Document ID: SEC-2009-0912-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to Outside Business Activities of Registered Persons
Posted Date: 2009-07-08T04:00Z

[Federal Register: July 8, 2009 (Volume 74, Number 129)]
[Notices]               
[Page 32668-32670]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08jy09-121]                         

[[Page 32668]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60199; File No. SR-FINRA-2009-042]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Outside Business Activities of Registered Persons

June 30, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on June 8, 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'') 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 adopt NASD Rule 3030 (Outside Business 
Activities of an Associated Person) as FINRA Rule 3270 (Outside 
Business Activities of Registered Persons) in the consolidated FINRA 
rulebook with moderate changes. The proposed rule change would delete 
Incorporated NYSE Rule 346 (Limitations--Employment and Association 
with Members and Member Organizations) and its interpretations. The 
proposed rule change would require registered persons to give notice to 
member firms prior to engaging in an outside business activity (as 
defined therein).
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

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 a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\3\ FINRA is proposing to adopt NASD 
Rule 3030 (Outside Business Activities of an Associated Person) as 
FINRA Rule 3270 (Outside Business Activities of Registered Persons) in 
the Consolidated FINRA Rulebook with moderate changes. The proposed 
rule change would delete NYSE Rule 346 \4\ (Limitations--Employment and 
Association with Members and Member Organizations) and its 
interpretations. However, as further described below, the proposed rule 
change would incorporate certain provisions of NYSE Rule 346 into new 
FINRA Rule 3270.
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    \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 new 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 FINRA Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
    \4\ For convenience, the proposed rule change refers to 
Incorporated NYSE Rules as NYSE Rules.
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(1) Proposed FINRA Rule 3270 (Outside Business Activities of Registered 
Persons)

    Proposed FINRA Rule 3270 would prohibit any registered person from 
being an employee, independent contractor, sole proprietor, officer, 
director or partner of another person, or being compensated, or having 
the reasonable expectation of compensation, from another person as a 
result of any business activity outside the scope of the relationship 
with his or her member firm, unless he or she has provided prior 
written notice to the member. The proposed rule change would expand the 
obligations imposed under NASD Rule 3030, which prohibits any 
registered person from being employed by or accepting any compensation 
from any person as a result of any outside business activity, other 
than passive investment, unless he has provided prompt written notice 
to his member firm. In contrast, NYSE Rule 346(b) generally prohibits 
any member (as defined in the NYSE rules) or employee of a member 
organization from being engaged in any other business, or being 
employed or compensated by any other person, or serving as an officer, 
director, partner or employee of another business organization or 
owning any stock or having any direct or indirect financial interest in 
any other organization engaged in any securities, financial or kindred 
business unless such person has made a written request to, and received 
prior written consent from, his or her member organization employer.
    The primary difference between the existing NASD and NYSE rules is 
the timing of the required notice and the requirement in the NYSE rule 
for a member's prior written consent. With respect to timing, FINRA 
believes that registered persons should not be permitted to engage in 
outside business activities without the firm's prior knowledge. 
Potential investor harm could ensue in the interim period between the 
time the registered person commences an outside business activity and 
the time a firm receives ``prompt'' written notice. Also, because the 
term ``prompt'' is susceptible to differing interpretations, adopting a 
prior written notice standard in this context would promote consistency 
within the securities industry, though FINRA understands that, in 
practice, many firms already require prior written notice. Further, a 
prior written notice standard would allow a firm an opportunity to 
determine whether the proposed outside business activity is properly 
being characterized by the registered representative as an outside 
business activity, or whether it is an outside securities activity, 
subject to NASD Rule 3040 (Private Securities Transactions of an 
Associated Person).\5\
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    \5\ FINRA is proposing to replace NASD Rule 3040 with new 
provisions in proposed FINRA Rule 3110(b)(3), as part of the 
consolidated FINRA rules addressing supervision and supervisory 
controls. See FINRA Regulatory Notice 08-24 (May 2008).
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    For these reasons, FINRA proposes that FINRA Rule 3270 require 
prior written notice whenever a registered representative will be an 
employee, independent contractor, sole proprietor, officer, director or 
partner of another person, or will be compensated, or have the 
reasonable expectation of compensation, from any other person as a 
result of any outside business activity.
    With respect to the requirement in NYSE Rule 346(b) for prior 
written consent, FINRA believes that requiring prior written consent 
for outside business activities is unnecessary. To the extent that 
these activities may

