 
proposed rule change would require that members preserve the customer 
complaint records for a period of at least four years.
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    \19\ See SEA Rules 17a-3(a)(18) and 17a-4(b)(4).
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d. Requirements When Using Predispute Arbitration Agreements for 
Customer Accounts (Proposed FINRA Rule 2268)
    To ensure that customers are advised about what they are agreeing 
to when they sign predispute arbitration agreements, NASD Rule 3110(f) 
requires, among other things, that such agreements contain certain 
highlighted disclosures. FINRA proposes to incorporate the requirements 
of the rule with minor changes into the Consolidated FINRA Rulebook. 
Specifically, FINRA proposes to update the disclosure language to 
reflect amendments to FINRA Rule 12904 requiring arbitrators to provide 
an explained decision to the parties in eligible cases \20\ if there is 
a joint request by all parties at least 20 days before the first 
scheduled hearing date.\21\
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    \20\ Pursuant to FINRA Rule 12904(g)(6), the requirement does 
not apply to simplified cases decided without a hearing under FINRA 
Rule 12800 or to default cases conducted under FINRA Rule 12801.
    \21\ See Securities Exchange Act Release No. 59358 (February 4, 
2009), 74 FR 6928 (February 11, 2009) (Order Approving File No. SR-
FINRA-2008-051).
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    The proposed rule change would renumber NASD Rule 3110(f) as FINRA 
Rule 2268 and would move it to the disclosure section of the 
Consolidated FINRA Rulebook as a standalone rule.

[[Page 67158]]

