Document ID: SEC-2008-1534-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-11-13T05:00Z

[Federal Register: November 13, 2008 (Volume 73, Number 220)]
[Notices]               
[Page 67237-67238]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13no08-86]                         

[[Page 67237]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58905; File No. SR-FINRA-2008-054]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rule 5280 (Trading Ahead of Research Reports) in the Consolidated 
FINRA Rulebook

November 6, 2008.
    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 October 29, 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 Interpretive Material 2110-4 
(Trading Ahead of Research Reports) as a FINRA rule, subject to certain 
amendments. The proposed rule change would renumber NASD IM-2110-4 as 
FINRA Rule 5280 in the consolidated FINRA Rulebook.
    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 Interpretive Material (``IM'') 
2110-4 (Trading Ahead of Research Reports) 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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    IM-2110-4 states that it is conduct inconsistent with just and 
equitable principles of trade for a member to establish or adjust an 
inventory position in an exchange-listed security traded over-the-
counter or a derivative of such security in anticipation of the 
issuance of a research report on that security. The IM further 
recommends--but does not require--that firms establish policies and 
procedures to develop and implement effective internal controls to 
isolate specific information within research and other relevant 
departments so as to prevent the trading department from utilizing 
advance knowledge of the issuance of research reports. Those members 
that choose not to establish such procedures bear the burden to show 
that changes in inventory positions in advance of research reports were 
not purposeful.\4\
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    \4\ Incorporated NYSE Rule Interpretation 401/01 includes 
aspects similar to IM-2110-4. FINRA deleted that Interpretation as 
part of an earlier filing to transfer NASD Rules 2110 (Standards of 
Commercial Honor and Principles of Trade) and 2120 (Use of 
Manipulative, Deceptive or Other Fraudulent Devices) to the 
Consolidated FINRA Rulebook, as the conduct addressed in the 
Interpretation is subsumed by those rules. See Securities Exchange 
Act Release No. 58643 (September 25, 2008), 73 FR 57174 (October 1, 
2008) (Order Approving SR-FINRA-2008-028).
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    The proposed rule change would amend the IM in three respects. 
First, it would extend the application of the IM to cover inventory 
positions with respect to any security--including debt--or derivative 
thereof, irrespective of whether the security is exchange-listed. FINRA 
believes the purpose of the IM--to prevent the manipulation of the 
supply of a security for the benefit of a firm and to the detriment of 
investors--applies equally to inventory positions in non-exchange-
listed securities.
    Second, the proposed rule change would apply the rule only to 
circumstances where a member establishes or adjusts its inventory based 
on non-public advance knowledge of the content or timing of a research 
report in that security. As such, it would not be a violation of the 
rule for a member to increase or decrease inventory of a security based 
on publicly available information regarding the likely timing of a 
research report. By way of example, when a member's trading desk 
adjusts an inventory position in anticipation of a research report 
because of a publicly discernible trend that a member's report tends to 
follow an earnings announcement, the prohibitions of the rule would not 
be triggered. However, having knowledge of a publicly discernible trend 
is not a viable alternative basis for the member's trading desk to 
adjust its inventory position when the trading desk is also the 
recipient of non-public advance knowledge of the content or timing of a 
research report in that security.
    Finally, the proposal would eliminate the option to establish 
internal controls to manage the flow of information between the 
research and trading departments and instead mandate that firms 
establish policies and procedures reasonably designed to restrict or 
limit the information flow between research department personnel, or 
other persons with knowledge of the content or timing of a research 
report, and trading department personnel, so as to prevent trading 
department personnel from utilizing non-public advance knowledge of the 
issuance or content of a research report for the benefit of the member 
or any other person.
    FINRA believes that a member should have an affirmative obligation 
to manage conflicts of interest in its trading of securities. Moreover, 
this approach is more consistent with existing and proposed rules 
regarding supervision and the requirements of NASD Rule 2711 and NYSE 
Rule 472 to eliminate conflicts involving the publication and 
distribution of research reports.
    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,\5\ which

[[Page 67238]]

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 protect the investing public by preventing firms from 
utilizing non-public advance knowledge of the timing or content of a 
research report to benefit its own trading to the detriment of its 
customers. The proposed rule change further would clarify and 
streamline NASD IM-2110-4 for adoption as a FINRA Rule in the new 
Consolidated FINRA Rulebook. NASD IM-2110-4 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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    \5\ 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-2008-054 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-2008-054. 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 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-2008-054 and should be 
submitted on or before December 4, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-26883 Filed 11-12-08; 8:45 am]

BILLING CODE 8011-01-P