Document ID: SEC-2009-1694-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Appoving Proposed Rule Change To Adopt NASD Rules 2360 and 2361 Into the Consolidated Rulebook as FINRA Rules 2130 and 2270
Posted Date: 2009-12-01T05:00Z

[Federal Register: December 1, 2009 (Volume 229, Number 74)]
[Notices]               
[Page 62847-62849]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01de09-140]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61059; File No. SR-FINRA-2009-059]

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

November 24, 2009.

I. Introduction

    On September 9, 2009, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') (f/k/a National Association of Securities Dealers, 
Inc. (``NASD'')) filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt NASD Rule 2360 (Approval Procedures for 
Day-Trading Accounts) as FINRA Rule 2130 and to adopt NASD Rule 2361 
(Day-Trading Risk Disclosure Statement) as FINRA Rule 2270 in the 
consolidated FINRA rulebook, with minor changes. The proposed rule 
change was published for comment in the Federal Register on October 8, 
2009.\3\ The Commission received no comments on the proposal. This 
order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 60754 (Oct. 2, 
2009), 74 FR 51886.
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II. Description of the Proposal

    As part of the process of developing a new consolidated rulebook 
(the ``Consolidated FINRA Rulebook''),\4\ FINRA proposed to adopt NASD 
Rules 2360 and 2361 as FINRA Rules 2130 and 2270. NASD Rules 2360 and 
2361 focus on members' obligations to disclose to non-institutional 
customers \5\ the basic risks of engaging in a ``day-trading strategy'' 
and to assess the appropriateness of day-trading strategies for such 
customers. The rules define a ``day-trading strategy'' as ``an overall 
trading strategy characterized by the regular transmission by a 
customer of intra-day orders to effect both purchase and sale 
transactions in the same security or securities.''\6\ NASD Rule 2360 
creates an obligation on members that promote a day-trading strategy 
regarding account-opening approval procedures for non-institutional 
customers. NASD Rule 2361 creates an obligation on such members to 
disclose to non-institutional customers the unique risks of engaging in 
a day-trading strategy.
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    \4\ 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 FINRA Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
    \5\ For purposes of these rules, the term ``non-institutional 
customer'' means a customer that does not qualify as an 
``institutional account'' under NASD Rule 3110(c)(4). See NASD Rule 
2360(f); NASD Rule 2361(d). FINRA is proposing to adopt NASD Rule 
3110(c)(4) as FINRA Rule 4512(c). See Regulatory Notice 08-25 (May 
2008).
    \6\ See NASD Rule 2360(e); NASD Rule 2361(c).
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Approval Procedures for Day-Trading Accounts

    NASD Rule 2360 prohibits a member promoting a day-trading strategy 
from opening an account for a non-institutional customer unless, prior 
to opening the account, the member has furnished the customer with a 
risk disclosure statement (as described in NASD Rule 2361) and has 
either (1) approved the customer's account for a day-trading strategy 
and prepared a record setting forth the basis for the approval; or (2) 
obtained from the customer a written agreement stating that the 
customer does not intend to use the account to engage in a day-trading

[[Page 62848]]

strategy. The rule further requires that, in order to approve a 
customer's account for a day-trading strategy, a member must have 
reasonable grounds to make a determination that a day-trading strategy 
is appropriate for the customer.\7\
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    \7\ In making such determination, the rule requires a member to 
exercise reasonable diligence to ascertain the essential facts 
relative to the customer, including investment objectives, 
investment and trading experience and knowledge, financial 
situation, tax status, employment status, marital status, number of 
dependents and age. See NASD Rule 2360(b).
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    The proposed rule change would transfer NASD Rule 2360 with the 
following minor changes into the Consolidated FINRA Rulebook as FINRA 
Rule 2130. First, the proposed rule change would add Supplementary 
Material to clarify the concept of ``promoting a day-trading 
strategy,'' based on guidance provided in the 2000 FINRA Notice and the 
2000 SEC Approval Order, as follows:

    .01 Promoting a Day-Trading Strategy.
    (a) A member shall be deemed to be ``promoting a day-trading 
strategy'' if it affirmatively endorses a ``day-trading strategy,'' 
as defined in paragraph (e) of this Rule, through advertising, its 
Web site, training seminars or direct outreach programs. For 
example, a member generally shall be deemed to be ``promoting a day-
trading strategy'' if its advertisements address the benefits of 
day-trading, rapid-fire trading, or momentum trading, or encourage 
persons to trade or profit like a professional trader. A member also 
shall be deemed to be ``promoting a day-trading strategy'' if it 
promotes its day-trading services through a third party. Moreover, 
the fact that many of a member's customers are engaging in a day-
trading strategy will be relevant in determining whether a member 
has promoted itself in this way.\8\
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    \8\ To enhance the readability of the rule, the proposed rule 
change would relocate paragraph (g) of Rule 2360 regarding those 
activities that would not constitute ``promoting a day-trading 
strategy,'' as paragraph (b) of this new Supplementary Material .01.

