Document ID: SEC-2022-1342-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2022-10-13T04:00Z

[Federal Register Volume 87, Number 197 (Thursday, October 13, 2022)]
[Notices]
[Pages 62137-62147]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-22174]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95990; File No. SR-FINRA-2022-028]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend FINRA Rule 0150 (Application of Rules to 
Exempted Securities Except Municipal Securities)

October 6, 2022.
    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 September 29, 2022, the 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend paragraph (c) of FINRA Rule 0150 
(Application of Rules to Exempted Securities Except Municipal 
Securities) to clarify the application of specified

[[Page 62138]]

FINRA rules to transactions in, and business activities relating to, 
exempted securities, including government securities (other than 
municipal securities).\4\ The proposed rule change would also amend 
Capital Acquisition Broker (``CAB'') Rule 015 (Application of Rules to 
Municipal Securities) to more closely track the text of FINRA Rule 
0150, and for consistency with the revisions to FINRA Rule 0150 made 
pursuant to this rule filing.
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    \4\ For purposes of the proposed rule change, the terms 
``exempted securities,'' ``government securities'' and ``municipal 
securities'' shall have the meanings as specified in Exchange Act 
Sections 3(a)(12), 3(a)(42) and 3(a)(29), respectively. 15 U.S.C. 
78c(a)(12), (a)(42) and (a)(29).
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    Below is the text of the proposed rule change. Proposed new 
language is underlined; proposed deletions are in brackets.\5\
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    \5\ FINRA notes that some of the rules listed in FINRA Rule 
0150(c) include provisions that are not applicable to government 
securities in whole or in part. For instance, notwithstanding the 
presence of FINRA Rule 2232 in FINRA Rule 0150(c), FINRA Rule 
2232(b) is inapplicable by its terms to government securities that 
are not also equity securities. In addition, FINRA Rules 2232(c) 
through (f) are not applicable to U.S. Treasury securities. See 
Securities Exchange Act Release No. 79346 (November 17, 2016), 81 FR 
84659, 84661 (November 23, 2016) (Order Approving File No. SR-FINRA-
2016-032). FINRA also notes that some of the rules listed in FINRA 
Rule 0150(c) are applicable to exempted securities other than 
government securities. For example, FINRA Rule 2320(g) (Member 
Compensation) is applicable to group variable contracts that are 
exempted securities.
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FINRA Rules
* * * * *
0100. General Standards
* * * * *
0150. Application of Rules to Exempted Securities Except Municipal 
Securities
    (a) through (b) No Change.
    (c) Unless otherwise indicated within a particular Rule, the 
following rules are applicable to transactions in, and business 
activities relating to, exempted securities, except municipal 
securities, conducted by members and associated persons: Rules 0110, 
0120, 0130, 0140, 0160, 0170, 0190, 1010, 1011, IM-1011-1, IM-1011-2, 
IM-1011-3, 1012, 1013, IM-1013-1, IM-1013-2, 1014, 1015, 1016, 1017, 
1019, 1020, 1021, 1122, 1200 Series (other than Rules 1220(a)(5), 
(a)(6), (a)(7), (b)(4), (b)(5) and (b)(6)), 2010, 2020, 2030, 2040, 
2060, 2070, 2080, 2081, 2090, 2111, 2122, 2130, 2140, 2150, 2165, 2210, 
2211, 2212, 2213, 2214, 2216, 2220, 2231, 2232, 2261, 2263, 2264, 2266, 
2267, 2268, 2269, 2270, 2272, 2273, 2320(g), 2360, [3110] 3100 Series, 
3200 Series, [3210, 3220, 3260, 3270, 3280,] 3300 Series, 4100 Series, 
[4120, 4130,] 4210, 4220, 4230, 4310 Series, [4311,] 4330, 4340, 4360, 
4370, 4380, 4510 Series, 4520 Series, 4530, 4540, 4570, 4580, 4590, 
5160, 5210, 5220, 5230, 5310, 5340, 6700 Series, 7730, 8100 Series, 
[8110, 8120,] 8210, 8211, 8300 Series, [8310, 8311, 8312, 8320, 8330] 
9000 Series [and 9552], 12000 Series, 13000 Series, and 14000 Series.
* * * * *
Capital Acquisition Broker Rules
010. General Standards
* * * * *
015. Application of Rules to Exempted Securities Except Municipal 
Securities
    [FINRA Rule 0150 shall apply to the Capital Acquisition Broker 
Rules.]
    (a) For purposes of this Rule, the terms ``exempted securities'' 
and ``municipal securities'' shall have the meanings specified in 
Sections 3(a)(12) and 3(a)(29) of the Exchange Act, respectively.
    (b) The Capital Acquisition Broker Rules are not intended to be, 
and shall not be construed as, rules concerning transactions in 
municipal securities.
    (c) Unless otherwise indicated within a particular Rule, all 
Capital Acquisition Broker Rules are applicable to transactions in, and 
business activities related to, exempted securities, except municipal 
securities, conducted by capital acquisition brokers and their 
associated persons, other than Capital Acquisition Broker Rules 512 and 
515.
    (d) Nothing in this Rule shall be deemed to expand or otherwise 
alter the scope of activities permitted for capital acquisition brokers 
under Capital Acquisition Broker Rule 016(c).
* * * * *

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
Background
    Prior to 1986, broker-dealers engaged solely in a government 
securities business were not required to register with the SEC and 
become members of a registered securities exchange or a registered 
securities association, such as FINRA (then NASD).\6\ Moreover, the 
Exchange Act expressly prohibited FINRA from adopting and enforcing 
compliance with its rules in connection with transactions by its 
members in exempted securities, including government securities.\7\
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    \6\ On July 30, 2007, NASD and NYSE consolidated their member 
regulation, enforcement and dispute resolution operations into a 
combined organization, FINRA. See Securities Exchange Act Release 
No. 56145 (July 26, 2007), 72 FR 42169 (August 1, 2007), as amended 
by Securities Exchange Act Release No. 56145A (May 30, 2008), 73 FR 
32377 (June 6, 2008) (Order Approving File No. SR-NASD-2007-023). 
For consistency purposes, when discussing FINRA or the predecessor 
NASD, this filing will refer solely to FINRA.
    \7\ Specifically, Section 15A(f) of the Exchange Act provided 
that ``[n]othing in this section shall be construed to apply with 
respect to any transaction by a broker or dealer in any exempted 
security.'' See 15 U.S.C. 78o-3 (historical notes).
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    The Government Securities Act of 1986 (``GSA''),\8\ however, 
amended the Exchange Act to require broker-dealers that engaged 
exclusively in transactions in government securities to register with 
the SEC and become members of a registered securities exchange or a 
registered securities association if they effected transactions in, or 
induced or attempted to induce the purchase or sale of, any government 
securities.\9\ The GSA also amended the Exchange Act to authorize a 
registered securities association, such as FINRA, to adopt and 
implement rules for specified limited purposes to govern transactions 
by its members in exempted securities (other than municipal 
securities).\10\ The

[[Page 62139]]

