Document ID: SEC-2015-2095-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.,
Posted Date: 2015-12-18T05:00Z

[Federal Register Volume 80, Number 243 (Friday, December 18, 2015)]
[Notices]
[Pages 79112-79113]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-31789]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76639; File No. SR-FINRA-2015-033]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Amend FINRA 
Rule 0150 To Apply FINRA Rule 2121 and its Supplementary Material .01 
and .02 to Transactions in Exempted Securities That Are Government 
Securities

December 14, 2015.

I. Introduction

    On September 17, 2015, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to FINRA Rule 0150, Application 
of Rules to Exempted Securities Except Municipal Securities, so that 
FINRA Rule 2121 and its Supplementary Material .01 and .02, which 
govern mark-ups and commissions, will apply to transactions in exempted 
securities that are government securities. The proposed amendment was 
published for comment in the Federal Register on October 6, 2015.\3\ On 
November 19, 2015, FINRA granted the Commission an extension of time, 
until January 4, 2016 to act on the proposal.\4\ No comments were 
received in response to the proposal. This order approves the rule 
change as proposed.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Notice of Filing of a Proposed Rule Change to Amend 
FINRA Rule 0150 to Apply FINRA Rule 2121 and its Supplementary 
Material .01 and .02 to Transactions in Exempted Securities That Are 
Government Securities; Exchange Act Release No. 76059 (September 30, 
2015), 80 FR 60416 (October 6, 2015) (``Notice'').
    \4\ See Letter from Andrew Madar, Associate General Counsel, 
FINRA Regulatory Policy and Oversight, to Katherine England, 
Assistant Director, Division of Trading and Markets, Securities and 
Exchange Commission, dated November 19, 2015.
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II. Description of the Proposed Rule Change

A. Background

    As stated in the Notice, FINRA is proposing to amend FINRA Rule 
0150, which governs the application of FINRA rules and the rules of the 
National Association of Securities Dealers (``NASD'') \5\ that apply to 
transactions in, and business activities relating to, exempted 
securities, except municipal securities, conducted by members and 
associated persons.\6\ Current FINRA Rule 0150(c) specifically 
enumerates these provisions and does not include reference to FINRA 
Rule 2121, Supplementary Material .01, and Supplementary Material .02, 
which govern mark-ups and commissions (``mark-up rule'').\7\ The 
proposed amendment would incorporate the mark-up rule into FINRA Rule 
0150 and extend its application to transactions in, and business 
activities relating to, exempted securities that are government 
securities, as defined in Section 3(a)(42) of the Exchange Act.\8\
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    \5\ 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 FINRA Information Notice, March 12, 2008 (Rulebook 
Consolidation Process), available at https://www.finra.org/sites/default/files/NoticeDocument/p038121.pdf.
    \6\ The terms exempted securities, municipal securities, and 
government securities as used in this order are defined in Sections 
3(a)(12), 3(a)(29), and 3(a)(42) of the Act, respectively.
    \7\ NASD Rule 2440, IM-2440-1, and IM-2440-2 were recently moved 
to the FINRA rules without any substantive changes, becoming FINRA 
Rule 2121, Supplementary Material .01, and Supplementary Material 
.02, respectively. See Notice of Filing and Immediate Effectiveness 
of a Proposed Rule Change to Adopt FINRA Rule 2121 (Fair Prices and 
Commissions), Supplementary Material .01 (Mark-Up Policy) and 
Supplementary Material .02 (Additional Mark-Up Policy For 
Transactions in Debt Securities, Except Municipal Securities) in the 
Consolidated FINRA Rulebook; Exchange Act Release No. 72208 (May 21, 
2014), 79 FR 30675 (May 28, 2014).
    \8\ This includes U.S. Treasury securities, as defined in FINRA 
Rule 6710(p). See Notice at 60417, note 12.
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    In the Notice, FINRA described the historical reasons for not 
applying certain NASD rules, including the mark-up rule, to exempted 
securities (except municipal securities). Prior to 1993, there were 
statutory limitations on the NASD's ability to apply sales practice 
rules, including the mark-up rules, to transactions in exempted 
securities. The Government Securities Act Amendments of 1993 (``GSAA'') 
\9\ eliminated the limitations on the authority of registered 
securities associations over transactions by a registered broker or 
dealer in an exempted security.\10\ Following the

[[Page 79113]]

GSAA, NASD proposed to apply certain NASD rules to exempted securities 
other than to municipal securities but did not propose to apply the 
mark-up rule then in effect to such securities.\11\ FINRA stated in the 
Notice that the NASD believed at the time that actions for conduct 
generally encompassed by the NASD mark-up rule in the government 
securities market could be brought under NASD Rule 2110 (Standards of 
Commercial Honor and Principles of Trade).\12\
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    \9\ Government Securities Act Amendments of 1993, Pub. L. 103-
202, Sec.  106(b)(1), 107 Stat. 2344 (1993).
    \10\ Specifically Section 15A(f) of the Act imposed limitations 
on the authority of registered securities associations over 
transactions by a registered broker or dealer in an exempted 
security. This provision was eliminated as part of the GSAA. For 
more information on the background of Section 15A(f), see Notice at 
60417, note 5.
    \11\ NASD Rule 2440 and IM-2440-1. See Notice at 60417. The NASD 
stated at the time that it intended to review the specific 
application of these rules to the government securities market and 
that it was developing an interpretation of the mark-up rule with 
respect to exempted securities and other debt securities.
    \12\ See Notice at 60417, note 9. FINRA also described in the 
Notice how NASD adopted NASD Rule 0116 (now FINRA Rule 0150) in 
2001, setting forth the NASD rules that would apply to transactions 
in exempted securities, except municipal securities and how the SEC 
approved IM-2440-2, which set forth a mark-up policy for 
transactions in debt securities, except municipal securities. See 
id., notes 10-11.
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B. Purpose

