[Federal Register Volume 73, Number 192 (Thursday, October 2, 2008)]
[Notices]
[Pages 57393-57395]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-23196]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58660; File No. SR-FINRA-2008-027]


Self-Regulatory Organizations: Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change Relating to the 
Adoption of FINRA Rule 3220 (Influencing or Rewarding Employees of 
Others) and FINRA Rule 2070 (Transactions Involving FINRA Employees) in 
the Consolidated FINRA Rulebook

September 26, 2008.

I. Introduction

    On July 18, 2008, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``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 relating to the adoption of FINRA Rule 3220 (Influencing 
or Rewarding Employees of Others) and FINRA Rule 2070 (Transactions 
Involving FINRA Employees) in the new consolidated FINRA rulebook 
(``Consolidated FINRA Rulebook'').\3\ The proposed rule change was 
published for comment in the Federal Register on August 11, 2008.\4\ 
The Commission received one comment letter in response to the proposed 
rule change.\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\ The current FINRA rulebook consists of two sets of rules: 
(1) NASD Rules and (2) rules incorporated from NYSE (``Incorporated 
NYSE Rules'') (together referred to as the ``Transitional 
Rulebook''). The Incorporated NYSE Rules (hereinafter, ``NYSE 
Rules'') apply only to those members of FINRA that are also members 
of the NYSE (``Dual Members''). Dual Members also must comply with 
NASD Rules. For more information about the rulebook consolidation 
process, see FINRA Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
    \4\ See Securities Exchange Act Release No. 34-58308 (August 5, 
2008); 73 FR 46664 (Aug. 11, 2008) (notice).
    \5\ See letter from Amal Aly, Managing Director and Associate 
General Counsel, Securities Industry and Financial Markets 
Association, dated Sept. 2, 2008 (``SIFMA letter'').
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II. Description of the Proposed Rule Change

    As part of the process of developing the Consolidated FINRA 
Rulebook, FINRA proposed to transfer without material change NASD Rules 
3060 (Influencing or Rewarding Employees of Others) and 3090 
(Transactions Involving Association and American Stock Exchange 
Employees) into the Consolidated FINRA Rulebook and to delete the 
corresponding provisions in Incorporated NYSE Rules 350, 350.10, 
407(a), 407.10 and NYSE Rule Interpretations 350/01 through 350/03. The 
proposed rule change would renumber NASD Rule 3060 as FINRA Rule 3220 
and NASD Rule 3090 as FINRA Rule 2070 in the Consolidated FINRA 
Rulebook, and would delete NASD Rules 3060 and 3090 in their entirety 
from the Transitional Rulebook.

(A) Proposed FINRA Rule 3220

(1) Background
    NASD Rule 3060 (Influencing or Rewarding Employees of Others) 
currently states that no member or associated person shall give gifts 
or gratuities to an agent or employee of another person in excess of 
$100 per year where the gift or gratuity is in relation to the business 
of the employer of the recipient. The rule, which protects against 
improprieties that may arise when members or their associated persons 
give gifts or gratuities to employees of a customer, has been in effect 
in its current form since 1969, with changes only to the dollar 
amounts, rising from $25 to $50 to $100.\6\ The rule requires each 
member to maintain a separate record of all gifts or gratuities. The 
rule also contains an express exclusion for payments made pursuant to 
bona fide, written employment contracts.
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    \6\ See NASD Notice to Members 93-8 (February 1993) (SEC 
Approval of Amendment Relating to the Payment of Gratuities or 
Anything of Value by Members to Others); see also Securities 
Exchange Act Release No. 21074 (June 20, 1984), 49 FR 26330 (June 
27, 1984) (SR-NASD-84-8) (approval order).
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    NYSE Rule 350 (Compensation or Gratuities to Employees of Others) 
reaches similar conduct in prohibiting, absent prior written consent of 
the recipient's employer, any member or member organization from giving 
any gratuity in excess of $100 per person per year to any principal, 
officer, or employee of another member or member organization, 
financial institution, news or financial information media, or non-
member broker or dealer in securities, commodities or money 
instruments.\7\ NYSE Rule 350 has specific provisions addressing 
compensation to operations employees of members (e.g., NYSE Floor 
personnel). In addition, NYSE Rule 350 requires that records of all 
such gratuities and compensation be retained for at least three years.
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    \7\ In addition, NYSE Rule 350(a)(1) prohibits any member from 
employing or compensating any person for services rendered except 
with the prior consent of that person's employer. FINRA proposed to 
delete this provision, even though it does not pertain to gifts, 
because a substantively identical provision exists in NYSE Rule 
346(b). FINRA intends to review NYSE Rule 346(b) as part of a later 
phase of the rulebook consolidation process.
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(2) Proposal
    FINRA proposed to transfer NASD Rule 3060 into the Consolidated 
FINRA Rulebook without material change and renumbered as FINRA Rule 
3220. One of the advantages of the existing regulatory standard is the 
clarity of the rule's application--it prevents gifts in excess of a 
fixed amount, currently $100. Both the NASD and NYSE rules have a $100 
limitation on gifts.
    FINRA believes that NASD Rule 3060 generally is well understood by 
members. FINRA recently issued additional guidance on NASD Rule 3060 in 
Notice to Members 06-69.\8\ Among the issues addressed in that Notice 
was the fact that NASD Rule 3060 does not apply to gifts of de minimis 
value, or to promotional items of nominal value