e. Authorization Records for Negotiable Instruments Drawn From a 
Customer's Account (Proposed FINRA Rule 4514)
    NASD Rule 3110(g) provides that members shall not obtain from a 
customer or submit for payment a check, draft or other form of 
negotiable paper drawn on the customer's checking, savings, share or 
similar account, without that person's express written authorization, 
which may include the customer's signature on the negotiable 
instrument. The rule requires members to maintain the required written 
authorization (other than a copy of a negotiable instrument signed by 
the customer) for a period of three years. FINRA proposes to amend this 
provision to clarify that where the required authorization is separate 
from the negotiable instrument, members must preserve the authorization 
for a period of three years following the date it expires. The proposed 
rule change would renumber NASD Rule 3110(g) as FINRA Rule 4514.
f. OATS Recordkeeping Requirements (Proposed FINRA Rule 7440(a)(4))
    NASD Rule 3110(h) sets forth the OATS recordkeeping requirements 
for members that are ``Reporting Members,'' as defined in the OATS 
rules, for orders received or executed at their trading departments. 
FINRA proposes to relocate this recordkeeping provision without 
material change into the OATS rules. The proposed rule change would 
renumber NASD Rule 3110(h) as paragraph (a)(4) of FINRA Rule 7440.
g. Approval and Documentation of Changes in Account Name or Designation 
(Proposed FINRA Rule 4515)
    NASD Rule 3110(j) requires that, before a customer order is 
executed, the account name or designation must be placed upon the 
memorandum for each transaction.\22\ The rule also addresses the 
approval and documentation procedures for changes in such account name 
or designation.
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    \22\ See also SEA Rule 17a-3(a)(6).
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    As discussed in more detail below, FINRA proposes to amend this 
provision to clarify that with respect to any change in account name or 
designation that takes place prior to execution of the trade, the 
essential facts the principal relied on in approving such change must 
be documented in writing prior to execution. The proposed rule change 
would renumber NASD Rule 3110(j) as FINRA Rule 4515. NYSE Rules 410 and 
410.10 also include provisions regarding approval and documentation of 
changes in account name or designation. FINRA proposes to delete the 
corresponding provisions in NYSE Rules 410 and 410.10 because these 
provisions are substantially similar to FINRA Rule 4515. As stated 
earlier, FINRA also proposes to delete the recordkeeping provisions of 
NYSE Rule 410.
    The proposed rule change, however, would transfer NYSE Rule 
Interpretation 410/02 as FINRA Rule 4515.01, with certain changes as 
described below. NYSE Rule Interpretation 410/02 outlines an exception 
to the order entry requirements of NYSE Rule 410 by permitting a member 
to accept block orders and allowing investment advisers to make 
allocations on such orders to customers (i.e., allocations among sub-
accounts), provided that the member obtains specific account 
designations or customer names for the order records by the end of the 
business day. Although the SEA recordkeeping rules do not specifically 
provide for this exception, SEC staff has previously indicated that the 
exception also applies to the SEA recordkeeping rules relating to 
orders.\23\ There is no direct NASD equivalent.
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    \23\ See NYSE Information Memo 00-19, note 2 (July 21, 2000) 
(Timely Designation and Allocation of Account Information--Records 
of Orders) (noting that pursuant to discussions with the SEC staff, 
NYSE Rule Interpretation 410/02 applies to the requirements of SEA 
Rules 17a-3(a)(6) and 17a-3(a)(7)).
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    The proposed rule change would adopt NYSE Rule Interpretation 410/
02 as FINRA Rule 4515.01 with the following changes. FINRA proposes to 
amend the provision so that the exception applies not only to block 
orders, but to all orders submitted by an investment adviser on behalf 
of multiple customers. Additionally, members have indicated that in 
some cases they are unable to obtain the required information by the 
end of the business day on which the order is executed. Therefore, as a 
clerical accommodation to members, FINRA proposes to amend the 
provision and give members until noon of the next business day 
following the trading session to obtain the required information. The 
proposal also clarifies that the exception only applies where there is 
more than one customer for any particular order. Further, the current 
exception only applies to investment advisers that are either 
registered under the Investment Advisers Act or subject to state 
regulation pursuant to Section 203A of the Investment Advisers Act. To 
cover all investment advisers, FINRA proposes to expand the category of 
investment advisers subject to the exception to also include investment 
advisers that qualify for an exception from the Investment Advisers 
Act's registration requirements pursuant to Section 203(b) of the 
Investment Advisers Act. FINRA also proposes to clarify that the 
exception does not apply to accounts handled by registered 
representatives who otherwise exercise discretionary authority over 
accounts pursuant to NASD Rule 2510.
    Moreover, FINRA proposes to clarify that nothing in the rule or 
supplementary material may be construed as allowing a member knowingly 
to facilitate the allocation of orders from investment advisers in a 
manner other than in compliance with both (i) the investment adviser's 
intent at the time of trade execution to allocate shares on a 
percentage basis to the participating accounts and (ii) the investment 
adviser's fiduciary duty with respect to allocations for such 
participating accounts, including but not limited to allocations based 
on the performance of a transaction between the time of execution and 
the time of allocation.
h. Pre-Time Stamping (Proposed FINRA Rule 5340)
    NYSE Rule Interpretation 410/01 notes that pre-time stamping of 
order tickets in connection with block positioning is contrary to NYSE 
Rule 410. The proposed rule change would adopt this NYSE Rule 
Interpretation as FINRA Rule 5340 without material change, except for 
replacing the reference to NYSE Rule 410 with FINRA Rule 4511. FINRA 
believes that retaining this requirement is appropriate as it expressly 
prohibits violative conduct for which there are no direct NASD rule 
equivalents. FINRA Rule 5340 would be new to legacy NASD-only members.
    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. The implementation date will be no later 
than 240 days following 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,\24\ 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

[[Page 67159]]

public interest. FINRA believes that the proposed rule change will 
further the purposes of the Act by streamlining the FINRA books and 
records rules to make them as clear as possible, grouping the 
requirements along similar subject matter lines to make finding them a 
more intuitive process and to provide members with a better 
understanding of the regulatory scheme, and eliminating those 
requirements contained in the current rules that have become obsolete 
or otherwise duplicative.
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    \24\ 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

