Document ID: SEC-2011-1912-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-12-09T05:00Z

[Federal Register Volume 76, Number 237 (Friday, December 9, 2011)]
[Notices]
[Pages 77034-77036]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-31632]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65890; File No. SR-FINRA-2011-070]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Order Granting Accelerated 
Approval of Proposed Rule Change To Amend FINRA Rule 4512 (Customer 
Account Information)

 December 5, 2011.
    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 December 2, 2011, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') a proposed rule as described in Items I and 
II below, which Items have been prepared by FINRA. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons and is approving the proposed rule change on an 
accelerated basis.
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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 the 
Substance of the Proposed Rule Change

    FINRA proposes to amend FINRA Rule 4512 (Customer Account 
Information) to except institutional accounts from the requirements of 
FINRA Rule 4512(a)(1)(C).
    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, as set forth in sections 
A, B and C below, of the most significant parts of such statements.

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

1. Purpose
    On January 27, 2011, the SEC approved FINRA's proposal to adopt 
rules governing books and records \3\ for the consolidated FINRA 
rulebook.\4\ In April 2011, FINRA issued Regulatory Notice 11-19, which 
announced SEC approval of the new rules and an implementation date of 
December 5, 2011. Following SEC approval of the rules and publication 
of the Regulatory Notice, several firms requested guidance regarding 
the application of FINRA Rule 4512(a)(1)(C) to institutional accounts.
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    \3\ See Securities Exchange Act Release No. 63784 (January 27, 
2011), 76 FR 5850 (February 2, 2011) (Order Approving Proposed Rule 
Change; File No. SR-FINRA-2010-052).
    \4\ 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).
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Servicing Institutional Accounts
    FINRA Rule 4512 requires firms to maintain certain information 
relating to customer accounts, and it is based on existing requirements 
in NASD Rule 3110(c) (Customer Account Information) with several 
changes, as described in Regulatory Notice 11-19. Among other changes, 
FINRA Rule 4512(a)(1)(C) requires firms to maintain the name of the 
associated person, if any, responsible for the account, rather than 
requiring firms to maintain the signature of the registered 
representative introducing the account.\5\ Where a member designates 
multiple individuals as being responsible for an account, the firm is 
required to maintain each of their names and a record indicating the 
scope of their responsibilities with respect to the account.\6\ For 
purposes of

[[Page 77035]]

the rule, it is the member's obligation to determine whether a 
particular individual is responsible for the account based on the scope 
of the individual's activities with respect to that account.
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    \5\ See also SEA Rule 17a-3(a)(17).
    \6\ This provision was added in response to a comment from the 
Securities Industry and Financial Markets Association (``SIFMA'') 
during the rulemaking process. See Securities Exchange Act Release 
No. 63181 (October 26, 2010), 75 FR 67155 (November 1, 2010) (Notice 
of Filing of Proposed Rule Change; File No. SR-FINRA-2010-052). 
Specifically, SIFMA had commented that the original proposal in 
Regulatory Notice 08-25 (May 2008) to maintain the name of a single 
individual as responsible for an account is not practical in all 
cases, such as an institutional account, where multiple individuals 
cover the account.
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    Following discussions with industry representatives, FINRA has 
determined that the application of FINRA Rule 4512(a)(1)(C) to 
institutional accounts \7\ raises significant operational issues in 
light of the manner in which institutional business is conducted. FINRA 
understands that numerous sales and trading associated persons often 
interact with institutional accounts, depending on such factors as the 
scope of the relationship with the institutional account and the 
products involved, and that, for purposes of institutional accounts, 
compliance with the recordkeeping requirements of FINRA Rule 
4512(a)(1)(C) would cause significant operational challenges. 
Accordingly, FINRA proposes to amend the rule to except institutional 
accounts from the recordkeeping requirements of FINRA Rule 
4512(a)(1)(C). Additionally, FINRA proposes to add Supplementary 
Material .05 (Supervision of Accounts) to FINRA Rule 4512 to clarify 
that nothing in paragraph (a)(1)(C) of the rule obviates a member's 
obligation to supervise an account that it services, including 
determining the associated persons responsible for the account and 
ensuring that such persons are appropriately qualified and registered, 
and to comply with the requirements of Rule 2090 (``Know Your 
Customer'') (which becomes effective on July 9, 2012). Moreover, the 
Supplementary Material states that, with respect to a member's 
obligation to supervise an account, it is incumbent upon the member to 
design appropriate mechanisms to determine the associated persons 
responsible for the account, ensure that such persons are appropriately 
qualified and registered, and have the ability to provide such 
information to FINRA or SEC staff upon request.
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    \7\ As defined in FINRA Rule 4512(c), the term ``institutional 
account'' means the account of: (1) A bank, savings and loan 
association, insurance company or registered investment company; (2) 
an investment adviser registered either with the SEC under Section 
203 of the Investment Advisers Act of 1940 or with a state 
securities commission (or any agency or office performing like 
functions); or (3) any other person (whether a natural person, 
corporation, partnership, trust or otherwise) with total assets of 
at least $50 million.
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    FINRA has requested the Commission to find good cause pursuant to 
Section 19(b)(2) of the Act \8\ for approving the proposed rule change 
prior to the 30th day after its publication in the Federal Register so 
that FINRA can implement the proposed rule change on December 5, 2011, 
which coincides with the implementation date for the amendments to the 
FINRA books and records rules.
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    \8\ 15 U.S.C. 78s(b)(2).
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\9\ 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 
further these purposes by providing greater clarity to members 
regarding the application of FINRA Rule 4512(a)(1)(C), which, in turn, 
will assist them in their compliance efforts. The clarification 
regarding FINRA Rule 4512(a)(1)(C) would except institutional accounts 
from the recordkeeping requirements of the provision, while new 
Supplementary Material .05 (Supervision of Accounts) emphasizes a 
member's obligation to supervise all accounts that it services, 
including determining the associated persons responsible for the 
account and ensuring that such persons are appropriately qualified and 
registered, and to comply with the requirements of Rule 2090 (which 
becomes effective on July 9, 2012). The Supplementary Material also 
states that, with respect to a member's obligation to supervise an 
account, it is incumbent upon the member to design appropriate 
mechanisms to determine the associated persons responsible for the 
account, ensure that such persons are appropriately qualified and 
registered, and have the ability to provide such information to FINRA 
or SEC staff upon request.
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    \9\ 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. 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 No. SR-FINRA-2011-070 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2011-070. 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-2011-070 and