GSA did not authorize FINRA to apply its rules, including its sales 
practice rules (which were then part of the Rules of Fair Practice), 
that were outside of those specified areas to transactions in exempted 
securities.\11\ In 1988, FINRA amended its existing rules and adopted 
new rules to carry out its responsibilities under the GSA.\12\
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    \8\ Public Law 99-571, 100 Stat. 3208 (1986).
    \9\ See supra note 8. (amending the Exchange Act to add Section 
15C(a)(1)(A) to require the registration of a government securities 
broker or dealer).
    \10\ The GSA, among other things, amended Section 15A(f) to add 
paragraph (2), which provided that a registered securities 
association could adopt and implement rules with respect to exempted 
securities to (A) enforce compliance with applicable provisions of 
the Exchange Act; (B) provide for appropriate discipline of members 
for violations of applicable provisions of the Exchange Act; (C) 
provide for reasonable inspection and examination of members' books 
and records; (D) deny or condition the membership of a broker-dealer 
that does not meet standards for financial responsibility or conduct 
under the Exchange Act; (E) bar any person from being associated 
with a member if such person has engaged in prohibited conduct or 
refused to provide requested information; and (F) prohibit 
fraudulent, misleading, deceptive and false advertising. See 100 
Stat. 3208, 3218.
    \11\ In contrast, the GSA did not prevent registered securities 
exchanges, such as the NYSE, from applying their rules to government 
securities transactions. See United States Government Accountability 
Office, U.S. Government Securities: More Transaction Information and 
Investor Protection Measures Are Needed, September 1990 at 47 
(noting that although the GSA did not authorize FINRA to apply its 
sales practice rules to government securities transactions, the GSA 
did not prevent registered securities exchanges, such as the NYSE, 
from applying their rules to government securities transactions), 
available at https://www.gao.gov/assets/ggd-90-114.pdf.
    \12\ Specifically, FINRA amended its By-Laws to address 
government securities transactions by members and the eligibility of 
sole government securities broker-dealers to become members. FINRA 
also amended Schedule C to the NASD By-Laws, which contained rules 
relating to membership and registration, to provide for the 
registration of government securities principals and government 
securities representatives. In addition, FINRA adopted a subset of 
rules designated as ``Government Securities Rules,'' which addressed 
books and records, supervisory procedures and the regulation of 
members experiencing financial or operational difficulties or 
changing their exemptive status under SEA Rule 15c3-3. The 
Government Securities Rules also included provisions regarding 
communications with the public and FINRA's ability to bring 
disciplinary actions for violations involving government securities 
transactions. See Securities Exchange Act Release No. 26240 
(November 2, 1988), 53 FR 45412 (November 9, 1988) (Order Approving 
File No. SR-NASD-88-12). The terms ``sole government securities 
broker-dealers,'' ``government securities broker-dealers,'' 
``registered government securities brokers and dealers'' and 
``government securities broker or dealer'' as used in this proposed 
rule change refer to brokers and dealers that engage exclusively in 
transactions in government securities and that are registered under 
Section 15C of the Exchange Act.
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    In 1993, Congress enacted the Government Securities Act Amendments 
of 1993 (``GSAA''), which removed all previous limitations on the 
ability of FINRA to apply its rules, including its sales practice 
rules, to transactions by members in exempted securities, other than 
municipal securities.\13\ Subsequently, in 1996, with oversight by the 
SEC and the SEC's consultation with the Department of the Treasury, 
FINRA specified provisions of its Rules of Fair Practice that would be 
applicable to exempted securities, other than municipal securities.\14\
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    \13\ Government Securities Act Amendments of 1993, Public Law 
103-202, 1(a), 107 Stat. 2344 (1993).
    \14\ See Securities Exchange Act Release No. 37588 (August 20, 
1996), 61 FR 44100 (August 27, 1996) (Order Approving File No. SR-
NASD-95-39) (``1996 Approval Order''). While not expressly listed as 
rules applicable to exempted securities in the 1996 Approval Order, 
the 1996 Approval Order noted that the general provisions of 
Articles I and II of the Rules of Fair Practice relating to the 
adoption, application and definitions of rules, which were formerly 
in the Government Securities Rules, also applied to government 
securities. In addition, the 1996 Approval Order stated that 
Schedule C to the By-Laws would apply to the personnel of sole 
government securities broker-dealers, including persons selling 
options on government securities.
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    In 2001, for ease of reference, FINRA adopted NASD Rule 0116 (now 
FINRA Rule 0150), which was intended to codify, with some 
additions,\15\ the rules that were approved by the Commission as 
applicable to transactions in, and business activities relating to, 
government securities, and more broadly exempted securities (other than 
municipal securities), and that were expressly listed in the 1996 
Approval Order.\16\ FINRA has amended Rule 0150 since its original 
adoption, but it has not updated the rule routinely.\17\
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    \15\ NASD Rule 0116 codified a FINRA staff interpretation that 
the non-cash compensation provisions of NASD Rule 2820(g) (now FINRA 
Rule 2320(g)) apply to group variable contracts that are exempted 
securities.
    \16\ See Securities Exchange Act Release No. 44631 (July 31, 
2001), 66 FR 41283 (August 7, 2001) (Order Approving File No. SR-
NASD-00-38).
    \17\ For example, in 2015, FINRA amended Rule 0150 to expressly 
apply FINRA Rule 2121 (Fair Prices and Commissions) to transactions 
in exempted securities that are government securities. See 
Securities Exchange Act Release No. 76639 (December 14, 2015), 80 FR 
79112 (December 18, 2015) (Order Approving File No. SR-FINRA-2015-
033). In addition, FINRA has replaced references to NASD rules when 
those rules were transferred into the FINRA rulebook as consolidated 
FINRA rules. See, e.g., Securities Exchange Act Release No. 78851 
(September 15, 2016), 81 FR 64969 (September 21, 2016) (Notice of 
Filing and Immediate Effectiveness of File No. SR-FINRA-2016-036) 
(replacing NASD IM-2210-2 with FINRA Rule 2211).
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    More recently, on August 19, 2016, the SEC's Division of Trading 
and Markets requested that FINRA undertake a comprehensive review of 
its rulebook to identify existing FINRA rules that exclude or may 
otherwise not apply to U.S. Treasury securities (or government 
securities more generally), or for which the applicability of the rule 
to U.S. Treasury securities requires clarification, and to assess the 
continuing validity for such exclusions.\18\ In response, FINRA 
undertook a review of its rulebook for this purpose.\19\ FINRA also 
reviewed its rulebook to identify the rules that are applicable to 
government securities, and those rules whose applicability to 
government securities requires clarification. On October 17, 2016, 
FINRA submitted a letter in response to the Commission's request.\20\
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    \18\ See Letter from Stephen Luparello, Director, Division of 
Trading and Markets, SEC, to Robert W. Cook, President and Chief 
Executive Officer, FINRA, dated August 19, 2016, available at 
https://www.sec.gov/divisions/marketreg/letter-to-finra-regulation-of-us-treasury-securities.pdf.
    \19\ The current FINRA rulebook consists of (1) FINRA rules; and 
(2) the Temporary Dual FINRA-NYSE Member Rule Series (formerly 
Incorporated NYSE Rules and Incorporated NYSE Rule Interpretations). 
While the FINRA rules generally apply to all FINRA members, the 
Temporary Dual FINRA-NYSE Member Rule Series apply solely to those 
members of FINRA that are also members of NYSE on or after July 30, 
2007. As previously mentioned, the Temporary Dual FINRA-NYSE Member 
Rule Series historically were not subject to the same limitations 
with respect to their applicability to government securities as 
FINRA rules. See supra note 11. Accordingly, FINRA believes that the 
Temporary Dual FINRA-NYSE Member Rule Series currently apply to 
exempted securities, including government securities, unless 
otherwise indicated by a particular rule.
    \20\ See Letter from Robert W. Cook, President and Chief 
Executive Officer, FINRA, to Stephen Luparello, Director, Division 
of Trading and Markets, SEC, dated October 17, 2016, available at 
https://www.sec.gov/divisions/marketreg/letter-from-finra-regulation-of-us-treasury-securities.pdf.
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Rules To Be Added to FINRA Rule 0150
    As an initial step in responding to the SEC staff's request, the 
proposed rule change would amend FINRA Rule 0150(c) to add to its list 
of rules those that are currently applicable to exempted securities, 
including government securities, but which are not currently listed in 
that rule. The rules that FINRA is proposing to add are rules that have 
general application to the activities of all FINRA members, 
irrespective of business model or client base. In addition, the 
proposed rule change would modernize and make current the list of rules 
in Rule 0150. It is not intended to substantively change the current 
application or requirements of FINRA rules to exempted securities. As 
stated in Rule 0150, the application of any listed rules, or specific 
provisions of those rules, to exempted securities, including government 
securities, is governed by the language of the rule itself.\21\
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    \21\ For example, FINRA Rule 7730(b), by its terms, currently 
excludes transactions in U.S. Treasury Securities, as defined under 
FINRA rules, from the TRACE transaction reporting fees. See 
Securities Exchange Act Release No. 79116, (October 18, 2016), 81 FR 
73167, 73169 (October 24, 2016) (Order Approving File No. SR-FINRA-
2016-027). While the proposed rule change would amend Rule 0150 to 
include Rule 7730, Rule 7730(b) would continue by its terms to 
exclude transactions in U.S. Treasury Securities, as defined under 
FINRA rules. Further, in updating FINRA Rule 0150, FINRA is not 
suggesting that every type of exempted security is subject to each 
rule listed in paragraph (c). It could be the case that a listed 
rule applies, by its terms, to a subcategory of exempted securities 
based on the characteristics of that security. For example, FINRA 
understands that U.S. Treasury securities do not have callable 
features. However, government-sponsored enterprises (``GSEs''), 
whose securities are considered by statute to be exempted 
securities, may issue callable securities.