    FINRA believes that the proposal to extend FINRA Rule 0150 to apply 
the mark-up rule to transactions in government securities is consistent 
with both the GSAA and with the prior application by NASD of certain of 
its rules, following the GSAA, to exempted securities other than 
municipal securities.\13\
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    \13\ See id. at 60417.
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    FINRA also believes that there would be regulatory benefits from 
amending FINRA Rule 0150 to apply the mark-up rule to transactions in 
government securities. In the Notice, FINRA notes that it must use the 
general provisions of FINRA Rule 2010 if FINRA staff wants to bring a 
case alleging excessive mark-ups, mark-downs, or commissions in 
transactions in exempted securities other than municipal securities, 
such as agency debt securities or U.S. Treasury securities.\14\ FINRA 
believes that the proposed amendment would provide it an additional 
``specific cause of action under which conduct involving government 
securities could be regulated'' and ``would clearly signal to members 
that conduct relating to mark-ups and commissions in the market for 
government securities directly implicates the mark-up rule.'' \15\ 
FINRA also noted that the mark-up rule provides ``specific criteria by 
which members should assess debt mark-ups and mark-downs.'' FINRA 
believes that amending Rule 0150 to apply these standards to 
transactions in government securities would provide both members and 
its staff with ``clearer standards by which to measure the propriety of 
mark-ups, mark-downs, and commissions'' in transactions involving 
government securities.\16\
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    \14\ See id. at 60418.
    \15\ Id.
    \16\ Id.
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    FINRA also believes that the proposed amendment would only have a 
minimal impact on its members because FINRA Rule 2010 already applies 
to these transactions.\17\ In addition, FINRA noted in the Notice that 
while the proposal would extend the more specific requirements of the 
mark-up rule to transactions in government securities, the provisions 
are already applicable to corporate debt securities.\18\ Therefore, 
FINRA members that currently engage in transactions in corporate debt 
will be familiar with its application.\19\
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    \17\ Id.
    \18\ Id.
    \19\ Id. FINRA also noted that it believes most firms apply 
substantially similar standards to all transactions in fixed income 
securities. Furthermore, FINRA does not believe that the proposed 
amendments would impact the reporting or surveillance of 
transactions in government securities because it already requires 
its members to report transactions in many government securities 
(i.e., agency debentures and agency asset backed securities) to its 
Trade Reporting and Compliance Engine (``TRACE'') and it actively 
surveils the markets in such securities. FINRA also noted that for 
government securities that are not TRACE-eligible, such as U.S. 
Treasury securities, any review of transactions pursuant to the 
mark-up rule would not change. See Notice at 60418.
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III. Discussion and Commission Findings

    After carefully considering the proposed rule, 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.\20\ In particular, the Commission 
finds that the proposed rule change is consistent with Section 
15A(b)(6) of the Act, which requires, among other things, that FINRA's 
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.\21\ The 
Commission notes that no comments were received in response to the 
proposal.\22\
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    \20\ In approving the proposed rule change, the Commission has 
also considered the rule change's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78o-3(b)(6).
    \22\ In 2013, FINRA sought comment on proposed rule changes 
that, among other things, would have amended Rule 0150 to apply the 
mark-up rule to certain government securities. No comments were 
received on that aspect of the proposal. See Notice at 60419, note 
18 for more information.
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    As discussed above, the proposed rule change would expand the 
applicability of the mark-up rule to exempted securities that are 
government securities. The Commission notes that government securities 
can be subject to excessive mark-ups and agrees that making more 
explicit FINRA's authority over excessive and improper mark-ups, mark-
downs, or commissions relating to government securities will benefit 
investors in government securities. While the Commission acknowledges 
that FINRA Rule 2010 already applies to transactions in government 
securities and instances of improper or excessive mark-ups, mark-downs, 
and commissions, the Commission believes that expanding FINRA Rule 0150 
to include the mark-up rule will give FINRA an important enforcement 
tool with which to pursue instances of excessive mark-ups, mark-downs, 
and commissions. The Commission also agrees with FINRA's belief that 
applying the mark-up rule to these securities will provide members with 
additional clarity when conducting transactions in government 
securities.
    Pursuant to Section 19(b)(5) of the Act,\23\ the Commission 
consulted with and considered the views of the Department of the 
Treasury (``Treasury'') in determining to approve the proposed rule 
change.\24\ Treasury did not object to FINRA's proposal that the mark-
up rule be applied to government securities.\25\
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    \23\ 15 U.S.C. 78s(b)(5).
    \24\ Section 19(b)(5) of the Act states generally that the 
Commission shall consult with and consider the views of the 
Secretary of the Treasury prior to approving a proposed rule filed 
by a registered securities association that primarily concerns 
conduct related to transactions in government securities. See also 
Notice at 60418, note 15.
    \25\ Telephone conversation between Treasury staff and Lourdes 
Gonzalez, Assistant Chief Counsel; Alicia Goldin, Senior Special 
Counsel; and Stephen Benham, Special Counsel, Division of Trading 
and Markets, Commission, on November 16, 2015.
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IV. Conclusion

    IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-FINRA-2015-033), be, and 
hereby is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-31789 Filed 12-17-15; 8:45 am]
 BILLING CODE 8011-01-P