Document ID: SEC-2009-0004-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.,
Posted Date: 2009-01-02T05:00Z

[Federal Register: January 2, 2009 (Volume 74, Number 1)]
[Notices]               
[Page 152-154]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02ja09-61]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59160; File No. SR-FINRA-2008-062]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rule 2267 (Investor Education and Protection) in the Consolidated 
FINRA Rulebook

December 23, 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 December 11, 2008, the 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt new FINRA Rule 2267 (Investor Education 
and Protection) based on NASD Rule 2280. The proposed rule change would 
require member firms, with certain exceptions, to provide customers 
with FINRA's Web site address and information regarding FINRA's 
BrokerCheck program at least once every calendar year. The text of the 
proposed rule change is attached as Exhibit 5.\3\
---------------------------------------------------------------------------

    \3\ The Commission notes that while provided in Exhibit 5 to the 
filing, the text of the proposed rule change is not attached to this 
notice but is available at FINRA, the Commission's Public Reference 
Room, and at 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
    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\4\ FINRA is proposing to adopt a new 
FINRA rule based on NASD Rule 2280 (Investor Education and Protection). 
The proposed rule would require member firms, with certain exceptions, 
to provide customers with FINRA's Web site address and information 
regarding FINRA's BrokerCheck program at least once every calendar 
year.
---------------------------------------------------------------------------

    \4\ The current FINRA rulebook includes, in addition to FINRA 
Rules, (1) NASD Rules and (2) 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''). For more 
information about the rulebook consolidation process, see FINRA 
Information Notice, March 12, 2008 (Rulebook Consolidation Process).
---------------------------------------------------------------------------

    NASD Rule 2280 currently applies to all member firms that carry 
customer accounts and hold customer funds or securities. The Rule 
requires that each such member firm provide its customers with the 
following information in writing not less than once every calendar 
year: (1) The ``Public Disclosure Program'' hotline number; (2) the 
NASD Regulation Web site address; and (3) a statement regarding the 
availability of an investor brochure that includes information 
describing the ``Public Disclosure Program.'' There is no comparable 
Incorporated NYSE Rule.
    The proposed rule would apply to all member firms, with two general 
exceptions: (1) a firm that does not have customers or (2) an 
introducing firm that is party to a carrying agreement where the 
carrying firm member complies with the Rule.
    Unlike NASD Rule 2280, the proposed rule would apply to member 
firms that conduct a limited business with customers, such as mutual 
fund distributors and member firms that deal solely with direct 
participation programs (``DPPs''). These member firms would be required 
to comply with the rule and provide the disclosures to their customers 
at least once every calendar year. To the extent such firms are parties 
to a carrying agreement and the carrying firm member complies on their 
behalf, these firms would be excepted from the requirements of the 
proposed rule.
    In December 2003, FINRA announced that its ``Public Disclosure 
Program'' would thereafter be known as ``BrokerCheck.'' Accordingly, 
the proposed rule would include references to ``BrokerCheck'' rather 
than the ``Public Disclosure Program''. Additionally, the proposed rule 
would include references to the FINRA Web site address rather than the 
NASD Regulation Web site address. Lastly, the proposed rule would 
clarify that the information required under the rule may be provided 
electronically to customers.\5\
---------------------------------------------------------------------------

    \5\ See NASD Notice to Members 98-3 (Electronic Delivery of 
Information Between Members and Their Customers). This Notice sets 
forth the policy applicable to electronic delivery of information 
between member firms and their customers as permitted or required by 
NASD rules.
---------------------------------------------------------------------------

    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,\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, by adopting the investor 
education and protection rule as a FINRA rule, the proposed rule change 
will help to ensure that customers continue to receive written 
information regarding FINRA's BrokerCheck program.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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.

[[Page 153]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    In May 2008, FINRA published Regulatory Notice 08-26 (Proposed 
Consolidated FINRA Rule Addressing Investor Education and Protection) 
requesting comment on the proposed rule change. A copy of the 
Regulatory Notice is attached as Exhibit 2a to this rule filing.\7\ The 
comment period expired on June 13, 2008. Nine comment letters were 
received in response to the Regulatory Notice. Copies of the comment 
letters, and a list of the commenters, are attached as Exhibit 2b to 
this rule filing.\8\
---------------------------------------------------------------------------

    \7\ The Commission notes that while provided in Exhibit 2a to 
the filing, the Regulatory Notice is not attached to this notice.
    \8\ All references to commenters under this Item are to the 
commenters as listed in Exhibit 2b. (The Commission notes that 
Exhibit 2b is not attached to this notice.)
---------------------------------------------------------------------------

    Certain commenters believe that the proposed rule should not apply 
to institutional customers of a member. One commenter \9\ notes that 
the proposed rule would continue to benefit retail investors but an 
exception should be provided for member firms that predominately 
transact business with institutional investors because these customers 
do not require the same levels of disclosure as retail investors. If 
FINRA pursues the rule change as currently proposed, the commenter 
requests that the required disclosures be made to institutional 
investors only at the time of account opening instead of once every 
calendar year. A second commenter \10\ requests that the proposed rule 
state expressly that member firms are not required to provide such 
items of information to ``institutional accounts'' as defined in NASD 
Rule 3110(c)(4) or any successor rule thereto. Another commenter,\11\ a 
small introducing broker doing business solely with ``sophisticated 
municipal market professionals'' and without any retail customers, 
requests clarification as to whether the rule applies to its business.
---------------------------------------------------------------------------

