Document ID: SEC-2014-0864-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2014-05-28T04:00Z

[Federal Register Volume 79, Number 102 (Wednesday, May 28, 2014)]
[Notices]
[Pages 30675-30678]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-12226]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72208; File No. SR-FINRA-2014-023]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Adopt FINRA Rule 2121 (Fair Prices and 
Commissions), Supplementary Material .01 (Mark-Up Policy) and 
Supplementary Material .02 (Additional Mark-Up Policy For Transactions 
in Debt Securities, Except Municipal Securities) in the Consolidated 
FINRA Rulebook

May 21, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 9, 2014, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') 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 been substantially prepared by 
FINRA. FINRA has designated the proposed rule change as constituting a 
``non-controversial'' rule change under paragraph (f)(6) of Rule 19b-4 
under the Act,\3\ which renders the proposal effective upon receipt of 
this filing by the Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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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 current NASD Rule 2440 and Interpretive 
Material (``IM'') 2440-1 and IM-2440-2 as FINRA Rule 2121 (Fair Prices 
and Commissions), Supplementary Material .01 (Mark-Up Policy) and

[[Page 30676]]

Supplementary Material .02 (Additional Mark-Up Policy For Transactions 
in Debt Securities, Except Municipal Securities) without any 
substantive changes. FINRA also proposes to update references and 
cross-references within Supplementary Material .01 and .02, and in 
other FINRA rules accordingly.\4\
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    \4\ The text of FINRA Rule 3170, which contains a cross-
reference to NASD Rule 2440 that will be updated as part of this 
proposal, was approved by the SEC on December 23, 2013. (See 
Securities Exchange Act Release No. 71179 (December 23, 2013); 78 FR 
79542 (December 30, 2013) (Order Approving SR-FINRA-2013-025)). The 
effective date for this rule is December 1, 2014.
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    Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.

* * * * *

Text of Proposed New FINRA Rules (Marked to Show Changes From NASD Rule 
2440, IM-2440-1 and IM-2440-2; NASD Rule 2440, IM-2440-1 and IM-2440-2 
to be Deleted in Their Entirety)

* * * * *

2000. Duties and Conflicts

* * * * *

2100. Transactions With Customers

* * * * *

2120. Commissions, Mark Ups and Charges

[2440.] 2121. Fair Prices and Commissions

    No Change.

Supplementary Material:

[IM-2440-1.] .01 Mark-Up Policy

    The question of fair mark-ups or spreads is one which has been 
raised from the earliest days of the National Association of 
Securities Dealers (``Association''). No definitive answer can be 
given and no interpretation can be all-inclusive for the obvious 
reason that what might be considered fair in one transaction could 
be unfair in another transaction because of different circumstances. 
In 1943, the Association's Board adopted what has become known as 
the ``5% Policy'' to be applied to transactions executed for 
customers. It was based upon studies demonstrating that the large 
majority of customer transactions were effected at a mark-up of 5% 
or less. The Policy has been reviewed by the Board of Governors on 
numerous occasions and each time the Board has reaffirmed the 
philosophy expressed in 1943. Pursuant thereto, and in accordance 
with Article VII, Section 1(a)(ii) of the By-Laws, the Board [has] 
adopted the following interpretation [under Rule 2440.]
    It shall be deemed a violation of Rule [2110] 2010 and Rule 
[2440] 2121 for a member to enter into any transaction with a 
customer in any security at any price not reasonably related to the 
current market price of the security or to charge a commission which 
is not reasonable.
    (a) through (d) No Change.
* * * * *

[IM-2440-2.] .02 Additional Mark-Up Policy For Transactions in Debt 
Securities, Except Municipal Securities \1\

(a) Scope

    [(1) IM-2440-1] Supplementary Material .01 to Rule 2121 applies 
to debt securities transactions, and this [IM-2440-2] Supplementary 
Material .02 supplements the guidance provided in [IM-2440-1] 
Supplementary Material .01.

