Document ID: SEC-2008-1107-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-08-11T04:00Z

[Federal Register: August 11, 2008 (Volume 73, Number 155)]
[Notices]               
[Page 46664-46667]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11au08-116]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58308; File No. SR-FINRA-2008-027]

 
Self-Regulatory Organizations: Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
the Adoption of FINRA Rule 3220 (Influencing or Rewarding Employees of 
Others) and FINRA Rule 2070 (Transactions Involving FINRA Employees) in 
the Consolidated FINRA Rulebook

August 5, 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 July 18, 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 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 transfer without material change NASD Rules 
3060 (Influencing or Rewarding Employees of Others) and 3090 
(Transactions Involving Association and American Stock Exchange 
Employees) into the new consolidated FINRA rulebook (``Consolidated 
FINRA Rulebook'') \3\ and to delete the corresponding provisions in 
NYSE Rules 350, 350.10, 407(a), 407.10 and NYSE Rule Interpretations 
350/01 through 350/03. The proposed rule change would renumber NASD 
Rule 3060 as FINRA Rule 3220 and NASD Rule 3090 as FINRA Rule 2070 in 
the Consolidated FINRA Rulebook, and would delete NASD Rules 3060 and 
3090 in their entirety from the Transitional Rulebook. The text of the 
proposed rule change is available at FINRA, the Commission's Public 
Reference Room, and http://www.finra.org.
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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 (hereinafter, ``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. For more information about the rulebook consolidation 
process, see FINRA Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
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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 the Consolidated FINRA 
Rulebook, FINRA is proposing to transfer without material change NASD 
Rules 3060 (Influencing or Rewarding Employees of Others) and 3090 
(Transactions Involving Association and American Stock Exchange 
Employees) into the Consolidated FINRA Rulebook and to delete the 
corresponding provisions in Incorporated NYSE Rules 350, 350.10, 
407(a), 407.10 and NYSE Rule Interpretations 350/01 through 350/03. The 
proposed rule change would renumber NASD Rule 3060 as FINRA Rule 3220 
and NASD Rule 3090 as FINRA Rule 2070 in the Consolidated FINRA 
Rulebook, and would delete NASD Rules 3060 and 3090 in their entirety 
from the Transitional Rulebook.
    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.

(A) Proposed FINRA Rule 3220

(1) Background
    NASD Rule 3060 (Influencing or Rewarding Employees of Others) 
currently states that no member or

[[Page 46665]]