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[[Page 62140]]

General Standards Rules
    The proposed rule change would amend FINRA Rule 0150(c) to 
expressly add FINRA Rules 0110 (Adoption of Rules), 0120 (Effective 
Date), 0130 (Interpretation), 0140 (Applicability), 0160 (Definitions), 
0170 (Delegation, Authority and Access) and 0190 (Effective Date of 
Revocation, Cancellation, Expulsion, Suspension or Resignation) 
(collectively, the ``General Standards Rules''), which will clarify the 
applicability of these rules to exempted securities, including 
government securities.\22\ The General Standards Rules govern the 
adoption, application and interpretation of FINRA rules and set forth 
specified definitions not contained in the FINRA By-Laws. In addition, 
these rules address FINRA's delegation of responsibilities to its 
subsidiary, and its authority and access with respect to its 
subsidiary. The General Standards Rules apply to all FINRA members, 
irrespective of business model or client base.
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    \22\ See supra note 14 (noting the application of the general 
provisions of the Rules of Fair Practice to government securities).
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Membership Rules
    The proposed rule change would amend FINRA Rule 0150(c) to include 
FINRA Rule 1011 (Definitions), IM-1011-1 (Safe Harbor for Business 
Expansions), IM-1011-2 (Business Expansions and Covered Pending 
Arbitration Claims), IM-1011-3 (Business Expansions and Persons with 
Specified Risk Events), Rule 1012 (General Provisions), Rule 1013 (New 
Member Application and Interview), IM-1013-1 (Membership Waive-In 
Process for Certain New York Stock Exchange Member Organizations), IM-
1013-2 (Membership Waive-In Process for Certain NYSE American LLC 
Member Organizations), Rule 1014 (Department Decision), Rule 1015 
(Review by National Adjudicatory Council), Rule 1016 (Discretionary 
Review by FINRA Board), Rule 1017 (Application for Approval of Change 
in Ownership, Control, or Business Operations), Rule 1019 (Application 
to the SEC for Review), Rule 1021 (Foreign Members) and Rule 1122 
(Filing of Misleading Information as to Membership or Registration) 
(together, the ``Membership Rules''). The Membership Rules provide a 
means for FINRA, through its Membership Application Program (``MAP''), 
to assess the proposed business activities of potential and current 
members with the ultimate goal of ensuring that each applicant is 
capable of conducting its business in compliance with applicable rules 
and regulations, and that its business practices are consistent with 
just and equitable principles of trade. The Membership Rules provide, 
for example, the standards of review for new member applications 
(``NMAs'') and continuing membership applications (``CMAs''). In 
addition, among other requirements, the Membership Rules require 
consideration of whether persons associated with an applicant have 
disciplinary actions taken against them by other industry authorities, 
customer complaints, adverse arbitrations, pending or unadjudicated 
matters, civil actions, remedial actions imposed or other industry-
related matters that could pose a threat to public investors. The 
Membership Rules apply to all applicants for membership and all 
existing members. FINRA does not have a separate membership process for 
persons engaged in activities relating to exempted securities, 
including government securities.
    The following is a summary of the Membership Rules:
     FINRA Rule 1011 (defines relevant terms for purposes of 
the Membership Rules);
     FINRA IM-1011-1 (creates a safe harbor for certain types 
of expansions that are presumed not to be a ``material change in 
business operations'' and, therefore, do not require a member to file a 
CMA pursuant to FINRA Rule 1017);
     FINRA IM-1011-2 (provides that the safe harbor for 
business expansions in FINRA IM-1011-1 is not available to any member 
that is seeking to add one or more associated persons involved in sales 
and one or more of those associated persons has a ``covered pending 
arbitration claim,'' an unpaid arbitration award or unpaid settlement 
related to an arbitration);
     FINRA IM-1011-3 (provides that the safe harbor for 
business expansions in FINRA IM-1011-1 is not available to any member 
that is seeking to add a natural person who has, in the prior five 
years, one or more ``final criminal matters'' or two or more 
``specified risk events'' and seeks to become an owner, control person, 
principal, or registered person of the member);
     FINRA Rule 1012 (provides information regarding, among 
others, the methods for submitting the applications required by the 
other Membership Rules, provisions governing when a membership 
application is considered to have lapsed as well as rules on ex parte 
communications in the event that a member requests review of a FINRA 
membership decision by the National Adjudicatory Council (``NAC''), 
pursuant to FINRA Rule 1015);
     FINRA Rule 1013 (sets forth the requirements for an NMA, 
including how to file, the documents that applicants must submit, the 
ability of FINRA to request additional documentation and to reject an 
application that is ``not substantially complete,'' and the process for 
conducting membership interviews);
     FINRA IM-1013-1 and IM-1013-2 (establish a waive-in 
process to expedite the approval of membership applications of NYSE-
only member organizations and NYSE American member organizations that 
were required to become FINRA members following the consolidation of 
NASD and NYSE's member regulation operations); \23\
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    \23\ See supra note 6.
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     FINRA Rule 1014 (sets forth the standards for admission, 
the process and timing for granting or denying an application, the 
timing and content requirements for FINRA's decision and submission of 
a membership agreement and the effectiveness of restrictions in the 
membership agreement);
     FINRA Rule 1015 (permits an applicant to submit a request 
for review by the NAC of an adverse decision rendered on an NMA or a 
CMA);
     FINRA Rule 1016 (permits a governor of the FINRA Board to 
call for a discretionary review of a membership proceeding);
     FINRA Rule 1017 (provides that specified changes in a 
member's ownership, control or business operations require the firm to 
file a CMA, which is subject to FINRA approval);
     FINRA Rule 1019 (provides that a person aggrieved by final 
action of FINRA under the Membership Rules may apply for review by the 
SEC);
     FINRA Rule 1021 (sets forth specific obligations for 
foreign members, which are members that do not maintain an office in 
the United States that is responsible for preparing and maintaining 
financial and other reports required to be filed with the SEC and 
FINRA); and
     FINRA Rule 1122 (prohibits members and associated persons 
from filing with FINRA incomplete or misleading membership or 
registration information).
Registration Rules
    The proposed rule change would amend FINRA Rule 0150(c) to add to 
the list of rules that are applicable to exempted securities, including 
government securities, the rules relating

