Document ID: SEC-2008-1041-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-07-28T04:00Z

[Federal Register: July 28, 2008 (Volume 73, Number 145)]
[Notices]               
[Page 43808-43810]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jy08-120]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58206; File No. SR-FINRA-2008-022]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
the Membership Waive-In Process for Certain New York Stock Exchange 
Members

July 22, 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 May 23, 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 amend NASD IM-1013-1, to address the 
applicability of the consolidated FINRA rules to member firms of the 
New York Stock Exchange LLC (``NYSE'') that became members of FINRA 
pursuant to the membership waive-in process set forth in IM-1013-1. 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
    On July 30, 2007, NASD and NYSE consolidated their member firm 
regulation operations into a combined organization, FINRA. To achieve 
the transaction's goal to eliminate duplicative member firm regulation 
and enable FINRA to meet its new regulatory responsibilities, the NYSE 
amended NYSE Rule 2(b) to require FINRA membership as a condition of 
being an NYSE member organization (``Mandatory FINRA Membership 
filing'').\3\
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    \3\ See Securities Exchange Act Release No. 56654 (October 12, 
2007), 72 FR 59129 (October 18, 2007) (SR-NYSE-2007-67) (amending 
the definition of ``member organization'' in NYSE Rule 2(b) to make 
FINRA membership a condition of being an NYSE member organization 
with a 60-day grace period for compliance); Securities Exchange Act 
Release No. 56953 (December 12, 2007), 72 FR 71990 (December 19, 
2007) (SR-NYSE-2007-115) (extending the grace period for NYSE-only 
member organizations to apply for and be approved as FINRA members 
to June 30, 2008); Securities Exchange Act Release No. 58096 (July 
3, 2008), 73 FR 39764 (July 10, 2008) (SR-NYSE-2008-54) (extending 
the grace period for NYSE-only member organizations to apply for and 
be approved as FINRA members to December 31, 2008). See also 
Securities Exchange Act Release No. 56751 (November 6, 2007), 72 FR 
64098 (November 14, 2007) (SR-FINRA-2007-19) (amending the 
definition of ``member organization'' in FINRA's NYSE Rule 2(b) to 
make FINRA membership a condition of being an NYSE member 
organization).
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    As part of the transaction, FINRA incorporated into its existing 
rulebook NYSE rules related to member firm conduct (``Incorporated NYSE 
Rules''). Thus, the current FINRA rulebook consists of two sets of 
rules: (1) NASD rules and (2) the Incorporated NYSE Rules (together 
referred to herein as the ``Transitional Rulebook'').\4\ The 
Incorporated NYSE Rules apply only to Dual Members.\5\
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    \4\ Pursuant to Rule 17d-2 under the Act, NASD, NYSE and NYSE 
Regulation Inc. entered into an agreement to reduce regulatory 
duplication for firms that are members of both FINRA and the NYSE 
(``Dual Members'') by allocating regulatory responsibilities for the 
Incorporated NYSE Rules to FINRA. FINRA has assumed examination, 
enforcement and surveillance responsibilities under the agreement 
relating to compliance by Dual Members to the extent such 
responsibilities involve member firm regulation. See Securities 
Exchange Act Release No. 56148 (July 26, 2007), 72 FR 42146 (August 
1, 2007) (File No. 4-544).
    \5\ The Incorporated NYSE Rules continue to apply to persons 
affiliated with Dual Members to the same extent and in the same 
manner as they did before the consolidation. In applying the 
Incorporated NYSE Rules to Dual Members and such affiliated persons, 
FINRA has incorporated the related interpretative positions set 
forth in the NYSE Rule Interpretations Handbook and NYSE Information 
Memos.
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    In furtherance of the consolidation, FINRA adopted NASD IM-1013-1 
to

[[Page 43809]]