(b) Prevailing Market Price

    (1) A dealer that is acting in a principal capacity in a 
transaction with a customer and is charging a mark-up or mark-down 
must mark-up or mark-down the transaction from the prevailing market 
price. Presumptively for purposes of this [IM-2440-2] Supplementary 
Material .02, the prevailing market price for a debt security is 
established by referring to the dealer's contemporaneous cost as 
incurred, or contemporaneous proceeds as obtained, consistent with 
[NASD] FINRA pricing rules. (See, e.g., Rule [2320] 5310.)
    (2) through (6) No Change.
    (7) Finally, if information concerning the prevailing market 
price of the subject security cannot be obtained by applying any of 
the above factors, [NASD] FINRA or its members may consider as a 
factor in assessing the prevailing market price of a debt security 
the prices or yields derived from economic models (e.g., discounted 
cash flow models) that take into account measures such as credit 
quality, interest rates, industry sector, time to maturity, call 
provisions and any other embedded options, coupon rate, and face 
value; and consider all applicable pricing terms and conventions 
(e.g., coupon frequency and accrual methods). Such models currently 
may be in use by bond dealers or may be specifically developed by 
regulators for surveillance purposes.
    (8) No Change.
    (9) ``Customer,'' for purposes of Rule [2440] 2121, [IM-2440-1] 
Supplementary Material .01 to Rule 2121 and this [IM-2440-2] 
Supplementary Material .02, shall not include a qualified 
institutional buyer (``QIB'') as defined in Rule 144A under the 
Securities Act of 1933 that is purchasing or selling a non-
investment grade debt security when the dealer has determined, after 
considering the factors set forth in [IM-2310-3] Rule 2111(b), that 
the QIB has the capacity to evaluate independently the investment 
risk and in fact is exercising independent judgment in deciding to 
enter into the transaction. For purposes of Rule [2440] 2121, [IM-
2440-1] Supplementary Material .01 to Rule 2121 and this [IM-2440-2] 
Supplementary Material .02, ``non-investment grade debt security'' 
means a debt security that: (i) If rated by only one nationally 
recognized statistical rating organization (``NRSRO''), is rated 
lower than one of the four highest generic rating categories; (ii) 
if rated by more than one NRSRO, is rated lower than one of the four 
highest generic rating categories by any of the NRSROs; or (iii) if 
unrated, either was analyzed as a non-investment grade debt security 
by the dealer and the dealer retains credit evaluation documentation 
and demonstrates to [NASD] FINRA (using credit evaluation or other 
demonstrable criteria) that the credit quality of the security is, 
in fact, equivalent to a non-investment grade debt security, or was 
initially offered and sold and continues to be offered and sold 
pursuant to an exemption from registration under the Securities Act 
of 1933.

(c) ``Similar'' Securities

    (1) No Change.
    (2) The degree to which a security is ``similar,'' as that term 
is used in this [IM-2440-2] Supplementary Material .02, to the 
subject security may be determined by factors that include but are 
not limited to the following:
    (A) through (D) No Change.
    (3) No Change.

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\1\ No Change.

