Document ID: SEC-2010-1263-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-08-18T04:00Z

[Federal Register: August 18, 2010 (Volume 75, Number 159)]
[Notices]               
[Page 51147-51148]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18au10-172]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62702; File No. SR-FINRA-2010-026]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving the Proposed Rule Change To Adopt 
FINRA Rule 5121 (Public Offerings of Securities With Conflicts of 
Interest) in the Consolidated FINRA Rulebook

August 12, 2010.

I. Introduction

    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'') 
on May 20, 2010, pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposal to adopt FINRA Rule 5121 (Public Offerings of Securities With 
Conflicts of Interest) (``Rule'') in the Consolidated FINRA Rulebook. 
This proposal was published for comment in the Federal Register on June 
4, 2010.\3\ The Commission received one comment on the proposal,\4\ and 
a letter from FINRA responding to the comment letter.\5\ This order 
approves this proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 62199 (June 1, 2010), 75 FR 31825 
(June 4, 2010) (SR-FINRA-2010-026).
    \4\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Jeffrey W. Rubin, Chair, Committee on Federal Regulation of 
Securities, American Bar Association dated June 22, 2010 (``ABA 
letter'').
    \5\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Stan Macel, Assistant General Counsel, FINRA, dated July 23, 
2010 (``FINRA Response Letter'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\6\ FINRA proposed to adopt NASD Rule 
2720 (Public Offerings of Securities With Conflicts of Interest) 
without material change as FINRA Rule 5121 in the Consolidated FINRA 
Rulebook.
---------------------------------------------------------------------------

    \6\ 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).
---------------------------------------------------------------------------

    NASD Rule 2720 governs public offerings of securities in which a 
member with a conflict of interest participates. The rule generally 
prohibits a member with a ``conflict of interest,'' as defined in the 
rule,\7\ from participating in a public offering, unless certain other 
requirements are met.\8\

[[Page 51148]]

There is no comparable Incorporated NYSE Rule.
---------------------------------------------------------------------------

    \7\ As defined in NASD Rule 2720(f)(5), a conflict of interest 
exists, if at the time of a member's participation in an entity's 
public offering, any of the following four conditions applies: (1) 
The securities are to be issued by the member; (2) the issuer 
controls, is controlled by or is under common control with the 
member or the member's associated persons; (3) at least five percent 
of the net offering proceeds, not including underwriting 
compensation, are intended to be (i) used to reduce or retire the 
balance of a loan or credit facility extended by the member, its 
affiliates and its associated persons, in the aggregate; or (ii) 
otherwise directed to the member, its affiliates and associated 
persons, in the aggregate; or (4) if, as a result of the public 
offering and any transactions contemplated at the time of the public 
offering (i) the member will be an affiliate of the issuer; (ii) the 
member will become publicly owned; or (iii) the issuer will become a 
member or form a broker-dealer subsidiary. NASD Rule 2720 defines 
several terms for purposes of the rule, including ``entity,'' 
``control,'' and ``common control.''
    \8\ The rule requires prominent disclosure of the nature of the 
conflict, and in certain circumstances, the participation of a 
qualified independent underwriter. Members also must comply with 
certain net capital, discretionary accounts and filing requirements, 
as applicable.
---------------------------------------------------------------------------

    On June 15, 2009, the SEC approved a proposed rule change to 
modernize NASD Rule 2720 (the ``2009 Rule Change'').\9\ The 2009 Rule 
Change became effective on September 14, 2009.\10\
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 60113 (June 15, 
2009), 74 FR 29255 (June 19, 2009) (File No. SR-FINRA-2007-009).
    \10\ See Regulatory Notice 09-49 (SEC Approves Amendments to 
Modernize and Simplify NASD Rule 2720 Relating to Public Offerings 
in Which a Member Firm With a Conflict of Interest Participates) 
(August 2009).
---------------------------------------------------------------------------

    The proposed rule change would adopt NASD Rule 2720 without 
material change as FINRA Rule 5121 in the Consolidated FINRA Rulebook. 
The proposal would make minor changes to the Rule to reflect the new 
terminology conventions of the Consolidated FINRA Rulebook.

III. Comment Letters

    The Commission received one comment letter in response to the 
proposed rule change.\11\ The Commission also received FINRA's response 
to comments.\12\ While the commenter had no objection to the proposal 
itself to move NASD Rule 2720 without material change into the 
Consolidated FINRA Rulebook, the commenter did offer a number of 
comments about the substance of the Rule. The specific comments from 
this letter, as well as FINRA's response, are discussed in detail 
below.
---------------------------------------------------------------------------

    \11\ See ABA Letter.
    \12\ See FINRA Response Letter.
---------------------------------------------------------------------------

    The commenter suggested that FINRA clarify what ``participation in 
a public offering'' means for purposes of the Rule and suggested an 
alternative definition. FINRA responded that ``participation in a 
public offering'' for purposes of the Rule are already widely 
understood and that the alternative definition suggested by the 
commenter would be an inappropriate narrowing of the Rule.
    The commenter also suggested that FINRA clarify what ``primarily 
responsible for managing the public offering'' means for purposes of 
the Rule and suggested an alternative for the term. FINRA asserted that 
the commenter's alternative would inappropriately narrow the 
application of the Rule and that the Rule as written provided FINRA 
flexibility to keep pace with developments in the underwriting process 
while also acknowledging the varied roles its members play currently.
    The commenter also offered an alternative to the experience 
standard necessary to qualify as a ``qualified independent 
underwriter'' under the Rule. FINRA recognized the issue raised by the 
commenter and stated their intention to take a more comprehensive 
review of the matter. FINRA also pointed out that they have exemptive 
authority in extreme circumstances where the standard may unnecessarily 
limit the availability of a qualified independent underwriter.
    The commenter also suggested that FINRA clarify that the definition 
of ``affiliate'' used in the Rule only applies to the Rule. FINRA did 
not agree with this change and stated the thrust of this comment was 
directed at rules beyond the rule proposal.
    Lastly, the commenter suggested that FINRA amend the definition of 
``entity'' used in the Rule to except financing instrument-backed 
securities from being considered an ``entity'' for purposes of the 
Rule. FINRA points out that these securities were purposefully not 
included in the exceptions to the definition of ``entity.''

IV. Discussion and Findings

    After careful review of the proposed rule change, the comment, and 
FINRA's response to the comment, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act, and the 
rules and regulations thereunder that are applicable to a national 
securities association.\13\ In particular, the Commission believes that 
the proposed rule change is consistent with the provisions of Section 
15A(b)(6) of the Act,\14\ 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. The Commission 
believes that the Rule continues regulation that protects investors in 
offerings where the member has a conflict of interest. The Commission 
also notes that FINRA is adopting NASD Rule 2720 into the Consolidated 
FINRA Rulebook as FINRA Rule 5121 without material change.
---------------------------------------------------------------------------

    \13\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (File No. SR-FINRA-2010-026) be, 
and hereby is, approved.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-20365 Filed 8-17-10; 8:45 am]
BILLING CODE 8010-01-P