[[Page 62141]]

to the qualification and registration of associated persons 
(collectively, the ``Registration Rules''). In general, the 
Registration Rules: (1) require that persons engaged in a member's 
investment banking or securities business who are to function as 
representatives or principals register with FINRA in each category of 
registration appropriate to their functions by passing one or more 
qualification examinations; (2) exempt specified associated persons 
from the registration requirements; and (3) provide for permissive 
registration of specified persons. FINRA believes that the identified 
Registration Rules are applicable to government securities because they 
are applicable to the activities of all members, irrespective of 
business model or client base.\24\
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    \24\ FINRA anticipates specifically addressing the application 
of some of the Registration Rules, including FINRA Rules 1220(a)(5) 
(Investment Banking Principal), 1220(a)(6) (Research Principal), 
1220(a)(7) (Securities Trader Principal), 1220(b)(4) (Securities 
Trader), 1220(b)(5) (Investment Banking Representative) and 
1220(b)(6) (Research Analyst), to government securities activities 
as part of a separate proposal.
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    Specifically, the proposed rule change would add the following 
Registration Rules to FINRA Rule 0150(c):
     FINRA Rule 1010 (Electronic Filing Requirements for 
Uniform Forms) (sets forth the filing and signature requirements for 
the Uniform Forms (e.g., Form U4 (Uniform Application for Securities 
Industry Registration or Transfer)); and
     FINRA Rule 1200 Series (Registration and Qualification):
    [cir] FINRA Rule 1210 (Registration Requirements) (requires that 
each person engaged in the investment banking or securities business of 
a member register with FINRA as a representative or principal in each 
category of registration appropriate to his or her functions and 
responsibilities as specified in FINRA Rule 1220, unless exempt from 
registration pursuant to FINRA Rule 1230. FINRA Rule 1210 also provides 
that such person is not qualified to function in any registered 
capacity other than that for which the person is registered, unless 
otherwise stated in the rules); \25\
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    \25\ Further, FINRA Rule 1210 addresses the following: (1) 
requirement to have a minimum number of registered principals; (2) 
ability to maintain permissive registrations for associated persons; 
(3) requirement to pass an appropriate qualification examination(s); 
(4) process for obtaining a waiver of a qualification 
examination(s); (5) requirements applicable to registered persons 
functioning as principals prior to passing an appropriate principal 
qualification examination; (6) rules of conduct for taking 
examinations and confidentiality of examinations; (7) waiting 
periods for retaking a failed examination; (8) requirement that 
registered persons satisfy continuing education; (9) lapse of 
registration and expiration of the Securities Industry Essentials 
examination; (10) waiver of examinations for individuals working for 
a financial services industry affiliate; (11) status of persons 
serving in the Armed Forces of the United States; and (12) 
impermissible registrations.
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    [cir] FINRA Rule 1220 (Registration Categories) (sets forth the 
definitions of ``principal'' and ``representative'' as well as the 
qualification and registration requirements for, among others, General 
Securities Principals, Financial and Operations Principals, Registered 
Options Principals, Government Securities Principals, General 
Securities Sales Supervisors, General Securities Representatives and 
Operations Professionals); \26\
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    \26\ The rule also addresses the following: (1) status of 
certain foreign registrations; (2) additional requirements for 
registered persons engaged in security futures activities; (3) 
requirements applicable to members operating with only one 
Registered Options Principal; (4) scope of the General Securities 
Sales Supervisor category; (5) scope of the Operations Professional 
category; and (6) status of eliminated registration categories.
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    [cir] FINRA Rule 1230 (Associated Persons Exempt from Registration) 
(identifies associated persons who are not required to be registered 
with FINRA, including, among others, associated persons whose functions 
are solely and exclusively clerical or ministerial); \27\ and
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    \27\ In addition, the rule clarifies that the function of 
accepting customer orders is not considered a clerical or 
ministerial function.
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    [cir] FINRA Rule 1240 (Continuing Education Requirements) (sets 
forth the continuing education requirements, which consist of a 
Regulatory Element and a Firm Element, and the Maintaining 
Qualifications Program through which eligible individuals may maintain 
their qualification in a representative or principal registration 
category following the termination of that registration category).
Rules Relating to Members' Financial Condition and Margin-Related Rules
    The proposed rule change would amend FINRA Rule 0150(c) to add 
rules that have general applicability to members and relate to members' 
financial condition and margin practices.\28\ These rules play an 
important role in supporting the SEC's minimum net capital and other 
financial responsibility requirements and support FINRA's authority to 
execute effectively its financial and operational surveillance and 
examination programs. In general, these rules: (1) establish criteria 
promoting the permanency of members' capital; (2) require the review 
and approval of specific material financial transactions; and (3) 
establish criteria intended to identify members approaching financial 
difficulty and to monitor their financial and operational condition.
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    \28\ FINRA notes that rules relating to members' financial 
condition historically have been applicable to all members, 
including sole government securities broker-dealers. For example, 
Section 6 of the Government Securities Rules, which applied to sole 
government securities broker-dealers before the Government 
Securities Rules merged into the Rules of Fair Practice in 1996, 
governed the regulation of activities of members experiencing 
financial or operational difficulties.
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    Several of the rules relating to members' financial condition and 
margin requirements, including, for example, FINRA Rules 4120 
(Regulatory Notification and Business Curtailment), 4130 (Regulation of 
Activities of Section 15C Members Experiencing Financial and/or 
Operational Difficulties) and 4210 (Margin Requirements) are currently 
listed in FINRA Rule 0150 as applicable to transactions in exempted 
securities, including government securities. For conformity, FINRA is 
proposing to amend FINRA Rule 0150(c) to include other financial 
condition- and margin-related rules of general applicability. As a 
result, the proposed rule change would amend FINRA Rule 0150(c) to add 
the following rules to the list of rules that are applicable to 
exempted securities, including government securities:
     FINRA Rule 2264 (Margin Disclosure Statement) (requires 
members that open margin accounts for or on behalf of non-institutional 
customers to deliver to such customers, prior to or at the time of 
opening the account, a specified margin disclosure statement 
highlighting the risks involved in trading securities in a margin 
account);
     FINRA Rule 2266 (SIPC Information) (sets forth specified 
requirements for providing Securities Investor Protection Corporation 
(SIPC) information to customers); \29\
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    \29\ FINRA notes that the Securities Investor Protection Act of 
1970 (``SIPA'') excludes a government securities broker or dealer 
from the definition of ``persons registered as brokers or dealers'' 
for purposes of SIPA. See 15 U.S.C. 78lll(12). Therefore, FINRA Rule 
2266 does not apply to such members.
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     FINRA Rule 4100 Series (Financial Condition)
    [cir] FINRA Rule 4110 (Capital Compliance) (sets forth requirements 
relating to a member's financial responsibility, including, among 
others: authorizing FINRA to prescribe greater net capital requirements 
for carrying and clearing members when deemed necessary for the 
protection of investors or in the public interest; requiring members to 
suspend all business operations during any period in which a member is 
not in compliance with the applicable net capital requirements of

[[Page 62142]]

