Document ID: SEC-2009-1033-0001
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 2262 (Disclosure of Control Relationship With Issuer), 2269 (Disclosure of Participation or Interest in Primary or Secondary Distribution) and 5260 (Prohibition on Transactions, Publication of Quotations)
Posted Date: 2009-07-24T04:00Z

[Federal Register: July 24, 2009 (Volume 74, Number 141)]
[Notices]               
[Page 36787-36790]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24jy09-146]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60330; File No. SR-FINRA-2009-044]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rules 2262 (Disclosure of Control Relationship With Issuer), 2269 
(Disclosure of Participation or Interest in Primary or Secondary 
Distribution) and 5260 (Prohibition on Transactions, Publication of 
Quotations, or Publication of Indications of Interest During Trading 
Halts) in the Consolidated FINRA Rulebook

July 17, 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 June 29, 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 without material change NASD Rules 2240 
(Disclosure of Control Relationship with Issuer), 2250 (Disclosure of 
Participation or Interest in Primary or Secondary Distribution) and 
3340 (Prohibition on Transactions, Publication of Quotations, or 
Publication of Indications of Interest During Trading Halts) as FINRA 
rules in the Consolidated FINRA Rulebook and to delete NYSE Rules 
312(f)(1) through 312(f)(3) and 321.24. The proposed rule change would 
renumber NASD Rules 2240, 2250 and 3340 as FINRA Rules 2262, 2269 and 
5260, respectively, 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 36788]]

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 
without material change NASD Rules 2240 (Disclosure of Control 
Relationship with Issuer), 2250 (Disclosure of Participation or 
Interest in Primary or Secondary Distribution) and 3340 (Prohibition on 
Transactions, Publication of Quotations, or Publication of Indications 
of Interest During Trading Halts) as FINRA rules in the Consolidated 
FINRA Rulebook and to delete NYSE Rules 312(f)(1) through 312(f)(3) and 
321.24. The proposed rule change would renumber NASD Rules 2240, 2250 
and 3340 as FINRA Rules 2262, 2269 and 5260, respectively, in the 
Consolidated FINRA Rulebook.
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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 
member firms, unless such rules have a more limited application by 
their terms. For more information about the rulebook consolidation 
process, see FINRA Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
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(A) Proposed FINRA Rules 2262 and 2269
(1) Background
    Both NASD and NYSE Rules \4\ address disclosures or notifications 
that member firms must provide to customers in connection with certain 
securities transactions.
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    \4\ For convenience, the Incorporated NYSE Rules are referred to 
as the ``NYSE Rules.''
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    NASD Rules 2240 and 2250 set forth requirements that apply to 
transactions with or for a customer in any market.\5\ In short:
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    \5\ NASD Rules 2240 and 2250 (formerly designated, respectively, 
as Sections 13 and 14 of the Rules of Fair Practice) were adopted in 
1939 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). The 
requirements of NASD Rules 2240 and 2250 duplicate almost word-for-
word SEA Rules 15c1-5 (Disclosure of Control) and 15c1-6 (Disclosure 
of Interest in Distributions), respectively. See Securities Exchange 
Act Release No. 1330 (August 4, 1937) (``Release No. 1330'').
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     Disclosure of control relationship: NASD Rule 2240 
provides that a member controlled by, controlling, or under common 
control with the issuer of any security must, before entering into any 
contract with or for a customer for the purchase or sale of such 
security, disclose to the customer the existence of such control; if 
such disclosure is not made in writing, it must be supplemented by 
written disclosure at or before the completion of the transaction; \6\
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    \6\ SEA Rule 15c1-5 defines ``manipulative, deceptive, or other 
fraudulent device or contrivance,'' as used in Section 15(c)(1) of 
the Exchange Act, to include failure to provide the required 
disclosure. Section 15(c)(1) provides, in part, that no broker or 
dealer ``shall make use of the mails or any means or instrumentality 
