Document ID: SEC-2010-0289-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-02-25T05:00Z

[Federal Register: February 25, 2010 (Volume 75, Number 37)]
[Notices]               
[Page 8772-8774]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25fe10-143]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61537; File No. SR-FINRA-2009-095]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Adopt FINRA 
Rule 3240 (Borrowing From or Lending to Customers) in the Consolidated 
FINRA Rulebook

February 18, 2010.

I. Introduction

    On December 31, 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''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt NASD Rule 2370 (Borrowing From or Lending 
to Customers) as FINRA Rule 3240 (Borrowing From or Lending to 
Customers) in the Consolidated FINRA Rulebook \3\ with certain changes 
and to delete Incorporated NYSE Rules 352(e) (Limitations on Borrowing 
From or Lending to Customers), (f) (Loan Procedures) and (g). The 
proposed rule change would also add a Supplementary Material section 
regarding record retention requirements to proposed FINRA Rule 3240. 
The proposed rule change was published for comment in the Federal 
Register on January 12, 2010.\4\ The Commission received no

[[Page 8773]]

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\ 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 Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
    \4\ See Securities Exchange Act Release No. 61302 (January 6, 
2010), 75 FR 1672 (January 12, 2010).
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II. Description of the Proposed Rule Change

    FINRA proposed adopting NASD Rule 2370 as FINRA Rule 3240 in the 
Consolidated FINRA Rulebook with certain changes as described below. 
FINRA also proposed deleting Incorporated NYSE Rules 352(e) through (g) 
\5\ from the Transitional Rulebook.\6\ Further, the proposed rule 
change would also add a Supplementary Material section regarding record 
retention requirements to proposed FINRA Rule 3240.
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    \5\ For convenience, the Incorporated NYSE Rules are referred to 
as the NYSE Rules.
    \6\ NYSE Rules 352(a) through (d) were deleted as part of a 
prior rule change. See Securities Exchange Act Release No. 60701 
(September 21, 2009), 74 FR 49425 (September 28, 2009) (Order 
Approving File No. SR-FINRA-2009-014).
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A. Background

    The purpose of NASD Rule 2370 is to give FINRA member broker-
dealers the opportunity to evaluate the appropriateness of particular 
lending arrangements between their registered persons and customers, to 
the extent permitted by the member, and the potential for conflicts of 
interests between both the registered person and his or her customer 
and the registered person and the member with which he or she is 
associated.
    To that end, NASD Rule 2370 prohibits registered persons from 
borrowing money from or lending money to their customers (collectively 
referred to as ``lending arrangements'') unless certain conditions are 
met. Specifically, under Rule 2370, no registered person may borrow 
money from or lend money to his or her customer unless the firm has 
written procedures allowing such lending arrangements and (1) the 
customer is a member of the registered person's immediate family; \7\ 
(2) the customer is in the business of lending money; (3) the customer 
and the registered person are both registered persons of the same firm; 
(4) the lending arrangement is based on a personal relationship outside 
of the broker-customer relationship; or (5) the lending arrangement is 
based on a business relationship outside of the broker-customer 
relationship. In addition, with the exception of lending arrangements 
between immediate family members and lending arrangements between 
registered persons and customers in the business of lending money, 
FINRA members are required to pre-approve in writing the other lending 
arrangements described above.
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    \7\ NASD Rule 2370 defines the term ``immediate family'' to 
include parents, grandparents, mother-in-law or father-in-law, 
husband or wife, brother or sister, brother-in-law or sister-in-law, 
son-in-law or daughter-in-law, children, grandchildren, cousin, aunt 
or uncle, or niece or nephew, and any other person whom the 
registered person supports, directly or indirectly, to a material 
extent.
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    With respect to lending arrangements between immediate family 
members, a FINRA member's written procedures may indicate that the 
member permits such lending arrangements and that registered persons 
need not notify the member or receive member approval for such lending 
arrangements.
    For lending arrangements between registered persons and customers 
in the business of lending money, a member's written procedures may 
indicate that registered persons are not required to notify the member 
or receive member approval for such lending arrangements, provided that 
such lending arrangements have been made on commercial terms that the 
customer generally makes available to members of the general public who 
are similarly situated as to need, purpose and creditworthiness.\8\ 
Further, the member need not investigate such lending arrangements, but 
may rely on the registered person's representation that the terms of 
the loan meet these standards.
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    \8\ The fact that a registered person can negotiate a better 
rate or terms for a loan that is not the product of the broker-
customer relationship would not vitiate the idea that the loan 
occurred on terms generally offered to the public. See Notice to 
Members 04-14 (March 2004).
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    It is important to note that members can choose to permit 
registered persons to borrow money from or lend money to their 
customers consistent with the requirements of the rule or prohibit the 
practice in whole or in part.
    NYSE Rules 352(e) through (g) also govern lending arrangements 
between registered persons and their customers. These provisions are 
substantially similar to the provisions of NASD Rule 2370, with one 
exception. NYSE Rule 352(f) provides an exception from the pre-approval 
requirements of the rule for loans totaling $100 or less between 
registered persons of the same firm.