associated person shall give gifts or gratuities to an agent or 
employee of another person in excess of $100 per year where the gift or 
gratuity is in relation to the business of the employer of the 
recipient. The rule, which protects against improprieties that may 
arise when members or their associated persons give gifts or gratuities 
to employees of a customer, has been in effect in its current form 
since 1969, with changes only to the dollar amounts, rising from $25 to 
$50 to $100.\4\ The rule requires each member to maintain a separate 
record of all gifts or gratuities. The rule also contains an express 
exclusion for payments made pursuant to bona fide, written employment 
contracts.
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    \4\ See NASD Notice to Members 93-8 (February 1993) (SEC 
Approval of Amendment Relating to the Payment of Gratuities or 
Anything of Value by Members to Others); see also Securities 
Exchange Act Release No. 21074 (June 20, 1984), 49 FR 26330 (June 
27, 1984) (SR-NASD-84-8) (approval order).
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    NYSE Rule 350 (Compensation or Gratuities to Employees of Others) 
reaches similar conduct in prohibiting, absent prior written consent of 
the recipient's employer, any member or member organization from giving 
any gratuity in excess of $100 per person per year to any principal, 
officer, or employee of another member or member organization, 
financial institution, news or financial information media, or non-
member broker or dealer in securities, commodities or money 
instruments.\5\ NYSE Rule 350 has specific provisions addressing 
compensation to operations employees of members (e.g., NYSE Floor 
personnel). In addition, NYSE Rule 350 requires that records of all 
such gratuities and compensation be retained for at least three years.
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    \5\ In addition, NYSE Rule 350(a)(1) prohibits any member from 
employing or compensating any person for services rendered except 
with the prior consent of that person's employer. FINRA proposes to 
delete this provision, even though it does not pertain to gifts, 
because a substantively identical provision exists in NYSE Rule 
346(b). FINRA intends to review NYSE Rule 346(b) as part of a later 
phase of the rulebook consolidation process.
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(2) Proposal
    FINRA proposes that NASD Rule 3060 be transferred into the 
Consolidated FINRA Rulebook without material change and renumbered as 
FINRA Rule 3220. One of the advantages of the existing regulatory 
standard is the clarity of the rule's application--it prevents gifts in 
excess of a fixed amount, currently $100. Both the NASD and NYSE rules 
have a $100 limitation on gifts.
    FINRA believes that NASD Rule 3060 generally is well understood by 
members. FINRA recently issued additional guidance on NASD Rule 3060 in 
Notice to Members 06-69.\6\ Among the issues addressed in that Notice 
was the fact that NASD Rule 3060 does not apply to gifts of de minimis 
value, or to promotional items of nominal value displaying a firm's 
logo. The Notice stated that NASD Rule 3060 does not prohibit customary 
Lucite tombstones, plaques or other similar solely decorative items 
commemorating a business transaction or event. The Notice also stated 
that gifts should be valued at the higher of cost or market value and 
tickets should be valued at the higher of cost or face value. In 
addition, FINRA staff has used its interpretive authority to address 
unintended consequences of the rule, such as unreasonable limitations 
on giving a bereavement or sympathy gift.\7\
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    \6\ See NASD Notice to Members 06-69 (December 2006) (Gifts and 
Gratuities).
    \7\ See Interpretive Letter dated December 17, 2007 to Amal Aly, 
SIFMA from Gary L. Goldsholle, FINRA, available at: <http://
www.finra.org/RulesRegulation/ PublicationsGuidance/
InterpretiveLetters/ConductRules/P037695>.
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    FINRA would eliminate the provision in NYSE Rule 350 permitting 
member firms to obtain prior written consent of the recipient's 
employer for any gift over $100. FINRA believes that the gift rule 
should establish a fixed amount and does not see any business need to 
justify giving gifts in amounts greater than the limits specified in 
the rule. FINRA also would delete the provisions in NYSE Rule 350 and 
NYSE Rule Interpretation 350/02 addressing compensation to operations/
Floor employees of NYSE as they are not relevant for FINRA.\8\ For 
similar reasons, provisions in NYSE Rule 350.10 pertaining to 
employment of or gratuities to personnel working the Floor of other 
exchanges would be deleted.\9\ Finally, FINRA would eliminate the 
provisions of NYSE Rule 350 relating to record retention, as NASD Rule 
3060(c) addresses the same issue.
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    \8\ NYSE Rule Interpretation 350/02 would be deleted in its 
entirety. Note that NYSE Rule 350 also contains provisions that 
address gifts and gratuities to employees of the NYSE. These 
provisions are addressed in connection with FINRA's proposal to 
adopt FINRA Rule 2070. See Section (B) under Item II.A.1. FINRA's 
proposals with respect to FINRA Rules 3220 and 2070 would, in 
combination, delete NYSE Rule 350 in its entirety.
    \9\ NYSE Rule 350.10 also contains provisions that address 
employment or compensation of NYSE employees by members or member 
organizations. These provisions are addressed in connection with 
FINRA's proposal to adopt FINRA Rule 2070. See Section (B) under 
Item II.A.1. Because Proposed FINRA Rules 3220 and 2070 would 
address the substance of NYSE Rule 350.10, FINRA proposes to delete 
NYSE Rule 350.10 in its entirety.
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    FINRA would eliminate NYSE Rule Interpretation 350/01, and 
provisions in NYSE Rule 350.10 pertaining to gifts among close 
relatives, because the concepts contained in both are adequately 
addressed by proposed FINRA Rule 3220 and existing guidance. Lastly, 
FINRA would eliminate NYSE Rule Interpretation 350/03 because FINRA has 
proposed a separate rule that addresses business entertainment.\10\
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    \10\ See Securities Exchange Act Release No. 55765 (May 15, 
2007), 72 FR 28743 (May 22, 2007) (Notice of Filing of Proposed Rule 
Change; File No. SR-NASD-2006-044); see also Amendment No. 3 to File 
No. SR-NASD-2006-044 (January 2, 2008).
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(B) Proposed FINRA Rule 2070

(1) Background
    Both NASD and NYSE rules address conflicts of interest involving 
FINRA and NYSE employees.
    NASD Rule 3090 addresses this issue in three ways. First, NASD Rule 
3090(a) requires a member, when it has actual notice that an NASD 
employee has a financial interest or controls trading in an account, to 
promptly obtain and implement an instruction from the employee 
directing that duplicate account statements be provided by the member 
to NASD. Second, NASD Rule 3090(b) prohibits a member from making any 
loan of money or securities to an NASD employee. This prohibition does 
not apply to loans made in the context of disclosed, routine banking 
and brokerage agreements, or loans that are clearly motivated by a 
personal or family relationship. Third, NASD Rule 3090(c) prohibits any 
member from directly or indirectly giving, or permitting to be given, 
anything of more than nominal value to any NASD employee who has 
responsibility for a regulatory matter involving the member. This 
applies regardless of the $100 per individual per year limitation set 
forth in NASD Rule 3060(a). The term ``regulatory matter'' is defined 
to include, without limitation, examinations, disciplinary proceedings, 
membership applications, listing applications, delisting proceedings, 
and dispute-resolution proceedings that involve the member.
    The NYSE rules governing conflicts of interest involving NYSE 
employees differ from the NASD approach in two ways. First, rather than 
applying the duplicate statement approach to NYSE employees (which 
applies to NASD employees under NASD Rule 3090(a)), NYSE Rule 407(a) 
prohibits a member or member organization, without the prior written 
consent of the NYSE, from opening a securities or commodities account 
or executing any transaction in which an employee of the NYSE is

