Document ID: SEC-2009-0114-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2009-01-27T05:00Z

[Federal Register: January 27, 2009 (Volume 74, Number 16)]
[Notices]               
[Page 4792-4793]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27ja09-71]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59253; File No. SR-FINRA-2008-052]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
the Adoption of FINRA Rule 2140 (Interfering With the Transfer of 
Customer Accounts in the Context of Employment Disputes) in the 
Consolidated FINRA Rulebook

January 15, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 29, 2008, 
Financial Industry Regulatory Authority, Inc. (``FINRA'') (f/k/a 
National Association of Securities Dealers, Inc. [``NASD'']) filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change described in Items I, II, and III below, which items have 
been prepared by FINRA. The Commission is publishing this notice to 
solicit comments from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
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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 without material change NASD 
Interpretive Material 2110-7 (IM-2110-7) (``Interfering With the 
Transfer of Customer Accounts in the Context of Employment Disputes'') 
as a FINRA rule in the consolidated FINRA rulebook. The proposed rule 
change would renumber NASD IM-2110-7 as FINRA Rule 2140 in the 
consolidated FINRA rulebook.

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 these 
statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    As part of the process of developing the new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\2\ FINRA is proposing to adopt 
without material change NASD Interpretive Material 2110-7 (IM-2110-7) 
(``Interfering With the Transfer of Customer Accounts in the Context of 
Employment Disputes'') as a FINRA rule in the Consolidated FINRA 
Rulebook. The proposed rule change would renumber NASD IM-2110-7 as 
FINRA Rule 2140 in the Consolidated FINRA Rulebook.
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    \2\ The current FINRA rulebook includes, in addition to FINRA 
Rules, (1) NASD Rules and (2) 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''). For more 
information about the rulebook consolidation process, see FINRA 
Information Notice, March 12, 2008 (Rulebook Consolidation Process).
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(A) Background
    NASD IM-2110-7 provides that it shall be inconsistent with just and 
equitable principles of trade for a member or person associated with a 
member \3\ to interfere with a customer's request to transfer his or 
her account in connection with the change in employment of the 
customer's registered representative provided that the account is not 
subject to any lien for monies owed by the customer or other bona fide 
claim. Prohibited interference includes, but is not limited to, seeking 
a judicial order or decree that would bar or restrict the submission, 
delivery, or acceptance of a written request from a customer to 
transfer his or her account.\4\
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    \3\ The term ``person associated with a member'' includes, among 
others, registered representatives. See FINRA By-Laws, Article I, 
Paragraph (rr).
    \4\ IM-2110-7 further states that nothing in the Interpretation 
shall affect the operation of NASD Rule 11870 (Customer Account 
Transfer Contracts). Generally, Rule 11870 addresses the transfer of 
securities account assets from one member to another member in 
connection with a customer request. (FINRA intends to review NASD 
Rule 11870 and related interpretive materials as part of a later 
phase in the rulebook consolidation process. Note that the 
Commission has approved FINRA's proposed rule change to rescind, as 
duplicative of Rule 11870, Incorporated NYSE Rule 412 and its 
Interpretation. See Securities Exchange Act Release No. 58533 
(September 12, 2008), 73 FR 54652 (September 22, 2008) [File No. SR-
FINRA-2008-036].
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    FINRA adopted IM-2110-7 to address the practice of delaying 
customer account transfers.\5\ In adopting IM-2110-7, FINRA noted that, 
when a registered representative leaves his or her firm for a position 
at a different firm, clients serviced by the registered representative 
may decide to continue their relationship with the registered 
representative by transferring their accounts to the registered 
representative's new firm. FINRA expressed concern that the registered 
representative's former firm, concerned that its former employee may 
have breached his or her employment contract by sharing client 
information with the new firm or by soliciting clients to transfer 
their accounts to the new firm, sometimes would seek a court order to 
prevent the transfer of accounts. FINRA noted that in a prior Notice to 
Members it had already alerted members that unnecessary delays in 
transferring customer accounts, including delays accompanied by 
attempts to persuade customers not to transfer their accounts, are 
inconsistent with just and equitable principles of trade.\6\ FINRA 
stated that

[[Page 4793]]

obtaining court orders to prevent customers from following a registered 
representative to a different firm is similar to the unfair practice of 
delaying transfers that the earlier Notice had warned about.
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    \5\ See NASD Notice to Members 02-07 (January 2002) (Interfering 
With Customer Account Transfers); see also Securities Exchange Act 
Release No. 45239 (January 4, 2002), 67 FR 1790 (January 14, 2002) 
[File No. SR-NASD-2001-95].
    \6\ NASD Notice to Members 79-7 (February 1979) (Fair Treatment 
of Customer Accounts); see also Securities Exchange Act Release No. 
15194 (September 28, 1978) (Notice to Broker-Dealers Concerning Fair 
Treatment of Customer Accounts).
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    In adopting IM-2110-7, FINRA further stated that the Interpretive 
Material does not affect the ability of member firms to use employment 
agreements to prevent former representatives from soliciting firm 
customers. Members are not prevented from pursuing other remedies they 
may have arising from employment disputes with former registered 
representatives. Rather, IM-2110-7 is limited to restricting a member 
from interfering with a customer's right to transfer his or her account 
once the customer has asked the firm to move the account.
(B) Proposal
    FINRA believes that NASD IM-2110-7 is consistent with the goal of 
investor protection and serves the public interest. FINRA proposes to 
transfer NASD IM-2110-7 with only minor changes into the Consolidated 
FINRA Rulebook. Specifically, IM-2110-7 would be recodified with 
conforming revisions as a stand-alone FINRA rule rather than as 
interpretive material to NASD Rule 2110 (Standards of Commercial Honor 
and Principles of Trade).\7\
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    \7\ The exact revised text of IM-2100-8 is attached as Exhibit 5 
to the proposed rule change and is available at http://
www.finra.org/Industry/Regulation/RuleFilings/2008/P117330. 
Similarly, FINRA has transferred NASD Rule 2110 to the Consolidated 
FINRA Rulebook without change as FINRA Rule 2010. Securities 
Exchange Act Release No. 58643 (September 25, 2008), 73 FR 57174 
(October 1, 2008) [File No. SR-FINRA-2008-028].
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    FINRA will announce the implementation date of the proposed rule 
change in a Regulatory Notice to be published no later than ninety days 
following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\8\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change would 
further the purposes of the Act because as part of the Consolidated 
FINRA Rulebook the proposed rule change will protect investors and the 
public interest by addressing interference with the transfer of 
customer accounts in the context of employment disputes.
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    \8\ 15 U.S.C. 78o-3(b)(6).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

    Within thirty-five 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 ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:
    (A) by order approve such proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml) or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2008-052 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-2008-052. 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 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 inspection 
and copying in the Commission's Public Reference Room, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA and on FINRA's 
Web site at http://www.finra.org/Industry/Regulation/RuleFilings/2008/
P117330. 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-2008-052 and should be submitted on or before February 17, 2009.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-1656 Filed 1-26-09; 8:45 am]

BILLING CODE 8011-01-P