Document ID: SEC-2007-1029-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2007-08-01T04:00Z

[Federal Register: August 1, 2007 (Volume 72, Number 147)]
[Notices]               
[Page 42166-42169]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01au07-129]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56147; File No. SR-NASD-2007-054]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval 
of Proposed Rule Change To Incorporate Certain NYSE Rules Relating to 
Member Firm Conduct

July 26, 2007.
    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 24, 2007, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change to incorporate into its 
rulebook certain rules of the New York Stock Exchange LLC (``NYSE'') 
relating to the regulation of member firm conduct (``Incorporated NYSE 
Rules'') as described in Items I and II below, which Items have been 
substantially prepared by NASD. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons and is simultaneously approving the proposal on an accelerated 
basis.
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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

    In connection with the proposed transaction to combine the member 
regulation operations of NASD and NYSE into a single organization 
(``Transaction''), NASD proposes to add the Incorporated NYSE Rules to 
its rules. As discussed below, the Incorporated NYSE Rules will apply 
solely to members of the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') \3\ that also are members of NYSE (``Dual Members'') on or 
after the date of closing (``Closing'') of the Transaction. The text of 
the proposed rule change, including the list of the Incorporated NYSE 
Rules, is available at NASD, the Commission's Public Reference Room, 
and http://nasd.complinet.com.

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    \3\ In connection with the Transaction, NASD will change its 
corporate name to FINRA as of the date of closing of the Transaction 
(``Closing''). See Securities Exchange Act Release No. 56146 (July 
26, 2007) (changing the name of NASD to FINRA in the Restated 
Certificate of Incorporation).
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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, NASD 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 III below. NASD 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
    Currently, both NASD and NYSE Regulation, Inc. (``NYSE 
Regulation'') \4\ oversee the activities of U.S.-based broker-dealers 
doing business with the public, approximately 170 of which are 
regulated by both organizations. According to NASD, the result is a 
duplicative, sometimes conflicting system that makes inefficient use of 
resources and, as such, can be detrimental to the ultimate goal of 
investor protection.
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    \4\ NYSE Regulation is a wholly-owned subsidiary of NYSE.
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    NASD states that it has long supported the adoption of a hybrid

[[Page 42167]]

