Document ID: SEC-2009-1338-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2009-09-21T04:00Z

[Federal Register: September 21, 2009 (Volume 74, Number 181)]
[Notices]               
[Page 48107-48110]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21se09-83]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60669; File No. SR-FINRA-2009-058]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change to Adopt 
FINRA Rule 2232 (Customer Confirmations) in the Consolidated FINRA 
Rulebook and to Delete NASD Rule 2230, NASD IM-2110-6 and Incorporated 
NYSE Rule 409(f)

September 14, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``SEA'' or ``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on August 24, 2009, the Financial Industry Regulatory 
Authority, Inc. (``FINRA'') (f/k/a National Association of Securities

[[Page 48108]]

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 a customer confirmation rule for 
purposes of the consolidated FINRA rulebook (``Consolidated FINRA 
Rulebook'').\3\ In particular, FINRA proposes to adopt FINRA Rule 2232 
(Customer Confirmations) and to delete NASD Rule 2230, NASD IM-2110-6 
and Incorporated NYSE Rule 409(f).
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    \3\ See infra note 4.
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    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 FINRA 
Rulebook,\4\ FINRA is proposing to adopt a new, consolidated customer 
confirmation rule. FINRA proposes to adopt FINRA Rule 2232 (Customer 
Confirmations) and to delete NASD Rule 2230, NASD IM-2110-6 and NYSE 
Rule 409(f).\5\
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    \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 
member firms, 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).
    \5\ For convenience, the Incorporated NYSE Rules are referred to 
as the ``NYSE Rules.''
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(A) Background
    NASD and NYSE Rules set forth certain basic requirements with 
respect to confirmations of transactions with customers.\6\
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    \6\ The proposed rule change addresses basic customer 
confirmation requirements. FINRA Rules separately set forth 
confirmation requirements that are specific to certain types of 
financial products, such as the requirements set forth in FINRA Rule 
2360 (adopted as part of FINRA's set of consolidated rules 
addressing index warrants, options and security futures). See 
Securities Exchange Act Release No. 58932 (November 12, 2008), 73 FR 
69696 (November 19, 2008) (Approval Order).
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(1) NASD Rule 2230
    NASD Rule 2230 provides that a member at or before the completion 
of each transaction\7\ with a customer shall give or send to the 
customer written notification (i.e., confirmation) disclosing: (a) 
whether the member is acting as a broker for the customer, as a dealer 
for its own account, as a broker for some other person, or as a broker 
for both the customer and some other person; and (b) in any case in 
which the member is acting as a broker for the customer or for both the 
customer and some other person, either the name of the person from whom 
the security was purchased or to whom it was sold for the customer and 
the date and time when the transaction took place or the fact that such 
information will be furnished upon the request of the customer, and the 
source and amount of any commission or other remuneration received or 
to be received by the member in connection with the transaction.
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    \7\ SEA Rule 10b-10(d)(2) states that the term ``completion of 
the transaction'' has the meaning set forth in SEA Rule 15c1-1. The 
Rule 15c1-1 definition of ``completion of the transaction'' depends 
on whether the customer is purchasing or selling the security, the 
time when payment is made and the status of the custody/delivery of 
the security.
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    When NASD Rule 2230 was adopted in 1939\8\ its requirements 
essentially duplicated those set forth in SEA Rule 15c1-4 as originally 
adopted by the SEC. The primary difference between the two rules was 
that the scope of Rule 15c1-4 was restricted to over-the-counter 
transactions while the NASD rule by its terms extended to all member 
transactions with customers.\9\ In 1977, the SEC rescinded Rule 15c1-4 
and adopted SEA Rule 10b-10, indicating that it would apply 
``regardless of the manner in which a broker-dealer conducts its 
business or the marketplace where transactions are effected.''\10\ 
Since then, the SEC has amended Rule 10b-10 several times.\11\
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    \8\ Rule 2230, formerly designated as Section 12 of the Rules of 
Fair Practice, was adopted as part of FINRA's original rulebook. 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).
    \9\ See Securities Exchange Act Release No. 1330 (August 4, 
1937).
    \10\ See Securities Exchange Act Release No. 13508 (May 5, 1977) 
(Securities Confirmations: Final Rule).
    \11\ See, e.g., Securities Exchange Act Release No. 19687 (April 
18, 1983), 48 FR 17583 (April 25, 1983) (Securities Confirmations: 
Final Rule Amendments) (requiring, among things, disclosure to 
investors of certain yield and call feature information in 
connection with transactions in debt securities); Securities 
Exchange Act Release No. 34962 (November 10, 1994), 59 FR 59612 
(November 17, 1994) (Confirmation of Transactions: Final Rule 
Amendments) (generally requiring, among others, disclosure if a debt 
security is not rated by a nationally recognized statistical rating 
organization, disclosure if a broker-dealer is not a member of the 
Securities Investor Protection Corporation, and disclosure with 
respect to the availability of information with respect to 
transactions in collateralized debt securities); Securities Exchange 
Act Release No. 46471 (September 6, 2002), 67 FR 58302 (September 
13, 2002) (Confirmation Requirements for Transactions of Security 
Futures Products Effected in Futures Accounts: Final Rule 
Amendments) (adopting, among others, requirements regarding 
transactions in securities futures products); Securities Exchange 
Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) 
(Regulation NMS: Final Rules and Amendments) (making conforming 
amendments to Rule 10b-10 in connection with the adoption of 
Regulation NMS).
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    (2) NASD IM-2110-6
    NASD IM-2110-6 requires that any member providing a customer 
confirmation pursuant to SEA Rule 10b-10 in connection with any 
transaction in callable common stock\12\ must disclose on the 
confirmation that the security is callable common stock and that a 
customer may contact the member for more information concerning the 
security. When IM-2110-6 was adopted in 2000, FINRA noted that an 
investor purchasing callable common stock is subject to unique risks 
not typically associated with ownership of common stock, even when such 
stock is called away at a premium.\13\ FINRA also stated that the 
ability of an issuer's common stock to be called away from a 
shareholder generally is a material fact to an investor. Accordingly, 
in adopting the IM, FINRA stated that high standards of commercial 
honor and just and equitable principles of trade would require members 
to provide the

