Document ID: SEC-2015-1612-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-10-06T04:00Z

[Federal Register Volume 80, Number 193 (Tuesday, October 6, 2015)]
[Notices]
[Pages 60416-60419]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-25329]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76059; File No. SR-FINRA-2015-033]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rule 0150 to Apply FINRA Rule 2121 and its Supplementary Material 
.01 and .02 to Transactions in Exempted Securities That Are Government 
Securities

September 30, 2015.
    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 September 17, 2015, 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. 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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[[Page 60417]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 0150, Application of Rules 
to Exempted Securities Except Municipal Securities, so that FINRA Rule 
2121 and its Supplementary Material .01 and .02, which govern mark-ups 
and commissions, will apply to transactions in exempted securities that 
are government securities.
    Below is the text of the proposed rule change. Proposed new 
language is in italics.
* * * * *

0100. GENERAL STANDARDS

* * * * *

0150. Application of Rules to Exempted Securities Except Municipal 
Securities

    (a) through (c) No Change.
    (d) FINRA Rule 2121 is applicable to transactions in, and business 
activities relating to, exempted securities that are government 
securities.
* * * * *

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
    Rule 0150(c) enumerates the FINRA rules and the rules of the 
National Association of Securities Dealers (``NASD'') that apply to 
transactions in, and business activities relating to, exempted 
securities, except municipal securities, conducted by members and 
associated persons.\3\ Currently, this rule does not include Rule 2121, 
Supplementary Material .01, or Supplementary Material .02, which govern 
mark-ups and commissions (``mark-up rule'').\4\
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    \3\ The terms exempted securities, government securities, and 
municipal securities are defined in Sections 3(a)(12), 3(a)(42), and 
3(a)(29) of the Act, respectively. 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).
    \4\ NASD Rule 2440, IM-2440-1, and IM-2440-2 were recently moved 
to the FINRA rules without any substantive changes, becoming Rule 
2121, Supplementary Material .01, and Supplementary Material .02, 
respectively. See Securities Exchange Act Release No. 72208 (May 21, 
2014), 79 FR 30675 (May 28, 2014) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2014-023).
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    The basis for not applying certain FINRA and NASD rules, including 
the mark-up rules, to exempted securities (except municipal securities) 
is largely historical. Prior to 1993, there were statutory limitations 
on NASD's ability to apply sales practice rules, including the mark-up 
rules, to transactions in exempted securities. Specifically, Section 
15A(f) of the Act imposed limitations on the authority of registered 
securities associations over transactions by a registered broker or 
dealer in an exempted security.\5\ This provision was eliminated as 
part of the Government Securities Act Amendments of 1993 (``GSAA'').\6\ 
Following the GSAA, the NASD proposed to apply certain NASD rules to 
exempted securities other than to municipal securities, although it did 
not propose to apply the mark-up rule then in effect (NASD Rule 2440 
and IM-2440-1) to such securities.\7\ Rather, the NASD stated that it 
intended to review the specific application of these rules to the 
government securities market and that it was developing an 
interpretation of the mark-up rule with respect to exempted securities 
and other debt securities.\8\ The NASD further stated that actions for 
conduct generally encompassed by the NASD mark-up rule in the 
government securities market could be brought under NASD Rule 2110 
(Standards of Commercial Honor and Principles of Trade).\9\ In 2001, 
NASD adopted Rule 0116 (now FINRA Rule 0150), which set forth the NASD 
rules that would apply to transactions in exempted securities, except 