SEA Rule 15c3-1; governing the limitations on the withdrawal of a 
firm's equity capital; providing for sale-and-leasebacks, factoring, 
financing loans and similar arrangements; addressing subordinated 
loans, notes collateralized by securities and capital borrowing; 
addressing compliance with other applicable laws for purposes of the 
approval of a subordinated loan agreement; and providing that the 
requirements of the rule also apply to members that clear customer 
transactions or hold customer funds in a bank account pursuant to the 
exemptive provisions of SEA Rule 15c3-3(k)(2)(i));
    [cir] FINRA Rule 4111 (Restricted Firm Obligations) (allows FINRA 
to impose obligations on members with significantly higher levels of 
risk-related disclosures than other similarly sized peers, based on 
numeric, threshold-based criteria);
    [cir] FINRA Rule 4140 (Audit) (provides FINRA the authority to 
request an audit or an agreed-upon procedures review under 
circumstances specified in the rule);
    [cir] FINRA Rule 4150 (Guarantees by, or Flow Through Benefits for, 
Members) (sets forth the notice requirement when a member guarantees, 
endorses or assumes, directly or indirectly, the obligations or 
liabilities of another person (including an entity), and the approval 
requirements when a member receives flow-through capital benefits in 
accordance with Appendix C of SEA Rule 15c3-1); and
    [cir] FINRA Rule 4160 (Verification of Assets) (provides that a 
member, when notified by FINRA, may not continue to custody or retain 
record ownership of assets at a non-member financial institution, 
which, upon FINRA staff's request, fails promptly to provide FINRA with 
written verification of assets maintained by the member at such 
financial institution);
     FINRA Rule 4200 Series (Margin):
    [cir] FINRA Rule 4220 (Daily Record of Required Margin) (sets forth 
the requirements for daily recordkeeping of initial and maintenance 
margin calls that are issued pursuant to the Federal Reserve Board's 
Regulation T and the FINRA margin rules); \30\ and
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    \30\ The initial margin requirement on exempted securities held 
in a margin account is the margin required by the broker in good 
faith or applicable SRO margin requirement, whichever is greater. 
Accordingly, the initial margin requirements on exempted securities 
positions set by FINRA Rule 4210 act as a floor on the requirement 
under Regulation T. Rule 4220 requires members to make a daily 
record of initial or additional margin that must be obtained in a 
customer's account as set forth in Rule 4210.
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    [cir] FINRA Rule 4230 (Required Submissions for Requests for 
Extensions of Time Under Regulation T and SEA Rule 15c3-3) (governs 
members' requests for extensions of time, as permitted in accordance 
with the Federal Reserve Board's Regulation T and SEA Rule 15c3-3(n)); 
\31\
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    \31\ Section 220.4(c)(3)(i) of Regulation T requires any margin 
call to be satisfied within one payment period (four business days) 
after the margin deficiency is created, but Section 220.4(c)(3)(ii) 
of Regulation T allows a broker-dealer to obtain an extension of 
that payment period from its examining authority. This time limit 
applies to all transactions effected in margin accounts, including 
transactions in exempted securities. Accordingly, firms may make 
Regulation T extension requests involving exempted securities that 
are governed by FINRA Rule 4230.
    In addition, under SEA Rule 15c3-3(m), as modified by Treasury 
Rules 403.1 and 403.4(m), if an exempted security sold long by a 
customer has not been delivered within 30 business days (60 business 
days if it is a mortgage-backed security) after the settlement date, 
the broker-dealer generally must buy-in the customer. If a national 
securities association is satisfied that a broker-dealer is acting 
in good faith and exceptional circumstances warrant the action, the 
national securities association may, on application from the broker-
dealer, grant an extension of the time before the broker-dealer must 
buy-in the customer. Therefore, FINRA Rule 4230, which governs these 
requests for extensions of time is applicable to transactions in 
exempted securities.
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     FINRA Rule 4310 Series (Member Agreements and Contracts):
    [cir] FINRA Rule 4314 (Securities Loans and Borrowings) (sets forth 
the obligations of a firm that engages in lending and borrowing 
securities and establishes consistent disclosure and recordkeeping 
requirements relating to a firm's securities lending activities);
     FINRA Rule 4340 (Callable Securities) (provides clarity to 
customers about the procedures used by a member when a security is 
called or redeemed prior to maturity);
     FINRA Rule 4520 Series (Financial Records and Reporting 
Requirements):
    [cir] FINRA Rule 4521 (Notifications, Questionnaires and Reports) 
(addresses FINRA's authority to request financial and operational 
information from members to carry out its surveillance and examination 
responsibilities and sets forth the reporting requirements for members 
carrying margin accounts for customers);
    [cir] FINRA Rule 4522 (Periodic Security Counts, Verifications and 
Comparisons) (requires each member that is subject to the requirements 
of SEA Rule 17a-13 to make the counts, examinations, verifications, 
comparisons and entries set forth in SEA Rule 17a-13 and further 
requires each carrying or clearing member subject to SEA Rule 17a-13 to 
make more frequent counts, examinations, verifications, comparisons and 
entries where prudent business practice would require);
    [cir] FINRA Rule 4523 (Assignment of Responsibility for General 
Ledger Accounts and Identification of Suspense Accounts) (sets forth 
requirements intended to ensure the accuracy of a member's financial 
books and records, including the requirement that each member designate 
an associated person to be responsible for each general ledger 
bookkeeping account and account of like function used by the member); 
and
    [cir] FINRA Rule 4524 (Supplemental FOCUS Information) (requires 
each member, as FINRA designates, to file as a supplement to the FOCUS 
Report, additional financial or operational schedules or reports as 
FINRA deems necessary or appropriate for the protection of investors or 
in the public interest); \32\ and
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    \32\ The Supplemental Statement of Income (``SSOI''), the 
Supplemental Inventory Schedule (``SIS'') and the Derivatives and 
Other Off-Balance Sheet Items Schedule (``OBS''), all of which were 
adopted pursuant to FINRA Rule 4524 as supplements to the FOCUS 
Report, require the reporting of various figures that are based on 
all securities, including government securities. While firms that 
are government securities broker-dealers do not file a FOCUS Report 
and instead are required to file reports concerning their financial 
and operational status using the Finances and Operations of 
Government Securities Brokers and Dealers Report (``FOGS Report''), 
such firms are subject to FINRA Rule 4524 and the financial or 
operational schedules or reports, as designated by FINRA, adopted 
pursuant to that rule. See e.g., Securities Exchange Act Release No. 
73192 (September 23, 2014), 79 FR 58390 (September 29, 2014) (Order 
Approving File No. SR-FINRA-2014-025) (approving the adoption of the 
SIS, including with respect to filers of FOGS Reports).
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     FINRA Rule 4540 (Reporting Requirements for Clearing 
Firms) (requires each member clearing firm or self-clearing firm to 
report to FINRA in such format as FINRA may require, prescribed data 
pertaining to the member and any member broker-dealer for which it 
clears; the rule also provides that a member may submit a written 
request for exemptive relief, pursuant to the FINRA Rule 9600 Series 
(Procedures for Exemptions), from the reporting requirements of Rule 
4540, and specifies the circumstances under which FINRA will grant such 
exemptive requests).
    FINRA acknowledges that some of the rules listed above do not apply 
to members that are sole government securities broker-dealers because 
such members are subject to separate laws, rules and regulations or are 
otherwise excluded from the FINRA requirements. For example, as noted 
above, a government securities broker or dealer is excluded from the 
definition of ``persons registered as brokers or

[[Page 62143]]

dealers'' for purposes of SIPA.\33\ Therefore, FINRA Rule 2266 does not 
apply to such members. In addition, members that are registered 
government securities brokers and dealers are subject to separate 
capital compliance provisions from those set forth in FINRA Rule 
4110.\34\ By listing these rules under FINRA Rule 0150(c), FINRA is not 
changing the underlying requirements otherwise applicable to such 
members.
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    \33\ See 15 U.S.C. 78lll(12) and supra note 29.
    \34\ See 17 CFR 402.2 (setting forth the capital requirements 
for registered government securities brokers and dealers).
---------------------------------------------------------------------------