model of self-regulation, with one self-regulatory organization 
(``SRO'') having responsibility for all member firm regulation.\5\ NASD 
further notes that, at the same time, the Commission, Congress, 
securities firms and independent observers have long encouraged greater 
efficiencies, clarity and cost savings in the regulation of the U.S. 
financial markets.
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    \5\ See NASD comment letter dated March 15, 2005 in response to 
the SEC's Concept Release Concerning Self-Regulation, Securities 
Exchange Act Release No. 50700 (November 18, 2004), 69 FR 71256 
(December 8, 2004) (File No. S7-40-04).
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    With these goals in mind, on November 28, 2006, NASD and the NYSE 
Group, Inc. (``NYSE Group'') announced a plan to consolidate their 
member regulation operations into a combined organization that will be 
the sole U.S. private-sector provider of member firm regulation for 
securities firms that conduct business with the public.\6\ This 
consolidation is intended to streamline the broker-dealer regulatory 
system, combine technologies, and permit the establishment of a single 
set of rules and group examiners with complementary areas of expertise 
in a single organization--all of which will serve to enhance oversight 
of U.S. securities firms and help ensure investor protection. Moreover, 
NASD notes that the new organization will be committed to reducing 
regulatory costs and burdens for firms of all sizes through greater 
regulatory efficiency.
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    \6\ Today, the Commission approved the amendments to the NASD's 
By-Laws proposed in connection with the Transaction. Securities 
Exchange Act Release No. 56145 (July 26, 2007).
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Incorporation of NYSE Conduct Rules--General
    NASD represents that FINRA will work expeditiously to consolidate 
the rules that apply to its member firms, reducing to one the two sets 
of rules currently applicable to Dual Members. During an interim 
period, however, until the approval of a consolidated rulebook, NASD is 
proposing to incorporate into FINRA's rulebook the Incorporated NYSE 
Rules.\7\ The Incorporated NYSE Rules will apply solely to Dual Members 
until such time as FINRA adopts, subject to Commission approval, 
consolidated rules applicable to all of its members.\8\
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    \7\ The text of the Incorporated NYSE Rules, as of the effective 
date of the proposed rule change, will be available on the FINRA Web 
site. To the extent the Commission has approved an amendment to an 
Incorporated NYSE Rule that has not yet become effective prior to 
the closing of the Transaction, NASD is proposing to incorporate any 
such amendment into FINRA's rulebook (with such amendment becoming 
effective upon its scheduled effective date). In the event the NYSE 
were to file a proposed rule change to amend an NYSE rule relating 
to member firm conduct following the closing of the Transaction, 
NASD is not proposing to incorporate any such amendment into FINRA's 
rulebook, absent a separate rule filing by FINRA to adopt conforming 
changes.
    \8\ The Incorporated NYSE Rules would continue to apply to the 
same categories of persons to which they currently apply. In other 
words, in addition to applying to Dual Members, the Incorporated 
NYSE Rules would apply to persons affiliated with those firms to the 
same extent and in the same manner that the Incorporated NYSE Rules 
currently apply. NASD stated that it expects FINRA to submit to the 
Commission within one year of the date of Closing proposed rule 
changes that would constitute a significant portion of a harmonized 
rulebook, with the remaining rules being submitted to the Commission 
within two years of the Closing. See Letter from T. Grant Callery, 
Executive Vice President and General Counsel, NASD to Nancy M. 
Morris, Secretary, Commission, dated July 16, 2007.
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    The proposed rule change would incorporate those NYSE rules 
pertaining to the regulation of member firm conduct.\9\ In applying the 
Incorporated NYSE Rules to Dual Members, FINRA also would incorporate 
the related interpretative positions set forth in the NYSE Rule 
Interpretations Handbook and NYSE Information Memos.
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    \9\ To the extent an Incorporated NYSE Rule includes a reference 
to NYSE or the Exchange, such terms will be construed to mean FINRA, 
unless the context otherwise requires.
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    Importantly, under the proposed rule change, there would be no new 
rule requirements placed on member firms as a result of the 
Transaction. Until the adoption of a consolidated rulebook by FINRA, 
those members that are NASD-only members as of the date of the Closing 
would continue to comply with NASD (and not NYSE) rules; those members 
that were Dual Members as of the date of Closing would continue to be 
subject to NASD and NYSE rules; and NYSE members that were not also 
members of NASD as of the date of Closing (``NYSE-only members'') would 
continue to comply with NYSE (and not NASD) rules, provided that any 
such NYSE-only member does not engage in any activities that would 
require it to be an NASD member, in which case the NYSE-only member 
would be subject to both NYSE and NASD rules.\10\ In short, the 
proposed rule change is designed to ensure that all firms, whether Dual 
Members or members of only NYSE or NASD, will have the same set of 
regulatory obligations immediately following the Closing of the 
Transaction that those firms had prior to the Closing of the 
Transaction.
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    \10\ NASD anticipates NYSE's filing a proposed rule change to 
require its members to be members of FINRA, and expects to file a 
separate rule change to establish a waive-in application process for 
the NYSE-only members. These NYSE-only members will be subject to 
FINRA's By-Laws and Schedules to the By-Laws, including Schedule A 
(Assessments and Fees), as well as the NASD Rule 8000 Series 
(Investigations and Sanctions) and Rule 9000 Series (Code of 
Procedure).
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    Because NYSE Group would maintain the functions it currently 
carries out with respect to market operations, including market 
surveillance functions, the proposed rule change would not incorporate 
NYSE rules in such areas as market regulation, including those rules 
addressing NYSE's Order Tracking System (``OTS'') and listing 
standards. The proposed rule change also would not incorporate NYSE's 
proxy rules. Further, the proposed rule change would not incorporate 
NYSE arbitration rules, as FINRA would operate its arbitration and 
mediation forums pursuant to the NASD Code of Arbitration 
Procedure.\11\
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    \11\ NYSE recently filed a proposed rule change to provide 
guidance regarding new and pending arbitration claims in light of 
the consolidation of NYSE Regulation's arbitration department with 
that of NASD Dispute Resolution, Inc. See Securities Exchange Act 
Release No. 56015 (July 5, 2007), 72 FR 37811 (July 11, 2007) 
(Notice of Filing of Proposed Rule Change and Amendment No. 1) (SR-
NYSE-2007-48).
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Disciplinary Matters
    Because FINRA would conduct its disciplinary proceedings in 
accordance with the NASD Code of Procedure, the proposed rule change 
would not incorporate the NYSE disciplinary rules. With respect to any 
disciplinary investigations pending at NYSE Regulation as of the 
Transaction's Closing date that pertain to the Incorporated NYSE Rules, 
the applicable rules and forum would depend on whether NYSE Regulation 
has filed a Charge Memorandum or Stipulation of Facts and Consent to 
Penalty (``Stipulation and Consent'') as of the date of Closing. In the 
event NYSE Regulation has filed a Charge Memorandum or Stipulation and 
Consent as of the date of Closing, the matter (including any later 
appeals) would be adjudicated in accordance with the NYSE disciplinary 
rules and before the NYSE Hearing Board. Similarly, to the extent an 
NYSE Hearing Board decision remains subject to appeal as of the date of 
Closing, any such appeal would be addressed pursuant to the NYSE 
disciplinary rules.\12\
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    \12\ See SR-NYSE-2007-69 (Information Memo to NYSE members 
reflecting changes to disciplinary proceedings at NYSE Regulation as 
a result of the Transaction).
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    In contrast, if as of the date of Closing, NYSE Regulation has not 
filed a Charge Memorandum or Stipulation and Consent in an 
investigation relating to the Incorporated NYSE Rules, the matter 
(including any later appeals) would be adjudicated by FINRA, pursuant 
to the