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

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

    Third, the proposed rule change would add Supplementary Material to 
alert members of additional FINRA rules specifically addressing day-
trading, including the rule addressing the Disclosure Statement 
(further discussed below) and rules regarding margin requirements.\9\
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    \9\ See proposed Supplementary Material .03 to proposed FINRA 
Rule 2130.
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    Finally, the proposal would make minor changes to the rule to 
update cross-references and format.

Day-Trading Risk Disclosure Statement

    NASD Rule 2361 requires members that promote a day-trading strategy 
to deliver to their non-institutional customers, prior to opening an 
account for such customers, a risk disclosure statement, as specified 
in paragraph (a) of the rule (the ``Disclosure Statement'').\10\ In 
addition, members that promote a day-trading strategy must post the 
Disclosure Statement on their Web sites in a clear and conspicuous 
manner. The Disclosure Statement includes seven specific points, 
described in more detail in the statement itself, addressing the 
factors that a customer should consider before engaging in day-trading.
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    \10\ The rule provides that, in lieu of the disclosure statement 
specified in the rule, a member may use an alternative disclosure 
statement, provided that it is substantially similar to the 
specified disclosure statement and is approved by FINRA's 
Advertising Department prior to use. See NASD Rule 2361(b).
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    The proposed rule change would transfer NASD Rule 2361 with the 
following minor changes into the Consolidated FINRA Rulebook as FINRA 
Rule 2270.
    First, the proposed rule change would slightly modify the rule's 
existing provisions regarding form of delivery of documents. Currently, 
the rule provides that the disclosure statements may be provided to 
individuals either ``in writing or electronically.'' Because in some 
circumstances electronic documents may be considered a form of 
``writing,'' the proposal would amend the rule to clarify that the 
documents may be provided ``in paper or electronic form.''
    Second, to comport with the proposed revisions to NASD Rule 2360, 
the proposed rule change would add a statement to FINRA Rule 2270 that 
the term ``promoting a day-trading strategy'' shall have the meaning as 
provided in FINRA Rule 2130.
    Third, the proposed rule change would add Supplementary Materials 
similar to those proposed to be added to FINRA Rule 2130, as discussed 
above, to specifically provide that a member may submit advertising 
materials to FINRA's Advertising Department for review and guidance on 
whether the content of the advertisement constitutes ``promoting a day-
trading strategy'' and to alert members of additional FINRA rules 
specifically addressing day-trading.\11\
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    \11\ See proposed Supplementary Material .01 and .02 to proposed 
FINRA Rule 2270.
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    Finally, the proposed rule change would make minor changes to the 
rule to update cross-references and format.

III. Discussion

    Day-trading raises unique investor protection concerns. In general, 
day traders seek to profit from very small movements in the price of a 
security. Such a strategy often requires aggressive trading of a 
brokerage account and the use of strategies including margin trading 
and short selling. As a result, day-trading generally requires a 
significant amount of capital, a sophisticated understanding of 
securities markets and trading techniques, and a high tolerance for 
risk. Even experienced day traders with in-depth knowledge of the 
securities markets may suffer severe and unexpected financial losses.
    Firms that are actively promoting a day-trading strategy should be 
responsible for assessing whether the strategy is appropriate for an 
individual who opens a day-trading account at that firm. These firms 
also should be required to disclose the risks of engaging in a day-
trading strategy to an individual prior to opening an account for that 
individual. NASD Rules 2360 and 2361 were designed to assure that firms 
promoting a day-trading strategy check to make certain that day-trading 
is an appropriate investment strategy for a customer opening a day-
trading account and that the customer is aware of its risks.
    After careful review, the Commission finds that transferring NASD 
Rules 2360 and 2361, with the changes specified above, into the FINRA 
Consolidated Rulebook as FINRA Rules 2130 and 2270 is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities association.\12\ In particular, the 
Commission finds that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\13\ which requires, among 
other things, that FINRA rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and

[[Page 62849]]

equitable principles of trade, and, in general, to protect investors 
and the public interest.
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    \12\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition and capital 
formation. See 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78o-3(b)(6).
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    More specifically, the Commission believes requiring a member firm 
to disclose the risks of day-trading to non-institutional customers 
when the firm promotes a day-trading strategy should help alert 
individuals to the risks associated with a day-trading strategy. In 
addition, requiring a member firm to determine whether a day-trading 
strategy is appropriate for a customer should help to assure that 
individuals who are unable to bear the risks of day-trading, or who 
have investment objectives incompatible with day-trading, are not 
approved for day-trading.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-FINRA-2009-059) be, and it 
hereby is, approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12)
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Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-28613 Filed 11-30-09; 8:45 am]

BILLING CODE 8011-01-P