Document ID: SEC-2009-1040-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change To Adopt FINRA Rules 1010 (Electronic Filing Requirements for Uniform Forms) and 2263 (Arbitration Disclosure to Associated Persons Signing or Acknowledging Form U4) in the Consolidated FINRA Rulebook
Posted Date: 2009-07-27T04:00Z

[Federal Register: July 27, 2009 (Volume 74, Number 142)]
[Notices]               
[Page 37077-37079]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jy09-91]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60348; File No. SR-FINRA-2009-019]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Adopt FINRA 
Rules 1010 (Electronic Filing Requirements for Uniform Forms) and 2263 
(Arbitration Disclosure to Associated Persons Signing or Acknowledging 
Form U4) in the Consolidated FINRA Rulebook

July 20, 2009.

I. Introduction

    On April 7, 2009, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a ``NASD'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt, subject to certain 
amendments, NASD Rule 1140 (Electronic Filing Rules) as new FINRA Rule 
1010 (Electronic Filing Requirements for Uniform Forms) and NASD Rule 
3080 (Disclosure to Associated Persons When Signing Form U-4) as new 
FINRA Rule 2263 (Arbitration Disclosure to Associated Persons Signing 
or Acknowledging Form U4) in the consolidated FINRA rulebook. The 
proposal was published for comment in the Federal Register on April 24, 
2009.\3\ The Commission received one comment letter, on May 15, 2009, 
on the proposal.\4\ FINRA responded to the commenter on July 8, 
2009.\5\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 59784 (April 17, 
2009), 74 FR 18779 (April 24, 2009) (``Notice'').
    \4\ See letter to Florence E. Harmon, Deputy Secretary, 
Commission, from Bari Havlik, Senior Vice President and Chief 
Compliance Officer, Charles Schwab & Co., Inc., dated May 15, 2009 
(``Schwab Letter'').
    \5\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from Patricia Albrecht, Assistant General Counsel, FINRA, dated July 
8, 2009 (``Response Letter'').
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II. Description of the Proposal

Proposed FINRA Rule 1010

    NASD's Rule 1140 specifies that an electronic initial and transfer 
Form U4 must be based on a signed Form U4, but the rule does not 
expressly state that the signatures must be manual. The proposed rule 
would require that every initial Form U4 and every Form U4 filed to 
transfer a registered person's association from one firm to another 
firm be based on an original, manually-signed Form U4 provided to the 
member by the person on whose behalf the Form U4 is being filed.\6\
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    \6\ Member firms use the Central Registration Depository (CRD), 
a Web based system, to submit the form on behalf of the associated 
person by typing the person's name into the signature box on the 
electronic form.
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    The proposed rule change also modifies the signature requirement 
with respect to amendments to disclosure information in the Form U4. 
NASD's Rule 1140 requires the associated person on whose behalf the 
filing is made to sign amendments to Form U4 that provide disclosure 
information. Proposed FINRA Rule 1010 would permit a firm to file 
amendments to the Form U4 disclosure information without obtaining the 
registered person's manual signature if the firm uses reasonable 
efforts to i) provide the registered person with a copy of the amended 
disclosure information before filing and ii) obtain the registered 
person's written acknowledgment that the information has been received 
and reviewed, which may be accomplished electronically, before 
filing.\7\
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    \7\ The member, as part of its recordkeeping requirements 
pursuant to Rule 17a-4(e)(1) under the Act, would be required to 
retain the written acknowledgment and make it available promptly 
upon request.

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[[Page 37078]]

    In the event the member is not able to obtain an associated 
person's manual signature or written acknowledgement of an amendment to 
disclosure information before filing the amended Form U4, the proposal 
would require that the member file disclosure information of which it 
has knowledge, and the member would enter ``Representative Refused to 
Sign/Acknowledge'' or ``Representative Not Available'' or a 
substantially similar phrase in the signature box of the electronic 
form. This change codifies the member's obligation in Article V, 
Section 2 of FINRA's By-Laws that every Form U4 be kept current.
    Fourth, the proposed rule change incorporates the practice in the 
Web CRD of permitting administrative information (such as the addition 
of state or self-regulatory organization registrations, exam 
scheduling, and updates to residential, business, and personal history) 
to be amended on Form U4 without obtaining the associated person's 
signature.\8\ If that occurs, the member must use reasonable efforts to 
provide the associated person with a copy of the amended administrative 
information that was filed.
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    \8\ See Securities Exchange Act Release No. 41575 (June 29, 
1999), 64 FR 36728, 36729 n.7 (July 7, 1999) (Order Approving File 
No. SR-NASD-99-28); see also Securities Exchange Act Release No. 
37439 (July 15, 1996), 61 FR 37950 (July 22, 1996) (Order Approving 
File No. SR-NASD-96-21).
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    Fifth, the proposal would permit the registered principal(s) or 
corporate officer(s) who is responsible for supervising a firm's 
electronic filings to delegate to another associated person, who need 
not be registered, the electronic filing of the member's forms via Web 
CRD. The principal(s) or corporate officer(s) may not, however, 
delegate any of his supervision, review or approval responsibilities 
and must take reasonable and appropriate action to ensure that all 
delegated electronic filing functions are properly executed and 
supervised.