Rules Relating to Members' Books and Records and General Supervisory 
Obligations
    FINRA Rule 3110 (Supervision) and the FINRA Rule 4510 Series (Books 
and Records Requirements) apply to transactions in exempted securities, 
including government securities, and are currently listed in FINRA Rule 
0150(c). FINRA Rule 3110 requires a firm to establish and maintain a 
system to supervise the activities of its associated persons that is 
reasonably designed to achieve compliance with the applicable 
securities laws and regulations and FINRA rules. The rule details 
requirements for a firm to have reasonably designed written supervisory 
procedures (``WSPs'') to supervise the activities of its associated 
persons and the types of businesses in which it engages. Among other 
things, a firm's WSPs must address supervision of supervisory personnel 
and provide for the review of a firm's investment banking and 
securities business, correspondence and internal communications, and 
customer complaints. The rules governing books and records, including 
the FINRA Rule 4510 Series, in general, require members to make and 
preserve specific books and records to show compliance with applicable 
securities laws, rules and regulations, and to enable FINRA and SEC 
staffs to conduct effective examinations.
    FINRA is proposing a conforming change to FINRA Rule 0150(c) to 
expressly include those rules of general applicability that are based 
on, or related to, the obligations imposed by FINRA Rule 3110 and the 
FINRA Rule 4510 Series. In particular, the proposed rule change would 
add the following rules to the list of rules in FINRA Rule 0150(c):
     FINRA Rule 3100 Series (Supervisory Responsibilities):
    [cir] FINRA Rule 3120 (Supervisory Control System) (establishes the 
requirements on members to test and verify supervisory procedures);
    [cir] FINRA Rule 3130 (Annual Certification of Compliance and 
Supervisory Processes) (requires each member to designate one or more 
principals to serve as a chief compliance officer(s) and further 
requires that the chief executive officer(s) certify annually that the 
member has in place processes to establish, maintain, review, modify 
and test policies and procedures reasonably designed to achieve 
compliance with applicable FINRA rules, MSRB rules and federal 
securities laws and regulations);
    [cir] FINRA Rule 3150 (Holding of Customer Mail) (allows a firm to 
hold a customer's mail for a specific time period in accordance with 
the customer's written instructions if the firm meets several 
conditions);
    [cir] FINRA Rule 3160 (Networking Arrangements Between Members and 
Financial Institutions) (provides the conditions for a member that is a 
party to a networking arrangement with a financial institution under 
which the member offers broker-dealer services, regardless of whether 
the member is conducting broker-dealer services on or off the premises 
of a financial institution); and
    [cir] FINRA Rule 3170 (Tape Recording of Registered Persons by 
Certain Firms) (requires a firm to establish, enforce and maintain 
special written procedures supervising the telemarketing activities of 
all of its registered persons, including the tape recording of 
conversations, if the firm has hired more than a specified percentage 
of registered persons from firms that meet the rule's definition of 
``disciplined firm'');
     FINRA Rule 3200 Series (Responsibilities Relating to 
Associated Persons):
    [cir] FINRA Rule 3230 (Telemarketing) (requires members to maintain 
do-not-call lists, to limit the hours of telephone solicitations and 
prohibits members from using deceptive and abusive acts and practices 
in connection with telemarketing);
    [cir] FINRA Rule 3240 (Borrowing From or Lending to Customers) 
(provides members the opportunity to evaluate the appropriateness of 
particular lending arrangements between their registered persons and 
customers, to the extent permitted by the member, and the potential for 
conflicts of interests between both the registered person and his or 
her customer and the registered person and the member with which he or 
she is associated);
    [cir] FINRA Rule 3241 (Registered Person Being Named a Customer's 
Beneficiary or Holding a Position of Trust for a Customer) (limits a 
registered person from being named a beneficiary, executor or trustee, 
or to have a power of attorney or similar position of trust for or on 
behalf of a customer); and
    [cir] FINRA Rule 3250 (Designation of Accounts) (establishes a 
general requirement that a member must hold each customer account in 
the customer's name, except that a member may identify a customer's 
account with a number or symbol, as long as the member maintains 
documentation identifying the customer);
     FINRA Rule 3300 Series (Anti-Money Laundering):
    [cir] FINRA Rule 3310 (Anti-Money Laundering Compliance Program) 
(requires each member to develop and implement a written anti-money 
laundering program reasonably designed to achieve and monitor the 
member's compliance with the Bank Secrecy Act and its implementing 
regulations);
     FINRA Rule 4570 (Custodian of Books and Records) (requires 
a member to designate as the custodian of its required books and 
records, pursuant to SEA Rule 17a-4, on Form BDW (Uniform Request for 
Broker-Dealer Withdrawal) a person who is associated with the firm at 
the time Form BDW is filed); and
     FINRA Rule 4580 (Books and Records Requirements for 
Government Distribution and Solicitation Activities) (establishes the 
recordkeeping requirements in connection with FINRA Rule 2030 (Engaging 
in Distribution and Solicitation Activities with Government Entities) 
and requires covered members that engage in distribution or 
solicitation activities with a government entity on behalf of any 
investment adviser that provides or is seeking to provide investment 
advisory services to such government entity to maintain books and 
records that will allow FINRA to examine for compliance with FINRA Rule 
2030).\35\
---------------------------------------------------------------------------

    \35\ See infra note 41.
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Procedural Rules
    FINRA is proposing to amend FINRA Rule 0150(c) to add a number of 
procedural rules--including the FINRA Code of Procedure, Code of 
Arbitration Procedure for Customer Disputes, Code of Arbitration 
Procedure for Industry Disputes, Code of Mediation Procedure and other 
procedural rules--to clarify their application to transactions in, or 
business activities relating to, exempted securities, including 
government securities. These rules of general applicability provide the 
procedural framework for FINRA to ensure that

[[Page 62144]]

members and associated persons comply with FINRA rules, MSRB rules and 
the federal securities laws and provide for the effective and efficient 
resolution of customer and industry disputes.
Code of Procedure
    FINRA believes that the FINRA Rule 9000 Series (Code of Procedure) 
is applicable to transactions in exempted securities. The Code of 
Procedure governs proceedings for disciplining members and associated 
persons (including review of disciplinary proceedings by the NAC and 
FINRA Board and application for SEC review), proceedings for regulating 
the activities of members experiencing financial or operational 
difficulties, and proceedings for suspensions, cancellations and bars. 
These are foundational rules applicable to all FINRA members, 
irrespective of business model or client base, and they provide the 
procedural framework for enforcing many of the rules listed in FINRA 
Rule 0150.\36\ In this regard, several of the rules that are currently 
applicable to exempted securities would be rendered operationally 
meaningless without the application of the Code of Procedure. For 
example, the sanctions under FINRA Rule 8310 (Sanctions for Violation 
of the Rules) are contingent on compliance with the Code of Procedure.
---------------------------------------------------------------------------

    \36\ The Rule 9000 Series also includes FINRA's revolving door 
rules, which are applicable to all firm types.
---------------------------------------------------------------------------

FINRA Arbitration and Mediation Codes
    The FINRA Rule 12000 Series (Code of Arbitration Procedure for 
Customer Disputes or ``Customer Code'') and FINRA Rule 13000 Series 
(Code of Arbitration Procedure for Industry Disputes or ``Industry 
Code'') (collectively, the ``Codes'') contain the rules that govern 
arbitration between investors and industry parties and between or among 
industry-only parties. The Codes provide, among other things, the 
procedural rules for arbitration, initiating and responding to claims, 
the appointment of arbitrators, arbitration discovery, hearing and fees 
and awards. These rules are essential to the arbitration forum and have 
general applicability to all FINRA members, irrespective of business 
model or client base. As such, FINRA is proposing to amend FINRA Rule 
0150 to explicitly add the Codes as applicable to transactions in 
exempted securities, including government securities. FINRA notes that, 
following the GSAA, FINRA amended the Code of Arbitration Procedure to 
explicitly allow claims relating to transactions in exempted 
securities, including government securities, to be submitted to the 
Office of Dispute Resolution for arbitration under the Code of 
Arbitration Procedure without limitation.\37\
---------------------------------------------------------------------------

    \37\ See Securities Exchange Act Release No. 40103 (June 19, 
1998), 63 FR 34951 (June 26, 1998) (Order Approving File No. SR-
NASD-98-04).
---------------------------------------------------------------------------