municipal securities.\10\ In 2007, the SEC approved IM-2440-2, which 
set forth a mark-up policy for transactions in debt securities, except 
municipal securities.\11\
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    \5\ Prior to 1986, Section 15A(f) provided that ``[n]othing in 
this section shall be construed to apply with respect to any 
transaction by a broker or dealer in any exempted security.'' See 15 
U.S.C. 78o-3 (historical notes).
    In 1986, the Government Securities Act of 1986 (``GSA'') was 
enacted, which established a federal system for the regulation of 
brokers and dealers who transact business in government securities 
and certain other exempted securities. See Government Securities Act 
of 1986, Pub. L. 99-571, 100 Stat. 3208 (1986). The GSA, among other 
things, amended Section 15A(f) to provide that, ``[e]xcept as 
provided in paragraph (2) of this subsection, nothing in this 
section shall be construed to apply with respect to any transaction 
by a registered broker or dealer in any exempted security.'' See 
Government Securities Act of 1986, Pub. L. 99-571, Sec.  102(g)(1), 
100 Stat. 3208 (1986). Paragraph (f)(2), which was added by the GSA, 
provided that a registered securities association could adopt and 
implement rules with respect to exempted securities to (1) enforce 
members' compliance with the relevant provisions of the Act and 
rules and regulations thereunder, (2) adequately discipline its 
members, (3) inspect members' books and records, and (4) prohibit 
fraudulent, misleading, deceptive and false advertising. Id.
    \6\ See Government Securities Act Amendments of 1993, Pub. L. 
103-202, Sec.  106(b)(1), 107 Stat. 2344 (1993).
    \7\ See Securities Exchange Act Release No. 37588 (August 20, 
1996), 61 FR 44100 (August 27, 1996) (Order Approving File No. SR-
NASD-95-39).
    \8\ See id. at 44104-44105 nn.3-4.
    \9\ See id. at 44113 (noting that Amendment No. 5 to the 
proposal ``clarifies and reminds members that [NASD] rules requiring 
members to adhere to just and equitable principles of trade apply to 
conduct that may violate the Fair Prices and Commissions provision 
and the Mark-Up Policy.'')
    NASD Rule 2110 has since been adopted as FINRA Rule 2010. See 
Securities Exchange Release No. 58643 (September 25, 2008), 73 FR 
57174 (October 1, 2008) (Order Approving File No. SR-FINRA-2008-
028).
    \10\ See Securities Exchange Act Release No. 44631 (July 31, 
2001), 66 FR 41283 (August 7, 2001) (Order Approving File No. SR-
NASD-00-38).
    \11\ See Securities Exchange Act Release No. 55638 (April 16, 
2007), 72 FR 20150 (April 23, 2007) (Order Approving File No. SR-
NASD-2003-141). As noted above, NASD Rule 2440, IM-2440-1, and IM-
2440-2 were recently moved to the FINRA rulebook without any 
substantive changes, becoming FINRA Rule 2121, Supplementary 
Material .01, and Supplementary Material .02, respectively. See 
supra note 4.
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    FINRA is now proposing to amend Rule 0150 so that Rule 2121, along 
with Supplementary Material .01 and .02, would apply to transactions 
in, and business activities relating to, exempted securities that are 
government securities, as defined in Section 3(a)(42) of the Exchange 
Act.\12\ FINRA believes that amending Rule 0150 to apply the mark-up 
rule to transactions in government securities is consistent with the 
GSAA. FINRA also believes that amending Rule 0150 in this manner is 
consistent with NASD's application of certain of its rules, following 
the GSAA, to exempted securities except for municipal securities.\13\
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    \12\ This includes U.S. Treasury securities, as defined in FINRA 
Rule 6710(p). As defined in Rule 6710(p), a U.S. Treasury Security 
means a ``security issued by the U.S. Department of the Treasury to 
fund the operations of the federal government or to retire such 
outstanding securities.''
    \13\ See Securities Exchange Act Release No. 37588 (August 20, 
1996), 61 FR 44100 (August 27, 1996) (Order Approving File No. SR-
NASD-95-39).
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    FINRA also notes the regulatory benefits of applying the mark-up 
rule to

[[Page 60418]]

