Document ID: SEC-2009-1171-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2009-08-18T04:00Z

[Federal Register: August 18, 2009 (Volume 74, Number 158)]
[Notices]
[Page 41774-41777]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18au09-89]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60475; File No. SR-FINRA-2009-047]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt
FINRA Rule 3160 (Networking Arrangements Between Members and Financial
Institutions) in the Consolidated FINRA Rulebook

August 11, 2009.
    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 July 21, 2009, 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 2350 (Broker/Dealer Conduct
on the Premises of Financial Institutions) as FINRA Rule 3160 in the
consolidated FINRA rulebook, subject to certain amendments.
    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.

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''),\3\ FINRA is proposing to adopt NASD
Rule 2350 (Broker/Dealer Conduct on the Premises of Financial
Institutions), subject to certain amendments, as FINRA Rule 3160
(Networking Arrangements Between Members and Financial Institutions).
The details of the proposed rule change are described below.
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    \3\ 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 FINRA Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
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NASD Rule 2350
    NASD Rule 2350 governs the activities of broker-dealers on the
premises of financial institutions.\4\ Also known as the ``bank broker-
dealer rule,'' Rule 2350 generally requires broker-dealers that conduct
business on the premises of a financial institution where retail
deposits are taken to: (1) Enter into a written agreement with the
financial institution specifying each party's responsibilities and the
terms of compensation (networking agreement); (2) segregate the
securities activities conducted on the premises of the financial
institution from the retail deposit-taking area; (3) allow access for
inspection and examination by the SEC and FINRA; (4) ensure that
communications with customers clearly identify that the broker-dealer
services are provided by the member; (5) disclose to customers that the
securities products offered by the broker-dealer are not insured like
other banking products; and (6) make reasonable

[[Page 41775]]

