[Federal Register Volume 74, Number 207 (Wednesday, October 28, 2009)]
[Notices]
[Pages 55598-55600]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-25872]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60850; File No. SR-FINRA-2009-067]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt
FINRA Rules 2060 (Use of Information Obtained in Fiduciary Capacity)
and 5290 (Order Entry and Execution Practices) in the Consolidated
FINRA Rulebook
October 21, 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 October 6, 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 Rules 3120 (Use of Information
Obtained in Fiduciary Capacity) and 3380 (Order Entry and Execution
Practices) as FINRA rules in the consolidated FINRA rulebook without
material change. The proposed rule change would renumber NASD Rule 3120
as FINRA Rule 2060 and NASD Rule 3380 as FINRA Rule 5290 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.
[[Page 55599]]
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 a new consolidated rulebook
(``Consolidated FINRA Rulebook''),\3\ FINRA is proposing to adopt NASD
Rules 3120 and 3380 in the Consolidated FINRA Rulebook without material
change as FINRA Rules 2060 and 5290 respectively.
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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 Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
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Proposed FINRA Rule 2060
FINRA is proposing to adopt NASD Rule 3120 as FINRA Rule 2060 in
the Consolidated FINRA Rulebook. NASD Rule 3120 provides that a member
who receives information as to the ownership of securities while acting
in the capacity of paying agent, transfer agent, trustee or otherwise
shall under no circumstances make use of the information for soliciting
purchases, sales or exchanges except at the request and on behalf of
the issuer. Rule 3120, formerly designated as Article III, Section 9 of
the Rules of Fair Practice, was adopted as part of FINRA's original
rulebook.\4\ The text of the rule has not been amended since its
inception.
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\4\ See Certificate of Incorporation and By-Laws, Rules of Fair
Practice and Code of Procedure for Handling Trade Practice
Complaints of National Association of Securities Dealers, Inc.
(August 8, 1939).
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FINRA believes that the rule serves an important purpose by
prohibiting a member, while acting in the capacity of paying agent,
transfer agent, trustee or otherwise, from using certain information it
obtains about the ownership of securities to solicit purchases, sales
or exchanges except at the request and on behalf of the issuer.\5\
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\5\ With respect to the exception allowing use of information at
the request and on behalf of the issuer, the descriptive analysis of
the identical precursor provision drafted by the Investment Bankers
Code Committee in 1934 explains that the exception is provided
[B]ecause if the issuer desires either to refund or propose an
exchange to the security holder, he certainly has the right to
demand from his transfer agent or trustee the list of security
holders and the issuer thus being in a position to address them
directly, the investment banker should be able to address them on
his behalf.
See Code of Fair Competition for Investment Bankers with a
Descriptive Analysis of its Fair Practice Provisions and a History
of its Preparation (1934).
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Proposed FINRA Rule 5290
FINRA is proposing to adopt NASD Rule 3380 as FINRA Rule 5290 in
the Consolidated FINRA Rulebook. NASD Rule 3380 prohibits members and
associated persons from splitting any order into multiple smaller
orders for execution or any execution into multiple smaller executions
for transaction reporting for the primary purpose of maximizing a
monetary or in-kind payment to the member or associated persons as a
result of the execution of such orders or the transaction reporting of
such executions.\6\ For purposes of the rule, ``monetary or in-kind
amount'' is defined to include, but not be limited to, any credits,
commissions, gratuities, payments for or rebates of fees, or any other
payments of value to the member or associated person. The SEC approved
NASD Rule 3380 in February 2006 after notice and comment with no
subsequent amendments.\7\
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\6\ This is commonly also referred to as ``trade shredding,''
which is the unlawful practice of splitting customer orders for
securities into multiple smaller orders (e.g., a 1,000 share order
is split into ten 100 share orders) for the primary purpose of
maximizing payments or rebates to the member.
\7\ See Securities Exchange Act Release No. 53371 (February 24,
2006), 71 FR 11008 (March 3, 2006) (Order Approving File No. SR-
NASD-2005-144).
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FINRA is proposing to replace ``may'' with ``shall'' in the rule
text, but believes no substantive changes to this rule are appropriate
or necessary.\8\ FINRA continues to believe that NASD Rule 3380 is
necessary and appropriate to deter the distortive practice of trade
shredding.\9\
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\8\ See Exhibit 5 (``No member or associated person [may] shall
engage in conduct that has the intent or effect of splitting any
order into multiple smaller orders for execution or any execution
into multiple smaller executions for transaction reporting for the
primary purpose of maximizing a monetary or in-kind amount to be
received by the member or associated person as a result of the
execution of such orders or the transaction reporting of such
executions'').
\9\ FINRA also notes that the rule is consistent with the rules
of other securities self-regulatory organizations regarding trade
shredding. See, e.g., NYSE Rule 123G (Order Entry Practices)
approved pursuant to Securities Exchange Act Release No. 52683
(October 26, 2005), 70 FR 66480 (November 2, 2005) (Order Approving
File No. SR-NYSE-2005-62).
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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,\10\ 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 continues to believe that, in certain
circumstances, a rule prohibiting members from using information about
ownership of securities to solicit purchases, sales or exchanges except
at the request and on behalf of the issuer serves to protect investors
and the public interest. In addition, FINRA continues to believe that a
rule regarding order entry and execution practices will continue to
further the goal of preventing manipulative acts and practices by
prohibiting the potentially distortive practice of trade shredding.
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\10\ 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
[[Page 55600]]
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-2009-067 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-2009-067. 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 the 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-2009-067 and should be
submitted on or before November 18, 2009.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-25872 Filed 10-27-09; 8:45 am]
BILLING CODE 8011-01-P