Document ID: SEC-2008-1070-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-08-04T04:00Z

[Federal Register: August 4, 2008 (Volume 73, Number 150)]
[Notices]               
[Page 45258-45260]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04au08-77]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58244; File No. SR-FINRA-2008-029]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change as Modified 
by Amendment No. 1 Thereto To Repeal NASD Rule 1130 and Incorporated 
NYSE Rules 405A, 440F, 440G and 477 as Part of the Process of 
Developing the Consolidated FINRA Rulebook

July 29, 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 June 16, 2008, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by FINRA. On July 15, 
2008, FINRA filed Amendment No. 1 to the proposed rule change. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, 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 proposes a rule change to repeal NASD Rule 1130 (Reliance on 
Current Membership List) and incorporated NYSE Rules 405A (Non-Managed 
Fee-Based Account Programs--Disclosure and Monitoring), 440F (Public 
Short Sale Transactions Effected on the Exchange), 440G (Transactions 
in Stocks and Warrants for the Accounts of Members, Allied Members and 
Member Organizations) and 477 (Retention of Jurisdiction--Failure to 
Cooperate) as part of the process of developing the consolidated FINRA 
rulebook. The text of the proposed rule change is available at FINRA, 
the Commission's Public Reference Room, and http://www.finra.org.

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
Background
    As part of the process of developing the new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\3\ FINRA is proposing a rule change 
to repeal NASD Rule 1130 (Reliance on Current Membership List) and 
incorporated NYSE Rules 405A (Non-Managed Fee-Based Account Programs--
Disclosure and Monitoring), 440F (Public Short Sale Transactions

[[Page 45259]]

