Document ID: SEC-2009-1052-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Amend Rules 6440 and 6540 To Require Members To Create a Contemporaneous Record of Certain Customer and Order Information
Posted Date: 2009-07-28T04:00Z

[Federal Register: July 28, 2009 (Volume 74, Number 143)]
[Notices]               
[Page 37268-37270]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jy09-83]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60366; File No. SR-FINRA-2009-030]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Amend Rules 
6440 and 6540 To Require Members To Create a Contemporaneous Record of 
Certain Customer and Order Information

July 22, 2009.
    On May 22, 2009, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``SEA'' or ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend Rules 6440 and 6540 to 
require members to create a contemporaneous record of certain customer 
and order information. The proposed rule change was published for 
comment in the Federal Register on June 17, 2009.\3\ The Commission 
received no comments on the proposal. This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 60085 (June 10, 2009), 
74 FR 28741 (June 17, 2009).
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I. Description of the Proposed Rule Change

    FINRA has proposed to amend Rules 6440 and 6540 to, among other 
things,

[[Page 37269]]

require members to create a contemporaneous record of certain customer 
and order information demonstrating eligibility for the unsolicited 
customer order exception of SEA Rule 15c2-11 when the member is relying 
on such exception. SEA Rule 15c2-11 sets forth the information review 
and maintenance requirements for broker-dealers that publish quotations 
\4\ in a quotation medium \5\ for certain over-the-counter equity 
securities (e.g., those quoted on the OTC Bulletin Board and Pink 
Sheets).
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    \4\ SEA Rule 15c2-11 defines ``quotation'' as any bid or offer 
at a specified price with respect to a security, or any indication 
of interest by a broker or dealer in receiving bids or offers from 
others for a security, or any indication by a broker or dealer that 
advertises its general interest in buying or selling a particular 
security.
    \5\ ``Quotation medium'' means any ``inter-dealer quotation 
system'' or any publication or electronic communications network or 
other device that is used by brokers or dealers to make known to 
others their interest in transactions in any security, including 
offers to buy or sell at a stated price or otherwise, or invitations 
of offers to buy or sell. ``Inter-dealer quotation system'' means 
any system of general circulation to brokers or dealers that 
regularly disseminates the quotations of identified brokers or 
dealers.
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    Specifically, SEA Rule 15c2-11 prohibits a broker-dealer from 
publishing, or submitting for publication, a quotation for a covered 
OTC equity security unless it has obtained and reviewed current 
information about the issuer whose security is the subject of the 
quotation that the broker-dealer believes is accurate and obtained from 
a reliable source. There are several exceptions to SEA Rule 15c2-11, 
including paragraph (f)(2) of the Rule, which excepts quotations that 
represent a customer's unsolicited order or indication of interest 
(unsolicited customer order exception).
    FINRA Rule 6440 sets forth the standards applicable to member firms 
for demonstrating compliance with SEA Rule 15c2-11. FINRA has indicated 
that it has found that member firms maintain varying levels of 
documentation for demonstrating eligibility for the unsolicited 
customer order exception and, in some cases, are unable to produce any 
proof that a quote in fact represented a customer's unsolicited order 
or indication of interest (``IOI'').
    While a member relying on this or any exception should be able to 
proffer evidence of its eligibility for and compliance with the 
exception, FINRA believes that providing specific recordkeeping 
requirements for demonstrating eligibility for the SEA Rule 15c2-
11(f)(2) exception is appropriate and will promote more uniform record-
keeping and compliance with this exception.
    Specifically, FINRA has proposed that contemporaneous with the 
receipt of any unsolicited customer order or IOI, members would be 
required to record the following details: The identity of the 
associated person who receives the order or IOI directly from the 
customer, if applicable; \6\ the identity of the customer; the date and 
time the order or IOI was received; and the terms of the order or IOI 
that is the subject of the quotation (e.g., security name and symbol, 
size, side of the market, the duration (if specified) and, if priced, 
the price). To the extent a member is displaying a quote representing 
