Document ID: SEC-2009-0546-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Change: Financial Industry Regulatory Authority, Inc.
Posted Date: 2009-04-20T04:00Z

[Federal Register: April 20, 2009 (Volume 74, Number 74)]
[Notices]               
[Page 18007-18009]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20ap09-122]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59754; File No. SR-FINRA-2009-018]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt IM-
2830-1 (``Breakpoint'' Sales) in the Consolidated FINRA Rulebook

April 13, 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 March 26, 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 Interpretive Material 2830-1 
(``IM-2830-1'') (``Breakpoint'' Sales) as a FINRA rule in the 
consolidated FINRA rulebook with minor changes. The proposed rule 
change would renumber NASD IM-2830-1 as FINRA Rule 2342 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.

[[Page 18008]]

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 
IM-2830-1 into the Consolidated FINRA Rulebook with minor changes 
discussed below. The proposed rule change would renumber NASD IM-2830-1 
as FINRA Rule 2342. NASD IM-2830-1 prohibits sales of mutual fund 
shares in amounts below a ``breakpoint'' if such sales are made ``so as 
to share in the higher sales charges.'' In the context of mutual fund 
sales, a ``breakpoint'' is that point at which the sales charge is 
reduced for quantity purchases of fund shares.
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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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    The application of the standard in NASD IM-2830-1 depends on the 
facts and circumstances of particular transactions to determine whether 
a member executed a transaction for the purpose of earning a higher 
sales charge. In 1998, NASD IM-2830-1 was amended to address the use of 
modern portfolio investment strategies that utilize many different 
mutual funds with varying investment objectives.\4\ The amendments 
specify more precisely those facts and circumstances that FINRA will 
consider when examining whether trades that miss breakpoints, but are 
made pursuant to bona fide asset allocation programs, may have violated 
NASD IM-2830-1. In making such determinations, the rule provides that 
FINRA will consider, among other things, whether a member has retained 
records that demonstrate that the trade was executed in accordance with 
a bona fide asset allocation program that the member offers to its 
customers which is designed to meet their diversification needs and 
investment goals; and under which the member discloses to its customers 
that they may not qualify for breakpoint reductions that are otherwise 
available.
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    \4\ See Securities Exchange Act Release No. 40659 (Nov. 10, 
1998), 63 FR 64136 (Nov. 18, 1998) (Order Approving Proposed Rule 
Change Relating to Mutual Fund Breakpoint Sales).
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    Breakpoint issues have been of concern to the regulatory community. 
On December 23, 2002, FINRA issued Special Notice to Members 02-85, 
which reminded firms of their obligation to apply correctly breakpoint 
discounts to front-end sales load mutual fund transactions.\5\ In 2003, 
the staffs of FINRA, the SEC, and the NYSE conducted examinations of 
broker-dealers to assess their ability to deliver breakpoint discounts 
and memorialized the findings of those examinations in a joint 
report.\6\ Concurrently, FINRA staff and industry members formed a 
joint task force to consider issues regarding breakpoints. The joint 
task force issued a report in July 2003 containing recommendations for 
the industry to facilitate the accurate delivery of breakpoint 
discounts.\7\
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    \5\ NASD Special Notice to Members 02-85, NASD Requires 
Immediate Member Firm Action Regarding Mutual Fund Purchases and 
Breakpoint Schedules (December 2002).
    \6\ See Joint SEC/NASD/NYSE Report of Examinations of Broker/
Dealers Regarding Discounts on Front-End Sales Charges on Mutual 
Funds (March 2003), available at http://www.finra.org/Industry/
Issues/Breakpoints/P006438.
    \7\ See Report of the Joint NASD/Industry Task Force on 
Breakpoints (July 2003), available at  http://www.finra.org/
Industry/Issues/Breakpoints/P006422.
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    FINRA proposes to adopt NASD IM-2830-1 as FINRA Rule 2342 as it 
believes this rule continues to be an important tool in regulating 
members' sales of mutual fund shares to ensure that they are not sold 
in dollar amounts just below breakpoints so as to share in higher sales 
charges. FINRA proposes to eliminate references to ``just and equitable 
principles of trade'' and make other minor changes to the text to 
reflect that it would be a stand-alone rule, rather than Interpretive 
Material, and to eliminate certain redundant text that is inconsistent 
with a rules-based format.
    As noted above, 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,\8\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change would 
continue to provide FINRA with an important tool in regulating members' 
sales of mutual fund shares, consistent with the goals of protecting 
investors and the public interest.
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    \8\ 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-2009-018 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-2009-018. This 
file number should be included on the subject line if e-mail is used. 
To help the

[[Page 18009]]

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-2009-018 and should be submitted 
on or before May 11, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-8877 Filed 4-17-09; 8:45 am]

BILLING CODE 8010-01-P