Proposed FINRA Rule 2263

    The proposed rule change transfers NASD Rule 3080 into the 
consolidated FINRA Rulebook as FINRA Rule 2263 with several minor 
changes. First, the proposed rule change amends the current title 
``Disclosure to Associated Person When Signing Form U-4'' to 
``Arbitration Disclosure to Associated Persons Signing or Acknowledging 
Form U4'' to clarify that the rule relates to arbitration disclosures. 
Second, proposed FINRA Rule 2263 clarifies that a member must provide 
the required arbitration disclosures whenever a member asks an 
associated person, pursuant to proposed FINRA Rule 1010, to manually 
sign an initial or amended Form U4, or to otherwise provide written 
acknowledgement, which may be electronic, of an amendment to the Form. 
Third, the proposed rule updates language to reflect amendments to 
FINRA's Code of Arbitration Procedure requiring arbitrators to provide 
an explained decision to the parties in eligible cases if there is a 
joint request by all parties at least twenty days before the first 
scheduled hearing date.\9\
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    \9\ See Securities Exchange Act Release No. 59358 (February 4, 
2009), 74 FR 6928 (February 11, 2009) (Order Approving File No. SR-
FINRA-2008-051).
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III. Summary of Comments

Proposed FINRA Rule 1010(c)(3)

    While the Schwab Letter generally supports the proposal, it 
expressed several concerns, including that the aspect of the proposed 
rule that requires the member to file amendments to U4 regarding 
disclosure information as to which it has knowledge, proposed FINRA 
Rule 1010(c)(3) would require a firm to file a Form U4 disclosure 
amendment when the firm may have inaccurate or incomplete information. 
Schwab also argues that the proposal may dilute the standard that the 
primary responsibility for updating and keeping current Form U4 lies 
with the associated person.\10\
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    \10\ See Schwab Letter at 2-3.
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    FINRA responded that the proposal merely codifies a member's 
existing obligation under Article V, Section 2(c) of FINRA's By-Laws 
that every U4 be kept current, and implicit in this duty is the 
expectation that the member will seek to ensure that such information 
is accurate and complete.\11\ FINRA noted that the member's obligation 
is in addition to the associated person's obligation to keep Form U4 
current, which is set forth generally in Article V, Section 2 of the 
FINRA By-Laws.\12\
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    \11\ See Response Letter at 2.
    \12\ Id. at 2-3.
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Proposed FINRA Rule 1010(c)(4)

    Schwab supports allowing firms to file amendments to administrative 
information without obtaining the associated person's signature, but it 
objects to the requirement that the member firm use reasonable efforts 
to provide the associated person with a copy of the amended 
administrative information and believes that this could cause firms to 
incur significant system changes and costs.\13\ FINRA responded that 
Web CRD is used to help protect investors, and its effectiveness 
depends on accurate information.\14\ Thus, FINRA believes this aspect 
of the proposal is appropriate in that it encourages members to verify 
information with an associated person while allowing firms the 
flexibility to do so after amendments to administrative information 
have been filed.
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    \13\ See Schwab Letter at 4.
    \14\ See Response Letter at 4.
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Proposed FINRA Rule 1010(c)(1) and (2) and FINRA Rule 2263

    Schwab believes that the requirements imposed on a firm, in 
connection with filing amendments to Form U4 disclosure information 
without obtaining the associated person's manual signature, and 
providing the written statement related to arbitration disclosure, may 
prove costly and complex for firms to implement.\15\ Schwab opines that 
the goal of having clear evidence of the registered person's knowledge 
and acceptance of disclosure information may be achieved using existing 
procedures and electronic systems that accomplish certain 
functions.\16\ FINRA stated that this concern can be addressed with 
interpretive guidance and that it would address it accordingly, 
assuming approval of the proposal.\17\
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    \15\ See Schwab Letter at 4-5.
    \16\ Id.
    \17\ See Response Letter at 4.
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IV. Discussion and Commission Findings

    After carefully reviewing the proposed rule change, the Schwab 
Letter, and the Response Letter, the Commission finds that the proposal 
is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\18\ In particular, the Commission finds that the proposal 
is consistent with Section 15A(b)(6) of the Act,\19\ which requires, 
among other things that FINRA's rules be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
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    \18\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the revisions FINRA proposed in 
connection with moving NASD Rule 1140 and Rule 3080 to the consolidated 
FINRA Rulebook as new FINRA Rule 1010 and new FINRA Rule 2263 should,

[[Page 37079]]

among other things, strike a fair balance between providing notice to 
associated persons of changes to their U4 where obtaining a signature 
may prove difficult and allowing firms to expeditiously update 
information. In addition, the Commission believes that it is 
appropriate for FINRA to make explicit in its rules a member's 
obligation to ensure that information in Form U4 regarding its 
associated persons is accurate, even though this requirement is 
explicit in FINRA's By-Laws. Ensuring that information in Web CRD is 
current and accurate enhances the usefulness of Web CRD.
    The Commission believes that FINRA, in its Response Letter, 
adequately addressed the comments raised in the Schwab Letter. The 
Commission emphasizes that FINRA correctly noted that both firms and 
associated persons have a duty to keep information in Web CRD current, 
and both are responsible for ensuring that disclosure information is 
accurate; this proposal merely codifies this obligation. The Commission 
also agrees with FINRA that firms should try to ensure the accuracy and 
completeness of information submitted. This purpose should be served by 
the rule requiring a firm to use reasonable efforts to provide the 
associated person with a copy of the amended disclosure information 
post-filing, since the firm should have contact information for the 
associated person, whom it is responsible for regulating, and the 
associated person can ensure that the amended information is accurate.
    For the reasons discussed above, the Commission finds that the rule 
change is consistent with the Act and the rules and regulations 
thereunder.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-FINRA-2009-019), be, and 
hereby is, approved.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-17764 Filed 7-24-09; 8:45 am]

BILLING CODE 8010-01-P