[[Page 42168]]

FINRA Code of Procedure, which includes the Acceptance, Waiver and 
Consent process pursuant to the FINRA Code of Procedure.\13\
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    \13\ Under the proposed rule change, FINRA would incorporate 
NYSE Rule 477 (Retention of Jurisdiction-Failure to Cooperate) with 
respect to matters relating to potential violations of the 
Incorporated NYSE Rules. NYSE Rule 477 governs, among other things, 
NYSE's retention of jurisdiction over certain persons for purposes 
of initiating disciplinary actions. The rule generally provides that 
NYSE shall retain jurisdiction over such persons if, prior to 
termination, or within one year following receipt by NYSE of written 
notice of the termination, of a person's status as a member, member 
organization, allied member, approved person or registered or non-
registered employee of a member or member organization, NYSE serves 
written notice on such person that it is making inquiry into matters 
occurring prior to the termination of such person's status.
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    Regarding summary proceedings currently adjudicated pursuant to 
NYSE Rule 475, the applicable rule and forum would depend on whether 
NYSE Regulation has notified the person or entity in writing of the 
summary action before the Closing date. If the notification in writing 
has occurred before the Closing date, then the matter would be 
adjudicated pursuant to NYSE disciplinary rules. If no such 
notification has occurred, the matter would be addressed by FINRA, 
pursuant to FINRA rules.
    Finally, with regard to fines imposed pursuant to NYSE Rule 476A 
(Imposition of Fines for Minor Violation(s) of Rules) (or summary 
fines), if a summary fine notice is issued before the date of Closing, 
the matter would be handled pursuant to NYSE rules. With respect to 
matters arising after the date of Closing, NASD expects to file with 
the Commission a proposed rule change to modify its Minor Rule 
Violation Plan (``MRVP'') to include the Incorporated NYSE Rules that, 
as of the date of such filing, are enumerated in NYSE's MRVP. Thus, 
NASD states that after the date of Closing, if the Commission were to 
approve the proposed rule changes, FINRA would be authorized to impose 
fines under NASD's MRVP for minor violations by Dual Members of the 
NYSE rules that are set forth in FINRA's MRVP.
Non-Exclusive Common Rules
    As further detailed in the Agreement between NASD, NYSE, and NYSE 
Regulation pursuant to Rule 17d-2 under the Act \14\ (``Rule 17d-2 
Agreement''), certain of the Incorporated NYSE Rules have been 
designated ``Non-Exclusive Common Rules'' for which both FINRA and NYSE 
will bear responsibility when performing their respective regulatory 
responsibilities. To the extent a Non-Exclusive Common Rule pertains to 
matters other than member firm regulation as set forth in the Rule 17d-
2 Agreement, the potential violation of such a rule would continue to 
be adjudicated by NYSE Regulation, in accordance with NYSE disciplinary 
rules. In addition, NYSE Regulation would retain sole authority to 
investigate and prosecute any violations of the NYSE rules that are not 
Incorporated NYSE Rules.
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    \14\ 17 CFR 240.17d-2.
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    The effective date of the proposed rule change will be the Closing 
date of the Transaction. The proposed rule change will not become 
effective if the Transaction does not close.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A of the Act,\15\ including Section 15A(b)(2) 
of the Act,\16\ in that it will permit FINRA to carry out the purposes 
of the Act, to comply with the Act and to enforce compliance by FINRA 
members and persons associated with members with the Act, the rules and 
regulations thereunder and FINRA rules. NASD further believes that the 
proposed rule change is consistent with the provisions of Section 
15A(b)(6) of the Act,\17\ which requires, among other things, that 
FINRA rules 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. As a result of 
the proposed rule change, firms that currently are regulated by both 
NASD and NYSE Regulation will continue to comply with the same set of 
rules applicable to their operations, with minimal disruption to the 
businesses. FINRA will work expeditiously to consolidate the rules 
applicable to such members, so that they are required to comply with 
only one set of rules.
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    \15\ 15 U.S.C. 78o-3.
    \16\ 15 U.S.C. 78o-3(b)(2).
    \17\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD 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.

