[Federal Register Volume 75, Number 11 (Tuesday, January 19, 2010)]
[Notices]
[Pages 2897-2899]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-798]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61319; File No. SR-FINRA-2009-093]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Repeal 
NASD Rule 2450 (Installment or Partial Sales), NASD Interpretive 
Material 2830-2 (``IM-2830-2'') (Maintaining the Public Offering Price) 
and Incorporated NYSE Rule 413 (Uniform Forms) as Part of the Process 
of Developing a Consolidated FINRA Rulebook

January 8, 2010.
    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 December 23, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to repeal NASD Rule 2450 (Installment or Partial 
Sales), NASD Interpretive Material 2830-2 (``IM-2830-2'') (Maintaining 
the Public Offering Price), and Incorporated NYSE Rule 413 (Uniform 
Forms), as part of the process of developing a 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.

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 repeal NASD 
Rule 2450 (Installment or Partial Sales), NASD IM-2830-2 (Maintaining 
the Public Offering Price), and Incorporated NYSE Rule 413 (Uniform 
Forms) to eliminate duplicative and unnecessary rules and remove 
outdated provisions from the Consolidated FINRA Rulebook.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

NASD Rule 2450 (Installment or Partial Sales)
    NASD Rule 2450 prohibits any arrangement whereby the customer of a 
member submits partial or installment payments for the purchase of a 
security with the following exceptions: (1) If a member is acting as 
agent or broker in such transaction, then the member must immediately 
make an actual purchase of the security for the account of the 
customer, and immediately take possession or control of the security 
and maintain possession or control of the security as long as the 
member is under the obligation to deliver the security to the customer; 
(2) if a member is acting as principal in such transaction, the member 
must, at the time of the transaction, own such security and maintain 
possession or control of the security as long as the member is under 
the obligation to deliver the security to the customer; and (3) where 
the provisions of Regulation T,\4\ if applicable to the member, are 
satisfied.
---------------------------------------------------------------------------

    \4\ Federal Reserve Board, Regulation T (Credit by Brokers and 
Dealers), 12 CFR 220 et seq.
---------------------------------------------------------------------------

    The rule also prohibits the member, whether acting as principal or 
agent, in connection with any installment or partial sales transaction, 
from making any agreement with the customer whereby the member would be 
allowed to pledge or hypothecate any security involved in such 
transaction for any

[[Page 2898]]

amount in excess of the indebtedness of the customer to such member.
    Section 220.8 of Regulation T permits the purchase of a security in 
the cash account predicated on either (1) there being sufficient funds 
in the account; or (2) the member accepting in good faith the 
customer's agreement that full cash payment will be made.\5\ The rule 
further stipulates that payment must be made within a specified payment 
period.\6\ Regulation T also allows the purchase of a security in a 
margin account, whereby a customer must deposit an initial requirement, 
based upon the amount of the transaction, within the specified payment 
period.
---------------------------------------------------------------------------

    \5\ See Regulation T 220.8(a)(1).
    \6\ According to Section 220.2 of Regulation T, payment period 
``means the number of business days in the standard securities 
settlement cycle in the United States, as defined in paragraph (a) 
of SEC Rule 15c6-1 (17 CFR 240.15c6-1(a)), plus two business days.''
---------------------------------------------------------------------------

