Document ID: SEC-2008-0838-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: National Association of Securities Dealers, Inc. (n/k/a Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-06-20T04:00Z

[Federal Register: June 20, 2008 (Volume 73, Number 120)]
[Notices]               
[Page 35180-35181]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20jn08-104]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57964; File No. SR-NASD-2006-005]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc. (n/k/a Financial Industry Regulatory Authority, Inc.); 
Order Approving Proposed Rule Change and Amendment No. 1 Thereto To 
Expand the Scope of NASD Rule 2440 and Interpretive Material 2440-1 
Relating to Fair Prices and Commissions To Apply to All Securities 
Transactions

June 13, 2008.

I. Introduction

    On January 19, 2006, the National Association of Securities 
Dealers, Inc. (``NASD'') (n/k/a Financial Industry Regulatory 
Authority, Inc. (``FINRA'')) 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 expand the coverage of NASD 
Rule 2440 and Interpretive Material (``IM'') 2440 relating to fair 
prices and commissions, to all securities transactions that involve 
members and their customers.\3\ The proposed rule change was published 
for comment in the Federal Register on April 4, 2006.\4\ The Commission 
received two comment letters regarding the proposal.\5\ NASD

[[Page 35181]]

responded to the comment letters on October 2, 2006.\6\ On May 30, 
2008, FINRA filed Amendment No. 1 to the proposed rule change.\7\ This 
order approves the proposed rule change, as modified by Amendment No. 
1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ IM-2440-1, which was designated as IM-2440 at the time of 
this filing, was proposed to be re-numbered in SR-NASD-2003-141, 
which was filed before this proposal was filed and approved while 
this proposal was pending. See Securities Exchange Act Release No. 
55638 (April 16, 2007), 72 FR 20150 (April 23, 2007) (SR-NASD-2003-
141).
    \4\ See Securities Exchange Act Release No. 53562 (March 29, 
2006), 71 FR 16849.
    \5\ See submission via SEC WebForm from Dan Mayfield, President, 
Sanderlin Securities, dated April 6, 2006 (``First Commenter''); 
letter from Mary C.M. Kuan, Vice President and Assistant General 
Counsel, The Bond Market Association, to Nancy M. Morris, Secretary, 
Commission, dated May 4, 2006 (``Second Commenter'').
    \6\ See letter from Stephanie M. Dumont, Vice President and 
Associate General Counsel, NASD, to Nancy M. Morris, Secretary, 
Commission, dated October 2, 2006 (``NASD letter'').
    \7\ In Amendment No. 1, FINRA clarified that the proposed rule 
change will regulate the charges imposed by members on customers for 
trades that are executed on an exchange, and not the execution 
prices that are obtained on the exchange. Because the Amendment is 
technical in nature, it is not subject to notice and comment.
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II. Description of the Proposed Rule Change

    FINRA proposes to amend NASD Rule 2440, which requires that a 
member charge fair commissions and service charges, and buy or sell 
securities at fair prices, in over-the-counter (``OTC'') securities 
transactions with a customer. FINRA also proposes to amend IM-2440-1, 
which provides further guidance on the commissions and prices that a 
member may charge a customer in an OTC transaction. Specifically, FINRA 
proposes to expand the scope of Rule 2440 and IM-2440-1 to include all 
securities transactions involving members and their customers, 
including transactions between members and their customers that are 
executed on an exchange.\8\
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    \8\ The proposed amendments would only apply to transactions 
between members and their customers, and not to transactions among 
members.
    Rule 2440 and IM-2440-1 do not currently apply to municipal 
securities or exempt securities. This would be unchanged by the 
proposal.
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III. Summary of Comments