an unsolicited customer order or IOI that was received from another 
broker-dealer, the member is still required to create a contemporaneous 
record of the identity of the person from whom information regarding 
the unsolicited customer order or IOI was received, if applicable; \7\ 
the date and time the unsolicited customer order or IOI was received by 
the member displaying the quotation; and the terms of the order that is 
the subject of the quotation.\8\ The member displaying the quotation 
may rely on the information provided by the routing firm if the member 
has a reasonable basis for believing that the information is valid.
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    \6\ FINRA stated that in cases where a member is displaying a 
quote representing an unsolicited customer order or IOI that was 
received electronically, it is understood that there may not be a 
``person'' associated with the receipt or submission of such 
unsolicited customer order or IOI. Thus, with respect to the 
requirement that members record (1) the identity of the associated 
person who received the unsolicited customer order or IOI; or (2) 
the identity of the person from whom information regarding the 
unsolicited customer order or IOI was received where the order or 
IOI is received from another broker-dealer, members are only 
required to record such information if applicable.
    \7\ See supra note 6.
    \8\ FINRA stated that it is critical that the member receiving 
an order be advised of and understand the terms of the order that 
are relevant to the exception so that the receiving member may 
reasonably and accurately rely on the unsolicited customer order 
exception. For example, if the customer order is a ``day'' order, 
the receiving member must be advised of that fact so that it can 
withdraw the quote upon the expiration of the order. Similarly, to 
the extent that the terms of the order change or other significant 
information is received by the firm routing the order (e.g., a 
``good-till-cancelled'' order is cancelled or there is a change in 
the terms of the order), the firm routing such order must promptly 
update the member displaying the quote as to the change in the terms 
of the order. To the extent the firm routing the order is not a 
member, the member should make periodic inquiry as to whether the 
terms of the order have changed. Members may not rely on the 
unsolicited customer order exception where a displayed quote no 
longer accurately represents current unsolicited customer interest.
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    In addition, FINRA proposed to amend Rule 6540 (Requirements 
Applicable to Market Makers). The proposed amendment would delete 
footnote 1 under Rule 6540. Footnote 1 sets forth a 
summary of exemptive relief granted by the SEC from the requirements of 
SEA Rule 15c2-11 (subject to certain conditions). FINRA noted that 
because the Commission has granted additional exemptive requests from 
the requirements of SEA Rule 15c2-11 that are not included in footnote 
1, and believes the Commission may continue to grant such 
requests in the future, FINRA has proposed to delete footnote 
1 in its entirety and specify in Rule 6540 that members must 
demonstrate compliance with, or qualify for an exception or exemption 
from, SEA Rule 15c2-11.\9\
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    \9\ SEA Rule 15c2-11(h) sets forth the SEC's exemptive authority 
with respect to the requirements of SEA Rule 15c2-11 and provides 
that SEA Rule 15c2-11 shall not prohibit any publication or 
submission of any quotation if the SEC, upon written request or upon 
its own motion, exempts such quotation either unconditionally or on 
specified terms and conditions, as not constituting a fraudulent, 
manipulative or deceptive practice comprehended within the purpose 
of the rule.
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II. Discussion and Findings

    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 that are applicable to a national securities 
association.\10\ In particular, the Commission believes that the 
proposed rule change is consistent with the provisions of Section 
15A(b)(6) of the Act, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest. The Commission 
believes that the proposed amendments to Rules 6440 and 6540 will 
protect the public interest by promoting more uniform record-keeping 
and compliance with SEA Rule 15c2-11.
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    \10\ In approving the proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-FINRA-2009-030) be 
and hereby is approved.
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ 17 CFR 200.30-3(a)(12).

[[Page 37270]]

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-17858 Filed 7-27-09; 8:45 am]

BILLING CODE 8010-01-P