[[Page 46666]]

directly or indirectly interested.\11\ NYSE Rule 401.10 states that an 
employee of the NYSE or any of its affiliated companies who wishes to 
open a securities or commodities account should apply for permission 
from the NYSE's Ethics Officer. Second, the NYSE Rules differ from the 
nominal value approach set forth in NASD Rule 3090(c) by instead 
setting procedures for outside compensation and placing a dollar limit 
on gifts. Specifically, with respect to outside compensation, NYSE Rule 
350(a)(1) prohibits any member, allied member, member organization or 
employee thereof from employing or compensating any person for services 
rendered without the prior consent of the person's employer (i.e., the 
NYSE with respect to NYSE employees).\12\ With respect to gifts, NYSE 
Rule 350(a)(2) prohibits giving any gift or gratuity in excess of $50 
per person per year to any principal, officer, or employee of the NYSE 
or its subsidiaries without the prior written consent of the NYSE. This 
rule is written without regard to whether the NYSE employee has 
responsibility for regulatory matters affecting the member.
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    \11\ NYSE Rule 407(a) requires duplicate confirmations and 
account statements with respect to accounts or transactions of 
members, allied members and employees associated with another member 
or member organization.
    \12\ NYSE Rule 350.10 provides that requests for NYSE consent 
under Rule 350(a)(1) should be sent to the NYSE's Human Resources 
Department at least 10 days in advance of the proposed date of 
employment. NYSE Rule 350.10 states that approval to employ an NYSE 
employee outside the hours of regular employment by the NYSE will be 
limited to employment of a routine or clerical nature. NYSE Rule 
350.10 further states that when the NYSE has granted permission for 
part-time employment of a NYSE employee, no approval is required for 
a subsequent gratuity or bonus to such person provided it is in 
proportion to gratuities given to full-time employees of the 
employing organization.
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(2) Proposal
    FINRA proposes that NASD Rule 3090 be transferred into the 
Consolidated FINRA Rulebook without material change,\13\ renumbered as 
FINRA Rule 2070 and that the corresponding provisions in NYSE Rules 
350(a)(1), 350(a)(2), 350.10, 407(a) and 407.10 be eliminated.\14\ 
Rather than requiring the member to obtain FINRA's consent to open a 
securities or commodities account or execute a trade (as set forth 
under NYSE Rules 407(a) and 407.10), FINRA believes that it is 
sufficient, as set forth under NASD Rule 3090(a), to continue to 
require the member to obtain and implement an instruction from the 
FINRA employee directing the member to provide duplicate statements to 
FINRA. The proposed rule change would, as set forth in NASD Rule 
3090(b), continue to prohibit members from making any loan of money or 
securities to a FINRA employee, subject to the exceptions set forth in 
that rule. Lastly, the proposed rule change would, as set forth in NASD 
Rule 3090(c), continue to prohibit members from directly or indirectly 
giving, or permitting to be given, anything above nominal value to any 
FINRA employee who has responsibility for a ``regulatory matter'' 
involving the member. FINRA does not believe that its employees should 
be permitted to receive gifts of up to $50 per year when such employees 
have responsibility for a regulatory matter. In addition, FINRA 
proposes not to adopt the $50 limit in NYSE Rule 350(a)(2) for gifts to 
all other employees to maintain consistency with the FINRA Code of 
Conduct, which, like NASD Rule 3060(a) (and proposed FINRA Rule 
3220(a)), establishes a $100 limit. Rule 3090(c) need not be amended to 
address the employment and compensation issues as to NYSE employees in 
NYSE Rules 350(a)(1) and 350.10 because the FINRA Code of Conduct 
addresses these issues through its provisions on Outside Activities or 
Employment.
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    \13\ The proposal includes stylistic edits to NASD Rule 3090 for 
purposes of clarity and readability.
    \14\ With respect to NYSE Rule 407(a), the only change to the 
rule at this stage in the rulebook consolidation would be to delete 
language pertaining to employees of the NYSE. See Exhibit 5. NYSE 
Rule 407.10 would be deleted in its entirety. With respect to NYSE 
Rules 350(a)(1), 350(a)(2) and 350.10, see supra notes 8 and 9.
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    FINRA proposes to delete listing and delisting proceedings as 
potential ``regulatory matters'' under NASD Rule 3090(c) in light of 
FINRA's separation from NASDAQ and The American Stock Exchange.
(2) Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\15\ 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 FINRA rulebook 
consolidation process, the proposed rule change would streamline and 
reorganize existing rules that govern influencing or rewarding the 
employees of others and transactions involving FINRA employees. 
Further, the proposed rule change would provide greater regulatory 
clarity with respect to these issues.
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    \15\ 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 would 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-2008-027 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-2008-027. 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/

[[Page 46667]]

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-2008-027 
and should be submitted on or before September 2, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-18460 Filed 8-8-08; 8:45 am]

BILLING CODE 8010-01-P