of interstate commerce to effect any transaction in, or to induce or 
attempt to induce the purchase or sale of, any security * * * 
otherwise than on a national securities exchange of which it is a 
member * * * by means of any manipulative, deceptive, or other 
fraudulent device or contrivance.'' See also Release No. 1330.
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     Disclosure of participation or interest in distribution: 
Rule 2250 provides that if a member is acting as a broker for a 
customer, or is acting for both the customer and some other person, or 
is acting as a dealer and receives or has promise of receiving a fee 
from a customer for advising the customer with respect to securities, 
then the member must, at or before the completion of any transaction 
for or with the customer in any security in the primary or secondary 
distribution of which the member is participating or is otherwise 
financially interested, give the customer written notification of the 
existence of such participation or interest.\7\
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    \7\ Under SEA Rule 15c1-6, like Rule 15c1-5, failure to provide 
the required notification is a fraudulent act. Rule 15c1-6, like 
Rule 15c1-5, is limited by the scope of Section 15(c)(1) of the 
Exchange Act. See supra note 6.
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    NYSE Rules 312(f)(2) and 321.24 address disclosures or 
notifications to customers in somewhat different fashion than NASD 
Rules 2240 and 2250:
     NYSE Rule 312(f)(2) is similar to NASD Rule 2240, except 
that Rule 312(f)(2)'s requirement to disclose the control relationship 
between the issuer and the member is triggered in the context of making 
a recommendation to a customer. Specifically, Rule 312(f)(2) requires 
that any member organization that makes any recommendation of any 
equity or non-investment grade debt security issued by any person 
controlled by or under common control with such member organization 
(other than a Material Associated Person \8\) must promptly disclose to 
the customer the existence and nature of such control at the time of 
recommendation and, if the disclosure is not made in writing, must 
provide it in writing prior to the completion of the transaction; \9\
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    \8\ The indicia for determining status as a Material Associated 
Person are set forth in SEA Rule 17h-1T(a)(2). See NYSE Rule 
312(f)(1).
    \9\ Note that NYSE Rules 312(f)(1), (f)(2) and (f)(3) were, 
prior to revisions adopted in 2006, combined together as former Rule 
312(f). NYSE Rule 312(f)(1) prohibits member organizations, after 
completion of a distribution, from effecting any transaction (except 
on an unsolicited basis) for the account of any customer in the 
equity or non-investment grade debt of the member organization 
itself, any parent entity, or any Material Associated Person. Rule 
312(f)(3), among other things, requires a member corporation with 
publicly held securities outstanding to obtain the NYSE's approval 
to acquire such securities for its own account or the account of any 
corporation controlling, controlled by or under common control with 
the member corporation. The rule provides that the NYSE will approve 
such acquisition unless it determines that such action will impair 
the financial responsibility or operational capability of the member 
corporation. For further discussion of NYSE Rule 312(f), see NYSE 
Information Memo 06-65 (September 11, 2006).
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     NYSE Rule 321.24, like NASD Rule 2250, requires disclosure 
of interest in securities, except that the provisions of Rule 321.24 
apply in contexts involving securities underwritten, distributed or 
sold by a subsidiary of the member. Specifically, Rule 321.24 requires 
that, in connection with any transactions which the member or member 
organization may have had with its customers, or any recommendation 
which the member or member organization may make to its customers, 
involving securities underwritten, distributed or sold by the 
subsidiary, full disclosure must be made by the member or member 
organization to its customers of the interest of the subsidiary in the 
securities at that time.
(2) Proposal
    FINRA proposes to transfer NASD Rules 2240 and 2250 unchanged into 
the Consolidated FINRA Rulebook. Though the substantive requirements of 
both rules are duplicated, almost word-for-word, in SEA Rules 15c1-5 
and 15c1-6, the two NASD rules provide broad protection to customers 
because their scope extends to transactions with or for a customer in 
any market, not just over-the-counter transactions.