Effected on the Exchange), 440G (Transactions in Stocks and Warrants 
for the Accounts of Members, Allied Members and Member Organizations) 
and 477 (Retention of Jurisdiction--Failure to Cooperate) to eliminate 
duplicative provisions and remove requirements that are specific to the 
NYSE marketplace.
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    \3\ The current FINRA rulebook consists of two sets of rules: 
(1) NASD Rules and (2) rules incorporated from NYSE (``Incorporated 
NYSE Rules'') (together referred to as the ``Transitional 
Rulebook''). The Incorporated NYSE Rules apply only to those members 
of FINRA that are also members of the NYSE (``Dual Members''). Dual 
Members also must comply with NASD Rules. From more information 
about the rulebook consolidation process, see FINRA Information 
Notice, March 12, 2008 (``Rulebook Consolidation Process'').
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Proposal
NASD Rule 1130 (Reliance on Current Membership List)
    The proposed rule change would repeal NASD Rule 1130, which 
provides that the Secretary of FINRA shall furnish every member a list 
of all members of FINRA, and shall currently keep every member advised, 
by amendments to the list or otherwise, of all new members and of all 
suspensions and cancellations of membership. The rule also requires 
that each member provide such information to its offices and associated 
persons as appropriate, and entitles members to rely on the information 
provided by FINRA for the purpose of complying with the rules.
    FINRA is proposing to repeal NASD Rule 1130 because the requirement 
to furnish a membership list is substantially similar to provisions in 
Article IV, Section 4 of the FINRA By-Laws, which require the Secretary 
of FINRA to keep a currently accurate and complete membership roll, 
which shall at all times be available to all members, governmental 
authorities and the general public.\4\
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    \4\ Additionally, information about membership suspensions and 
cancellations is available to firms and the public through 
BrokerCheck and announced to members in a monthly report of 
disciplinary actions.
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NYSE Rule 405A (Non-Managed Fee-Based Account Programs--Disclosure and 
Monitoring)
    The proposed rule change would repeal Incorporated NYSE Rule 405A, 
which prescribes certain requirements in connection with placing a 
customer in a fee-based brokerage account. Among other things, the rule 
requires a member to provide the customer, in advance of opening such 
an account, a detailed disclosure document that must include, at a 
minimum: A description of the services provided, eligible assets, fees 
charged, an explanation of how costs will be computed and/or the 
provision of cost estimates based on hypothetical portfolios, any 
conditions or restrictions imposed and a summary of the program's 
advantages and disadvantages. The rule also requires that the member 
make a determination that the program is appropriate for the customer, 
as well as ongoing monitoring of transactional activity by customers 
and procedures to follow up with customers whose account activity may 
be inappropriate in the context of the fee-based program.
    Incorporated NYSE Rule 405A essentially codifies, in a more 
prescriptive fashion, guidance regarding the applicability of NASD Rule 
2110 (Standards of Commercial Honor and Principles of Trade) to fee-
based programs set forth in NASD Notice to Members 03-68. In general, 
the Notice requires members to have reasonable grounds to believe that 
a fee-based account is appropriate for a particular customer, taking 
into account the services provided, cost and customer preferences. The 
Notice further explains that a member must implement supervisory 
procedures to require a periodic review of fee-based accounts to 
determine whether they remain appropriate for their respective 
customers.
    As a practical matter, these requirements may have little or no 
current applicability to brokerage accounts in light of a recent court 
holding that fee-based compensation constitutes ``special 
compensation'' that triggers the requirements of the Investment 
Advisers Act of 1940.\5\ As a result of the court's decision, firms 
generally have converted fee-based brokerage accounts into advisory 
accounts or altered the compensation practices for such accounts (e.g. 
charging transaction-based commissions rather than a fixed fee or 
percentage of assets under management). However, both the Notice and 
Incorporated NYSE Rule 405A are aimed at fee-based accounts that do not 
constitute advisory accounts.
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    \5\ See Financial Planning Ass'n v. SEC, 375 U.S. App. D.C. 389, 
482 F.3d 481 (D.C. Cir. 2007)
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    To the extent fee-based programs may continue to exist in some form 
in brokerage accounts, FINRA believes the Notice provides the necessary 
guidance for members to conform their conduct in accordance with the 
just and equitable principles of trade mandated by NASD Rule 2110, and 
further provides firms with the flexibility to adopt policies and 
procedures to achieve that compliance in a manner consistent with their 
business structure and practices.
NYSE Rules 440F (Public Short Sale Transactions Effected on the 
Exchange) and 440G (Transactions in Stocks and Warrants for the 
Accounts of Members, Allied Members and Member Organizations)
    The proposed rule change would repeal Incorporated NYSE Rules 440F 
and 440G. Incorporated NYSE Rule 440F requires members to report on 
Form SS20 round-lot short sale transactions in stocks or warrants 
effected on the NYSE floor for public customers. Incorporated NYSE Rule 
440G requires members to report on Form 121 round-lot purchases or 
sales of stocks or warrants effected on the NYSE floor for members, 
allied members or member organizations. FINRA is proposing to repeal 
these rules as they are specific to the NYSE marketplace and relate 
solely to exchange transactions.
NYSE Rule 477 (Retention of Jurisdiction--Failure to Cooperate)
    Both FINRA's By-Laws and Incorporated NYSE Rule 477 provide for 
retained jurisdiction over former members and associated persons for 
initiating disciplinary actions. Under Article IV, Section 6 and 
Article V, Section 4 of the FINRA By-Laws, a former member or former 
associated person, respectively, remains subject to the filing of a 
FINRA complaint for two years after termination based on conduct that 
commenced prior to the termination. In the case of former associated 
persons, the FINRA By-Laws also provide that the two-year period 
recommences if an amendment to a notice of termination filed within the 
original two-year period discloses possible misconduct. Incorporated 
NYSE Rule 477 provides for retained jurisdiction over a member or a 
member's employee for an unspecified time if, prior to termination or 
within one year following termination, NYSE serves written notice on 
such member or person that it is making inquiry into matters that 
occurred prior to termination.
    Under the proposed rule change, FINRA would continue to use the 
retention of jurisdiction provisions set forth in the FINRA By-Laws and 
would repeal the corresponding provisions in Incorporated NYSE Rule 
477.
    FINRA will announce the implementation date of the proposed rule 
change in a Regulatory Notice to be published no later than 60 days 
following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions

[[Page 45260]]

of Section 15A(b)(6) of the Act,\6\ 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 
eliminate duplicative and unnecessary rules and advance the development 
of a more efficient and effective Consolidated FINRA Rulebook.
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    \6\ 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 impose 
any burden on competition 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-2008-029 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-2008-029. 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-2008-029 and should be 
submitted on or before August 25, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-17788 Filed 8-1-08; 8:45 am]

BILLING CODE 8010-01-P