[[Page 57394]]

displaying a firm's logo. The Notice stated that NASD Rule 3060 does 
not prohibit customary Lucite tombstones, plaques or other similar 
solely decorative items commemorating a business transaction or event. 
The Notice also stated that gifts should be valued at the higher of 
cost or market value and tickets should be valued at the higher of cost 
or face value. In addition, FINRA staff has used its interpretive 
authority to address unintended consequences of the rule, such as 
unreasonable limitations on giving a bereavement or sympathy gift.\9\
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    \8\ See NASD Notice to Members 06-69 (December 2006) (Gifts and 
Gratuities).
    \9\ See Interpretive Letter dated December 17, 2007 to Amal Aly, 
SIFMA from Gary L. Goldsholle, FINRA, available at: http://www.finra.org/RulesRegulation/PublicationsGuidance/InterpretiveLetters/ConductRules/P037695.
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    FINRA proposed to eliminate the provision in NYSE Rule 350 
permitting member firms to obtain prior written consent of the 
recipient's employer for any gift over $100. FINRA believes that the 
gift rule should establish a fixed amount and does not see any business 
need to justify giving gifts in amounts greater than the limits 
specified in the rule. FINRA also would delete the provisions in NYSE 
Rule 350 and NYSE Rule Interpretation 350/02 addressing compensation to 
operations/Floor employees of NYSE as they are not relevant for 
FINRA.\10\ For similar reasons, provisions in NYSE Rule 350.10 
pertaining to employment of or gratuities to personnel working the 
Floor of other exchanges would be deleted.\11\ Finally, FINRA would 
eliminate the provisions of NYSE Rule 350 relating to record retention, 
as NASD Rule 3060(c) addresses the same issue. FINRA proposed to 
eliminate NYSE Rule Interpretation 350/01, and provisions in NYSE Rule 
350.10 pertaining to gifts among close relatives, because the concepts 
contained in both are adequately addressed by proposed FINRA Rule 3220 
and existing guidance. Lastly, FINRA would eliminate NYSE Rule 
Interpretation 350/03 because FINRA has proposed a separate rule that 
addresses business entertainment.\12\ Any guidance provided under NASD 
Rule 3060, including, without limitation, notices to members and 
interpretation letters, also would apply to the proposed FINRA Rule 
3220.\13\ The Commission notes three interpretative letters previously 
issued with respect to NASD Rule 3060.\14\ The interpretative letters 
include FINRA's rule on members providing business entertainment.\15\
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    \10\ NYSE Rule Interpretation 350/02 would be deleted in its 
entirety. Note that NYSE Rule 350 also contains provisions that 
address gifts and gratuities to employees of the NYSE. These 
provisions are addressed in connection with FINRA's proposal to 
adopt FINRA Rule 2070. See Section (B) under Item II.A.1. FINRA's 
proposals with respect to FINRA Rules 3220 and 2070 would, in 
combination, delete NYSE Rule 350 in its entirety.
    \11\ NYSE Rule 350.10 also contains provisions that address 
employment or compensation of NYSE employees by members or member 
organizations. These provisions are addressed in connection with 
FINRA's proposal to adopt FINRA Rule 2070. See Section (B) under 
Item II.A.1. Because Proposed FINRA Rules 3220 and 2070 would 
address the substance of NYSE Rule 350.10, FINRA proposed to delete 
NYSE Rule 350.10 in its entirety.
    \12\ See Securities Exchange Act Release No. 55765 (May 15, 
2007), 72 FR 28743 (May 22, 2007) (notice) see also Amendment No. 3 
to File No. SR-NASD-2006-044 (January 2, 2008).
    \13\ Telephone conference among Gary Goldsholle and Adam Arkel, 
FINRA, and Haimera Workie, Branch Chief, Alicia Goldin, Special 
Counsel, Sharon Lawson, Senior Special Counsel and Steve Kuan, 
Special Counsel, Commission, on September 11, 2008.
    \14\ These interpretative letters are currently available at 
FINRA's web site at http://www.finra.org/Industry/Regulation/Guidance/InterpretiveLetters/ConductRules/index.htm.
    \15\ See, e.g., letter to Henry H. Hopkins and Sarah McCafferty, 
T. Rowe Price Investment Services, Inc., dated June 24, 1999.
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(B) Proposed FINRA Rule 2070