[[Page 36789]]

    FINRA proposes to repeal NYSE Rules 312(f)(1) through (f)(3) and 
321.24 because the purposes they serve are addressed by proposed FINRA 
Rules 2262 and 2269, other existing or proposed FINRA rules, and SEC 
rules. With respect to NYSE Rule 312(f)(1), FINRA notes that making a 
recommendation or effecting a transaction such as set forth in the rule 
raises concerns that are within the purview of current anti-
manipulation rules (e.g., FINRA Rule 2020 and SEA Rule 10b-5). Further, 
FINRA notes that customers would be protected by the disclosure that 
the proposed rules require with respect to the conflicts of interest 
that the NYSE rule addresses. Moreover, members must comply with 
FINRA's suitability rule when recommending securities transactions to 
their customers. With respect to NYSE Rule 312(f)(2), FINRA notes that 
the proposed FINRA rules would operate to protect customers without 
regard to whether a member recommends a security to a customer. With 
respect to NYSE Rule 312(f)(3), FINRA believes that the customer 
protections provided by the proposed rules and the anti-manipulation 
rules, in combination, would render the NYSE rule redundant. Further, 
FINRA maintains a set of rules specifically addressing financial 
responsibility requirements for members and is separately proposing to 
adopt consolidated financial responsibility rules.\10\ Lastly, with 
respect to NYSE Rule 321.24, FINRA notes that the disclosure required 
by the proposed FINRA rules is not limited to situations involving 
securities underwritten, distributed or sold by a member's subsidiary.
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    \10\ See, e.g., Securities Exchange Act Release No. 59273 
(January 22, 2009), 74 FR 4992 (January 28, 2009) (Notice of Filing 
File No. SR-FINRA-2008-067).
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(B) Proposed FINRA Rule 5260
(1) Background
    NASD Rule 3340 prohibits members from, directly or indirectly, 
effecting transactions or publishing quotations or indications of 
interest (``IOIs'') in (1) any security with respect to which a trading 
halt is in effect; or (2) any security future when there is a 
regulatory trading halt in effect with respect to the underlying 
security.
    The trading and quoting conduct prohibited by Rule 3340 is 
triggered only when a trading halt is in effect. The rule also provides 
that, in the event that FINRA halts over-the-counter trading and 
quoting in NMS stocks because the Alternative Display Facility 
(``ADF'') or a Trade Reporting Facility (``TRF'') is unable to transmit 
real-time information to the applicable Securities Information 
Processor, members are not prohibited from trading through other 
markets for which trading is not halted.
    NASD Rule 3340 was originally approved by the SEC in 1988.\11\ The 
rule was subsequently amended in 2001, 2002, 2003 and 2006. The 2001 
amendments expressly prohibited members from publishing quotations and 
IOIs during a trading halt (the rule in its form prior to the 2001 
amendments prohibited members from effecting a transaction but did not 
expressly address quotations and IOIs).\12\ The 2002 and 2006 
amendments to Rule 3340 provided that, if the ADF or a TRF were unable 
to transmit real-time information to the applicable Securities 
Information Processor, members would not be prohibited from trading 
through other markets for which trading is not halted.\13\ The 2003 
amendments to the rule added a provision to prohibit member firms, 
including Alternate Trading Systems (``ATSs''), from trading or 
publishing quotes or IOIs in any security future when a regulatory 
trading halt is in effect with respect to the underlying security. 
Specifically, Rule 3340 was amended to apply to a future for a single 
security when a regulatory trading halt is in effect for the underlying 
security or a future on a narrow-based securities index when a 
regulatory trading halt is in effect for one or more underlying 
securities that constitute 50% or more of the market capitalization of 
the index.\14\
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    \11\ NASD Rule 3340 was originally adopted as Section 42 of 
Article III of the Rules of Fair Practice.
    \12\ See Securities Exchange Act Release No. 44390 (June 5, 
2001), 66 FR 31262 (June 11, 2001) (Order Approving File No. SR-
NASD-2000-33).
    \13\ See Securities Exchange Act Release No.46249 (July 24, 
2002), 67 FR 49822 (July 31, 2002) (Order Approving File No. SR-
NASD-2002-97) (approving the 2002 amendments to NASD Rule 3340); 
Securities Exchange Act Release No. 54084 (June 30, 2006), 71 FR 
38935 (July 10, 2006) (Order Approving File No. SR-NASD-2005-087) 
(approving the 2006 amendments to NASD Rule 3340).
    \14\ See Securities Exchange Act Release No. 47259 (January 27, 
2003), 68 FR 5319 (February 3, 2003) (Order Approving File No. SR-
NASD-2001-047).
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    In 2002, FINRA published a set of frequently asked questions in 
response to members' requests for guidance on the application of NASD 
Rule 3340 to particular scenarios.\15\
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    \15\ See NASD Notice to Members 02-82 (December 2002) 
(Frequently Asked Questions Relating to Trading Halts).
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    (2) Proposal
    FINRA believes that Rule 3340 is well understood by its members and 
has proven effective. Accordingly, FINRA proposes that the rule be 
transferred without material change into the Consolidated FINRA 
Rulebook as FINRA Rule 5260.\16\
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    \16\ On December 30, 2008, FINRA filed with the SEC a proposed 
rule change to amend NASD Rule 3340 to create a limited exception to 
permit members to route unsolicited customer orders for execution 
outside the United States while a trading halt is in effect in the 
United States. See SR-FINRA-2008-069. Assuming Commission approval 
of this proposed rule change prior to Commission approval of SR-
FINRA-2008-069, FINRA will amend SR-FINRA-2008-069, as necessary, to 
reflect such approval. Similarly, in the event the Commission 
approves SR-FINRA-2008-069 prior to approval of this proposed rule 
change, FINRA will amend this proposed rule change, as necessary, to 
reflect such approval.
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    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,\17\ 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 would 
further the purposes of the Act because, as part of the Consolidated 
FINRA Rulebook, the proposed rule change will protect investors and the 
public interest by addressing disclosures or notifications in 
connection with certain securities transactions and by addressing 
certain trading and quoting conduct when a trading halt is in effect.
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    \17\ 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

[[Page 36790]]

(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-2009-044 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-2009-044. 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-2009-044 and should be 
submitted on or before August 14, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-17633 Filed 7-23-09; 8:45 am]

BILLING CODE 8010-01-P