Document ID: SEC-2013-0783-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2013-04-24T04:00Z

[Federal Register Volume 78, Number 79 (Wednesday, April 24, 2013)]
[Notices]
[Pages 24261-24263]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-09631]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69398; File No. SR-FINRA-2013-020]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to FINRA Rule 5250 (Payments for Market 
Making)

April 18, 2013.
    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 April 15, 2013, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') 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 prepared by FINRA. FINRA has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 5250 (Payments for Market 
Making) to create an exception for payments to members that are 
expressly provided for under the rules of a national securities 
exchange.
    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
    FINRA Rule 5250 (Payments for Market Making or ``Rule'') explicitly 
prohibits any payment by issuers or issuers' affiliates and promoters, 
directly or indirectly, to a member for publishing a quotation, acting 
as a market maker, or submitting an application in connection 
therewith. The Rule is intended, among other things, to prohibit 
members from receiving compensation or other payments from an issuer 
for quoting or making a market in the issuer's securities and to assure 
that members act in an independent capacity when publishing a quotation 
or making a market in an issuer's securities.
    FINRA's policy concerning payments for market making was first set 
forth in Notice to Members 75-16 and then codified as NASD Rule 2460 
(now FINRA Rule 5250) in 1997.\4\ Among other things, FINRA recognized 
that members generally have considerable latitude and freedom to make 
or terminate market making activities and was concerned that payments 
by an issuer to a market maker could influence a firm's decision to 
make a market. In particular, the existence of undisclosed, private 
arrangements between market makers and an issuer and/or its promoters 
may make it difficult for investors to ascertain the true market for 
the securities, such that what might appear to be independent trading 
activity may well be illusory.\5\
---------------------------------------------------------------------------

    \4\ See Notice to Members 75-16 (February 20, 1975) and 
Securities Exchange Act Release No. 38812 (July 3, 1997), 62 FR 
37105 (July 10, 1997) (``Order Approving File No. SR-NASD-97-29'').
    \5\ ``If payments * * * were permitted, investors would not be 
able to ascertain which quotations in the marketplace are based on 
actual interest and which quotations are supported by issuers or 
promoters. This structure would harm investor confidence in the 
overall integrity of the marketplace.'' See Order Approving File No. 
SR-NASD-97-29 at 37107.
---------------------------------------------------------------------------

    FINRA staff has received inquiries regarding the application of the 
Rule to various types of arrangements provided for by the rules of a 
national securities exchange (an ``exchange''). For example, the 
Commission has approved a rule change by NASDAQ Stock Market 
implementing a voluntary program for market makers that would be funded 
through fees by the issuer or an affiliate of the issuer (``NASDAQ 
MQP'').\6\ The Commission also currently is considering a proposed rule 
change by NYSE Arca to adopt a voluntary market maker program for 
certain exchange-traded products that would be funded through fees by 
the issuer.\7\
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 69195 (March 20, 
2013), 78 FR 18393 (March 26, 2013) (Order Granting Approval of a 
Proposed Rule Change, as Modified by Amendment Nos. 1 and 3 Thereto, 
To Establish the Market Quality Program) (File No. SR-NASDAQ-2012-
137) (``SEC Approval Order'').
    \7\ See Securities Exchange Act Release No. 69335 (April 5, 
2013), 78 FR 21681 (April 11, 2013) (Notice of Filing of Proposed 
Rule Change and Amendment No. 1 Thereto To Implement a One-Year 
Pilot Program for Issuers of Certain Exchange-Traded Products Listed 
on the Exchange) (File No. SR-NYSEArca-2013-34). This proposal has 
not been acted upon by the Commission. The Commission has solicited 
comment on the proposed rule change, which are due by May 2, 2013.
---------------------------------------------------------------------------

    FINRA believes certain exchange program structures, such as the one 
adopted by NASDAQ, could be deemed an indirect payment under Rule 5250;

[[Page 24262]]

however, FINRA does not believe that such arrangements should be 
prohibited under the Rule because those payments would be made as part 
of a transparent structure put in place by another self-regulatory 
organization pursuant to a rule change, which generally must be 
approved by the SEC following publication for public comment in the 
Federal Register.\8\ Accordingly, where a market maker payment is 
provided for under the rules of an exchange that are effective after 
being filed with, or filed with and approved by, the SEC pursuant to 
the requirements of the Act, it is FINRA's view that comity should be 
afforded to such exchange rulemaking and the payment should not be 
prohibited under Rule 5250.
---------------------------------------------------------------------------

    \8\ See, e.g., Securities Exchange Act Release No. 68515 
(December 21, 2012), 77 FR 77141 (December 31, 2012) (Notice of 
Filing of a Proposed Rule Change and Amendment No. 1 Thereto to 
Establish the Market Quality Program) (File No. SR-NASDAQ-2012-137).
---------------------------------------------------------------------------

    FINRA also believes the NASDAQ MQP contains several features that 
mitigate the concerns the Commission discussed when approving the 
predecessor rule to FINRA Rule 5250.\9\ For example, the terms of the 
NASDAQ MQP generally are ``objective, clear, and transparent'' \10\ and 
includes [sic] disclosure requirements to help alert and educate 
potential and existing investors about the program.\11\ Specifically, 
and among other things, the NASDAQ program provides for Web site 
disclosure of certain information, including the identities of the 
companies, securities and market makers participating in the NASDAQ 
MQP, as well as the amount of the supplemental fee, if any, per 
security that would be in addition to the fixed basic fee. FINRA 
believes the level of transparency available regarding the structure of 
the program, participation of the parties and possible payments to 
market makers, provides important disclosure to investors in NASDAQ MQP 
securities, enabling them to identify which exchange-traded funds are 
and are not subject to the NASDAQ MQP. FINRA, therefore, believes it is 
appropriate to create an exception to Rule 5250 for payments to members 
expressly provided for under the rules of an exchange where the 
Commission has analyzed the payments and determined that the concerns 
Rule 5250 was designed to addressed have been sufficiently mitigated.
---------------------------------------------------------------------------

    \9\ See supra text accompanying note 5.
    \10\ See SEC Approval Order at 18401.
    \11\ See SEC Approval Order.
---------------------------------------------------------------------------

    FINRA has filed the proposed rule change for immediate 
effectiveness. The implementation date of the proposed rule change will 
be May 15, 2013.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\12\ 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. FINRA believes that the proposed rule change meets 
these requirements in that it excepts payments to market makers that 
are provided for under the rules of a national securities exchange, 
which are adopted pursuant to the Act's Section 19(b) rule filing 
process. In addition, these payments and related activity would be 
governed by the established market surveillance and oversight 
procedures of a national securities exchange.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    FINRA believes that the proposed rule change also maintains the 
protections the rule was designed to provide, while refining the proper 
scope of the Rule to exclude payments made pursuant to objective, clear 
and transparent programs that are established by a national securities 
exchange to improve the market quality, depth and/or liquidity of 
securities traded on such exchange.

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 in that it treats all national 
securities exchanges equally by uniformly excepting payments made to 
market makers pursuant to the rules of an exchange that are effective 
after being filed with, or filed with and approved by, the SEC pursuant 
to the requirements 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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6) thereunder.\14\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
FINRA has satisfied this requirement.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2013-020 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-2013-020. This 
file number should be included on the subject line if email 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

[[Page 24263]]

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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 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-2013-020 and should be 
submitted on or before May 15, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Kevin M. O'Neill,
Deputy Secretary.
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 2013-09631 Filed 4-23-13; 8:45 am]
BILLING CODE 8011-01-P