    \9\ UBS.
    \10\ Baum.
    \11\ Gilboy.
---------------------------------------------------------------------------

    NASD Rule 2280 does not provide an exemption for institutional 
customers, and FINRA continues to believe that institutional customers 
may benefit from the receipt of the information required by the 
proposed rule. Thus, at this time, FINRA has not included an 
institutional exemption in the proposed FINRA rule.
    One commenter \12\ objects to the scope of the proposed rule 
stating that the rule should not apply to firms that do not carry 
customer accounts and do not hold customer funds or securities. The 
commenter fails to see the benefit of providing this information to 
customers who have no funds or securities being held with the member 
firm and believes the proposed rule is unclear in its application to 
firms that do not carry customer funds or securities. The commenter 
requests that FINRA retain the exemption in current NASD Rule 2280(b) 
for these types of firms. If FINRA pursues the rule change as currently 
proposed, the commenter requests that FINRA clarify which offerees or 
purchasers of DPPs must receive the annual disclosures. The commenter 
suggests an alternative proposal to require the disclosures in the 
subscription documents for future DPPs without an annual requirement or 
a look-back to any closed offerings.
---------------------------------------------------------------------------

    \12\ Kinkade.
---------------------------------------------------------------------------

    FINRA understands the noted concerns and believes that if the 
customer relationship does not extend beyond the offering, then a 
subsequent annual notice is not needed. However, in such instances, the 
member must provide the customer with the disclosures during the time a 
customer relationship exists.
    One commenter \13\ notes that variable annuity issuers typically 
distribute their products through a principal underwriter (a registered 
broker-dealer) that enters into selling agreements with other member 
firms (``selling firms''). The commenter believes that the purchaser of 
the variable annuity contract should only be viewed as a customer of 
the selling firm and that the principal underwriter should be able to 
rely on the exception in the proposed rule for a firm with ``no 
customers.'' The commenter further seeks clarification as to whether a 
selling firm may rely on appropriate disclosure in a variable annuity 
prospectus.
---------------------------------------------------------------------------

    \13\ Sutherland.
---------------------------------------------------------------------------

    FINRA agrees that a purchaser of a variable annuity contract 
generally may be viewed as the customer of the selling firm and not of 
the principal underwriter, for purposes of complying with the proposed 
rule. However, although the rule does not prescribe the manner in which 
the annual disclosures must be provided to customers, the selling firm 
would not be permitted to provide such disclosures in the variable 
annuity prospectus. FINRA does not believe that such manner of delivery 
is sufficiently prominent so as to provide customers with the requisite 
information regarding BrokerCheck. In contrast, in response to a 
separate commenter,\14\ FINRA believes that such disclosures may be 
included on periodic account statements and/or trade confirmations.
---------------------------------------------------------------------------

    \14\ Baum.
---------------------------------------------------------------------------

    According to one commenter,\15\ the proposed rule is unnecessary 
because customers do not value receiving such information. The 
commenter questions the usefulness of providing this notice to 
customers. FINRA, however, believes that the proposed rule, like its 
predecessor NASD Rule 2280, serves an important regulatory purpose as 
it provides customers with information regarding the availability and 
purpose of the BrokerCheck program.
---------------------------------------------------------------------------

    \15\ FFSI.
---------------------------------------------------------------------------

    Another commenter \16\ requests that the proposed rule have an 
effective date beginning in January 2009 to avoid the administrative 
costs of sending a separate all-client mailing at the end of the 2008 
calendar year. The commenter notes that a January 1, 2009 effective 
date for the proposed rule would allow member firms to combine the 
proposed disclosures in a mailing with the required SIPC written 
disclosures for 2009,\17\ since most member firms have already sent the 
SIPC disclosures for the 2008 calendar year. In this regard, FINRA 
notes that the proposed rule change would not become effective prior to 
January 1, 2009. Further, it is FINRA's view that any firm subject to 
NASD Rule 2280 that complies with its annual (calendar year) mailing 
requirement on or after January 1, 2009 but prior to the effective date 
of the proposed rule change (i.e., the effective date of FINRA Rule 
2267) will be deemed to have complied with FINRA Rule 2267 for the 2009 
calendar year.
---------------------------------------------------------------------------

    \16\ MMLISI.
    \17\ See NASD Rule 2342.
---------------------------------------------------------------------------

    Two commenters \18\ submitted letters that are outside the scope of 
the proposed rule change.
---------------------------------------------------------------------------

    \18\ FSI and Wachovia.
---------------------------------------------------------------------------

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

[[Page 154]]

    (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-2008-062 on the subject line.

Paper Comments

     Send paper comments in triplicate to Florence E. Harmon, 
Acting Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2008-062. 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 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-2008-062 and should be submitted on or before January 23, 
2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Florence E. Harmon,
Acting Secretary.
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. E8-31204 Filed 12-31-08; 8:45 am]

BILLING CODE 8011-01-P