    In May 2008, FINRA published Regulatory Notice 08-25 soliciting 
comment on proposals relating to the FINRA books and records rules.\25\ 
FINRA received eight comment letters in response to the Notice,\26\ 
which are discussed below. A copy of the Notice is attached as Exhibit 
2a.\27\ A list of the comment letters received in response to the 
Notice is attached as Exhibit 2b.\28\ Copies of the comment letters 
received in response to the Notice are attached as Exhibit 2c.\29\
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    \25\ Some of the proposed changes discussed in this filing were 
not part of the proposals set forth in Regulatory Notice 08-25, 
including the requirement to preserve for six years those FINRA 
books and records for which there is no specified retention period, 
revisions to the disclosure language in proposed FINRA Rule 2268 to 
reflect amendments to FINRA's Code of Arbitration Procedure for 
Customer Disputes and Code of Arbitration Procedure for Industry 
Disputes, the adoption of NYSE Rule Interpretation 410/01 as FINRA 
Rule 5340, and the adoption of NYSE Rule Interpretation 410/02 as 
FINRA Rule 4515.01.
    \26\ See Letter from Jerry Hamlin, dated May 18, 2008 
(``Hamlin''); letter from MuniVest Financial Group, dated May 29, 
2008; letter from Sanderlin Securities, LLC, dated June 11, 2008 
(``Sanderlin''); letter from the Securities Industry and Financial 
Markets Association, dated June 11, 2008 (``SIFMA''); letter from 
the Financial Services Institute, Inc., dated June 13, 2008 
(``FSI''); letter from ING Advisors Network, dated June 13, 2008 
(``ING''); letter from the Public Investors Arbitration Bar 
Association, dated June 13, 2008 (``PIABA''); and letter from 
Wachovia Securities, LLC, dated June 13, 2008.
    \27\ The Commission notes that while provided in Exhibit 2a to 
FINRA's filing with the Commission, the Notice is not attached 
hereto. The Notice can be accessed online at http://www.finra.org/
web/groups/industry/@ip/@reg/@notice/documents/notices/p038507.pdf.
    \28\ The Commission notes that while provided in Exhibit 2b to 
the filing, the list of the commenters and comment letters received 
by FINRA are not attached hereto. Those comment letters can be 
accessed online at http://www.finra.org/Industry/Regulation/Notices/
2008/p038503. As stated previously, all references to ``commenters'' 
are to the commenters to the Notice, which are listed in Exhibit 2b.
    \29\ Id.
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1. General Comments
    Two commenters believe that the requirements in SEA Rules 17a-3 and 
17a-4 are sufficiently inclusive to satisfy investor protection 
interests.\30\ One of these commenters requests that FINRA refrain from 
considering recordkeeping requirements that are in addition to the SEA 
rules.\31\
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    \30\ SIFMA and ING.
    \31\ ING.
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    SEA Rules 17a-3 and 17a-4 impose minimum recordkeeping 
requirements.\32\ These rules are not intended to be the only 
recordkeeping requirements applicable to members. As noted above, FINRA 
requires members to make and preserve certain books and records to 
evidence compliance with FINRA Rules and to enable FINRA staff to 
conduct effective examinations. Accordingly, where necessary, FINRA 
will consider recordkeeping requirements beyond the minimum 
requirements of the SEA rules. For instance, as described above, to 
take into account FINRA's four-year routine examination cycle for 
certain members, FINRA proposes to increase the retention period for 
customer complaint records to at least four years.
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    \32\ See Commission Guidance to Broker-Dealers on the Use of 
