Document ID: SEC-2009-0801-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2009-06-15T04:00Z

[Federal Register: June 15, 2009 (Volume 74, Number 113)]
[Notices]               
[Page 28308-28310]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15jn09-147]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60066; File No. SR-FINRA-2009-036]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rules 2124 (Net Transactions With Customers), 2220 (Options 
Communications), 4370 (Business Continuity Plans and Emergency Contact 
Information) and 5250 (Payments for Market Making) in the Consolidated 
FINRA Rulebook

June 8, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 21, 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 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 Rules 2220 (Options 
Communications), 2441 (Net Transactions with Customers), 2460 (Payments 
for Market Making), 3510 (Business Continuity Plans) and 3520 
(Emergency Contact Information) as FINRA rules in the consolidated 
FINRA rulebook without substantive change. The proposed rule change 
would renumber NASD Rule 2220 as FINRA Rule 2220, NASD Rule 2441 as 
FINRA Rule 2124, NASD Rule 2460 as FINRA Rule 5250, and NASD Rules 3510 
and 3520 would be combined into FINRA Rule 4370 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 
Rules 2220 (Options Communications), 2441 (Net Transactions with 
Customers), 2460 (Payments for Market Making), 3510 (Business 
Continuity Plans) and 3520 (Emergency Contact Information) as FINRA 
rules in the consolidated FINRA rulebook without substantive change.
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    \3\ The current FINRA rulebook consists of (1) FINRA Rules; (2) 
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated 
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules 
are referred to as the ``Transitional Rulebook''). While the NASD 
Rules generally apply to all FINRA members, the Incorporated NYSE 
Rules apply only to those members of FINRA that are also members of 
the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA 
members, unless such rules have a more limited application by their 
terms. For more information about the rulebook consolidation 
process, see FINRA Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
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Proposed FINRA Rule 2220
    FINRA is proposing to adopt NASD Rule 2220 (Options Communications) 
without substantive change into the Consolidated FINRA Rulebook as 
FINRA Rule 2220. NASD Rule 2220 sets forth a member's obligations with 
respect to its options communications with the public. In 2008, FINRA 
revised NASD Rule 2220 to make it more consistent with FINRA's general 
rules on communications with the public and the options communications 
rules of other self-regulatory organizations (SROs).\4\ As amended, 
NASD Rule 2220,

[[Page 28309]]

