Document ID: SEC-2012-1712-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-10-17T04:00Z

[Federal Register Volume 77, Number 201 (Wednesday, October 17, 2012)]
[Notices]
[Pages 63908-63911]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25501]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68037; File No. SR-FINRA-2012-045]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Order Granting Accelerated 
Approval of Proposed Rule Change To Amend NASD Rule 2711 and 
Incorporated NYSE Rule 472 To Conform With the Requirements of the 
Jumpstart Our Business Startups Act and Related Changes

October 11, 2012.

I. Introduction

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 63909]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 28, 2012, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have substantially been prepared by 
FINRA. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons and to approve the 
proposed rule change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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II. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend NASD Rule 2711 (Research Analysts and 
Research Reports) to conform with the requirements of the Jumpstart Our 
Business Startups Act (``JOBS Act'') \3\ and make certain additional 
changes to quiet period restrictions consistent with the policies 
underlying the JOBS Act. The proposed rule change also makes conforming 
amendments to Incorporated NYSE Rule 472 (Communications With The 
Public).
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    \3\ Pub. L. No. 112-106, 126 Stat. 306.
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    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.

III. 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
    The JOBS Act was signed into law on April 5, 2012. Among other 
things, the JOBS Act is intended to help facilitate capital formation 
for ``emerging growth companies'' (``EGCs'') by improving the 
information flow about EGCs to investors. To that end, Section 105(b) 
of the JOBS Act amended Section 15D of the Act to prohibit the 
Commission or any national securities association from adopting or 
maintaining any rule or regulation in connection with an initial public 
offering (``IPO'') of an EGC that:
     Restricts, based on functional role, which associated 
persons of a broker, dealer, or member of a national securities 
association, may arrange for communications between an analyst and a 
potential investor; or

     restricts a securities analyst from participating in any 
communication with the management of an EGC that is also attended by 
any other associated person of a broker, dealer, or member of a 
national securities association whose functional role is other than as 
a securities analyst.

Section 105(d) further prohibits the Commission or any national 
securities association from adopting or maintaining any rule or 
regulation that prohibits a broker or dealer from publishing or 
distributing any research report or making a public appearance, with 
respect to the securities of an EGC either:
     within any prescribed period of time following the IPO 
date of the EGC; or
     within any prescribed period of time prior to the 
expiration date of any agreement between the broker, dealer, or member 
of a national securities association and the EGC or its shareholders 
that restricts or prohibits the sale of securities held by the EGC or 
its shareholders after the IPO date.
    These provisions became effective upon signature of the President 
on April 5, 2012. On August 22, 2012, the SEC's Division of Trading and 
Markets provided guidance on these provisions in the form of Frequently 
Asked Questions (``FAQs'').\4\ FINRA is amending the applicable 
provisions of NASD Rule 2711 to conform with the JOBS Act and SEC staff 
guidance with regard to the applicable JOBS Act provisions.\5\
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    \4\ These FAQs are available at http://www.sec.gov/divisions/marketreg/tmjobsact-researchanalystsfaq.htm.
    \5\ FINRA notes that the SEC staff guidance interprets the JOBS 
Act provisions as applicable to Incorporated NYSE Rule 472 to the 
same extent as NASD Rule 2711. As such, the proposed rule change 
makes corresponding amendments to Incorporated NYSE Rule 472.
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Arranging and Participating in Communications
    NASD Rule 2711(c)(4) \6\ prohibits a research analyst from 
participating ``in efforts to solicit investment banking business,'' 
including any ``pitches'' for investment banking business or other 
communications with companies for the purpose of soliciting investment 
banking business. The FAQs interpret the JOBS Act to now allow, in 
connection with an IPO of an EGC, research analysts to attend meetings 
with issuer management that are also attended by investment banking 
personnel, including pitch meetings, but not ``engage in otherwise 
prohibited conduct in such meetings,'' including ``efforts to solicit 
investment banking business.'' The FAQs further explain that a research 
analyst that attends a pitch meeting ``could, for example, introduce 
themselves, outline their research program and the types of factors 
that the analyst would consider in his or her analysis of a company, 
and ask follow-up questions to better understand a factual statement 
made by the [EGC]'s management.'' Accordingly, the proposed rule change 
creates an exception to NASD Rule 2711(c)(4) to reflect this guidance 
regarding the application of the JOBS Act.\7\
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    \6\ See also Incorporated NYSE Rule 472(b)(5).
    \7\ A corresponding exception is created for Incorporated NYSE 
Rule 472(b)(5).
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    The FAQs state that under Section 105(b) of the JOBS Act, an 
associated person of a broker-dealer, including investment banking 
personnel, may arrange communications between research analysts and 
investors in connection with an IPO of an EGC. As an example, the FAQs 
state that an investment banker could forward a list of clients to a 
research analyst that the analyst could, ``at his or her own discretion 
and with appropriate controls, contact.'' The FAQs acknowledge that 
FINRA does not have a rule that directly prohibits this activity and 
further states that such activity, without more, would not constitute 
conduct by investment banking personnel to directly or indirectly 
direct a research analyst to engage in sales or marketing efforts 
related to an investment banking services transaction, in violation of 
NASD Rule 2711(c)(6).\8\ Accordingly, this JOBS Act provision requires 
no conforming rule change.
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    \8\ See also Incorporated NYSE Rule 427(b)(6)(ii). In 2003 and 
2004, the Commission, self-regulatory organizations, and other 
regulators instituted settled enforcement actions against 12 broker-
dealers to address conflicts of interest between the firms' research 
and investment banking functions (``Global Settlement''). As the 
FAQs point out, firms subject to the Global Settlement should also 
be mindful of the requirements of that court order as they remain in 
place.
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Quiet Periods
    Section 105(d) of the JOBS Act expressly permits publication of 
research and public appearances with

