Document ID: SEC-2009-0332-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2009-03-11T04:00Z

[Federal Register: March 11, 2009 (Volume 74, Number 46)]
[Notices]               
[Page 10632-10634]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11mr09-154]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59495; File No. SR-FINRA-2008-052]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of a Proposed Rule Change 
Relating to the Adoption of FINRA Rule 2140 (Interfering With the 
Transfer of Customer Accounts in the Context of Employment Disputes) in 
the Consolidated FINRA Rulebook

March 3, 2009.

I. Introduction

    On October 29, 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'') proposed rule change SR-FINRA-2008-052 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'').\1\ 
Notice of the proposal was published in the Federal Register on January 
27, 2009.\2\ No comment letters were received. For the reasons 
discussed below, the Commission is

[[Page 10633]]

granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 59253 (January 15, 
2009), 74 FR 4792.
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II. Description

    The proposed rule change adopts without material change NASD 
Interpretive Material 2110-7 (IM-2110-7) (Interfering With the Transfer 
of Customer Accounts in the Context of Employment Disputes) as a FINRA 
rule in the consolidated FINRA rulebook.

(1) Purpose

    As part of the process of developing the new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\3\ FINRA is proposing to adopt 
without material change NASD IM-2110-7 as a FINRA rule in the 
Consolidated FINRA Rulebook. The proposed rule change would renumber 
NASD IM-2110-7 as FINRA Rule 2140 in the Consolidated FINRA Rulebook.
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    \3\ The current Consolidated FINRA Rulebook includes, in 
addition to FINRA Rules, (1) NASD Rules and (2) rules incorporated 
from NYSE (``Incorporated NYSE Rules'') (until the completion of the 
rulebook consolidation process, the FINRA rulebook includes NASD 
Rules and Incorporated NYSE Rules, together referred to as the 
``Transitional Rulebook''), in addition to the new consolidated 
FINRA Rules). 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''). For more 
information about the rulebook consolidation process, see FINRA 
Information Notice, March 12, 2008 (Rulebook Consolidation Process).
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(A) Background
    NASD IM-2110-7 provides that it shall be inconsistent with just and 
equitable principles of trade for a member or person associated with a 
member \4\ to interfere with a customer's request to transfer his or 
her account in connection with the change in employment of the 
customer's registered representative provided that the account is not 
subject to any lien for monies owed by the customer or other bona fide 
claim. Prohibited interference includes, but is not limited to, seeking 
a judicial order or decree that would bar or restrict the submission, 
delivery, or acceptance of a written request from a customer to 
transfer his or her account.\5\
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    \4\ The term ``person associated with a member'' includes, among 
others, registered representatives. See FINRA By-Laws, Article I, 
Paragraph (rr).
    \5\ IM-2110-7 further states that nothing in the Interpretation 
shall affect the operation of NASD Rule 11870 (Customer Account 
Transfer Contracts). Generally, Rule 11870 addresses the transfer of 
securities account assets from one member to another member in 
connection with a customer request. FINRA intends to review NASD 
Rule 11870 and related interpretive materials as part of a later 
phase in the rulebook consolidation process. Note that the 
Commission has approved FINRA's proposed rule change to rescind, as 
duplicative of Rule 11870 Incorporated NYSE Rule 412 and its 
Interpretation. See Securities Exchange Act Release No. 58533 
(September 12, 2008), 73 FR 54652 (September 22, 2008) [File No. SR-
FINRA-2008-036].
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    FINRA adopted IM-2110-7 to address the practice of delaying 
customer account transfers.\6\ In adopting IM-2110-7, FINRA noted in a 
Notice to Members that, when a registered representative leaves his or 
her firm for a position at a different firm, clients serviced by the 
registered representative may decide to continue their relationship 
with the registered representative by transferring their accounts to 
the registered representative's new firm. FINRA expressed concern that 
the registered representative's former firm, concerned that its former 
employee may have breached his or her employment contract by sharing 
client information with the new firm or by soliciting clients to 
transfer their accounts to the new firm, sometimes would seek a court 
order to prevent the transfer of accounts. FINRA noted that in a prior 
Notice to Members it had already alerted members that unnecessary 
delays in transferring customer accounts, including delays accompanied 
by attempts to persuade customers not to transfer their accounts, are 
inconsistent with just and equitable principles of trade.\7\ FINRA 
stated that obtaining court orders to prevent customers from following 
a registered representative to a different firm is similar to the 
unfair practice of delaying transfers that the prior Notice had warned 
about.
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    \6\ See NASD Notice to Members 02-07 (January 2002) (Interfering 
With Customer Account Transfers); see also Securities Exchange Act 
Release No. 45239 (January 4, 2002), 67 FR 1790 (January 14, 2002) 
[File No. SR-NASD-2001-95].
    \7\ NASD Notice to Members 79-7 (February 1979) (Fair Treatment 
of Customer Accounts); see also Securities Exchange Act Release No. 
15194 (September 28, 1978) (Notice to Broker-Dealers Concerning Fair 
Treatment of Customer Accounts).
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    In adopting IM-2110-7, FINRA further stated that the Interpretive 
Material does not affect the ability of member firms to use employment 
agreements to prevent former representatives from soliciting firm 
customers. Members are not prevented from pursuing other remedies they 
may have arising from employment disputes with former registered 
representatives. Rather, IM-2110-7 is limited to restricting a member 
from interfering with a customer's right to transfer his or her account 
once the customer has asked the firm to move the account.
(B) Proposal
    FINRA believes that NASD IM-2110-7 is consistent with the goal of 
investor protection and serves the public interest. FINRA proposes to 
transfer NASD IM-2110-7 with only minor changes into the Consolidated 
FINRA Rulebook. Specifically, IM-2110-7 would be recodified with 
conforming revisions as a stand-alone FINRA rule rather than as 
interpretive material to NASD Rule 2110 (Standards of Commercial Honor 
and Principles of Trade).\8\
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    \8\ The exact revised text of IM-2100-8 is attached as Exhibit 5 
to the proposed rule change and is available at http://
www.finra.org/Industry/Regulation/RuleFilings/2008/P117330. 
Similarly, FINRA has transferred NASD Rule 2110 to the Consolidated 
FINRA Rulebook without change as FINRA Rule 2010. Securities 
Exchange Act Release No. 58643 (September 25, 2008), 73 FR 57174 
(October 1, 2008) [File No. SR-FINRA-2008-028].
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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 ninety days 
following Commission approval.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities association. 
In particular, the Commission finds that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act,\9\ 
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 is an 
interpretation to an existing rule of NASD that is being adopted 
without material change to the FINRA rulebook. The proposed rule change 
should continue to protect investors and the public interest by 
addressing interference with the transfer of customer accounts in the 
context of employment disputes between registered representatives and 
their former firms. For these reasons, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 15A(b)(6) of the Act and the rules and 
regulations thereunder.\10\
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    \9\ 15 U.S.C. 78o-3(b)(6).
    \10\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-

[[Page 10634]]

FINRA-2008-052) be and hereby is approved.
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    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-5212 Filed 3-10-09; 8:45 am]

BILLING CODE 8011-01-P