efforts at account opening to obtain a customer's written
acknowledgement of the receipt of such disclosure. Rule 2350 applies
only when broker-dealer services are conducted either in person, over
the telephone, or through any other electronic medium, on the premises
of a financial institution where retail deposits are taken, by a
broker-dealer that has a physical presence on those premises.\5\
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    \4\ The term ``financial institution'' includes Federal and
State-chartered banks, savings and loan associations, savings banks,
credit unions, and the service corporations of such institutions
required by law.
    \5\ See Notice to Members 97-89 (December 1997).
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    NASD Rule 2350 was adopted to reduce potential customer confusion
in dealing with broker-dealers that conduct business on the premises of
financial institutions, and to clarify the relationship between a
broker-dealer and a financial institution entering into a networking
agreement.\6\
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    \6\ See Securities Exchange Act Release No. 39294 (November 4,
1997), 62 FR 60542, 60547 (November 10, 1997) (Approval Order).
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The Gramm-Leach Bliley Act and Regulation R
    In 2007, the SEC and the Board of Governors of the Federal Reserve
jointly adopted rules, known as Regulation R,\7\ that implement the
bank broker provisions of the Gramm-Leach Bliley Act of 1999 (``GLB'').
These provisions replaced what had been a blanket exception for banks
from the definition of ``broker'' \8\ under the Exchange Act with
eleven exceptions from the definition of ``broker'' that are codified
in Exchange Act Section 3(a)(4)(B).
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    \7\ See 17 CFR 247.700-781.
    \8\ See 15 U.S.C. 78c(a)(4).
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    Exchange Act Section 3(a)(4)(B)(i) provides an exception from the
definition of ``broker'' for banks that enter into third-party
brokerage (or networking) arrangements with a broker-dealer (the
networking exception). Under this exception, a bank is not considered
to be a broker if it enters into a contractual or other written
arrangement with a registered broker-dealer under which the broker-
dealer offers brokerage services on or off bank premises, subject to
certain conditions (this differs from NASD Rule 2350, which only
applies to broker-dealers offering brokerage services on a financial
institution's premises).\9\ Although this exception generally provides
that a bank may not pay its unregistered employees incentive
compensation for referring a customer to a broker-dealer, it does
permit a bank employee to receive a ``nominal one-time cash fee of a
fixed dollar amount'' that is not contingent on whether the referral
results in a transaction with the broker-dealer.\10\ Further, Rule 701
of Regulation R provides an exemption for referrals of certain
institutional and high net worth clients that may result in the payment
of a higher referral fee (i.e., incentive compensation of more than a
nominal amount) to bank employees and may be contingent on the
occurrence of a securities transaction, subject to certain additional
requirements.\11\
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    \9\ The exceptions in Section 3(a)(4)(B) of the Exchange Act
apply to ``banks'' as defined in Exchange Act Section 3(a)(6). NASD
Rule 2350 addresses ``financial institutions.'' See supra note 4.
    \10\ See 17 CFR 247.700 for definitions of the terms ``nominal
one-time cash fee of a fixed dollar amount,'' ``referral,''
``contingent on whether the referral results in a transaction'' and
``incentive compensation.''
    \11\ See 17 CFR 247.701.
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Proposed FINRA Rule 3160
    FINRA proposes to adopt NASD Rule 2350 into the Consolidated FINRA
Rulebook as FINRA Rule 3160, subject to certain amendments to
streamline the rule and to reflect applicable provisions of GLB and
Regulation R.
    First, the proposed rule change would amend the scope of the rule
to conform to the networking exception in GLB. NASD Rule 2350 applies
only to broker-dealer conduct on the premises of a financial
institution where retail deposits are taken. However, the networking
exception in GLB applies to networking arrangements in which a broker
or dealer offers brokerage services on or off the premises of a
bank.\12\ Accordingly, with the exception of those requirements
addressing the physical setting, proposed FINRA Rule 3160 would apply
to a member that is a party to a networking arrangement with a
financial institution under which the member offers broker-dealer
services, regardless of whether the member is conducting broker-dealer
services on or off the premises of a financial institution.\13\
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    \12\ See 15 U.S.C. 78c(a)(4)(B)(i).
    \13\ The title of the rule would be changed from ``Broker/Dealer
Conduct on the Premises of Financial Institutions'' to ``Networking
Arrangements between Members and Financial Institutions.''
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    Second, the proposed rule change would make certain minor changes
to the provisions addressing setting, as set forth in NASD Rule
2350(c)(1) (Setting). The setting provision establishes the
requirements regarding a member's presence on the premises of a
financial institution. To better align the rule text with the language
in the networking exception in GLB and its associated rules in
Regulation R, proposed FINRA Rule 3160 would provide that a member
conducting broker-dealer services on the premises of a financial
institution: (1) Be clearly identified as the person performing broker-
dealer services and distinguish its broker-dealer services from the
services of the financial institution; (2) conduct its broker-dealer
services in an area that displays clearly the member's name; and (3) to
the extent practicable, maintain its broker-dealer services in a
location physically separate from the routine retail deposit-taking
activities of the financial institution.
    Third, the proposed rule change would amend the provisions
addressing networking agreements, in NASD Rule 2350(c)(2) (Networking
and Brokerage Affiliate Agreements), to reference certain requirements
in GLB and Regulation R regarding written agreements between banks and
broker-dealers. As noted above, Rule 701 of Regulation R allows a bank
employee to receive a contingent referral fee not subject to the
``nominal amount'' restriction, so long as the client referred to the
broker-dealer by the bank employee is an ``institutional'' or ``high
net worth'' customer, as defined in Rule 701, and the other conditions
of the rule are satisfied.
    Rule 701 requires that the written agreement between a bank relying
on the exception from the definition of ``broker'' under Exchange Act
Section (3)(a)(4)(B)(i) and the exemption under Rule 701 for
institutional and high net worth customers and its networking broker-
dealer to include terms that obligate the broker-dealer to take certain
actions.\14\ In particular, the written agreement between the bank and
broker-dealer must require that the broker-dealer:
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    \14\ See 17 CFR 247.701(a)(3). See also Securities Exchange Act
Release No. 56501, 72 FR 56514, 56523 (October 3, 2007) (Definitions
of Terms and Exemptions Relating to the ``Broker'' Exceptions for
Banks). (``Banks and broker-dealers are expected to comply with the
terms of their written networking arrangements. If a bank or broker-
dealer does not comply with the terms of the agreement, however, the
bank would not become a ``broker'' under Section 3(a)(4) of the
Exchange Act or lose its ability to operate under the proposed
exemption.'')
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    (1) Determine that a bank employee is not subject to a statutory
disqualification under Section 3(a)(39) of the Exchange Act, have a
reasonable basis to believe that the customer is a ``high net worth
customer'' or an ``institutional customer'' and conduct a suitability
or sophistication analysis for customers and securities transactions by
customers; \15\
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    \15\ See 17 CFR 247.701(a)(3)(ii)-(iii).
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    (2) Promptly inform the bank if the broker-dealer determines that
the customer referred to the broker-dealer is not a ``high net worth
customer'' or an ``institutional customer,'' as applicable or the bank
employee receiving the referral fee is subject to a statutory