Electronic Storage Media under the Electronic Signatures in Global 
and National Commerce Act of 2000 with Respect to Rule 17a-4(f), 
Securities Exchange Act Release No. 44238 (May 1, 2001), 66 FR 22916 
(May 7, 2001).
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2. Customer Account Information (Proposed FINRA Rule 4512)
    In Regulatory Notice 08-25, FINRA specifically requested comment on 
whether the registered representative signature requirement in NASD 
Rule 3110(c)(1)(C) should be retained. As noted above, FINRA proposes 
to instead require members to maintain the name of the associated 
person, if any, responsible for the account. One commenter expressly 
supports eliminating the registered representative signature 
requirement.\33\ Another commenter argues that the signatures of both 
the registered representative and the responsible manager are necessary 
to assure the authenticity of account documents and information, which 
may be at issue in arbitration.\34\ For regulatory purposes, FINRA 
believes that it is sufficient for a member to maintain the name of the 
associated person (if any) responsible for the account together with 
the signature of the partner, officer or manager denoting that the 
account has been accepted in accordance with the member's policies and 
procedures for acceptance of accounts. In addition, as noted above, 
members would continue to be subject to the associated person signature 
requirement of SEA Rule 17a-3(a)(17).\35\
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    \33\ SIFMA.
    \34\ PIABA.
    \35\ See supra note 14.
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    Two commenters suggest that the proposed rule be amended to require 
members to maintain the name of the registered representative 
responsible for the account because the individual ``responsible'' for 
an account generally has to be a registered representative.\36\ The 
proposed language ``the associated person, if any, responsible for the 
account'' is intended to provide consistency with the terminology used 
in SEA Rule 17a-3(a)(17). Nothing contained in the proposed 
recordkeeping rule would obviate the requirement that where a member 
designates a person as being responsible for a customer's account, the 
person charged with such responsibility be a qualified and registered 
person. One commenter notes that the designation of a single individual 
as ``responsible'' for an account is not practical in cases where a 
group of individuals may be assigned responsibility for an account.\37\ 
In response, FINRA has revised the proposed rule to clarify that where 
a member designates multiple individuals as being responsible for an 
account, the member is required to maintain each of their names and a 
record indicating the scope of their responsibilities with respect to 
the account.
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    \36\ SIFMA and FSI.
    \37\ SIFMA.
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    Two commenters request that the requirement to maintain the 
signature of the partner, officer or manager denoting acceptance of the 
account be amended to allow members the flexibility to designate an 
appropriate person other than a ``partner, officer or manager.'' \38\ 
FINRA believes that the appropriate person for this purpose is a 
partner, officer or manager of the member. Three commenters believe 
that the term ``signature'' may be interpreted to require the 
``manual'' signature of a partner, officer or manager.\39\ These 
commenters suggest that the phrase ``evidence of approval'' be used 
instead, so as to permit the use of an ``electronic'' signature. The 
staff previously has issued guidance regarding the permissibility of 
``electronic'' signatures