    The Commission received two comment letters in response to the 
proposed rule change.\9\ One commenter, using the example of a 
municipal bond that had not sold in several years, stated that the 
proposed rule was problematic for the same reason that the existing 
rule was problematic; specifically, that a mark-up, especially in a 
highly illiquid market, may have little relation to fair pricing.\10\
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    \9\ Supra note 5.
    \10\ First Commenter at 1.
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    The main concern the other commenter raised was which self-
regulatory organization had jurisdiction over the pricing of an 
exchange transaction.\11\ The commenter stated that NASD did not 
explain how Rule 2440 would be applied to exchange transactions.\12\ 
The commenter questioned whether, under the proposal, NASD and the 
exchanges would have overlapping authority over exchange 
transactions,\13\ as well as whether NASD had authority under Section 
15A of the Act to regulate exchange transactions.\14\ The commenter 
noted that the proposal would result in increased surveillance by NASD 
of exchange transactions, which NASD could use to justify increasing 
its regulatory fees for broker-dealers.\15\ Finally, the commenter said 
that, in the event the Commission approves the proposal, it should 
require NASD to enter into Rule 17d-2 agreements with the various 
exchanges to minimize regulatory duplication.\16\
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    \11\ Second Commenter at 1.
    \12\ Id. at 4.
    \13\ Id. at 3.
    \14\ Id.
    \15\ Id.
    \16\ Id. at 4.
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    In response to the comment letters, NASD said that the First 
Commenter's submission was not relevant to the proposed rule change, 
and that the Second Commenter only raised procedural, not substantive, 
issues.\17\ According to NASD, the First Commenter's submission was not 
germane to the proposed rule change, as it dealt with municipal 
securities.\18\ NASD stated that Rule 2440 and IM-2440-1 do not 
currently apply to municipal securities, and will not apply to 
municipal securities under the proposed rule change.\19\
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    \17\ NASD letter at 1, 4.
    \18\ Id. at 1-2.
    \19\ Id. at 2.
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    In response to the Second Commenter, NASD said that its regulatory 
jurisdiction is not limited to OTC trading, but encompasses members' 
conduct on all markets with respect to customer transactions.\20\ As 
such, the application of Rule 2440 and IM-2440-1 should not vary 
according to where the order is ultimately executed.\21\ According to 
NASD, the proposal will not create duplicative regulation, as it was 
not aware of another SRO that had established similar rules relating to 
a member's pricing of transactions with a customer.\22\ NASD stated 
that a Rule 17d-2 agreement was thus inapplicable in this context.\23\ 
Even if another SRO maintained similar rules relating to the pricing of 
customer transactions, however, NASD said that some regulatory overlap 
is inevitable, given the existence of multiple SROs.\24\ NASD also 
asserted that it did not intend to change its current formula for 
calculating regulatory fees for members, and that the proposal would 
not extend to non-members.\25\
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    \20\ Id. at 3.
    \21\ Id.
    \22\ Id.
    \23\ Id. at 4.
    \24\ Id. at 3-4.
    \25\ Id. at 4.
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IV. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change, the 
comment letters, and NASD's response to the comment letters, and finds 
that the proposed rule change is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to a 
national securities association \26\ and, in particular, Section 
15A(b)(6) of the Act,\27\ which requires, among other things, that 
FINRA rules 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. The Commission 
believes that the response to comments addressed the concerns the 
commenters raised. In addition, in Amendment No. 1, FINRA stated that 
the proposed rule change will apply to charges imposed by members on 
customers for trades that are executed on an exchange, and not to the 
execution prices that are obtained on the exchange.
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    \26\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \27\ 15 U.S.C. 78o-3(b)(6).
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    The proposed rule change extends broker-dealer fair pricing 
obligations to all securities transactions between members and their 
customers, except for those transactions involving municipal and exempt 
securities. By extending the requirement to charge fair commissions and 
mark-ups to customers in connection with exchange transactions, in 
addition to OTC transactions, the proposed rule change should enhance 
investor protection.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASD-2006-005), as modified by 
Amendment No. 1 be, and it hereby is, approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
Florence E. Harmon,
Acting Secretary.
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    \28\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E8-13945 Filed 6-19-08; 8:45 am]

BILLING CODE 8010-01-P