* * * * *

3000. Supervision and Responsibilities Relating to Associated Persons

3100. Supervisory Responsibilities

* * * * *

3170. Tape Recording of Registered Persons by Certain Firms

(a) Definitions

    (1) through (2) No Change.
    (3) For purposes of this Rule, the term ``disciplinary history'' 
means a finding of a violation by a registered person in the past 
five years by the SEC, a self-regulatory organization, or a foreign 
financial regulatory authority of one or more of the following 
provisions (or comparable foreign provision) or rules or regulations 
thereunder: Violations of the types enumerated in Exchange Act 
Section 15(b)(4)(E); Exchange Act Section 15(c); Securities Act 
Section 17(a); SEA Rules 10b-5 and 15g-1 through 15g-9; NASD Rule 
2110 (Standards of Commercial Honor and Principles of Trade) or 
FINRA Rule 2010 (Standards of Commercial Honor and Principles of 
Trade) (only if the finding of a violation of NASD Rule 2110 or 
FINRA Rule 2010 is for unauthorized trading, churning, conversion, 
material misrepresentations or omissions to a customer, 
frontrunning, trading ahead of research reports or excessive 
markups), FINRA Rule 5280 (Trading Ahead of Research Reports), NASD 
Rule 2120 (Use of Manipulative, Deceptive or Other Fraudulent 
Devices) or FINRA Rule 2020 (Use of Manipulative, Deceptive or Other 
Fraudulent Devices), NASD Rule 2310 (Recommendations to Customers 
(Suitability)) or FINRA Rule 2111 (Suitability), NASD Rule 2330 
(Customers' Securities or Funds) or FINRA Rule 2150 (Improper Use of 
Customers' Securities or Funds; Prohibition Against Guarantees and 
Sharing in Accounts), NASD Rule 2440 or FINRA Rule 2121 (Fair Prices 
and Commissions), NASD Rule 3010 (Supervision) or FINRA Rule 3110 
(Supervision) (failure to supervise only for both NASD Rule 3010 and 
FINRA Rule 3110), NASD Rule 3310 (Publication of Transactions and 
Quotations) or FINRA Rule 5210 (Publication of Transactions and 
Quotations), and NASD Rule 3330 (Payment Designed to Influence 
Market Prices, Other

[[Page 30677]]

than Paid Advertising) or FINRA Rule 5230 (Payments Involving 
Publications that Influence the Market Price of a Security); and 
MSRB Rules G-19, G-30, and G-37(b) & (c).
    (4) through (5) No Change.
    (b) through (d) No Change.
* * * * *

5000. Securities Offering and Trading Standards and Practices

* * * * *

5300. Handling of Customer Orders

5310. Best Execution and Interpositioning

    (a) through (d) No Change.
    (e) The obligations described in paragraphs (a) through (d) 
above exist not only where the member acts as agent for the account 
of its customer but also where transactions are executed as 
principal. Such obligations are distinct from the reasonableness of 
commission rates, markups or markdowns, which are governed by [NASD 
Rule 2440 and IM-2440] Rule 2121 and its Supplementary Material.

Supplementary Material

    .01 through .09 No Change.
* * * * *

6000. Quotation and Transaction Reporting Facilities

* * * * *

6600. OTC Reporting Facility

* * * * *

6630. Applicability of FINRA Rules to Securities Previously Designated 
as PORTAL Securities

    (a) The following are specifically applicable to transactions 
and business activities relating to securities that, prior to 
October 26, 2009, had been designated by The Nasdaq Stock Market LLC 
for inclusion in the PORTAL Market (``PORTAL securities''):
    (1) [NASD Rule 2440, and] FINRA Rules 0130, 0140, 2010, 2020, 
2111, 2121, 2232, 2251, 2261, 2262, 2269, 5310, 8210;
    (2) No Change.
    (3) FINRA Rules 5210, 5220, Supplementary Material to Rule 2121, 
and NASD IM-2420-1[, IM-2440-1, and IM-2440-2].
    (b) through (d) No Change.
* * * * *