    The proposed rule change would amend FINRA Rule 0150(c) to add the 
FINRA Rule 14000 Series (Code of Mediation Procedure) to the list of 
rules that are expressly applicable to transactions in, and business 
activities relating to, exempted securities, including government 
securities. FINRA's mediation forum serves an important public interest 
and furthers investor protection by providing a valuable alternative to 
arbitration. The Code of Mediation Procedure provides the procedural 
framework for parties wishing to mediate disputes through FINRA's 
mediation program. The Code of Mediation Procedure contains, for 
example, provisions governing the effect of mediation on arbitration 
proceedings, mediator selection, mediation ground rules and fees for 
mediation. Similar to the Codes, the Code of Mediation Procedure has 
general applicability to all FINRA members.
Other Procedural and Related Rules
    In addition to the procedural rules discussed above, FINRA proposes 
to amend FINRA Rule 0150(c) to add FINRA Rules 2080 (Obtaining an Order 
of Expungement of Customer Dispute Information from the Central 
Registration Depository (CRD) System), 2081 (Prohibited Conditions 
Relating to Expungement of Customer Dispute), 2263 (Arbitration 
Disclosure to Associated Persons Signing or Acknowledging Form U4) and 
8313 (Release of Disciplinary Complaints, Decisions and Other 
Information) to the list of rules that are applicable to transactions 
in, and business activities relating to, exempted securities, including 
government securities.
    FINRA recognizes that accurate and complete reporting in the CRD 
system is an important component of investor protection, and FINRA 
Rules 2080 and 2081, which have general applicability to all FINRA 
members, further this purpose.
    FINRA Rule 2080 addresses the expungement of customer dispute 
information from the CRD system and provides that a court of competent 
jurisdiction must order or confirm all expungement directives before 
FINRA will expunge customer dispute information from the CRD system. 
The rule also requires that FINRA members or associated persons name 
FINRA as an additional party in any court proceeding in which they seek 
an order to expunge customer dispute information or request 
confirmation of an award containing an order of expungement, unless the 
requirement is waived in accordance with the rule.
    FINRA Rule 2081 prohibits members and associated persons from 
conditioning or seeking to condition settlement of a dispute with a 
customer on, or to otherwise compensate the customer for, the 
customer's agreement to consent to, or not to oppose, the firm's or 
associated person's request to expunge such customer dispute 
information from the CRD system.
    FINRA Rule 2263 requires members to provide each associated person, 
whenever the associated person is asked to sign a new or amended Form 
U4, with certain written disclosures regarding the nature and process 
of arbitration proceedings. This rule ensures that associated persons 
of all members understand that the Form U4 contains a predispute 
arbitration clause and that by signing the Form U4, the associated 
persons are agreeing to be bound by the arbitration proceedings. The 
rule applies generally to all members and associated persons.
    FINRA Rule 8313 governs FINRA's release of disciplinary and other 
information to the public. The rule is applicable to all members, 
irrespective of business model or client base.
Trade Reporting and Operational Rules
    FINRA is also proposing to amend FINRA Rule 0150(c) to add several 
trade reporting and operational rules that have general application to 
the conduct of members. Specifically, the proposed rule change would 
add the following rules to FINRA Rule 0150(c):
     FINRA Rule 4370 (Business Continuity Plans and Emergency 
Contact Information) (requires a member to create, maintain, review at 
least annually and update upon any material change, a written business 
continuity plan identifying procedures relating to an emergency or 
significant business disruption and enumerates the minimum elements 
that a member's business continuity plan must address, to the extent 
those elements are applicable and necessary to the firm's business);
     FINRA Rule 4380 (Mandatory Participation in FINRA BC/DR 
Testing Under Regulation SCI) (authorizes FINRA to designate firms that 
are subject to mandatory participation in business continuity and 
disaster recovery (BC/DR) testing under

[[Page 62145]]

Regulation SCI, which will be conducted once per year);
     FINRA Rule 4590 (Synchronization of Member Business 
Clocks) (requires that firms synchronize their business clocks that are 
used for purposes of recording the date and time of any event that must 
be recorded pursuant to the FINRA By-Laws or other FINRA rules (e.g., 
the time a trade was executed or the time an order was received or 
routed), with reference to a time source as designated by FINRA); \38\
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    \38\ Rule 4590 applies to members' business clocks that are used 
for purposes of recording the date and time of any event that must 
be recorded pursuant to the FINRA By-Laws or other FINRA rules. As 
specified in Rule 6730(e)(8), an ``Auction Transaction'' in a U.S. 
Treasury Security, as defined under FINRA rules, shall not be 
reported to FINRA. Accordingly, the application of Rule 4590 to 
exempted securities does not cover auction transactions in U.S. 
Treasury securities, and it does not alter members' obligations to 
comply with any clock synchronization requirements otherwise 
applicable to U.S. Treasury securities auctions.
---------------------------------------------------------------------------

     FINRA Rule 7730 (Trade Reporting and Compliance Engine 
(TRACE)) (sets forth the TRACE transaction reporting fees and the TRACE 
data products offered by FINRA and the fees associated with those 
products); \39\ and
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    \39\ FINRA notes, however, that Rule 7730(b), by its terms, 
currently excludes transactions in U.S. Treasury Securities, as 
defined under FINRA rules, from the TRACE transaction reporting 
fees. See Securities Exchange Act Release No. 79116, (October 18, 
2016), 81 FR 73167, 73169 (October 24, 2016) (Order Approving File 
No. SR-FINRA-2016-027). See also supra note 21.
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     FINRA Rule 8211 (Automated Submission of Trading Data 
Requested by FINRA) (requires members to submit specified trade data in 
automated format as may be prescribed by FINRA).
Other Rules
    Finally, FINRA is proposing to amend FINRA Rule 0150(c) to add 
other rules that relate to customer protection and have general 
applicability to the conduct of members and associated persons or that 
are applicable to exempted securities, including government securities. 
These other rules are:
     FINRA Rule 2030 (Engaging in Distribution and Solicitation 
Activities with Government Entities) (regulates members engaging in 
distribution or solicitation activities with government entities on 
behalf of investment advisers); \40\
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    \40\ FINRA Rule 2030 is modeled after Rule 206(4)-5 under the 
Investment Advisers Act of 1940 (``SEC Pay-to-Play Rule'') that 
addresses pay-to-play practices by investment advisers. See 
Securities Exchange Act Release No. 78683 (August 25, 2016), 81 FR 
60051 (August 31, 2016) (Order Approving File No. SR-FINRA-2015-056) 
(``Approval Order''); see also Investment Advisers Act Release No. 
4532 (September 20, 2016), 81 FR 66526 (September 28, 2016) (finding 
that Rule 2030 imposes substantially equivalent or more stringent 
restrictions on members than the SEC Pay-to-Play Rule imposes on 
investment advisers and is consistent with the objectives of the SEC 
Pay-to-Play Rule). Neither the SEC Pay-to-Play Rule nor FINRA's Rule 
2030 exclude specific products, see Approval Order, 81 FR 60051, 
60058-59. In addition, both the SEC Pay-to-Play Rule and FINRA Rule 
2030 define the term ``government entity'' to mean any state or 
political subdivision of a state, including their agencies, 
authorities and instrumentalities, a pool of assets sponsored or 
established by the state or political subdivision or any agency, 
authority or instrumentality thereof, or a plan or program of such 
government entity. See 17 CFR 275.206(4)-5(f)(5); FINRA Rule 
2030(g)(6).
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     FINRA Rule 2040 (Payments to Unregistered Persons) 
(governs the payment of transaction-based compensation by members to 
unregistered persons, including retired representatives and foreign 
finders);
     FINRA Rule 2070 (Transactions Involving FINRA Employees) 
(addresses conflicts of interests involving FINRA employees and plays a 
vital role in helping FINRA monitor whether employees are abiding by 
trading restrictions imposed by the FINRA Code of Conduct);
     FINRA Rule 2090 (Know Your Customer) (requires members to 
use reasonable diligence in regard to the opening and maintenance of 
every account, in order to know and retain the essential facts 
concerning every customer to effectively service customer accounts, act 
in accordance with any special handling instructions, understand the 
authority of each person acting on behalf of customers, and comply with 
applicable laws, regulations and rules);
     FINRA Rule 2130 (Approval Procedures for Day-Trading 
Accounts) (requires firms that promote day-trading strategies, directly 
or indirectly, to deliver the risk disclosure statement set forth in 
FINRA Rule 2270 (Day-Trading Risk Disclosure Statement), to a non-
institutional customer prior to opening the account for the customer, 
and to (1) approve the customer's account for day-trading in accordance 
with procedures set forth in the rule or (2) obtain a written agreement 
from the customer stating that the customer does not intend to use the 
account for day-trading activities);
     FINRA Rule 2140 (Interfering With the Transfer of Customer 
Accounts in the Context of Employment Disputes) (prohibits members or 
associated persons from interfering with a customer's request to 
transfer his or her account in connection with the change in employment 
of the customer's registered representative, provided that the account 
is not subject to any lien for monies owed by the customer or other 
bona fide claim);
     FINRA Rule 2165 (Financial Exploitation of Specified 
Adults) (permits members to place temporary holds on disbursements of 
funds or securities from the accounts of specified customers where 
there is a reasonable belief of financial exploitation of such 
customers);
     FINRA Rule 2213 (Requirements for the Use of Bond Mutual 
Fund Volatility Ratings) (imposes conditions and disclosure 
requirements on a firm that distributes a retail communication that 
includes a ``bond mutual fund volatility rating,'' including that the 
rating must be based on objective factors, such as the credit quality 
of the fund's individual portfolio holdings, the market price 
volatility of the portfolio, the fund's performance, and specific 
risks, such as interest rate risk, prepayment risk and currency risk);
     FINRA Rule 2214 (Requirements for the Use of Investment 
Analysis Tools) (provides a limited exception to the general 
prohibition on members' communications that predict or project 
performance, as set forth in paragraph (d)(1)(F) of FINRA Rule 2210 
(Communications with the Public), for investment analysis tools, 
provided that specified conditions are met);
     FINRA Rule 2216 (Communications with the Public About 
Collateralized Mortgage Obligations (``CMOs'')) (sets forth standards 
applicable to retail communications concerning CMOs);
     FINRA Rule 2220 (Options Communications) (sets forth a 
member's obligations with respect to its options communications with 
the public); \41\
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    \41\ At the time of the 1996 Approval Order, FINRA Rule 2220 
required that firms designate a specific individual as a Compliance 
Registered Options Principal with responsibility for approving 
certain options communications. The rule has changed since that 
time, eliminating this operational condition, and currently requires 
that, among other things, a designated Registered Options 
Principal(s) review and approve all retail communications, which 
would allow more than one individual to review and approve such 
communications. Moreover, all firms that are engaged in, or intend 
to engage in, transactions in options with the public must have at 
least one Registered Options Principal pursuant to FINRA Rule 
1220(a)(8) (Registered Options Principal). FINRA believes that the 
requirements relating to options on government securities should be 
consistent, to the extent applicable, with the requirements for 
options covered by FINRA Rule 2360 (Options).
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     FINRA Rule 2267 (Investor Education and Protection) 
(requires members to provide customers at least once every calendar 
year in writing (which may be electronic) with: (1) FINRA's website 
address; (2) the BrokerCheck hotline number; and (3) a statement 
regarding the availability of an investor brochure that includes 
information describing BrokerCheck);