[[Page 67160]]

under NASD Rule 3110(c)(1)(C).\40\ This guidance will remain in effect.
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    \38\ SIFMA and ING.
    \39\ SIFMA, FSI and ING.
    \40\ See Letter to Selwyn Notelovitz, Charles Schwab & Co., 
Inc., from Eric Moss, NASD, dated June 4, 2002 (available at: http:/
/www.finra.org/Industry/Regulation/Guidance/InterpretiveLetters/
P002556), and Letter to Jeffrey W. Kilduff, O'Melveny & Myers, LLP, 
from Nancy Libin, NASD, dated July 5, 2001 (available at: http://
www.finra.org/Industry/Regulation/Guidance/InterpretiveLetters/
P005336).
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    One commenter believes that the requirement to denote that the 
account has been accepted in accordance with the member's policies and 
procedures is unnecessary since members are required to follow their 
policies and procedures in all instances.\41\ This commenter also 
believes that the proposed rule may be interpreted to require a 
partner, officer or manager to provide a representation stating that he 
or she has accepted the account in accordance with the member's 
policies and procedures. The proposed rule change simply clarifies that 
the purpose of the signature of the partner, officer or manager is to 
signify that the account has been accepted in accordance with the 
member's policies and procedures for acceptance of accounts. The 
proposed rule would not require a partner, officer or manager to 
provide any representations.
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    \41\ SIFMA.
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    One commenter recommends that the requirement to maintain the names 
of any persons authorized to transact business on behalf of a customer 
that is an entity be eliminated.\42\ The commenter argues that the 
requirement (which is currently in NASD Rule 3110(c)(1)(D)) has caused 
significant operational burden on members and may put them at 
regulatory risk. The commenter also states that some institutional 
customers use this provision to attempt to shift the burden of 
enforcing compliance with the customer's internal policies and controls 
from the customer to the member. FINRA is not proposing any changes to 
this provision. Moreover, FINRA believes that when a customer is an 
entity, it is important that the member maintain a record that 
identifies the person(s) authorized to transact business on behalf of 
that entity.
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    \42\ SIFMA.
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    One commenter seeks clarification regarding the impact of pending 
SEC rulemaking proposals relating to discretionary accounts, including 
whether members would need to develop additional policies and 
procedures with respect to such accounts.\43\ Members have always had 
an obligation to establish, maintain and enforce written procedures to 
supervise the types of business in which they engage that are 
reasonably designed to achieve compliance with applicable securities 
laws and regulations.\44\ As noted above, the proposed rule change 
simply clarifies that nothing in the rule shall be construed as 
allowing members to maintain discretionary accounts or exercise 
discretion in such accounts except to the extent permitted under the 
Federal securities laws.
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    \43\ Sanderlin.
    \44\ See NASD Rule 3010(b)(1).
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    One commenter suggests that the requirement to maintain a record of 
the dated signature of each named, natural person authorized to 
exercise discretion in an account be amended so as to permit 
``electronic'' signatures.\45\ Given the nature of discretionary 
accounts and FINRA's concern for potential abuse, members are required 
to obtain a ``manual'' dated signature. FINRA has revised the proposed 
rule to reflect this requirement. However, members may choose to 
maintain and preserve such records on electronic storage media 
consistent with the requirements of SEA Rule 17a-4(f).
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    \45\ FSI.
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    Two commenters believe that the requirement that members update the 
account information in compliance with the proposed rule whenever they 
update the account information in the course of their routine and 
customary business or as required by other applicable laws or rules is 
too burdensome.\46\ Alternatively, they argue that the updating 
requirements in the proposed rule should be based on the account 
updating requirements under SEA Rule 17a-3. FINRA believes that to 
promote greater consistency and uniformity of account record 
information, it is necessary that members update the account 
information in compliance with the proposed rule whenever they update 
the information in the course of their routine and customary business 
or as required by other applicable laws or rules. In addition, FINRA 
does not believe that limiting the updating requirements in the 
proposed rule to the account updating requirements under SEA Rule 17a-3 
would achieve this purpose.
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    \46\ ING and FSI.
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    One commenter argues that it may not be possible to obtain the 
required signatures, where retained in the proposed rule, when the 
account record information is updated years after the account has been 
opened.\47\ FINRA disagrees. With respect to all existing customer 
accounts, members currently are required to maintain the signature of 
the member, partner, officer or manager who accepted the account and, 
for discretionary accounts, the signature of each person authorized to 
exercise discretion in the account.
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    \47\ ING.
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    Two commenters request that supplementary materials be used 
sparingly, or not at all, in the proposed books and records rules and 
that any supplementary material be incorporated into the main part of 
the proposed rule wherever possible.\48\ The use of supplementary 
materials is intended to, among other things, enhance the utility of 
the Consolidated FINRA Rulebook. The supplementary materials provide 
clarifications, explanations, interpretations and greater depth. The 
proposed supplementary materials are placed at the end of the proposed 
rule for purposes of clarity and readability, but the materials are in 
fact part of the rule. Further, these commenters seek clarification 
regarding whether the explanation in the supplementary materials 
regarding the terms ``maintain'' and ``preserve'' would be applied to 
other FINRA Rules. As stated in the supplementary materials, the 
explanation regarding these terms is only for purposes of the proposed 
rule.
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    \48\ SIFMA and ING.
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3. Records of Written Customer Complaints (Proposed FINRA Rule 4513)
    One commenter suggests that the proposed rule be amended to further 
clarify that the requirement to keep and preserve complaints that 
relate to activities supervised from the OSJ is limited to a ``customer 
complaint'' as defined in the rule.\49\ This commenter also recommends 
that the definition of ``customer complaint'' precede the other 
provisions in the proposed rule. Another commenter suggests that the 
proposed rule be amended to clarify that it applies only to ``written 
customer complaints that relate to activities subject to regulation by 
FINRA'' so that it excludes complaints related to outside business 
activities.\50\ Additionally, one commenter suggests that use of the 
term ``written customer complaints'' in the proposed rule is not 
sufficiently clear and recommends that the definition of a ``customer 
complaint'' expressly include only a ``written grievance.'' \51\ FINRA, 
however, believes that the scope of the proposed rule and the 
definition of ``customer complaint'' are both appropriate and 
sufficiently clear. Moreover, as discussed above, the proposed rule 
change would clarify that the obligation to keep customer

[[Page 67161]]