enable eligible NYSE member organizations to become FINRA members 
through an expedited process.\6\ Under the process outlined in IM-1013-
1, certain NYSE firms were eligible to automatically become FINRA 
members and to register all associated persons whose registrations were 
approved with NYSE in registration categories recognized by FINRA upon 
submission to FINRA's Member Regulation Department of a signed waive-in 
membership application. As provided in IM-1013-1, the NYSE firms 
admitted pursuant to IM-1013-1 (the ``Waive-in Firms'') currently are 
subject to the Incorporated NYSE Rules, FINRA's By-Laws and Schedules 
to By-Laws, including Schedule A (Assessments and Fees), and the NASD 
Rule 8000 (Investigations and Sanctions) and Rule 9000 (Code of 
Procedure) Series, provided that their securities business is limited 
to floor brokerage on the NYSE, or routing away to other markets orders 
that are ancillary to their core floor business under NYSE Rule 70.40 
(``permitted floor activities'').\7\ If a Waive-In Firm seeks to expand 
its business operations beyond the permitted floor activities, the firm 
must apply for and receive approval to engage in such business activity 
pursuant to NASD Rule 1017 (Application for Approval of Change in 
Ownership, Control, or Business Operations). Upon approval of such 
business expansion, the firm would become subject to all NASD rules, in 
addition to the Incorporated NYSE Rules.
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    \6\ See Securities Exchange Act Release No. 56653 (October 12, 
2007); 72 FR 59127 (October 18, 2007) (SR-NASD-2007-056).
    \7\ For purposes of IM-1013-1, activities that are ancillary to 
a Floor broker's core business include (i) routing orders in NYSE-
traded securities to an away market for any reason relating to their 
ongoing Floor activity, including regulatory compliance or meeting 
best-execution obligations, or (ii) provided that the majority of 
transactions effected by the firm are effected on the NYSE, sending 
to other markets orders in NYSE-traded or non-NYSE-traded securities 
and/or futures if such orders relate to hedging positions in NYSE-
traded securities, or are part of arbitrage or program trade 
strategies that include NYSE-traded securities.
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    FINRA has established a process to develop a new consolidated 
rulebook (``Consolidated FINRA Rulebook''), which will consist only of 
FINRA Rules and will apply to all FINRA members, unless such rules have 
a more limited application by their terms.\8\ With limited exceptions 
specified in the Act, the Commission must approve the FINRA Rules prior 
to their becoming effective in the new Consolidated FINRA Rulebook. 
FINRA intends to obtain those approvals through a series of rule 
filings with the Commission. As the Commission approves new rules for 
inclusion in the Consolidated FINRA Rulebook and they become effective, 
FINRA members will become subject to those rules. Members also will 
remain subject to the rules remaining in the Transitional Rulebook. 
(The Incorporated NYSE Rules in the Transitional Rulebook will continue 
to apply only to Dual Members.) As the Consolidated FINRA Rulebook 
expands with Commission-approved final FINRA Rules, the Transitional 
Rulebook will be reduced by the elimination of those rules, or sections 
thereof, that address the same subject matter of regulation. When the 
Consolidated FINRA Rulebook is completed, the Transitional Rulebook 
will have been eliminated in its entirety.
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    \8\ FINRA issued an Information Notice on March 12, 2008 that 
describes the rulebook consolidation process in greater detail.
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    The proposed rule change would amend NASD IM-1013-1 to address the 
applicability of consolidated FINRA rules to the Waive-In Firms. FINRA 
believes that the Waive-In Firms should be subject to all consolidated 
FINRA Rules, unless the rules have a more limited application by their 
terms. In addition, this amendment is essential because all of the 
existing Incorporated NYSE Rules currently applicable to the Waive-In 
Firms are scheduled to be eliminated from the Transitional Rulebook as 
the consolidated FINRA Rules are adopted and implemented (although it 
may be the case concepts or parts of Incorporated NYSE Rules will 
become adopted as part of the consolidated FINRA rules). Absent the 
proposed rule change, the elimination of the those legacy rules in the 
Transitional Rulebook applicable to the Waive-In Firms would result in 
a gap in regulation for such firms.
    Accordingly, the proposed rule change would amend IM-1013-1 to 
specify that the Waive-In Firms will be subject to FINRA's By-Laws and 
Schedules to By-Laws, including Schedule A, the consolidated FINRA 
rules and the Incorporated NYSE Rules, provided that their securities 
business is limited to the permitted floor activities. If a Waive-In 
Firm seeks to expand its business operations to include any activities 
other than the permitted floor activities, the firm must continue to 
apply for and receive approval pursuant to NASD Rule 1017. Upon 
approval of such expansion, the firm would be subject to all NASD 
rules, in addition to the consolidated FINRA rules and the Incorporated 
NYSE Rules (as is the case with the Incorporated NYSE Rules, when the 
Consolidated FINRA Rulebook is completed, all NASD rules would be 
eliminated; although it may be the case that concepts or parts of NASD 
rules will become adopted as part of the consolidated FINRA rules). 
FINRA is proposing to continue to require the Waive-In Firms to comply 
with the Incorporated NYSE Rules and, as applicable, NASD Rule 1017 
until such time as these rules are eliminated as part of the adoption 
of the Consolidated FINRA Rulebook.\8\
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    \8\ FINRA notes that the Waive-In Firms will continue to be 
subject to the content of the NASD Rule 8000 and 9000 Series, 
insofar as FINRA has filed a rule change to transfer these two rule 
series, without substantive change, to the Consolidated FINRA 
Rulebook. See Securities Exchange Release No. 58176 (July 16, 2008) 
(SR-FINRA-2008-021).
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    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 of Section 15A of the Act, including Section 15A(b)(6) of 
the Act,\9\ in that it is designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade and, in general, to protect investors and the public interest. 
FINRA believes that the proposed rule change will ensure that members 
eligible for the waive-in process continue to meet appropriate 
regulatory standards, resulting in effective and efficient regulation 
of brokers and dealers, thereby enhancing investor protection.
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    \9\ 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

[[Page 43810]]

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-2008-022 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-2008-022. 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-2008-022 and should be 
submitted on or before August 18, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-17209 Filed 7-25-08; 8:45 am]

BILLING CODE 8010-01-P