among other things: (1) Uses, to the extent appropriate, the same 
terminology and definitions as in FINRA's general rules on 
communications with the public; (2) makes the requirements for 
principal review of correspondence concerning options the same as for 
correspondence generally; and (3) updates the standards on the content 
of communications that precede the delivery of the options disclosure 
document (ODD). The amended rule became effective on March 4, 2009.\5\
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    \4\ See Securities Exchange Act Release No. 58738 (October 6, 
2008), 73 FR 60371 (October 10, 2008) (Order Approving File No. SR-
FINRA-2008-013).
    \5\ See Regulatory Notice 08-73 (December 2008) (SEC Approves 
Amendments to NASD Rule 2220 to Update the Standards for Options 
Communications). There is no longer a comparable Incorporated NYSE 
Rule. FINRA previously deleted substantially similar Incorporated 
NYSE Rule 791 (Communications to Customers) as part of a rule change 
that, among other things, reduced regulatory duplication for Dual 
Members during the interim period before the completion of the 
Consolidated FINRA Rulebook. See Securities Exchange Act Release No. 
58533 (September 12, 2008), 73 FR 54652 (September 22, 2008) (Order 
Approving File No. SR-FINRA-2008-036).
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    FINRA recommends that NASD Rule 2220 be transferred as FINRA Rule 
2220 into the Consolidated FINRA Rulebook without substantive change in 
light of the recent amendments.
Proposed FINRA Rule 2124
    FINRA is proposing to adopt NASD Rule 2441 (Net Transactions with 
Customers) without substantive change into the Consolidated FINRA 
Rulebook as FINRA Rule 2124. NASD Rule 2441 requires members to provide 
disclosure and obtain consent when trading on a ``net'' basis with 
customers.\6\ With respect to non-institutional customers, the member 
must obtain the customer's written consent on an order-by-order basis 
prior to executing the transaction and such consent must evidence the 
customer's understanding of the terms and conditions of the order. With 
respect to institutional customers, a member must obtain the customer's 
consent prior to executing the transaction and such consent may be 
obtained by either: (1) Use of a negative consent letter; (2) oral 
disclosure and consent on an order-by-order basis; or (3) written 
consent on an order-by-order basis.
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    \6\ A ``net'' transaction is a principal transaction in which a 
market maker, after having received an order to buy (sell) an equity 
security, purchases (sells) the equity security at one price (from 
(to) another broker-dealer or another customer) and then sells to 
(buys from) the customer at a different price.
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    Rule 2441 was approved by the SEC in 2006, and was the product of 
notice and comment rulemaking.\7\ There have not been subsequent 
amendments to the rule, and FINRA does not believe any substantive 
changes to this rule are necessary. Therefore, FINRA recommends that 
NASD Rule 2441 be transferred without substantive change into the 
Consolidated FINRA Rulebook as FINRA Rule 2124.
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    \7\ See Securities Exchange Act Release No. 54088 (June 30, 
2006), 71 FR 38950 (July 10, 2006) (Order Approving File No. SR-
NASD-2004-135).
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Proposed FINRA Rule 5250
    FINRA is proposing to adopt NASD Rule 2460 (Payment for Market 
Making) without substantive change into the Consolidated FINRA Rulebook 
as FINRA Rule 5250. NASD Rule 2460 prohibits any payments by an issuer 
or an issuer's affiliates and promoters, directly or indirectly, to a 
member or person associated with a member for publishing a quotation, 
acting as a market maker, or submitting an application in connection 
therewith. The rule contains two exceptions that permit a member to 
accept (1) payment for bona fide services, including, but not limited 
to, investment banking services and (2) reimbursement for registration 
or listing fees. The SEC approved NASD Rule 2460 after notice and 
comment in July 1997 with no subsequent amendments.\8\
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    \8\ See Securities Exchange Act Release No. 38812 (July 3, 
1997), 62 FR 37105 (July 10, 1997) (Order Approving File No. SR-
NASD-97-29).
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    FINRA believes no changes to this rule are appropriate or 
necessary. FINRA continues to believe, as stated in FINRA's 1997 rule 
filing, that a market maker should have considerable latitude and 
freedom to make or terminate market making activities in an issuer's 
securities. The decision by a firm to make a market in a given security 
and the question of price generally are dependent on a number of 
factors, including, among others, supply and demand, the firm's 
expectations toward the market, its current inventory, and exposure to 
risk and competition. This decision should not be influenced by 
payments to the member from issuers or promoters. Therefore, FINRA 
proposes to transfer NASD Rule 2460 without substantive change into the 
Consolidated FINRA Rulebook as FINRA Rule 5250.
Proposed FINRA Rule 4370
    FINRA is proposing to adopt NASD Rule 3510 (Business Continuity 
Plans) and NASD Rule 3520 (Emergency Contact Information) without 
substantive change into the Consolidated FINRA Rulebook and combine the 
rules as FINRA Rule 4370 (Business Continuity Plans and Emergency 
Contact Information). NASD Rule 3510 requires members to create and 
maintain 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 member's business. NASD Rule 3510 further requires 
members to update their business continuity plans upon any material 
change and, at a minimum, conduct an annual review of their plans. Each 
member also must disclose to its customers how its business continuity 
plan addresses the possibility of a future significant business 
disruption and how the member plans to respond to events of varying 
scope. Each member must make this disclosure, at a minimum, in writing 
to customers at account opening, by posting it on the member's Web site 
(if the member maintains a Web site), and by mailing it to customers 
upon request.
    NASD Rules 3510 is one part of the NASD Rule 3500 Series (Emergency 
Preparedness), which requires members to establish emergency 
preparedness plans and procedures. NASD Rule 3520, which comprises the 
remainder of the NASD Rule 3500 Series, requires members to designate 
two emergency contact persons and provide this information to FINRA via 
electronic process.\9\
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    \9\ There is no longer a comparable Incorporated NYSE Rule to 
NASD Rules 3510 and 3520. FINRA previously deleted from the 
Transitional Rulebook NYSE Rule 446 (Business Continuity and 
Contingency Plans), which contained substantially similar 
requirements as the two NASD rules, as part of the rule change to 
reduce regulatory duplication for Dual Members during the period 
before completion of the Consolidated FINRA Rulebook. See Securities 
Exchange Act Release No. 58533 (September 12, 2008), 73 FR 54652 
(September 22, 2008) (Order Approving File No. SR-FINRA-2008-036).
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    FINRA recommends that NASD Rules 3510 and 3520 be adopted as one 
rule, FINRA Rule 4370, in the Consolidated FINRA Rulebook without any 
substantive changes to the respective rules' provisions.
    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,\10\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and

[[Page 28310]]

equitable principles of trade, and, in general, to protect investors 
and the public interest. FINRA believes that transferring NASD Rule 
2220 into the Consolidated Rulebook protects investors and the public 
interest by providing the investing public with options communications 
rules that are designed to provide appropriate safeguards and greater 
clarity by promoting harmonization between FINRA's and other SROs' 
options communications rules. FINRA believes that transferring NASD 
Rule 2441 into the Consolidated FINRA Rulebook promotes investor 
protection by requiring members to provide disclosure and obtain 
customer consent when trading on a net basis. In addition, FINRA 
believes that the benefits to investors of requiring certain 
disclosures and obtaining customer consent when trading on a net basis 
outweighs the additional responsibilities placed on broker-dealers. 
FINRA believes that transferring NASD Rule 2460 into the Consolidated 
FINRA Rulebook will protect investors and the public interest and avert 
a potential conflict of interest by prohibiting members from receiving 
compensation or other payments from an issuer or others for listing, 
quoting or making a market in an issuer's securities. Finally, FINRA 
believes that transferring and combining NASD Rules 3510 and 3520 in 
the Consolidated FINRA Rulebook will help ensure that members are 
prepared in the event of a significant business disruption. The 
proposed rule change makes non-substantive changes to rules that have 
proven effective in meeting the statutory mandates.
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    \10\ 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-2009-036 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2009-036. 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-2009-036 and should be 
submitted on or before July 6, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-13971 Filed 6-12-09; 8:45 am]

BILLING CODE 8010-01-P