Document ID: SEC-2009-1523-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt FINRA Rules 2060 (Use of Information Obtained in Fiduciary Capacity) and 5290 (Order Entry and Execution Practices) in the Consolidated FINRA Rulebook
Posted Date: 2009-10-28T04:00Z

[Federal Register: October 28, 2009 (Volume 74, Number 207)]
[Notices]               
[Page 55598-55600]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28oc09-126]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60850; File No. SR-FINRA-2009-067]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rules 2060 (Use of Information Obtained in Fiduciary Capacity) 
and 5290 (Order Entry and Execution Practices) in the Consolidated 
FINRA Rulebook

October 21, 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 October 6, 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 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 Rules 3120 (Use of Information 
Obtained in Fiduciary Capacity) and 3380 (Order Entry and Execution 
Practices) as FINRA rules in the consolidated FINRA rulebook without 
material change. The proposed rule change would renumber NASD Rule 3120 
as FINRA Rule 2060 and NASD Rule 3380 as FINRA Rule 5290 in the 
consolidated FINRA rulebook.
    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.

[[Page 55599]]

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 
Rules 3120 and 3380 in the Consolidated FINRA Rulebook without material 
change as FINRA Rules 2060 and 5290 respectively.
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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 Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
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Proposed FINRA Rule 2060
    FINRA is proposing to adopt NASD Rule 3120 as FINRA Rule 2060 in 
the Consolidated FINRA Rulebook. NASD Rule 3120 provides that a member 
who receives information as to the ownership of securities while acting 
in the capacity of paying agent, transfer agent, trustee or otherwise 
shall under no circumstances make use of the information for soliciting 
purchases, sales or exchanges except at the request and on behalf of 
the issuer. Rule 3120, formerly designated as Article III, Section 9 of 
the Rules of Fair Practice, was adopted as part of FINRA's original 
rulebook.\4\ The text of the rule has not been amended since its 
inception.
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    \4\ See Certificate of Incorporation and By-Laws, Rules of Fair 
Practice and Code of Procedure for Handling Trade Practice 
Complaints of National Association of Securities Dealers, Inc. 
(August 8, 1939).
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    FINRA believes that the rule serves an important purpose by 
prohibiting a member, while acting in the capacity of paying agent, 
transfer agent, trustee or otherwise, from using certain information it 
obtains about the ownership of securities to solicit purchases, sales 
or exchanges except at the request and on behalf of the issuer.\5\
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    \5\ With respect to the exception allowing use of information at 
the request and on behalf of the issuer, the descriptive analysis of 
the identical precursor provision drafted by the Investment Bankers 
Code Committee in 1934 explains that the exception is provided
    [B]ecause if the issuer desires either to refund or propose an 
exchange to the security holder, he certainly has the right to 
demand from his transfer agent or trustee the list of security 
holders and the issuer thus being in a position to address them 
directly, the investment banker should be able to address them on 
his behalf.
    See Code of Fair Competition for Investment Bankers with a 
Descriptive Analysis of its Fair Practice Provisions and a History 
of its Preparation (1934).
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Proposed FINRA Rule 5290
    FINRA is proposing to adopt NASD Rule 3380 as FINRA Rule 5290 in 
the Consolidated FINRA Rulebook. NASD Rule 3380 prohibits members and 
associated persons from splitting any order into multiple smaller 
orders for execution or any execution into multiple smaller executions 
for transaction reporting for the primary purpose of maximizing a 
monetary or in-kind payment to the member or associated persons as a 
result of the execution of such orders or the transaction reporting of 
such executions.\6\ For purposes of the rule, ``monetary or in-kind 
amount'' is defined to include, but not be limited to, any credits, 
commissions, gratuities, payments for or rebates of fees, or any other 
payments of value to the member or associated person. The SEC approved 
NASD Rule 3380 in February 2006 after notice and comment with no 
subsequent amendments.\7\
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    \6\ This is commonly also referred to as ``trade shredding,'' 
which is the unlawful practice of splitting customer orders for 
securities into multiple smaller orders (e.g., a 1,000 share order 
is split into ten 100 share orders) for the primary purpose of 
maximizing payments or rebates to the member.
    \7\ See Securities Exchange Act Release No. 53371 (February 24, 
2006), 71 FR 11008 (March 3, 2006) (Order Approving File No. SR-
NASD-2005-144).
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    FINRA is proposing to replace ``may'' with ``shall'' in the rule 
text, but believes no substantive changes to this rule are appropriate 
or necessary.\8\ FINRA continues to believe that NASD Rule 3380 is 
necessary and appropriate to deter the distortive practice of trade 
shredding.\9\
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    \8\ See Exhibit 5 (``No member or associated person [may] shall 
engage in conduct that has the intent or effect of splitting any 
order into multiple smaller orders for execution or any execution 
into multiple smaller executions for transaction reporting for the 
primary purpose of maximizing a monetary or in-kind amount to be 
received by the member or associated person as a result of the 
execution of such orders or the transaction reporting of such 
executions'').
    \9\ FINRA also notes that the rule is consistent with the rules 
of other securities self-regulatory organizations regarding trade 
shredding. See, e.g., NYSE Rule 123G (Order Entry Practices) 
approved pursuant to Securities Exchange Act Release No. 52683 
(October 26, 2005), 70 FR 66480 (November 2, 2005) (Order Approving 
File No. SR-NYSE-2005-62).
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    As noted above, 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,\10\ 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 continues to believe that, in certain 
circumstances, a rule prohibiting members from using information about 
ownership of securities to solicit purchases, sales or exchanges except 
at the request and on behalf of the issuer serves to protect investors 
and the public interest. In addition, FINRA continues to believe that a 
rule regarding order entry and execution practices will continue to 
further the goal of preventing manipulative acts and practices by 
prohibiting the potentially distortive practice of trade shredding.
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    \10\ 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

[[Page 55600]]

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-2009-067 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-2009-067. 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 the 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-2009-067 and should be 
submitted on or before November 18, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-25872 Filed 10-27-09; 8:45 am]

BILLING CODE 8011-01-P