Document ID: SEC-2008-1687-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-12-16T05:00Z

[Federal Register: December 16, 2008 (Volume 73, Number 242)]
[Notices]               
[Page 76429-76431]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16de08-98]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59075; File No. SR-FINRA-2008-055]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Proposed Rule Change To Adopt FINRA Rule 
2114 (Recommendations to Customers in OTC Equity Securities) in the 
Consolidated FINRA Rulebook

December 10, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-5 thereunder,\2\ notice is hereby given that 
on November 4, 2008, 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 been substantially prepared by 
FINRA. 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.
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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 NASD Rule 2315 (Recommendations to 
Customers in OTC Equity Securities) as FINRA Rule 2114 in the 
Consolidated FINRA Rulebook, subject to certain amendments.
    The text of the proposed rule change is available at FINRA, on its 
Web site (http://www.finra.org), and at the Commission's Public 
Reference Room.

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 the new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\3\ FINRA is proposing to adopt in 
the Consolidated FINRA Rulebook NASD Rule 2315 (Recommendations to 
Customers in OTC Equity Securities) with certain modifications.
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    \3\ 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. The Current Rule
    NASD Rule 2315 is intended to address potential fraud and abuse in 
transactions involving securities not listed on an exchange and certain 
other higher risk securities. The rule mandates that a member conduct a 
due diligence review of an issuer's current financial and business 
information before recommending a covered security. The rule 
supplements existing FINRA rules and the federal securities law, 
including suitability obligations and the requirement that any 
recommendation to a customer have a reasonable basis. The rule 
requirements go beyond the basic suitability obligations to ensure that 
a registered representative has, at a minimum, confirmed the existence 
of and reviewed essential information that reveals the financial 
condition and business prospects of these riskier issuers.
    Specifically, the rule requires a member to review ``current 
financial statements'' and ``current material business information'' 
before it recommends the purchase or short sale of those securities 
that are published or quoted in a ``quotation medium'' and are either 
(1) not listed on Nasdaq or a national securities exchange or (2) are 
listed on a regional securities exchange and do not qualify for 
dissemination of transaction reports via the Consolidated Tape. Such 
securities may be more susceptible to fraud and abuse because they 
often are thinly capitalized or lack the profitability, liquidity or 
available

[[Page 76430]]

business and financial information that listing standards require. The 
rule does not apply to recommendations to sell long positions and also 
exempts certain other transactions, including those with an 
``institutional account'' under NASD Rule 3110(c)(4), a ``qualified 
institutional buyer'' under Rule 144A of the Securities Act of 1933 
(``Securities Act''), or a ``qualified purchaser'' under Section 
2(a)(51) of the Investment Company Act of 1940.\4\
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    \4\ Among the other exemptions, the Rule's requirements also do 
not apply to transactions that meet the requirements of Rule 504 of 
Regulation D of the Securities Act; those involving a security of an 
issuer with at least $50 million in total assets and $10 million in 
shareholder's equity; and those involving a security with worldwide 
average daily trading volume value of at least $100,000 during each 
of the six months preceding the recommendation.
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    The rule defines ``current financial statements'' to include 
balance sheets, statements of profit and loss and publicly available 
financial statements and reports. The definition makes certain 
distinctions between foreign private issuers and all other issuers. 
FINRA has interpreted the term ``current material business 
information'' to mean information that is available or relates to 
events that have occurred in the 12 months prior to the recommendation. 
The proposed definition of ``current material business information,'' 
discussed below, would supersede this prior interpretation.\5\
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    \5\ Telephone conference among Philip Shaikun, Associate Vice 
President and Associate General Counsel, FINRA, and Haimera Workie, 
Branch Chief, Securities and Exchange Commission, and Darren Vieira, 
Attorney Advisor, Commission, on December 3, 2008.
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    The required review must be conducted by a Series 24 principal or 
someone supervised by a Series 24 principal. Members are required to 
keep a written record of the information reviewed, the date of the 
review and the name of the person who conducted the review. The 
proposed rule change would add a requirement that, in the event the 
person designated to perform the review is not registered as a Series 
24 principal, the member must document the name of the Series 24 
principal who supervised the designated person. FINRA believes this 
change will help document the Series 24 principal with supervising 
responsibility in association with review.\6\
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    \6\ Telephone conference among Philip Shaikun, FINRA, and 
Haimera Workie, Branch Chief and Darren Vieira, Attorney Advisor, on 
December 3, 2008.
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b. Proposed Changes to the Current Rule
    The proposed rule change would expand the scope of the rule to 
cover a recommendation to buy any ``OTC Equity Security,'' irrespective 
of whether the security is published on a quotation medium. The term 
``OTC Equity Security'' would have the same meaning as in NASD Rule 
6610 (which will be renumbered as FINRA Rule 6420 in the Consolidated 
FINRA Rulebook \7\) and encompasses any non-exchange-listed security 
and certain exchange-listed securities that do not otherwise qualify 
for real-time trade dissemination. FINRA believes that those OTC Equity 
Securities not published on a quotation medium pose the same, if not 
greater, risk of fraud and manipulation that the rule seeks to redress.
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    \7\ See Securities Exchange Act Release No. 58643 (September 25, 
2008), 73 FR 57174 (October 1, 2008) (Order Approving SR-FINRA-2008-
021; SR-FINRA-2008-022; SR-FINRA-2008-026; SR-FINRA-2008-028 and SR-
FINRA-2008-029).
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    The proposed rule change also would add an express definition of 
``current material business information'' to include ``information that 
is ascertainable through the reasonable exercise of professional 
diligence and that a reasonable person would take into account in 
reaching an investment decision.''
    Finally, the proposed rule change would eliminate the exemption 
from the rule for a security with a worldwide average daily trading 
volume value of at least $100,000 during each of the six calendar 
months preceding the recommendation, as well as a related exemption for 
a convertible security where the underlying security satisfies the 
trading volume exemption requirements. FINRA believes that the advent 
of the Internet and the increased number of trading venues has rendered 
that threshold unreliable to screen out less risky securities.
    FINRA will announce the implementation date of the proposed rule 
change in a Regulatory Notice to be published no later than 90 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 the trade, and in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change will help 
protect investors against fraud in the trading of unlisted and certain 
other riskier securities and will clarify and streamline NASD Rule 2315 
for adoption as a FINRA Rule in the new Consolidated FINRA Rulebook. 
NASD Rule 2315 has previously have been found to meet the statutory 
requirements, and FINRA believes that rule has since proven effective 
in achieving the statutory mandates.
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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 or received.

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

    Within 35 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 90 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-2008-055 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-2008-055. This 
file number should be included on the

[[Page 76431]]

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. 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-2008-055 and should be submitted on or before January 6, 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,
Acting Secretary.
 [FR Doc. E8-29696 Filed 12-15-08; 8:45 am]

BILLING CODE 8011-01-P