Document ID: SEC-2009-0798-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2009-06-15T04:00Z

[Federal Register: June 15, 2009 (Volume 74, Number 113)]
[Notices]               
[Page 28302-28304]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15jn09-143]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60070; File No. SR-FINRA-2009-038]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Repeal 
Incorporated NYSE Rule 134 (Differences and Omissions--Cleared 
Transactions) and NYSE Rule 440I (Records of Compensation 
Arrangements--Floor Brokerage) as Part of the Process To Develop the 
Consolidated FINRA Rulebook

June 8, 2009.
    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 June 1, 2009, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been 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 repeal Incorporated NYSE Rule 134 
(Differences and Omissions--Cleared Transactions) and Incorporated NYSE 
Rule 440I (Records of Compensation Arrangements--Floor Brokerage), as 
part of the process of developing the consolidated FINRA rulebook.
    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 the 
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 repeal NYSE 
Incorporated Rule 134 (Differences and Omissions--Cleared Transactions) 
and NYSE Incorporated Rule 440I (Records of Compensation Arrangements--
Floor Brokerage), to remove rules that are specific to the New York 
Stock Exchange, LLC (``NYSE'') marketplace and relate primarily to 
activities by floor brokers.
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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 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).
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Incorporated NYSE Rule 134 (Differences and Omissions--Cleared 
Transactions)
    The proposed rule change would repeal Incorporated NYSE Rule 134, 
which sets forth procedures for clearing member firms to identify 
uncompared transactions and resolve them by making any necessary 
additions, deletions or changes to their data on the facility system. 
The rule provides guidelines for the review of uncompared transactions 
by clearing member firms and details the manner and timing of 
notifications that must be provided and the types of records that must 
be maintained.
    Further, NYSE Rule 134(d) requires floor brokers to maintain or 
participate in an error account in which all bona fide error 
transactions are processed and recorded. The rule defines an ``error'' 
to include an execution outside of an order's written instructions 
(e.g., wrong security, wrong side of the market, outside the limit 
price, over buying or selling, duplicate execution, etc.) or missing 
the market on a ``held'' order. In such cases, floor brokers use their 
error account to assume or acquire a position as a result of a 
legitimate error. Floor brokers are required pursuant to the rule to 
maintain a signed, time-stamped record, including supporting 
documentation of such error. The rule further requires every member not 
associated with a member organization, and every member associated with 
a member organization that derives at least 75% of its revenue from 
floor brokerage based on execution of orders on the floor to report to 
the NYSE error transactions in such member's or his or her member 
organization's account which result in a profit of more than $500 for 
any transaction, or for more than $3,000 in any calendar week. Such 
reports must contain a detailed record of the errors and liquidating 
transactions.
    FINRA is proposing to delete Incorporated NYSE Rule 134 from the 
Transitional Rulebook and not adopt the rule into the Consolidated 
FINRA Rulebook because the rule is narrowly directed to the trading 
activities of NYSE floor brokers. FINRA believes that it is not 
necessary to transfer NYSE Rule 134 into the Consolidated FINRA 
Rulebook because the resolution of trading errors on the NYSE and 
recordkeeping of error accounts is specific to the NYSE.\4\
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    \4\ In addition to being subject to SEC and FINRA rules, Dual 
Members also remain subject to the NYSE's rulebook. FINRA notes that 
the NYSE may determine to retain NYSE Rule 134 for its own purposes.
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Incorporated NYSE Rule 440I (Records of Compensation Arrangements--
Floor Brokerage)
    The proposed rule change would also repeal Incorporated NYSE Rule 
440I, which requires each member and member organization that is 
``primarily engaged as an agent in executing transactions on the Floor 
of the Exchange'' (e.g., $2 brokers or

[[Page 28303]]

independent brokers) to maintain certain records of compensation 
arrangements in excess of $5,000 per year. The records must include a 
description of each type of arrangement and identify, by name, the 
parties to each type of arrangement in effect. The rule applies only if 
the member or member organization derives at least 75 percent of its 
revenue from floor brokerage. The rule also excludes any compensation 
arrangement involving the transmission of orders solely through the 
NYSE's electronic order routing system.
    NYSE Rule 440I was adopted in 1999 following an SEC order relating 
to the settlement of an enforcement action against the NYSE for failure 
to enforce compliance with Section 11(a) of the Act,\5\ Rule 11a-1 
thereunder,\6\ and NYSE Rules 90, 95, and 111, which relate to conduct 
by floor brokers.\7\ NYSE Rule 440I was adopted to enhance the NYSE's 
oversight of floor brokerage compensation arrangements while also 
fulfilling some of the requirements imposed by the SEC's order. Thus, 
the NYSE determined to limit the rule to floor brokers and exclude 
other members in part because ``the requirements would be unduly 
burdensome on and impractical for those members and member 
organizations, based on the diverse nature and size of their business 
activities and customer base.'' \8\
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    \5\ 15 U.S.C. 78k(a).
    \6\ 17 CFR 240.11a-1.
    \7\ See Securities Exchange Act Release No. 41996 (October 8, 
1999), 64 FR 56560 (October 20, 1999). Subject to certain 
exceptions, these provisions generally prohibit exchange members 
from effecting transactions on the floor of an exchange for their 
own accounts, the accounts of associated persons, or an account over 
which they or their associated persons have investment discretion. 
See also Securities Exchange Act Release No. 41574, Admin. 
Proceeding File No. 3-9925 (June 29, 1999).
    \8\ See Securities Exchange Act Release No. 41441 (May 24, 
1999), 64 FR 29723 (June 2, 1999).
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    The proposed rule change would delete Incorporated NYSE Rule 440I 
from the Transitional Rulebook and would not adopt the rule into the 
Consolidated FINRA Rulebook. NYSE Rule 440I was adopted following the 
issuance of an SEC order to enhance the NYSE's ability to surveil the 
activity and compensation arrangements of floor brokers and to examine 
for their compliance with Section 11(a) of the Act, Rule 11a-1 
thereunder, and NYSE Rules 90, 95, and 111.\9\ FINRA does not believe 
it is necessary to incorporate NYSE Rule 440I into the Consolidated 
FINRA Rulebook.\10\
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    \9\ NYSE Rules 90, 95, and 111 were not incorporated into the 
Transitional FINRA Rulebook. Those rules, however, remain part of 
the NYSE's rulebook.
    \10\ In addition to being subject to SEC rules (including SEA 
Rule 17a-4(b)(7) (requiring every member, broker, or dealer to 
retain all written agreements (or copies thereof) entered into by 
such member, broker, or dealer relating to its business as such, 
including agreements with respect to any account) and FINRA rules, 
Dual Members also remain subject to the NYSE's rulebook. FINRA notes 
that the NYSE may determine to retain NYSE Rule 440I for its own 
purposes.
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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 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,\11\ 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 would 
remove rules that are specific to the NYSE marketplace and relate 
primarily to activities by floor brokers. The proposed rule change 
would also advance the development of a more efficient and effective 
Consolidated FINRA Rulebook.
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    \11\ 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 the 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-2009-038 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-2009-038. 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 the 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-2009-038 and should be 
submitted on or before July 6, 2009.

[[Page 28304]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-13975 Filed 6-12-09; 8:45 am]

BILLING CODE 8010-01-P