[[Page 63910]]

respect to the securities of an EGC any time after the IPO of an EGC or 
prior to the expiration of any lock up agreement. While the JOBS Act 
refers only to the ``expiration'' of a lock-up agreement, the FAQs note 
a SEC staff belief that Congress intended for the JOBS Act provisions 
to apply equally to the period before a ``waiver'' or ``termination'' 
of a lock-up agreement. Thus, in accordance with SEC staff guidance on 
this JOBS Act provision, the proposed rule change amends NASD Rule 2711 
to eliminate the following quiet periods with respect to an IPO of an 
EGC:
     NASD Rule 2711(f)(1)(A),\9\ which imposes a 40-day quiet 
period after an IPO on a member that acts as a manager or co-manager of 
such IPO;
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    \9\ See also Incorporated NYSE Rule 472(f)(1).
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     NASD Rule 2711(f)(2),\10\ which imposes a 25-day quiet 
period after an IPO on a member that participates as an underwriter or 
dealer (other than manager or co-manager) of such an IPO; and
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    \10\ See also Incorporated NYSE Rule 472(f)(3).
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     NASD Rule 2711(f)(4) \11\ with respect to the 15-day quiet 
period applicable to IPO managers and co-managers prior to the 
expiration, waiver, or termination of a lock-up agreement or any other 
agreement that such member has entered into with a subject company or 
its shareholders that restricts or prohibits the sale of securities 
held by the subject company or its shareholders after the completion of 
an IPO.
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    \11\ See also Incorporated NYSE Rule 472(f)(4).
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    The FAQs note that the JOBS Act makes no reference to quiet periods 
after a secondary offering or during a period of time after expiration, 
termination, or waiver of a lock-up agreement. Accordingly, the FAQs 
note that NASD Rule 2711(f)(1)(B),\12\ which imposes a 10-day quiet 
period on managers and co-managers following a secondary offering and 
the remaining portion of NASD Rule 2711(f)(4) \13\ relating to quiet 
periods after the expiration, termination or waiver of a lock up 
agreement, remain fully in effect. Nonetheless, the FAQs express the 
SEC staff's belief that the policies underlying the JOBS Act are 
equally applicable to quiet periods during these other times. FINRA 
agrees that elimination of those quiet periods would advance the policy 
objectives of the JOBS Act and therefore has proposed to amend NASD 
Rule 2711 accordingly.\14\
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    \12\ See also Incorporated NYSE Rule 472(f)(2).
    \13\ See also Incorporated NYSE Rule 472(f)(4).
    \14\ A corresponding change is made to Incorporated NYSE Rule 
472(f).
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    FINRA has requested the Commission to find good cause pursuant to 
Section 19(b)(2) of the Act \15\ for approving the proposed rule change 
prior to the 30th day after its publication in the Federal Register so 
that FINRA can implement changes to conform with the JOBS Act, which 
has been effective since April 5, 2012. The proposed changes to NASD 
Rules 2711(c)(4), (f)(1)(A), (f)(2), and (f)(4) (with respect to the 
15-day quiet period before the expiration, termination or waiver of a 
lock-up agreement) and the corresponding changes to Incorporated NYSE 
Rule 472 would be effective as of April 5, 2012. FINRA requests that 
the proposed changes to NASD Rules 2711(f)(1)(B) and (f)(4) (with 
respect to the 15-day quiet period after the expiration, termination or 
waiver of a lock-up agreement) and the corresponding changes to 
Incorporated NYSE Rule 472, which further the policies underlying the 
statutory mandates, become effective upon Commission approval.
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    \15\ 15 U.S.C. 78s(b)(2).
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\16\ 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 changes to NASD Rules 
2711(c)(4),\17\ (f)(1)(A),\18\ (f)(2),\19\ and (f)(4) \20\ (with 
respect to the 15-day quiet period before the expiration, termination 
or waiver of a lock-up agreement) and the corresponding changes to 
Incorporated NYSE Rule 472 conform those rules to statutory mandates. 
FINRA also believes that the proposed additional changes to NASD Rules 
2711(f)(1)(B) \21\ and (f)(4) \22\ further the policies underlying the 
statutory mandates by improving information flow to investors with 
respect to EGCs without sacrificing the reliability of research 
reports, as the other objectivity safeguards in NASD Rule 2711 \23\ and 
SEC Regulation AC \24\ are effective and will continue to apply.
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    \16\ 15 U.S.C. 78o-3(b)(6).
    \17\ See also Incorporated NYSE Rule 472(b)(5).
    \18\ See also Incorporated NYSE Rule 472(f)(1).
    \19\ See also Incorporated NYSE Rule 472(f)(3).
    \20\ See also Incorporated NYSE Rule 472(f)(4).
    \21\ See also Incorporated NYSE Rule 472(f)(2).
    \22\ See also Incorporated NYSE Rule 472(f)(4).
    \23\ See also Incorporated NYSE Rule 472.
    \24\ 17 CFR 242.500-05.
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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, as amended by the JOBS 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.