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
    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\5\ FINRA is proposing to transfer 
NASD Rule 2440 (Fair Prices and Commissions) into the Consolidated 
FINRA Rulebook as FINRA Rule 2121. NASD Rule 2440 provides that for 
securities transactions in both listed and unlisted securities a member 
that buys for his own account from his customer, or sells for his own 
account to his customer, shall buy or sell at a price that is fair 
taking into consideration all relevant circumstances, including market 
conditions with respect to such security at the time of the 
transaction, the expense involved, and the fact that it is entitled to 
a profit.\6\ Further, if the member acts as agent for its customer in 
any such transaction, that member shall not charge its customer more 
than a fair commission or service charge, taking into consideration all 
relevant circumstances, including market conditions with respect to 
such security at the time of the transaction, the expense of executing 
the order, and the value of any service he may have rendered by reason 
of his experience in and knowledge of such security and the market 
therefor.\7\ FINRA proposes to transfer this rule into the Consolidated 
FINRA Rulebook without any substantive changes.\8\
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    \5\ 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).
    \6\ NASD Rule 2440.
    \7\ NASD Rule 2440.
    \8\ FINRA previously has solicited comment on a proposal to move 
NASD Rule 2440 to the FINRA rules with substantive changes. See 
Regulatory Notice 11-08 (February 2011); see also Regulatory Notice 
13-07 (January 2013). Given that these proposals raised complex 
issues and FINRA would like to proceed with the rulebook 
consolidation process expeditiously, FINRA is proposing in this rule 
change to move Rule 2440 and its Interpretive Materials to the FINRA 
rules without substantive changes, and will defer proposing any 
substantive changes to the rule to a future rule proposal.
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    With NASD Rule 2440, FINRA also is proposing to transfer IM-2440-1 
(Mark-Up Policy) and IM-2440-2 (Additional Mark-Up Policy For 
Transactions in Debt Securities, Except Municipal Securities) as 
Supplementary Material .01 and .02, respectively. IM-2440-1 provides 
additional guidance as to what may constitute a fair price or spread; 
IM-2440-2 provides additional guidance for mark-ups related to 
transactions in debt securities, except municipal securities. As with 
NASD Rule 2440, FINRA proposes to transfer these Interpretive Materials 
without any substantive changes.\9\
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    \9\ In addition to transferring IM-2440-1 to Supplementary 
Material .01, FINRA is changing the introductory language in IM-
2440-1, which describes the adoption of the interpretation set forth 
in that provision, to reflect the historical nature of that 
adoption.
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    FINRA also is proposing to update references and cross-references 
within Supplementary Material .01. Specifically, FINRA is clarifying 
that the reference to ``Association'' in this Supplementary Material is 
to the National Association of Securities Dealers. FINRA is updating 
the reference in this Supplementary Material to NASD Rule 2110, which 
is now FINRA Rule 2010. FINRA is also updating Supplementary Material 
.02 to change references to NASD to FINRA, to update the reference to 
NASD Rule 2320 to FINRA Rule 5310, and to update the reference to NASD 
IM-2310-3 to FINRA Rule 2111(b).
    FINRA also proposes to update other FINRA rules as necessary to 
reflect the transfer of NASD Rule 2440 and its Interpretive Material to 
FINRA Rule 2121 and its Supplementary Material.
    FINRA has filed the proposed rule change for immediate 
effectiveness.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\10\ 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 this proposed rule change, which 
does not substantively change the rule, is consistent with the Act 
because it is being undertaken pursuant to the rulebook consolidation 
process, which is designed to provide additional clarity and regulatory 
efficiency to FINRA members by consolidating the applicable NASD, 
Incorporated NYSE, and FINRA rules into one rule set.
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    \10\ 15 U.S.C. 78o-3(b)(6).

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[[Page 30678]]

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 noted above, this proposal 
will not substantively change either the text or the application of the 
rule and its supporting material.

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 with respect 
to this proposal to transfer NASD Rule 2440 and its supporting 
Interpretive Material into the Consolidated FINRA Rulebook without any 
substantive changes.\11\
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    \11\ But see note 8 supra.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), FINRA provided the Commission with written notice of 
its intention to file the proposed rule change at least five 
business days prior to filing the proposal with the Commission or 
such shorter period as designated by the Commission.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2014-023 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2014-023. 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 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-2014-023 and should be 
submitted on or before June 18, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-12226 Filed 5-27-14; 8:45 am]
BILLING CODE 8011-01-P