government securities. Under current rules, if FINRA staff wishes to 
bring a case alleging excessive mark-ups, mark-downs or commissions in 
transactions in exempted securities other than municipal securities, 
such as agency debt securities or U.S. Treasury securities, FINRA must 
bring the case under Rule 2010. Amending Rule 0150 to apply the mark-up 
rule to transactions and business activities relating to government 
securities would provide a specific cause of action under which conduct 
involving such securities could be regulated, in addition to the more 
general provisions of Rule 2010. As such, this proposed rule change 
would clearly signal to members that conduct relating to mark-ups and 
commissions in the market for government securities directly implicates 
the mark-up rule, in addition to Rule 2010. FINRA also notes that the 
mark-up rule provides specific criteria by which members should assess 
debt mark-ups and mark-downs.\14\ Amending Rule 0150 to apply these 
standards to transactions in government securities would provide both 
members and FINRA staff with clearer standards by which to measure the 
propriety of mark-ups, mark-downs and commissions in such transactions.
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    \14\ See Rule 2121, Supplementary Material .02 (Additional Mark-
Up Policy For Transactions in Debt Securities, Except Municipal 
Securities).
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    As a practical matter, FINRA believes that amending Rule 0150 to 
apply to government securities would have little impact upon members. 
Rule 2010 already governs transactions in government securities, which 
would include instances of improper or excessive mark-ups, mark-downs 
or commissions. Although this proposal would apply the more specific 
provisions of the mark-up rule to transactions involving government 
securities, these provisions are already applicable to corporate debt 
securities. Member firms that currently engage in transactions in 
corporate debt will therefore already be familiar with the application 
of the mark-up rule, and FINRA believes that most firms apply 
substantially similar standards to transactions in all fixed income 
securities.
    FINRA also does not believe that this proposal will impact the 
reporting or surveillance of transactions in government securities. 
FINRA currently requires members to report transactions in many 
government securities (i.e., agency debentures and agency asset-backed 
securities) to its Trade Reporting and Compliance Engine (``TRACE''), 
and actively surveils the markets in such securities. For those 
government securities that are not TRACE-eligible, such as U.S. 
Treasury securities, any review of transactions in such securities 
pursuant to the mark-up rule would occur as it does today, e.g., 
through a manual process that is part of FINRA's regular examination 
cycle.
    FINRA notes that, following the end of the comment period for this 
proposal, it will consult with the U.S. Department of the Treasury with 
respect to the application of the mark-up rule to transactions in 
government securities that are U.S. Treasury securities.\15\
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    \15\ FINRA also notes that, pursuant to Section 19(b)(5) of the 
Act, the SEC ``shall consult with and consider the views of the 
Secretary of the Treasury prior to approving a proposed rule filed 
by a registered securities association that primarily concerns 
conduct related to transactions in government securities, except 
where the Commission determines that an emergency exists requiring 
expeditious or summary action and publishes its reasons therefor.'' 
See 15 U.S.C. 78s(b)(5).
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    If the Commission approves the proposed rule change, the proposed 
rule change will be effective upon 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,\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, and Section 15A(b)(9) of the Act,\17\ which requires 
that FINRA rules not impose any burden on competition that is not 
necessary or appropriate. FINRA believes that amending Rule 0150 so 
that the mark-up rule will apply to government securities is consistent 
with the Act, because government securities can be subject to instances 
of excessive mark-ups, and investors in government securities will 
therefore benefit from the specific application of the mark-up rule to 
that market. FINRA also believes that this proposal is consistent with 
both the GSAA and with NASD's subsequent application of certain of its 
rules to exempted securities except for municipal securities. FINRA 
also believes that the proposed rule change is consistent with the Act 
as it will provide FINRA with specific authority over instances of 
excessive mark-ups, mark-downs or commissions relating to government 
securities that may be pursued, in addition to the more general 
provisions of Rule 2010.
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    \16\ 15 U.S.C. 78o-3(b)(6).
    \17\ 15 U.S.C. 78o-3(b)(9).
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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. FINRA notes that the proposed 
rule change is designed to assist FINRA in meeting its regulatory 
obligations by extending the rule governing mark-ups and commissions to 
government securities. FINRA believes that the proposed rule change 
will have minimal impact on members, as FINRA currently requires 
members to report transactions in many government securities, and 
members that charge an excessive mark-up, markdown or commission in 
transactions in exempted securities are already subject to the 
provisions of Rule 2010.

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

    Written comments were solicited in Regulatory Notice 13-07 but none 
were received.\18\
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    \18\ In 2013, FINRA published Regulatory Notice 13-07, which 
sought comment on a proposed rule change that would have amended 
several aspects of the mark-up rule, including amending Rule 0150 to 
apply the mark-up rule to certain government securities. Although 
FINRA received eight comment letters in connection with this 
Regulatory Notice, none of those comment letters addressed the 
proposed rule change that is the subject of this rule filing. A copy 
of the Regulatory Notice is included as Exhibit 2.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 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 or disapprove 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.

[[Page 60419]]

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-2015-033 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2015-033. 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 
10:00 a.m. and 3:00 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-2015-033 and should be 
submitted on or before October 27, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-25329 Filed 10-5-15; 8:45 am]
 BILLING CODE 8011-01-P