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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2012-045 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-2012-045. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for 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

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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-2012-045 and should be submitted 
on or before November 7, 2012.

V. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful review of the proposed rule change, the Commission 
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.\25\ In particular, the Commission 
finds that the proposed rule change is consistent with Section 
15A(b)(6) of the Act.\26\ The proposal primarily reflects the changes 
imposed on FINRA's rules by Sections 105(b) and 105(d) of the JOBS Act 
and thus is primarily updating the language of NASD Rule 2711 and 
Incorporated NYSE Rule 472 to reflect that reality. The one change not 
expressly mandated by the JOBS Act, removing the quiet periods 
regarding the secondary offering of the securities of EGCs and after 
the expiration, termination, or waiver of a lock-up regarding such 
securities, is consistent with the purpose of the JOBS Act as part of 
an effort to improve communications with investors regarding EGCs. 
Furthermore, other safeguards designed to protect the objectivity of 
research and provide investors with more useful and reliable 
information remain in effect, including Regulation AC and the parts of 
NASD Rule 2711 and Incorporated NYSE Rule 472 not affected by these 
changes.
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    \25\ In approving this rule change, the Commission notes that it 
has considered the proposed rule change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \26\ 15 U.S.C. 78o-3(b)(6).
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    In its filing, FINRA has requested that the Commission find good 
cause for approving the proposed rule change prior to the 30th day 
after publication in the Federal Register. FINRA cites as the reason 
for this request is because the changes conforming to the JOBS Act have 
been effective since April 5, 2012 and the additional proposed changes 
further the policies underlying the applicable JOBS Act provision.
    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\27\ for approving the proposed rule change prior to the 30th 
day after the date of publication of notice in the Federal Register 
because the changes required by the JOBS Act have been in effect since 
April 5, 2012 and the additional proposed changes further the policies 
underlying the applicable JOBS Act provision.
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    \27\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-FINRA-2012-045) be, and hereby is, 
approved on an accelerated basis.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25501 Filed 10-16-12; 8:45 am]
BILLING CODE 8011-01-P