[Federal Register Volume 73, Number 220 (Thursday, November 13, 2008)]
[Notices]
[Pages 67237-67238]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-26883]
[[Page 67237]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58905; File No. SR-FINRA-2008-054]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt
FINRA Rule 5280 (Trading Ahead of Research Reports) in the Consolidated
FINRA Rulebook
November 6, 2008.
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 October 29, 2008, 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 substantially 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 2110-4
(Trading Ahead of Research Reports) as a FINRA rule, subject to certain
amendments. The proposed rule change would renumber NASD IM-2110-4 as
FINRA Rule 5280 in the consolidated FINRA Rulebook.
The text of the proposed rule change is available at FINRA, on its
Web site (http://www.finra.org), 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 the new consolidated rulebook
(``Consolidated FINRA Rulebook''),\3\ FINRA is proposing to adopt in
the Consolidated FINRA Rulebook NASD Interpretive Material (``IM'')
2110-4 (Trading Ahead of Research Reports) with certain modifications.
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\3\ The current FINRA rulebook includes, in addition to FINRA
Rules, (1) NASD Rules and (2) 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''). For more
information about the rulebook consolidation process, see FINRA
Information Notice, March 12, 2008 (Rulebook Consolidation Process).
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IM-2110-4 states that it is conduct inconsistent with just and
equitable principles of trade for a member to establish or adjust an
inventory position in an exchange-listed security traded over-the-
counter or a derivative of such security in anticipation of the
issuance of a research report on that security. The IM further
recommends--but does not require--that firms establish policies and
procedures to develop and implement effective internal controls to
isolate specific information within research and other relevant
departments so as to prevent the trading department from utilizing
advance knowledge of the issuance of research reports. Those members
that choose not to establish such procedures bear the burden to show
that changes in inventory positions in advance of research reports were
not purposeful.\4\
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\4\ Incorporated NYSE Rule Interpretation 401/01 includes
aspects similar to IM-2110-4. FINRA deleted that Interpretation as
part of an earlier filing to transfer NASD Rules 2110 (Standards of
Commercial Honor and Principles of Trade) and 2120 (Use of
Manipulative, Deceptive or Other Fraudulent Devices) to the
Consolidated FINRA Rulebook, as the conduct addressed in the
Interpretation is subsumed by those rules. See Securities Exchange
Act Release No. 58643 (September 25, 2008), 73 FR 57174 (October 1,
2008) (Order Approving SR-FINRA-2008-028).
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The proposed rule change would amend the IM in three respects.
First, it would extend the application of the IM to cover inventory
positions with respect to any security--including debt--or derivative
thereof, irrespective of whether the security is exchange-listed. FINRA
believes the purpose of the IM--to prevent the manipulation of the
supply of a security for the benefit of a firm and to the detriment of
investors--applies equally to inventory positions in non-exchange-
listed securities.
Second, the proposed rule change would apply the rule only to
circumstances where a member establishes or adjusts its inventory based
on non-public advance knowledge of the content or timing of a research
report in that security. As such, it would not be a violation of the
rule for a member to increase or decrease inventory of a security based
on publicly available information regarding the likely timing of a
research report. By way of example, when a member's trading desk
adjusts an inventory position in anticipation of a research report
because of a publicly discernible trend that a member's report tends to
follow an earnings announcement, the prohibitions of the rule would not
be triggered. However, having knowledge of a publicly discernible trend
is not a viable alternative basis for the member's trading desk to
adjust its inventory position when the trading desk is also the
recipient of non-public advance knowledge of the content or timing of a
research report in that security.
Finally, the proposal would eliminate the option to establish
internal controls to manage the flow of information between the
research and trading departments and instead mandate that firms
establish policies and procedures reasonably designed to restrict or
limit the information flow between research department personnel, or
other persons with knowledge of the content or timing of a research
report, and trading department personnel, so as to prevent trading
department personnel from utilizing non-public advance knowledge of the
issuance or content of a research report for the benefit of the member
or any other person.
FINRA believes that a member should have an affirmative obligation
to manage conflicts of interest in its trading of securities. Moreover,
this approach is more consistent with existing and proposed rules
regarding supervision and the requirements of NASD Rule 2711 and NYSE
Rule 472 to eliminate conflicts involving the publication and
distribution of research reports.
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,\5\ which
[[Page 67238]]
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 will protect the investing public by preventing firms from
utilizing non-public advance knowledge of the timing or content of a
research report to benefit its own trading to the detriment of its
customers. The proposed rule change further would clarify and
streamline NASD IM-2110-4 for adoption as a FINRA Rule in the new
Consolidated FINRA Rulebook. NASD IM-2110-4 has previously have been
found to meet the statutory requirements, and FINRA believes that rule
has since proven effective in achieving the statutory mandates.
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\5\ 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 [email protected]. Please include
File Number SR-FINRA-2008-054 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2008-054. 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-2008-054 and should be
submitted on or before December 4, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-26883 Filed 11-12-08; 8:45 am]
BILLING CODE 8011-01-P