    FINRA proposes to repeal NASD Rule 2450 in light of the explicit 
provisions in Regulation T requiring the deposit of sufficient funds 
within the specified payment period. FINRA also believes the 
hypothecation prohibition in NASD Rule 2450 would no longer be relevant 
because it is predicated on a partial or installment payment under the 
rule.
NASD IM-2830-2 (Maintaining the Public Offering Price)
    Section 22(d) of the Investment Company Act generally prohibits a 
registered investment company, its principal underwriter, or a dealer 
from selling the fund's shares at a price other than the current public 
offering price described in the prospectus. As a general matter, this 
means that a broker-dealer must sell shares of a mutual fund to 
investors at the fund's current net asset value, plus any applicable 
sales load. Section 22(d) excepts from this prohibition sales to the 
fund itself, the fund's principal underwriter or another dealer.
    In the 1950s, FINRA adopted an interpretation of Section 22(d) and 
NASD Rule 2420,\7\ now codified as NASD IM-2830-2, that requires 
members to sell mutual funds at the public offering price not only to 
investors, but also to any non-member broker or dealer. NASD IM-2830-2 
provides examples of transactions that would violate this prohibition. 
At the time NASD IM-2830-2 was adopted, some broker-dealers doing 
business with the public were not NASD members. Accordingly, it was 
possible for member firms to sell shares of mutual funds to non-member 
broker-dealers at a price below the current public offering price 
because of the exception in Section 22(d) for sales to other dealers. 
However, these kinds of transactions were inconsistent with the 
requirement under NASD Rule 2420 that transactions with non-member 
firms be on the same terms as transactions with the public.
---------------------------------------------------------------------------

    \7\ NASD Rule 2420 imposes various restrictions on dealings with 
non-member brokers and dealers, including prohibiting a member from 
dealing with any non-member broker or dealer except at the same 
prices, for the same commissions or fees, and on the same terms and 
conditions as the member firm offers to the general public. NASD 
Rule 2420 will be addressed as part of a separate phase of the 
rulebook consolidation process.
---------------------------------------------------------------------------

    Since the adoption of NASD IM-2830-2, the laws governing broker-
dealers have changed, and today virtually all broker-dealers doing 
business with the public are FINRA members. In addition, NASD IM-2830-2 
largely duplicates the requirement in Section 22(d) to sell mutual fund 
shares to investors at the current public offering price. As a result, 
FINRA believes NASD IM-2830-2 no longer serves any useful purpose, and 
proposes not to incorporate its content into the Consolidated FINRA 
Rulebook.
Incorporated NYSE Rule 413
    Incorporated NYSE Rule 413 requires members to adopt such uniform 
forms as the NYSE may prescribe to facilitate the orderly flow of 
transactions within the financial community. This provision was adopted 
in 1973 to apply to forms generally, including membership forms.
    The FINRA By-Laws contain several provisions by which FINRA may 
prescribe processes for members' activities, including the use of 
uniform forms.\8\ Accordingly, FINRA proposes to repeal Incorporated 
NYSE Rule 413 in light of these provisions.
---------------------------------------------------------------------------

    \8\ See, e.g., the following provisions of the FINRA By-Laws: 
Article IV, Section 1 (providing that FINRA may prescribe the 
process for application for FINRA membership); Article IV, Section 8 
(providing that FINRA may prescribe the process for members to 
advise FINRA regarding branch offices, including the opening, 
closing, relocation, change in designated supervisor, or change in 
designated activities of any branch office); Article V, Section 2 
(providing that FINRA may prescribe the process for application for 
registration by registered representatives and associated persons); 
and Article V, Section 3 (providing that FINRA may prescribe the 
process for members' notification of termination of registered 
persons). In addition, FINRA has issued for comment proposed FINRA 
Rule 4540 governing information and data reporting and filing 
requirements. See Regulatory Notice 09-02 (January 2009). (FINRA 
Requests Comment on Proposed Consolidated FINRA Rule Governing 
Information and Data Reporting and Filing Requirements).
---------------------------------------------------------------------------

    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. The implementation date will be no later 
than 180 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,\9\ 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 believes that the proposed rule change will 
further these requirements by eliminating duplicative and unnecessary 
rules and advancing the development of a more efficient and effective 
Consolidated FINRA Rulebook.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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

[[Page 2899]]

     Send an e-mail to [email protected]. Please include 
File Number SR-FINRA-2009-093 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-2009-093. 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,\10\, 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-2009-093 and should be submitted on or before February 9, 
2010.
---------------------------------------------------------------------------

    \10\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov/.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-798 Filed 1-15-10; 8:45 am]
BILLING CODE 8011-01-P