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. 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-NASD-2007-054 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2007-054. 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 NASD. 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-NASD-2007-054 and should be 
submitted on or before August 22, 2007.

IV. Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the Act

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and the rules and regulations thereunder applicable to a national 
securities association.\18\ Specifically, the Commission finds that the 
proposal is consistent with Section 15A(b)(6) of the Act \19\ in that 
it is 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. The Commission 
also finds that the proposed rule change is consistent with Section 
15A(b)(2) of the Act \20\ in that it will permit FINRA to be so 
organized to carry out the purposes of the Act, to comply with the Act 
and to enforce compliance by FINRA members and persons associated with 
members with the Act, the rules and regulations thereunder, and FINRA 
rules.
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    \18\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78o-3(b)(6).
    \20\ 15 U.S.C. 78o-3(b)(2).
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    As a result of the proposed rule change, firms that currently are 
regulated by both NASD and NYSE will continue to comply with the same 
member conduct rules following the Transaction until the member conduct 
rules of the NASD and NYSE Regulation are consolidated into a single 
set of FINRA rules. NASD represents that FINRA will work expeditiously 
to consolidate the rules applicable to Dual Members.\21\ In the 
Commission's view, the proposed rule change is an important step in the 
process of consolidating the member firm regulatory functions of the 
NASD and NYSE. This regulatory consolidation is intended, among other 
things, to increase efficient, effective, and consistent regulation of 
securities firms, provide cost savings to securities firms of all 
sizes, and strengthen investor protection and market integrity.
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    \21\ See supra note 8.
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    The Commission notes that the Incorporated NYSE Rules will be 
subject to the Rule 17d-2 Agreement in which the regulatory 
responsibility for these rules will be allocated to FINRA, although 
specified Non-Exclusive Common Rules as set forth in the Rule 17d-2 
Agreement also would continue to be adjudicated by NYSE in accordance 
with NYSE disciplinary rules.\22\ The proposed rule change also 
provides clarity with respect to the handling of disciplinary 
proceedings and summary proceedings initiated by NYSE prior to the date 
of Closing.
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    \22\ The Commission declared the Rule 17d-2 Agreement effective 
today. See Securities and Exchange Act Release No. 56148 (July 26, 
2007).
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    The Commission finds good cause to approve the proposed rule change 
prior to the thirtieth day after the proposal was published for comment 
in the Federal Register. Accelerating approval of the proposed rule 
change facilitates the proposed consolidation of NASD and NYSE's 
regulatory functions without delay. No changes are being made to the 
Incorporated NYSE Rules aside from their placement in FINRA's rulebook 
and no changes are being made to the class of members to which the 
Incorporated NYSE Rules apply. As NASD noted, the proposed rule change 
is designed to ensure that all firms, whether Dual Members, NYSE-only 
members, or NASD-only members, will have the same set of regulatory 
obligations immediately following the Closing of the Transaction that 
such firms had prior to the Closing of the Transaction. In addition, 
the Commission finds good cause to approve the proposal that any 
disciplinary matter in which a Charge Memorandum or Stipulation and 
Consent is filed after the date of Closing would be adjudicated 
pursuant to the FINRA Code of Procedure and that any summary proceeding 
in which the person or entity is notified in writing after the date of 
Closing, would be adjudicated pursuant to FINRA rules. This proposal 
reflects the fact that as of the date of Closing, FINRA will be 
responsible, under the Rule 17d-2 Agreement, for conducting 
disciplinary proceedings involving violations of FINRA's rules, 
including the Incorporated NYSE Rules, by Dual Members. Dual Members 
are already familiar with, and subject to, the NASD Code of Procedure, 
which is the FINRA Code of Procedure, and NASD rules, which are FINRA 
rules. While there are some distinctions between NASD's and NYSE's 
rules, both sets of rules applicable to the disciplinary process were 
previously approved by the Commission as consistent with the Act, 
generally following full notice and comment. Accordingly, although Dual 
Members and their associated persons no longer would be subject to 
NYSE's disciplinary procedures, but to FINRA's instead, the Commission 
finds good cause, consistent with Section 19(b)(2) of the Act,\23\ to 
grant accelerated approval to the proposed rule change.
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    \23\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASD-2007-054) is hereby approved on 
an accelerated basis.\24\
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    \24\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Nancy M. Morris,
Secretary.
 [FR Doc. E7-14854 Filed 7-31-07; 8:45 am]

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