B. Proposal

    FINRA proposed adopting NASD Rule 2370 as FINRA Rule 3240 in the 
Consolidated FINRA Rulebook, subject to the following changes. FINRA 
proposed amending paragraph (a) (Permissible Lending Arrangements; 
Conditions) of the rule to indicate more explicitly that such 
arrangements are subject to the procedural requirements set forth in 
paragraph (b) (Notification and Approval) of the rule. FINRA also 
proposed amending paragraph (a)(2)(B) of the rule regarding permissible 
lending arrangements between registered persons and customers in the 
business of lending money to indicate more explicitly that such 
customers must be acting in the course of such business.
    Further, FINRA proposed amending paragraph (b)(1) of the rule to 
require expressly that registered persons notify their member firms of 
the lending arrangements that require member pre-approval (FINRA 
proposed this change for purposes of consistency with paragraphs (b)(2) 
and (3) of the rule, which provide that a registered person is not 
required either to notify the member or receive member approval for 
certain specified lending arrangements) and to clarify that any 
modifications to such lending arrangements (including any extension of 
the duration of such arrangements) are also subject to notification and 
member pre-approval.
    In addition, FINRA proposed amending the definition of ``immediate 
family'' in paragraph (c) (Definition of Immediate Family) of the rule 
to replace the reference that the term ``includes'' the enumerated 
persons to reflect that the term ``means'' such persons. Finally, FINRA 
proposed adding Supplementary Material .01 (Record Retention) requiring 
that members preserve the written pre-approval required by the rule for 
at least three years after the date that the lending arrangement has 
terminated or for at least three years after the registered person's 
association with the member has terminated. FINRA proposed deleting 
NYSE Rules 352(e) through (g) as the provisions of the NYSE rules are 
substantially similar to NASD Rule 2370.
    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. The implementation date will be no later 
than 180 days following Commission approval.

III. Discussion and Findings

    After a careful review of the proposal, the Commission finds that 
the proposed rule change is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder applicable to 
FINRA.\9\ In particular, the Commission finds that the proposed rule 
change is consistent with Section

[[Page 8774]]

15A(b)(6) of the Exchange Act,\10\ which requires, among other things, 
that FINRA's rules be designed to prevent fraud and manipulative 
practices and to promote just and equitable principles of trade and, in 
general, to protect investors and the public interest. The Commission 
believes that the proposed rule change is reasonably designed to 
achieve these ends by providing FINRA member broker-dealers the 
opportunity to evaluate the appropriateness of certain lending 
arrangements between their registered persons and others, to the extent 
permitted by a FINRA member broker-dealer, and the potential that these 
lending arrangements could create certain conflicts of interest.
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    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78o-3(b)(6).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\11\ that the proposed rule change (SR-FINRA-2009-095) be, 
and hereby is, approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-3775 Filed 2-24-10; 8:45 am]
BILLING CODE 8011-01-P