[[Page 32669]]

nevertheless raise investor protection concerns and adversely impact 
the individual's business within the firm, the proposed rule change has 
supplementary material, drawn in part from procedures required in NYSE 
Rule 346(e), that sets forth the obligations of a member upon receipt 
of a written notice of a proposed outside business activity. FINRA 
believes that firms must review the registered person's participation 
in the outside activity to determine whether it raises investor 
protection concerns. Specifically, the supplementary material states 
that a member must make a determination as to whether the proposed 
activity raises investor protection concerns, and if so, the firm must 
implement procedures or restrictions on the activity to protect 
investors, or prohibit the activity. A member also must evaluate the 
proposed activity to determine whether the activity properly is 
characterized as an outside business activity or whether it should be 
treated as an outside securities activity subject to the requirements 
of NASD Rule 3040.\6\
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    \6\ FINRA is proposing to replace NASD Rule 3040 with new 
provisions in proposed FINRA Rule 3110(b)(3), as part of the 
consolidated FINRA rules addressing supervision and supervisory 
controls. See FINRA Regulatory Notice 08-24 (May 2008).
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    The proposed rule change also harmonizes and simplifies the 
standards for what constitutes an outside business activity. Currently, 
the NASD and NYSE rules have a number of overlapping provisions. NYSE 
Rule 346(b) generally requires, subject to certain exceptions, written 
notice whenever a member or employee of a member organization is 
employed or compensated by any other person; serves as an officer, 
director, partner or employee of another organization; or owns any 
stock or has, directly or indirectly, any financial interest in any 
other organization engaged in any securities, financial or kindred 
business. NASD Rule 3030 generally requires notice whenever a 
registered person is employed by or accepts any compensation from any 
person as a result of any outside business activity, other than passive 
investment. In reconciling these two standards, the proposed rule 
change requires prior written notice whenever a registered 
representative will be an employee, independent contractor, sole 
proprietor, officer, director or partner of another person, or will be 
compensated, or have the reasonable expectation of compensation, from 
any other person as a result of any outside business activity. The 
inclusion of the phrase ``or have the reasonable expectation of 
compensation'' addresses situations in which an outside activity does 
not immediately yield compensation (e.g., where a registered person 
intends to work for a start-up business). FINRA believes that a 
registered person should not be able to engage in an activity in which 
he or she reasonably expects to be compensated without providing the 
firm with prior written notice, and FINRA believes that a rule 
dependent on the prior receipt of compensation is too narrow and may be 
susceptible to abuse. Proposed Rule 3270 retains the exemptions in NASD 
Rule 3030 for ``passive investments'' and activities subject to the 
requirements of NASD Rule 3040.\7\
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    \7\ FINRA is separately considering NASD Rule 3050 (Transactions 
for or by Associated Persons) as part of the rulebook consolidation 
process and will consider whether transactions subject to NASD Rule 
3050, as proposed to be amended, also should be exempted from 
proposed FINRA Rule 3270.
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    In addition, the proposed rule would streamline the text by 
replacing the phrase ``person associated with a member in any 
registered capacity'' with ``registered person'' and would re-title the 
rule ``Outside Business Activities of Registered Persons'' to better 
reflect its application to registered persons.

(2) Deleted Provisions of Incorporated NYSE Rule 346 and Its 
Supplementary Material and Interpretations