(1) Background
    Both NASD and NYSE rules address conflicts of interest involving 
FINRA and NYSE employees.
    NASD Rule 3090 addresses this issue in three ways. First, NASD Rule 
3090(a) requires a member, when it has actual notice that an NASD 
employee has a financial interest or controls trading in an account, to 
promptly obtain and implement an instruction from the employee 
directing that duplicate account statements be provided by the member 
to NASD. Second, NASD Rule 3090(b) prohibits a member from making any 
loan of money or securities to an NASD employee. This prohibition does 
not apply to loans made in the context of disclosed, routine banking 
and brokerage agreements, or loans that are clearly motivated by a 
personal or family relationship. Third, NASD Rule 3090(c) prohibits any 
member from directly or indirectly giving, or permitting to be given, 
anything of more than nominal value to any NASD employee who has 
responsibility for a regulatory matter involving the member. This 
applies regardless of the $100 per individual per year limitation set 
forth in NASD Rule 3060(a). The term ``regulatory matter'' is defined 
to include, without limitation, examinations, disciplinary proceedings, 
membership applications, listing applications, delisting proceedings, 
and dispute-resolution proceedings that involve the member.
    The NYSE rules governing conflicts of interest involving NYSE 
employees differ from the NASD approach in two ways. First, rather than 
applying the duplicate statement approach to NYSE employees (which 
applies to NASD employees under NASD Rule 3090(a)), NYSE Rule 407(a) 
prohibits a member or member organization, without the prior written 
consent of the NYSE, from opening a securities or commodities account 
or executing any transaction in which an employee of the NYSE is 
directly or indirectly interested.\16\ NYSE Rule 401.10 states that an 
employee of the NYSE or any of its affiliated companies who wishes to 
open a securities or commodities account should apply for permission 
from the NYSE's Ethics Officer. Second, the NYSE Rules differ from the 
nominal value approach set forth in NASD Rule 3090(c) by instead 
setting procedures for outside compensation and placing a dollar limit 
on gifts. Specifically, with respect to outside compensation, NYSE Rule 
350(a)(1) prohibits any member, allied member, member organization or 
employee thereof from employing or compensating any person for services 
rendered without the prior consent of the person's employer (i.e., the 
NYSE with respect to NYSE employees).\17\ With respect to gifts, NYSE 
Rule 350(a)(2) prohibits giving any gift or gratuity in excess of $50 
per person per year to any principal, officer, or employee of the NYSE 
or its subsidiaries without the prior written consent of the NYSE. This 
rule is written without regard to whether the NYSE employee has 
responsibility for regulatory matters affecting the member.
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    \16\ NYSE Rule 407(a) requires duplicate confirmations and 
account statements with respect to accounts or transactions of 
members, allied members and employees associated with another member 
or member organizations.
    \17\ NYSE Rule 350.10 provides that requests for NYSE consent 
under Rule 350(a)(1) should be sent to the NYSE's Human Resources 
Department at least 10 days in advance of the proposed date of 
employment. NYSE Rule 350.10 states that approval to employ an NYSE 
employee outside the hours of regular employment by the NYSE will be 
limited to employment of a routine or clerical nature. NYSE Rule 
350.10 further states that when the NYSE has granted permission for 
part-time employment of a NYSE employee, no approval is required for 
a subsequent gratuity or bonus to such person provided it is in 
proportion to gratuities given to full-time employees of the 
employing organization.
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(2) Proposal
    FINRA proposed to transfer NASD Rule 3090 into the Consolidated 
FINRA Rulebook without material change,\18\ renumbered as FINRA Rule 
2070 and that the corresponding provisions in NYSE Rules 350(a)(1), 
350(a)(2), 350.10,

