Document ID: SEC-2009-1133-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2009-08-11T04:00Z

[Federal Register: August 11, 2009 (Volume 74, Number 153)]
[Notices]               
[Page 40256-40258]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11au09-133]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60437; File No. SR-FINRA-2009-052]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rule 2264 (Margin Disclosure Statement) in the Consolidated FINRA 
Rulebook

August 5, 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 July 29, 2009, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) 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 substantially 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 adopt NASD Rule 2341 (Margin Disclosure 
Statement) with minor changes as FINRA Rule 2264 in 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 
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 adopt NASD 
Rule 2341 (Margin Disclosure Statement) with minor changes as FINRA 
Rule 2264 in the Consolidated FINRA Rulebook.
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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 Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
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    NASD Rule 2341 requires members that open margin accounts for or on 
behalf of non-institutional customers \4\ to deliver to such customers, 
prior to or at the time of opening the account, a specified margin 
disclosure statement to highlight the risks involved in trading 
securities in a margin account. Members must disclose that the 
securities purchased on margin are the firm's collateral for the loan 
and that, if the securities in the margin account decline in value, the 
firm can take action, such as issuing a margin call and/or selling 
securities or other assets in any of the customer's other accounts, to 
maintain the required equity in the account.
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    \4\ For purposes of the rule, a non-institutional customer means 
a customer that does not qualify as an ``institutional account'' 
under NASD Rule 3110(c)(4). NASD rule 3110(c)(4) provides, ``the 
term `institutional account' shall mean the account of: (A) A bank, 
savings and loan association, insurance company, or registered 
investment company; (B) an investment adviser registered either with 
the Securities and Exchange Commission under Section 203 of the 
Investment Advisers Act of 1940 or with a state securities 
commission (or any agency or office performing like functions); or 
(C) any other entity (whether a natural person, corporation, 
partnership, trust, or otherwise) with total assets of at least $50 
million.'' FINRA is proposing to adopt NASD Rule 3110(c)(4) as FINRA 
Rule 4512(c). See Regulatory Notice 08-25 (May 2008).
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    The disclosure statement includes six specific points of 
information that must be disclosed to non-institutional customers 
before or at the time a margin account is opened for or on behalf of 
such customer:

[[Page 40257]]

     You can lose more funds than you deposit in the margin 
account. A decline in the value of securities that are purchased on 
margin may require you to provide additional funds to the firm that has 
made the loan to avoid the forced sale of those securities or other 
securities or assets in your account(s).
     The firm can force the sale of securities or other assets 
in your account(s). If the equity in your account falls below the 
maintenance margin requirements, or the firm's higher ``house'' 
requirements, the firm can sell the securities or other assets in any 
of your accounts held at the firm to cover the margin deficiency. You 
also will be responsible for any short fall in the account after such a 
sale.
     The firm can sell your securities or other assets without 
contacting you. Some investors mistakenly believe that a firm must 
contact them for a margin call to be valid, and that the firm cannot 
liquidate securities or other assets in their accounts to meet the call 
unless the firm has contacted them first. This is not the case. Most 
firms will attempt to notify their customers of margin calls, but they 
are not required to do so. However, even if a firm has contacted a 
customer and provided a specific date by which the customer can meet a 
margin call, the firm can still take necessary steps to protect its 
financial interests, including immediately selling the securities 
without notice to the customer.
     You are not entitled to choose which securities or other 
assets in your account(s) are liquidated or sold to meet a margin call. 
Because the securities are collateral for the margin loan, the firm has 
the right to decide which security to sell in order to protect its 
interests.
     The firm can increase its ``house'' maintenance margin 
requirements at any time and is not required to provide you advance 
written notice. These changes in firm policy often take effect 
immediately and may result in the issuance of a maintenance margin 
call. Your failure to satisfy the call may cause the member to 
liquidate or sell securities in your account(s).
     You are not entitled to an extension of time on a margin 
call. While an extension of time to meet margin requirements may be 
available to customers under certain conditions, a customer does not 
have a right to the extension.
    Members also must provide the margin disclosure statement (or an 
abbreviated version as provided by the rule) to non-institutional 
margin account customers not less than once a calendar year. The rule 
provides members with the flexibility to use an alternative disclosure 
statement to the language specified in the rule provided that the 
alternative disclosures are substantially similar to the disclosures 
specified in the rule. Members must deliver the initial and annual 
disclosure statement, in writing or electronically, to customers 
covered by the rule on an individual basis.
    In addition, the rule requires members that permit non-
institutional customers to open accounts online, or engage in 
transactions in securities online, to post the margin disclosure 
statement on their Web sites in a clear and conspicuous manner. This 
provision was added to NASD Rule 2341 in 2002 based on a recommendation 
by the General Accountability Office (GAO) as a means to allow a 
broader array of persons to review the disclosures.
    NASD Rule 2341 was approved by the SEC on April 26, 2001, and was 
the product of notice and comment rulemaking. FINRA proposes to adopt 
the requirements set forth in NASD Rule 2341 as FINRA Rule 2264 in the 
Consolidated FINRA Rulebook with minor changes. The minor changes, 
consistent with prior interpretive guidance, clarify that the initial 
margin disclosure statement may be furnished to customers in a separate 
document (or contained by itself on a separate page as part of another 
document), and that the annual disclosure statement may be provided 
within other documentation, such as the account statement, and does not 
have to be on a separate page.\5\ In addition, FINRA is proposing a 
minor change to clarify and update the rule text provisions stating 
that disclosure statements may be provided to individuals either ``in 
writing or electronically.'' Because electronic documents may be 
considered a form of ``writing,'' FINRA is proposing to amend the text 
to state that the documents may be provided ``in paper or electronic 
form.''
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    \5\ In 2001, FINRA issued interpretive guidance that, while the 
rule requires the initial disclosure statement to be provided in a 
separate document, the disclosure statement can be provided with or 
as part of another document provided that it is contained by itself 
on a separate page. The interpretation also clarified that the 
annual disclosure statement may be provided within other 
documentation, such as the account statement, and does not have to 
be on a separate page. Regulatory and Compliance Alert (Summer 
2001).
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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,\6\ 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 required margin disclosures 
provide investors with important information with which they can better 
understand the operation of margin accounts and the risks associated 
with margin trading.
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    \6\ 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 such 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-2009-052 on the subject line.

[[Page 40258]]

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-2009-052. 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 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-2009-052 and should be 
submitted on or before September 1, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-19147 Filed 8-10-09; 8:45 am]

BILLING CODE 8010-01-P