[Federal Register Volume 72, Number 189 (Monday, October 1, 2007)]
[Notices]
[Pages 55850-55852]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-19271]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56504; File No. SR-NASD-2007-055]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc. (n/k/a Financial Industry Regulatory Authority, Inc.); 
Order Approving Proposed Rule Change Relating to Interpretative 
Material 9216, Violations Appropriate for Disposition Under Plan 
Pursuant to SEC Rule 19d-1(c)(2)

 September 24, 2007.

I. Introduction

    On July 24, 2007, the National Association of Securities Dealers, 
Inc. (``NASD'') (n/k/a Financial Industry Regulatory Authority, Inc. 
(``FINRA'')) \1\ filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \2\ and Rule 19b-4 
thereunder,\3\ a proposed rule change to amend Interpretative Material 
9216 (Violations Appropriate for Disposition Under Plan Pursuant to SEC 
Rule 19d-1(c)(2)) (``IM-9216'') to expand the list of violations 
eligible for disposition under NASD's Minor Rule Violation Plan 
(``MRVP''). The proposed rule change was published for comment in the 
Federal Register on August 7, 2007.\4\ The Commission received no 
comment letters on the proposed rule change. This order approves the 
proposed rule change.
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    \1\ On July 26, 2007, the Commission approved a proposed rule 
change filed by NASD to amend NASD's Certificate of Incorporation to 
reflect its name change to the Financial Industry Regulatory 
Authority, Inc., or FINRA, in connection with the consolidation of 
the member firm regulatory functions of NASD and NYSE Regulation, 
Inc. See Securities Exchange Act Release No. 56146 (July 26, 2007).
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 56175 (July 31, 
2007), 72 FR 44201 (``Notice'').
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II. Description of the Proposed Rule Change

    In connection with the recently approved plan to consolidate the 
member regulation operations of NASD and the NYSE Group, Inc. into a 
single organization (``Transaction''),\5\ NASD proposed to amend IM-
9216 to expand the list of violations eligible for

[[Page 55851]]