complaint records in each OSJ applies only to complaints that relate to 
that office, including complaints that relate to activities supervised 
from that office.
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    \49\ ING.
    \50\ FSI.
    \51\ SIFMA.
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    With respect to the proposed four-year retention period for 
customer complaint records, one commenter recommends maintaining the 
current three-year retention period for customer complaint records.\52\ 
The commenter does not believe that FINRA's four-year routine 
examination cycle for certain members is a sufficient or persuasive 
reason to increase the retention period to four years. The commenter 
also argues that a four-year retention period would be impractical and 
burdensome for members since the majority of retention periods under 
the securities laws are three or six years, and members have already 
established policies and procedures relating to these retention 
periods. Two commenters favor a three or six year retention period for 
customer complaint records.\53\ One commenter supports the proposed 
four-year retention period for customer complaint records, but suggests 
that the retention period be increased to six years consistent with the 
eligibility provisions for customer disputes under FINRA Rule 12206 
(Time Limits) and the six-year retention period for account record 
information.\54\ As discussed above, the proposed four-year retention 
period is tailored to address a specific regulatory need. FINRA does 
not believe that it is necessary to impose a six-year retention period 
to achieve this goal.
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    \52\ SIFMA.
    \53\ ING and FSI.
    \54\ PIABA.
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    One commenter requests that the definition of ``customer 
complaint'' be consistent across all FINRA Rules, particularly when 
considering NASD Rule 3070 (Reporting Requirements) in the context of 
the Consolidated FINRA Rulebook.\55\ FINRA disagrees with this comment. 
NASD Rule 3070 serves a different regulatory purpose than FINRA Rule 
4513, which is why the definitions under these rules are different.
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    \55\ SIFMA.
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4. Authorization Records for Negotiable Instruments Drawn From a 
Customer's Account (Proposed FINRA Rule 4514)
    One commenter believes that the proposed rule should provide 
members the flexibility to develop reasonable policies and 
procedures.\56\ For example, the commenter suggests that members could 
establish a threshold where check requests over a certain dollar amount 
would require written authorization, whereas requests for checks in 
smaller amounts would require only verbal authorization with a follow-
up telephone call or e-mail. In addition, the commenter does not 
believe that members should be required to preserve the written 
authorization for a period of three years following the date it expires 
as it is difficult for them to track an end date. Rather, the commenter 
argues that the written authorization should be preserved for a period 
of three years from the date of the request.
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    \56\ SIFMA.
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    FINRA believes that the written authorization requirement in FINRA 
Rule 4514 (current NASD Rule 3110(g)) is an effective means of 
deterring the fraudulent misuse of negotiable instruments. With respect 
to the retention period, FINRA believes that it is imperative that the 
required written authorization be preserved for a period of three years 
following the date it expires since a customer authorization may remain 
in effect beyond three years from the date of the request.
6. Approval and Documentation of Changes in Account Name or Designation 
(Proposed FINRA Rule 4515)
    One commenter asserts that the requirement in FINRA Rule 4515 to 
document in writing prior to execution of the trade the essential facts 
relied upon by the principal approving any changes in account names or 
designations could have a potentially adverse impact on investors, 
including institutional accounts, by affecting the timing and price of 
orders that were executed or booked erroneously.\57\ The commenter 
believes that to prove compliance with the rule, members would have to 
implement a time-stamp or similar system at considerable expense. The 
commenter recommends that the proposed rule be revised to permit 
approval and documentation after execution of the trade for all 
accounts, but, at a minimum, for institutional accounts. The commenter 
also seeks additional clarification regarding whether ``electronic'' 
approval by a principal would comply with the proposed rule.
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    \57\ SIFMA.
---------------------------------------------------------------------------

    As FINRA (then known as NASD) stated in its response to comments to 
proposed NASD Rule 3110(j), account names and designations are material 
information that must be protected from possible fraudulent activity. 
Requiring a principal to authorize the change and be aware of the 
surrounding facts for the change is a relatively low-cost method of 
protecting this information. Moreover, FINRA believes that where the 
account name or designation is changed prior to execution of the trade, 
the required approval and documentation must take place prior to 
execution. FINRA has revised the proposed rule to further clarify this 
requirement.
    With respect to the permissibility of ``electronic'' approval, 
FINRA believes that the standards set forth in the staff's guidance 
regarding the permissibility of ``electronic'' signatures under NASD 
Rule 3110(c)(1)(C) \58\ are equally applicable to the approval and 
documentation requirements of FINRA Rule 4515.
---------------------------------------------------------------------------

    \58\ See supra note 37.
---------------------------------------------------------------------------

7. Miscellaneous Comments
    One commenter suggests that members be required to tape record 
outgoing telephone calls by registered persons to customers regarding 
their accounts and that members be required to maintain a log of the 
full name of the registered person who made the call.\59\ A second 
commenter recommends that the proposed rules include a provision 
requiring members to provide current and former customers, upon the 
customer's written request, free duplicate records within a reasonable 
time.\60\ The changes recommended by these commenters are outside the 
scope of the proposed changes to the books and records rules. 
Therefore, FINRA is not responding to their recommendations 
specifically herein.
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    \59\ Hamlin.
    \60\ PIABA.
---------------------------------------------------------------------------

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 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 or disapprove 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:

[[Page 67162]]

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-2010-052 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-2010-052. 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 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-2010-052 and should be 
submitted on or before November 22, 2010.
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    \61\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\61\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-27495 Filed 10-29-10; 8:45 am]
BILLING CODE 8011-01-P