[[Page 62146]]

     FINRA Rule 2270 (Day-Trading Risk Disclosure Statement) 
(requires firms that promote day-trading strategies, directly or 
indirectly, to deliver the risk disclosure statement set forth in the 
rule to a non-institutional customer prior to opening the account for 
the customer);
     FINRA Rule 2272 (Sales and Offers of Sales of Securities 
on Military Installations) (governs sales and offers of sales of 
securities by members on the premises of any military installation to 
members of the Armed Forces of the United States or their dependents); 
\42\
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    \42\ Rule 2272 requires, among other things, a member engaging 
in sales or offers of sales of securities on the premises of a 
Military Installation to any member of the U.S. Armed Forces or his 
or her dependents to provide a clear and conspicuous disclosure with 
the identity of the member offering the securities and stating that 
the securities are not being offered or provided by the member of 
behalf of the Federal Government, and that the offer of such 
securities is not sanctioned, recommended or encouraged by the 
Federal Government. See Rule 2272(b). The rule applies to all 
members seeking to engage in sales or offers of sales of securities, 
irrespective of the type of securities offered. While some exempted 
securities are issued by the U.S. Federal Government (e.g., U.S. 
Treasury securities), other exempted securities (e.g., group 
variable contracts) are not.
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     FINRA Rule 2273 (Educational Communication Related to 
Recruitment Practices and Account Transfers) (provides that a member 
that hires or associates with a registered representative must furnish 
to a former customer of the representative, individually (in paper or 
electronic form) required educational communication when: (1) the 
member, directly or through a representative, individually contacts a 
former customer of that representative to transfer assets; or (2) a 
former customer of the representative, absent individual contact, 
transfers assets to an account assigned, or to be assigned, to the 
representative at the member); and
     FINRA Rule 2360 (Options) (addresses specific risks that 
pertain to options, and implements provisions of the federal securities 
laws and SEC rules, including, among other things, provisions requiring 
specific disclosure documents, additional diligence in approving the 
opening of accounts, and specific requirements for confirmations, 
account statements, suitability, recordkeeping and reporting).\43\
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    \43\ See supra note 41.
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Capital Acquisition Broker Rules
    The CAB Rules are a separate set of FINRA rules for firms that meet 
the definition of a ``capital acquisition broker'' and that elect to be 
governed under this rule set. CABs are members that engage in a limited 
range of activities, essentially advising companies and private equity 
funds on capital raising and corporate restructuring, and acting as 
placement agents for sales of unregistered securities to institutional 
investors under limited conditions. Members that elect to be governed 
under the CAB rule set are not permitted, among other things, to carry 
or maintain customer accounts, handle customers' funds or securities, 
accept customers' trading orders, or engage in proprietary trading or 
market-making.\44\
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    \44\ See CAB Rule 016(c).
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    CAB Rule 015 states that FINRA Rule 0150 shall apply to the CAB 
Rules. FINRA proposes to amend CAB Rule 015 to more closely track the 
text of FINRA Rule 0150, and to be consistent with the revisions to 
FINRA Rule 0150 made pursuant to this rule filing.
    Proposed CAB Rule 015(a), which defines the terms ``exempted 
securities'' and ``municipal securities,'' is exactly the same as FINRA 
Rule 0150(a). Similar to FINRA Rule 0150(b), proposed CAB Rule 015(b) 
provides that the CAB Rules are not intended to be, and shall not be 
construed as, rules concerning transactions in municipal securities.
    Proposed CAB Rule 015(c) resembles FINRA Rule 0150(c), but refers 
to the CAB Rules that apply to transactions in, and business activities 
related to, exempted securities, except municipal securities, conducted 
by CABs and their associated persons, rather than to FINRA Rules. In 
this regard, FINRA proposes to apply all CAB Rules, other than CAB 
Rules 512 (Private Placements of Securities Issued by Members) and 515 
(Fairness Opinions), to such transactions and activities, because 
either the CAB Rule provides that all CABs are subject to a FINRA Rule 
included in FINRA Rule 0150(c), or the CAB Rule has provisions that are 
similar to those in FINRA Rules included in FINRA Rule 0150(c). FINRA 
does not propose to apply CAB Rules 512 and 515 to such activities and 
transactions, because those rules provide that CABs are subject to 
FINRA Rules 5122 and 5150, respectively, which are not included in 
FINRA Rule 0150(c).
    Proposed CAB Rule 015(d) provides that nothing in this Rule shall 
be deemed to expand or otherwise alter the scope of activities 
permitted for CABs under CAB Rule 016(c) (the definition of ``capital 
acquisition broker''). The purpose of this provision is to make clear 
that CAB Rule 015 is not intended to define the scope of activities in 
which CABs may engage. Instead, CAB Rule 016(c) defines what activities 
in which a CAB may engage.
    FINRA has filed the proposed rule change for immediate 
effectiveness. The implementation date will be 270 days after the date 
of the filing.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\45\ 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.
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    \45\ 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. As stated above, the proposed 
rule change does not impact the current status of any of the listed 
rules, but serves to modernize FINRA Rule 0150 to include rules of 
general applicability to all FINRA members.

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 \46\ and Rule 19b-
4(f)(6) thereunder.\47\
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    \46\ 15 U.S.C. 78s(b)(3)(A).
    \47\ 17 CFR 240.19b-4(f)(6).
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    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.

[[Page 62147]]

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 [email protected]. Please include 
File Number SR-FINRA-2022-028 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2022-028. 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 website (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 website 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 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. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
FINRA-2022-028 and should be submitted on or before November 3, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\48\
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    \48\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2022-22174 Filed 10-12-22; 8:45 am]
BILLING CODE 8011-01-P