disposition under NASD's MRVP to include certain NYSE rules that 
pertain to the regulation of member firm conduct. \6\ The proposed rule 
change would amend NASD's MRVP to include those Incorporated NYSE Rules 
currently enumerated in NYSE's MRVP. This would permit FINRA, during 
the interim period until the adoption of a consolidated rulebook, to 
impose a fine for minor rule violations by a Dual Member of the 
Incorporated NYSE Rules in lieu of commencing disciplinary proceedings. 
As discussed in Release No. 34-56147, NASD is not proposing to 
incorporate, among other rules, the NYSE disciplinary rules or related 
interpretations, including NYSE's MRVP as set forth in NYSE Rule 476A 
(Imposition of Fines for Minor Violation(s) of Rules). \7\
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    \5\ On July 26, 2007, the Commission approved amendments to 
NASD's By-Laws to implement governance and related changes to 
accommodate the consolidation of the member firm regulatory 
functions of NASD and NYSE Regulation, Inc. See Securities Exchange 
Act Release No. 56145 (July 26, 2007). The date of closing of the 
Transaction was July 30, 2007.
    \6\ Until the adoption of a consolidated rulebook that would 
reduce to one the two sets of rules currently applicable to members 
of both the NASD and NYSE (``Dual Members''), NASD has proposed to 
incorporate into FINRA's rulebook certain NYSE Rules that pertain to 
the regulation of member firm conduct (``Incorporated NYSE Rules''). 
See Securities Exchange Act Release No. 56147 (July 26, 2007) (SR-
NASD-2007-054, Exhibit 5) (incorporating certain NYSE Rules relating 
to member firm conduct into FINRA's rulebook) (``Release No. 34-
56147''). As noted in Release No. 34-56147, the Incorporated NYSE 
Rules apply solely to FINRA members that are Dual Members on or 
after the date of closing of the Transaction. NASD represented that 
FINRA will work expeditiously to consolidate the rules that apply to 
its member firms. See Notice, supra note 4. The Incorporated NYSE 
Rules will apply solely to Dual Members until such time as FINRA 
adopts, subject to Commission approval, consolidated rules 
applicable to all of its members.
    \7\ NASD is not proposing to incorporate NYSE's MRVP (NYSE Rule 
476A), because NYSE Rule 476A contains procedures that would 
conflict with the finding of a minor rule violation by FINRA. For 
example, NYSE Rule 476A permits a person against whom a fine is 
imposed to contest the NYSE's fine determination by, among other 
things, appealing to the NYSE board of directors.
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    The proposed amendments to IM-9216 also would specify the 
applicability of the rules listed therein to various members of FINRA. 
Specifically, any Dual Member (including any persons affiliated with 
such member) may be subject to a fine under Rule 9216(b) with respect 
to any rule listed in IM-9216 that applies to such member or person; 
provided, however, that any Dual Member that was not also a member of 
NASD as of the date of closing of the Transaction and that does not 
engage in any activities that would have required it to be an NASD 
member (and its affiliated persons that are not otherwise subject to 
NASD rules) would only be subject to a fine under Rule 9216(b) with 
respect to the following rules listed in IM-9216: any NYSE rule, 
Exchange Act rule, NASD By-Law or Schedule to By-Laws, or the NASD Rule 
8000 Series. In addition, any member of FINRA that is not also a member 
of the NYSE (and its associated persons that are not otherwise subject 
to NYSE rules) may be subject to a fine under Rule 9216(b) with respect 
to any rule listed in IM-9216, with the exception of the NYSE rules.
    NASD is not proposing to adopt the provision in NYSE's MRVP that 
establishes a $5,000 maximum fine that may be imposed under NYSE's MRVP 
for minor violations of NYSE rules. Rather, FINRA would continue to 
apply the $2,500 maximum fine level under NASD's MRVP in determining 
fine levels for minor violations of either an NASD or NYSE rule 
included in NASD's MRVP. \8\
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    \8\ Rule 19d-1(c)(2) under the Exchange Act, 17 CFR 240.19d-
1(c)(2), provides that any disciplinary action taken by a self-
regulatory organization (``SRO'') against any person of a rule of 
the SRO that has been designated as a minor rule violation pursuant 
to a plan is not considered ``final'' for purposes of Rule 19d-
1(c)(1) under the Exchange Act, 17 CFR 240.19d-1(c)(2), if the 
sanction imposed consists of a fine not exceeding $2,500 and the 
sanctioned person has not sought an adjudication, including a 
hearing, or otherwise exhausted his administrative remedies at the 
SRO with respect to the matter. SROs are permitted to report such 
minor rule violations (where the fine does not exceed $2,500) to the 
Commission on a periodic, rather than immediate, basis. In addition, 
members are not required to report ``minor rule violations'' on the 
Forms BD, U4 or U5 (as such term is defined on the forms). These 
forms provide that a rule violation may be designated as ``minor'' 
under a plan approved by the Commission if, among other things, the 
sanction imposed consists of a fine of $2,500 or less. See also 
Securities Exchange Act Release No. 40193 (July 10, 1998), 63 FR 
39338 (July 22, 1998) (Order Granting Approval to Proposed Rule 
Change Relating to Fines for Disruptive Action on the Options Floor) 
(SR-PCX-98-21) (stating in the context of amendments to the MRVP of 
the Pacific Exchange, Inc's (``PCX'') (now NYSE Arca, Inc.) that, as 
noted in PCX's MRVP, pursuant to Securities Exchange Act Release No. 
30958, any person or organization found in violation of a minor rule 
under an MRVP is not required to report such violation on Form BD, 
provided that, among other things, the sanction imposed consists of 
a fine not exceeding $2,500).
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    The proposed rule change also would delete from IM-9216 references 
to NASD rules that have been rescinded.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Exchange Act and the rules and 
regulations thereunder applicable to a national securities 
association.\9\ Specifically, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(2) of the Exchange Act 
\10\ in that it will permit FINRA to be so organized to carry out the 
purposes of the Exchange Act and to enforce compliance by FINRA members 
and persons associated with its members with the Exchange Act, the 
rules and regulations thereunder, and FINRA rules. The Commission also 
finds that the proposed rule change is consistent with Section 
15A(b)(6) of the Exchange Act \11\ in that it is designed, among other 
things, 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. Further, the Commission finds that the proposed rule change 
is consistent with Section 15A(b)(7) of the Exchange Act \12\ in that 
it will provide that FINRA members and persons associated with its 
members will be appropriately disciplined for violations of the 
Exchange Act, the rules and regulations thereunder, and FINRA rules. 
The Commission also finds the proposed rule change consistent with 
Section 15A(b)(8) of the Exchange Act \13\ in that it furthers the 
statutory goals of providing a fair procedure for the disciplining of 
members and persons associated with members.
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    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78o-3(b)(2).
    \11\ 15 U.S.C. 78o-3(b)(6).
    \12\ 15 U.S.C. 78o-3(b)(7).
    \13\ 15 U.S.C. 78o-3(b)(8).
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    As a result of the proposed rule change, FINRA would be able to 
impose a fine for minor rule violations with respect to the 
Incorporated NYSE Rules that currently are enumerated in NYSE's MRVP. 
The proposed rule change is designed to ensure that Dual Members will 
have substantially the same set of regulatory obligations immediately 
following the closing date of the Transaction that such members had 
prior to the closing of the Transaction until the member conduct rules 
of the NASD and NYSE are consolidated into a single set of FINRA rules. 
The proposed rule change provides a reasonable means of addressing 
violations of both NASD and NYSE rules that do not rise to the level of 
requiring formal disciplining proceedings, while providing greater 
flexibility in handling certain violations. The Commission expects that 
FINRA will continue to conduct surveillance with due diligence and make 
a determination based on its findings, on a case-by-case basis, whether 
a fine under the MRVP is appropriate, or whether a violation requires 
formal disciplinary action.

[[Page 55852]]

    The proposed rule change also provides that Dual Members will be 
subject to FINRA's disciplinary procedures, including FINRA's current 
$2,500 maximum fine level for minor rule violations of either an NASD 
or NYSE rule included in FINRA's MRVP. While there are some 
distinctions between NASD's and NYSE's rules, both sets of rules 
applicable to the disciplinary process were previously approved by the 
Commission as consistent with the Exchange Act, generally following 
notice and comment.\14\ Accordingly, although Dual Members and their 
associated persons no longer would be subject to NYSE's disciplinary 
procedures with respect to the Incorporated NYSE Rules, but to FINRA's 
instead, the Commission finds that the proposed rule change should help 
ensure greater consistency in the administration of the disciplinary 
process for FINRA and its members, as well as in the related reporting 
obligations for minor violations of rules.
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    \14\ See Securities Exchange Act Release Nos. 21688 (January 25, 
1985), 50 FR 5025 (February 5, 1985) (order approving NYSE's Rule 
476A--Imposition of Fines for Minor Violation(s) of Rules); and 
32383 (May 28, 1993), 58 FR 31768 (June 4, 1993) (order approving 
establishment of NASD's Minor Rule Violations Plan).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\15\ that the proposed rule change (SR-NASD-2007-055), be, 
and it hereby is, approved.
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    \15\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-19271 Filed 9-28-07; 8:45 am]
BILLING CODE 8011-01-P