Document ID: SEC-2009-0713-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Granting Approval of Proposed Rule Change To Adopt IM-2830-1 ("Breakpoint" Sales) in the Consolidated FINRA Rulebook
Posted Date: 2009-05-29T04:00Z

[Federal Register Volume 74, Number 102 (Friday, May 29, 2009)]
[Notices]
[Pages 25795-25796]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-12443]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59961; File No. SR-FINRA-2009-018]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of Proposed Rule Change To 
Adopt IM-2830-1 (``Breakpoint'' Sales) in the Consolidated FINRA 
Rulebook

May 21, 2009.
    On March 26, 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'') a proposed rule change pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ Notice of the proposal was published for comment in the 
Federal Register on April 20, 2009.\3\ The Commission received no 
comments on the proposed rule change. This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Rel. No. 59754 (Apr. 13, 2009), 74 FR 18007 
(Apr. 20, 2009).
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I. Description of the Proposed Rule Change

    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\4\ FINRA proposed to adopt NASD IM-
2830-1 (``Breakpoint'' Sales), renumbered as FINRA Rule 2342, into the 
Consolidated FINRA Rulebook with the minor changes discussed below. 
NASD IM-2830-1 prohibits sales of mutual fund shares in amounts below a 
``breakpoint'' if such sales are made ``so as to share in the higher 
sales charges.'' In the context of mutual fund sales, a ``breakpoint'' 
is that point at which the sales charge is reduced for quantity 
purchases of fund shares.
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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 
members, 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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    The application of the standard in NASD IM-2830-1 depends on the 
facts and circumstances of particular transactions to determine whether 
a member executed a transaction for the purpose of earning a higher 
sales charge. In 1998, NASD IM-2830-1 was amended to address the use of 
modern portfolio investment strategies that utilize many different 
mutual funds with varying investment objectives.\5\ The amendments 
specify more precisely those facts and circumstances that FINRA will 
consider when examining whether trades that miss breakpoints, but are 
made pursuant to bona fide asset allocation programs, may have violated 
NASD IM-2830-1. In making such determinations, the rule provides that 
FINRA will consider, among other things, whether a member has retained 
records that demonstrate that the trade was executed in accordance with 
a bona fide asset allocation program that the member offers to its 
customers which is designed to meet their diversification needs and 
investment goals, and under which the member discloses to its customers 
that they may not qualify for breakpoint reductions that are otherwise 
available.
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    \5\ See Securities Exchange Act Release No. 40659 (Nov. 10, 
1998), 63 FR 64136 (Nov. 18, 1998) (Order Approving Proposed Rule 
Change Relating to Mutual Fund Breakpoint Sales).
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    Breakpoint issues have been of concern to the regulatory community. 
On December 23, 2002, FINRA issued Special Notice to Members 02-85, 
which reminded firms of their obligation to apply correctly breakpoint 
discounts to front-end sales load mutual fund transactions.\6\ In 2003, 
the staffs of FINRA, the SEC, and the NYSE conducted examinations of 
broker-dealers to assess their ability to deliver breakpoint discounts 
and memorialized the findings of those examinations in a joint 
report.\7\ Concurrently, FINRA staff and industry members formed a 
joint task force to consider issues regarding breakpoints. The joint 
task force issued a report in July 2003 containing recommendations for 
the industry to facilitate the accurate delivery of breakpoint 
discounts.\8\
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    \6\ NASD Special Notice to Members 02-85, NASD Requires 
Immediate Member Firm Action Regarding Mutual Fund Purchases and 
Breakpoint Schedules (December 2002).
    \7\ See Joint SEC/NASD/NYSE Report of Examinations of Broker/
Dealers Regarding Discounts on Front-End Sales Charges on Mutual 
Funds (March 2003), available at http://www.finra.org/Industry/Issues/Breakpoints/P006438.
    \8\ See Report of the Joint NASD/Industry Task Force on 
Breakpoints (July 2003), available at http://www.finra.org/Industry/Issues/Breakpoints/P006422.
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    FINRA proposed to adopt NASD IM-2830-1 as FINRA Rule 2342, stating 
it believes this rule continues to be an important tool in regulating 
members' sales of mutual fund shares to ensure that they are not sold 
in dollar amounts just below breakpoints so as to share in higher sales 
charges. FINRA proposed to eliminate references to ``just and equitable 
principles of trade'' and make other minor changes to the text to 
reflect that it would be a stand-alone rule, rather than Interpretive 
Material, and to eliminate certain redundant text that is inconsistent 
with a rules-based format.
    FINRA stated that it 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.

[[Page 25796]]

II. Discussion and Findings

    After careful review of the proposal, the Commission finds 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.\10\ The 
Commission believes that the proposed rule change will continue to 
provide FINRA with an important tool in regulating members' sales of 
mutual fund shares, consistent with the goals of protecting investors 
and the public interest.
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    \9\ 15 U.S.C. 78o-3(b)(6).
    \10\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition and capital 
formation. See 15 U.S.C. 78c(f).
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III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-FINRA-2009-018) be, and 
hereby is, approved.
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-12443 Filed 5-28-09; 8:45 am]
BILLING CODE 8010-01-P