[[Page 41776]]

disqualification under Section 3(a)(39) of the Exchange Act; \16\ and
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    \16\ See 17 CFR 247.701(a)(3)(v).
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    (3) Inform the customer if the customer or the securities
transaction(s) to be conducted by the customer does not meet the
applicable standard set forth in the suitability or sophistication
determination in Rule 701; \17\
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    \17\ See 17 CFR 247.701(a)(3)(iv). See Securities Exchange Act
Release No. 56501, 72 FR 56514, 56526 (October 3, 2007) (re:
Suitability or Sophistication Analysis by Broker-Dealer). The
``sophistication'' analysis is based on the elements of NASD IM-
2310-3 (Suitability Obligations to Institutional Customers). FINRA
is seeking comment on a proposal regarding a consolidated FINRA rule
addressing suitability obligations. See Regulatory Notice 09-25 (May
2009).
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    In addition, the broker-dealer may be contractually obligated to
provide certain disclosures to a referred customer.\18\
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    \18\ See 17 CFR 247.701(b).
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    Proposed FINRA Rule 3160 would clarify that networking agreements
must include all broker-dealer obligations, as applicable, in Rule 701
and that independent of their contractual obligations, members must
comply with all such broker-dealer obligations. In this regard, the
release adopting Regulation R specifically contemplated that FINRA
would adopt a rule to require that broker-dealers comply with the
requirements of Rule 701.\19\
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    \19\ See Securities Exchange Act Release No. 56501, 72 FR 56514,
56528 n.135 (October 3, 2007) (``As stated in the proposal, the
Commission anticipates that it may be necessary for either FINRA or
the Commission to propose a rule that would require broker-dealers
to comply with the written agreements entered into pursuant to Rule
701.'').
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    Next, the proposed rule change would modify the provisions
addressing customer disclosure and acknowledgements, in NASD Rule
2350(c)(3) (Customer Disclosure and Written Acknowledgement), which
require members to make certain disclosures to customers, at or prior
to account opening, regarding securities products, and to make
reasonable efforts to obtain a customer's written acknowledgement of
the receipt of such disclosures at account opening. Such disclosures
include that the securities products are: (1) Not insured by the
Federal Deposit Insurance Corporation; (2) not deposits or other
obligations of the financial institution and not guaranteed by the
financial institution; and (3) subject to investment risk, including
possible loss of the principal invested. The proposal would not
incorporate the written acknowledgement requirement into proposed FINRA
Rule 3160, in light of the application of the rule to networking
arrangements regardless of whether the member is conducting broker-
dealer services on or off the premises of a financial institution and
the obligation that members provide the requisite disclosures orally
and in writing. In this context, FINRA believes that oral and written
disclosure to customers regarding securities products is sufficient and
that requiring a written acknowledgement of receipt from customers is
unnecessary.
    Lastly, the proposed rule change would amend the provisions
addressing communications with the public, in NASD Rule 2350(c)(4)
(Communications with the Public), consistent with the extension of
proposed FINRA Rule 3160 to networking arrangements where the member
conducts broker-dealer services on or off the premises of a financial
institution. NASD Rule 2350(c)(4) requires a member to make the same
disclosures regarding securities products discussed above on
advertisements and sales literature that announce the location of a
financial institution where broker-dealer services are provided by the
member or that are distributed by the member on the premises of a
financial institution. To further reduce potential customer confusion,
proposed FINRA Rule 3160 would extend this requirement to include all
of the member's advertisements and sales literature that promote the
name or services of the financial institution or that are distributed
by the member at any other location where the financial institution is
present or represented.
    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,\20\ 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 will
clarify and streamline the FINRA requirements for broker-dealer
networking arrangements and will serve to better align the FINRA
requirements with GLB and Regulation R.
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    \20\ 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 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-2009-047 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-2009-047. 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

[[Page 41777]]

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-2009-047 and should be submitted on or before September 8,
2009.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-19735 Filed 8-17-09; 8:45 am]

BILLING CODE 8010-01-P