[[Page 77036]]

should be submitted on or before December 30, 2011.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    In its filing, FINRA requested that the Commission approve the 
proposal on accelerated basis so that the proposed rule change is 
approved in time to coincide with the implementation date for the 
amendments to the FINRA books and records rules. After careful 
consideration, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\10\
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    \10\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
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    The Commission believes that the proposed rule change is consistent 
with the provisions of Section 15A(b)(6) of the Act,\11\ 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. The Commission believes that the 
proposed rule change is consistent with Section 15A(b)(6) of the Act 
because it will clarify to members that FINRA Rule 4512(a)(1)(C) does 
not apply to institutional accounts, which, in turn, will assist them 
in their compliance efforts. The proposal also includes new .05 of the 
Supplementary Material to FINRA Rule 4512, which emphasizes a member's 
obligation to supervise all accounts that it services, including 
determining the associated persons responsible for the account and 
ensuring that such persons are appropriately qualified and registered, 
and that members servicing institutional accounts continue to have the 
obligation to comply with the requirements of Rule 2090 when that rule 
becomes effective on July 9, 2012. The new provision within the 
Supplementary Material also states that, with respect to a member's 
obligation to supervise an account, it is incumbent upon the member to 
design appropriate mechanisms to determine the associated persons 
responsible for the account, ensure that such persons are appropriately 
qualified and registered, and have the ability to provide such 
information to FINRA or SEC staff upon request. The Commission believes 
that the provisions included in .05 of the Supplementary Material will 
serve to prevent fraudulent and manipulative acts and practices 
relating to institutional accounts and protect institutional investors 
and the public interest by effectively reminding members of their 
supervisory and Know Your Customer obligations for institutional 
accounts.
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    \11\ 15 U.S.C. 78o-3(b)(6).
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    The Commission also finds good cause pursuant to Section 19(b)(2) 
of the Act \12\ for approving the proposed rule change prior to the 
30th day after its publication in the Federal Register. FINRA Rule 
4512, which provides for member recordkeeping obligations relating to 
customer account information, becomes effective on December 5, 2011. 
The instant proposed rule change clarifies the inapplicability of FINRA 
Rule 4512(a)(1)(C) to institutional accounts while advising firms of 
other relevant obligations related to the supervision of institutional 
accounts and the obligations related to complying with FINRA Rule 2090. 
Accelerating approval of the instant proposed rule change will enable 
FINRA to have the proposed rule change's effectiveness coincide with 
the effectiveness of FINRA's revised books and records rules, including 
FINRA Rule 4512, on December 5, 2011.
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    \12\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-FINRA-2011-070) be, and 
hereby is, approved.
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    \13\ Id.

    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. 2011-31632 Filed 12-8-11; 8:45 am]
BILLING CODE 8011-01-P