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407(a) and 407.10 be eliminated.\19\ Rather than requiring the member 
to obtain FINRA's consent to open a securities or commodities account 
or execute a trade (as set forth under NYSE Rules 407(a) and 407.10), 
FINRA believes that it is sufficient, as set forth under NASD Rule 
3090(a), to continue to require the member to obtain and implement an 
instruction from the FINRA employee directing the member to provide 
duplicate statements to FINRA. The proposed rule change would, as set 
forth in NASD Rule 3090(b), continue to prohibit members from making 
any loan of money or securities to a FINRA employee, subject to the 
exceptions set forth in that rule. Lastly, the proposed rule change 
would, as set forth in NASD Rule 3090(c), continue to prohibit members 
from directly or indirectly giving, or permitting to be given, anything 
above nominal value to any FINRA employee who has responsibility for a 
``regulatory matter'' involving the member. FINRA does not believe that 
its employees should be permitted to receive gifts of up to $50 per 
year when such employees have responsibility for a regulatory matter. 
In addition, FINRA proposed not to adopt the $50 limit in NYSE Rule 
350(a)(2) for gifts to all other employees to maintain consistency with 
the FINRA Code of Conduct, which, like NASD Rule 3060(a) (and proposed 
FINRA Rule 3220(a)), establishes a $100 limit. Rule 3090(c) need not be 
amended to address the employment and compensation issues as to NYSE 
employees in NYSE Rules 350(a)(1) and 350.10 because the FINRA Code of 
Conduct addresses these issues through its provisions on Outside 
Activities or Employment.
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    \18\ The proposal included stylistic edits to NASD Rule 3090 for 
purposes of clarity and readability.
    \19\ With respect to NYSE Rule 407(a), the only change to the 
rule at this stage in the rulebook consolidation would be to delete 
language pertaining to employees of the NYSE. See Exhibit 5. NYSE 
Rule 407.10 would be deleted in its entirety. With respect to NYSE 
Rules 350(a)(1), 350(a)(2) and 350.10, see supra notes 10 and 11.
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    FINRA proposed to delete listing and delisting proceedings as 
potential ``regulatory matters'' under NASD Rule 3090(c) in light of 
FINRA's separation from NASDAQ and The American Stock Exchange.

III. Comment Letters

    The Commission received one comment letter on the proposal \20\ and 
a response to comments from FINRA.\21\ In its comment letter, SIFMA 
supported FINRA's effort to consolidate its two rulebooks.\22\ However, 
SIFMA suggested that FINRA should amend the proposed rule change with 
respect to NASD Rule 3060 to incorporate a principles-based approach to 
gifts and gratuities.\23\ SIFMA said that FINRA should permit firms to 
establish their own gifts and gratuities policies and limits rather 
than retain the limits set forth in the rule.\24\ SIFMA also supports 
the inclusion of a safe harbor in new Rule 3220, under which a FINRA 
member firm would be deemed to be in compliance with new Rule 3220, if 
the aggregate annual amount of gifts and gratuities to any one person 
did not exceed a de minimis amount, such as $250.\25\
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    \20\ See supra, footnote 5.
    \21\ See letter from Gary L. Goldsholle, Vice President and 
Associate General Counsel, FINRA Regulatory Group, dated September 
11, 2008.
    \22\ See SIFMA letter.
    \23\ Id.
    \24\ Id.
    \25\ Id.
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    FINRA responded to the request by SIFMA for a principles-based 
approach to gifts and gratuities by stating that FINRA had given a 
great deal of consideration to this approach, but had determined to 
maintain the existing standards, which offer predictability and 
clarity.\26\ FINRA also noted that it does not believe that it is 
appropriate at this time to increase the limit for gifts and gratuities 
to $250 from $100.\27\
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    \26\ See supra, footnote 21.
    \27\ Id.
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IV. Discussion and Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act, and the rules 
and regulations thereunder that are applicable to a national securities 
association.\28\ In particular, the Commission believes that the 
proposed rule change is consistent with the provisions of Section 
15A(b)(6) of the Act,\29\ 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. The 
Commission believes that, as part of the FINRA rulebook consolidation 
process, the proposed rule change would streamline and reorganize 
existing rules that govern influencing or rewarding the employees of 
others and transactions involving FINRA employees. Further, the 
proposed rule change would provide greater regulatory clarity with 
respect to these issues.
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    \28\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition and capital 
formation. See 15 U.S.C. 78c(f).
    \29\ 15 U.S.C. 78o-3(b)(6).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\30\ that the proposed rule change (SR-FINRA-2008-027) be, and 
hereby is, approved.
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    \30\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
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pursuant to delegated authority.\31\

Florence E. Harmon,
Acting Secretary.
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    \31\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E8-23196 Filed 10-1-08; 8:45 am]
BILLING CODE 8011-01-P