    FINRA proposes to delete other provisions of NYSE Rule 346 that are 
unnecessary and/or duplicative of provisions in the federal securities 
laws or the FINRA Rulebook and delete NYSE Rule Interpretations that 
are unnecessary or inconsistent with Proposed Rule 3270.
    NYSE Rule 346(a) and related NYSE Interpretation 346/01 require 
natural persons not associated with entities that are registered 
broker-dealers to register with the SEC unless specifically exempted by 
the Exchange Act. FINRA proposes to delete these provisions as 
redundant in light of Section 15(a) of the Exchange Act.\8\
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    \8\ 15 U.S.C. 78o-3.
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    NYSE Rule 346(c) provides that where a member organization approves 
an employee's participation in a private securities transaction in 
which regard the employee has or may receive selling compensation, the 
transaction shall be recorded on the books and records of the member 
organization, which shall supervise such participation as if the 
transaction were executed on its behalf. FINRA proposes to delete this 
provision as redundant of NASD Rule 3040 (Private Securities 
Transactions of an Associated Person).\9\
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    \9\ See supra note 5.
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    NYSE Rule 346(d) provides that no member shall qualify more than 
one member organization for membership. This provision is inconsistent 
with FINRA's approach to membership, which allows the same individual 
to qualify more than one firm for membership, as appropriate. FINRA 
examines separately the merits of each membership application and 
proposes to delete the prohibition in the NYSE rule.
    NYSE Rule 346(e) requires every employee of a member organization 
who is assigned or delegated any responsibility or authority pursuant 
to NYSE Rule 342 to devote his entire time during business hours to the 
business of such member organization unless an alternative arrangement 
has been approved in writing by the member organization. FINRA believes 
that the existing and proposed rules on supervision and outside 
business activities adequately ensure that the member firm's business 
is not adversely affected by outside activities. Moreover, associated 
persons in the independent broker-dealer channel at times devote 
substantial time to non-member business and this provision would create 
unnecessary administrative burdens if applied to them. Accordingly, 
FINRA proposes to delete this provision.
    NYSE 346(f) provides that unless otherwise permitted by the 
Exchange, no member, member organization, approved person, employee or 
any person directly or indirectly controlling, controlled by or under 
common control with a member or member organization shall have 
associated with him or it any person who is known, or in the exercise 
of reasonable care should be known, to be subject to any ``statutory 
disqualification'' defined in Section 3(a)(39) of the Exchange Act.\10\ 
In connection with FINRA's consolidation transaction, FINRA amended its 
definition of disqualification in its By-Laws to align with the 
Exchange Act definition, thereby incorporating additional categories of 
statutory disqualification, including certain affiliated 
relationships.\11\ Accordingly, FINRA proposes to delete NYSE Rule 
346(f) as redundant.\12\
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    \10\ 15 U.S.C. 78c(a)(39).
    \11\ For further discussion, see Securities Exchange Act Release 
No. 59586 (March 17, 2009), 74 FR 12166 (March 23, 2009) (Order 
Approving SR-FINRA-2008-045).
    \12\ This was confirmed in a conversation with Gary Goldshelle 
of FINRA on June 29, 2009.
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    Finally, FINRA proposes to delete NYSE Rule Interpretations 346/02 
and/03, which address personal business expenses and factors to 
consider when

[[Page 32670]]

approving outside activities, FINRA believes the Interpretations are 
unnecessary or inconsistent with proposed FINRA Rule 3270. In 
particular, the provisions in NYSE Rule Interpretation 346/02 requiring 
a firm to assume responsibility for all activities effected on its 
behalf and under its name are addressed by other FINRA rules, including 
supervision rules. In addition, FINRA has chosen not to impose a 
requirement for firms to approve all advertisements of an outside 
business, although a firm may impose such restrictions as part of its 
obligations under supplementary material .01. FINRA requires firms to 
approve all advertisements for member firm business, even if an 
advertisement relates to the firm's non-securities business; however, 
FINRA does not believe that approval should be required for outside 
business activities permitted under the proposed rule change.
    For the reasons noted above, FINRA proposes to transfer NASD Rule 
3030 into the Consolidated FINRA Rulebook with the changes described 
herein. In addition, FINRA proposes to delete NYSE Rule 346 and its 
interpretations from the Transitional Rulebook also as described 
herein.
    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.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\13\ 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. The proposed rule change will clarify and streamline 
NASD Rule 3030 for adoption as a FINRA rule in the new Consolidated 
FINRA Rulebook, while also implementing additional protections such as 
the need for registered persons to provide prior written notice to its 
member firms of proposed outside business activities and for firms to 
determine whether the proposed activities raise investor protection 
concerns.
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    \13\ 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 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-2009-042 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2009-042. 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-2009-042 and should be 
submitted on or before July 29, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-15996 Filed 7-7-09; 8:45 am]

BILLING CODE 8010-01-P