[[Page 48109]]

disclosures as set forth in the IM. FINRA further emphasized that the 
disclosure of the call feature on the confirmation in no way relieves a 
member of its obligation to consider the callable nature of the 
security when complying with any applicable suitability obligations.
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    \12\ Callable common stock is stock that is subject to being 
called away from a shareholder, either by the issuer or by a third 
party.
    \13\ See Securities Exchange Act Release No. 42761 (May 5, 
2000), 65 FR 30459 (May 11, 2000) (Approval Order). See also Notice 
to Members 00-33 (May 2000) (Callable Common Stock).
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(3) NYSE Rule 409(f)
    NYSE Rule 409(f) requires that confirmation of all transactions in 
securities admitted to dealings on the NYSE--whether over-the-counter 
or on an exchange--sent by members or member organizations to their 
customers, must clearly set forth with a suitable legend the settlement 
date of each transaction. The rule provides that this requirement also 
applies to confirmations or reports from an organization to a 
correspondent, but does not apply to reports made by floor brokers to 
the member organization from which the orders were received. The rule 
further contains a general cross-reference instructing members to refer 
to SEA Rule 10b-10.
    (B) Proposal
    The proposed rule change would delete current NASD Rule 2230 from 
the FINRA rulebook and replace it with proposed FINRA Rule 2232, which 
would streamline and combine basic customer confirmation requirements 
in the NASD and NYSE Rules. Specifically:
     Proposed FINRA Rule 2232 would provide that confirmations 
must be given or sent to customers in conformity with the requirements 
of SEA Rule 10b-10. FINRA believes that incorporating by reference the 
requirements of Rule 10b-10, as opposed to replicating the SEC rule's 
detailed requirements in FINRA's rule, would make the proposed rule 
clear and serve the interests of regulatory efficiency.
     The proposed rule change would delete NASD IM-2110-6 from 
the FINRA rulebook and transfer its requirements to proposed FINRA Rule 
2232. Proposed FINRA Rule 2232 would expand the coverage of those 
requirements to make clear that the requirement to disclose that the 
security is callable (and that further information is available from 
the member) applies to any callable equity security,\14\ not just 
callable common stock. FINRA believes that, from the standpoint of 
investor protection, this change is necessary to ensure that the rule 
covers, for instance, callable preferred stock.\15\
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    \14\ Exchange Act Section 3(a)(11) defines the term ``equity 
security'' to include, among others, ``any stock or similar 
security.''
    \15\ FINRA notes that SEA Rule 10b-10(a)(4) requires that, in 
the case of any transaction in a debt security subject to redemption 
before maturity, the confirmation must include a statement to the 
effect that the debt security may be redeemed in whole or in part 
before maturity, that such a redemption could affect the yield 
represented and that additional information is available upon 
request.
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     The requirement in NYSE Rule 409(f) to disclose the 
settlement date of the transaction would be transferred to the new 
rule, with two changes. First, consistent with FINRA's investor 
protection mission, the requirement to disclose the settlement date of 
the transaction would include all transactions in securities, not just 
NYSE-listed securities. Second, because the proposed rule would address 
customer confirmations, the elements of the NYSE rule addressing 
member-to-member communications would, consistent with the parameters 
of SEA Rule 10b-10, be deleted.
    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,\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. FINRA believes that the proposed rule change will 
further the purposes of the Act because, as part of the FINRA rulebook 
consolidation process, the proposed rule change would streamline and 
reorganize existing rules that govern basic customer confirmation 
requirements. Further, the proposed rule change would provide greater 
regulatory clarity with respect to a member's customer confirmation 
obligations.
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    \16\ 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-2009-058 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-2009-058. 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

[[Page 48110]]

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-2009-058 and should be submitted on or before October 13, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Florence E. Harmon,
Deputy Secretary.
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    \17\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E9-22513 Filed 9-18-09; 8:45 am]

BILLING CODE 8010-01-P