[Federal Register Volume 75, Number 136 (Friday, July 16, 2010)]
[Notices]
[Pages 41562-41564]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-17356]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62482; File No. SR-FINRA-2010-024]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Adopt FINRA 
Rule 4210 (Margin Requirements), FINRA Rule 4220 (Daily Record of 
Required Margin) and FINRA Rule 4230 (Required Submissions for Requests 
for Extensions of Time Under Regulation T and SEC Rule 15c3-3) in the 
Consolidated FINRA Rulebook

July 12, 2010.

I. Introduction

    On May 14, 2010, 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 change to adopt FINRA Rule 4210 (Margin Requirements), 
FINRA Rule 4220 (Daily Record of Required Margin) and FINRA Rule 4230 
(Required Submissions for Requests for Extensions of Time under 
Regulation T and SEC Rule 15c3-3) as part of the process of developing 
a consolidated FINRA rulebook. The proposed rule change was published 
for comment in the Federal Register on June 8, 2010.\3\ The Commission 
received no comments on the proposal. 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\ See Securities Exchange Act Release No. 62205 (June 2, 
2010), 75 FR 32519 (June 8, 2010).
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II. Description of the Proposal

    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\4\ FINRA proposes to adopt (1) NASD 
Rules 2520, 2521, 2522, and IM-2522 regarding margin requirements, (2) 
NASD Rule 3160 regarding extension of time requests under Regulation T 
and SEC Rule 15c3-3, and (3) Incorporated NYSE Rule 432(a) regarding 
daily record of margin requirements as FINRA rules in the Consolidated 
FINRA Rulebook, subject to certain amendments, and to delete 
Incorporated NYSE Rule 431 (Margin Requirements), Incorporated NYSE 
Rule 431 Interpretations,\5\ Incorporated NYSE Rule 432(b) and 
Incorporated NYSE Rule 434 (Required Submissions of Requests for 
Extension of Time for Customers). The proposed rule change would (1) 
consolidate and renumber NASD Rules 2520, 2521, 2522 and IM-2522 as 
FINRA Rule 4210 (Margin Requirements), (2) renumber NASD Rule 3160 as 
FINRA Rule 4230 (Required Submissions for Requests for Extensions of 
Time Under Regulation T and SEC Rule 15c3-3), and (3) renumber 
Incorporated NYSE Rule 432(a) as FINRA Rule 4220 (Daily Record of 
Required Margin) in the Consolidated FINRA Rulebook.
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    \4\ 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 FINRA Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
    \5\ See supra note 4.
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Margin Requirements--NASD Rules 2520, 2521, 2522, and IM-2522 and 
Incorporated NYSE Rule 431

    FINRA proposes to adopt the margin requirements set forth in NASD 
Rules 2520 through 2522 and IM-2522 as FINRA Rule 4210, subject to 
certain amendments, discussed below and to delete Incorporated NYSE 
Rule 431 (Margin Requirements). The proposed amendments, among other 
things, reflect certain requirements in Incorporated NYSE Rule 431.
    NASD Rule 2520 (Margin Requirements) and Incorporated NYSE Rule 
431, which are almost identical, prescribe requirements governing the 
extension of credit by members that offer margin accounts to customers, 
as generally permitted in accordance with Regulation T of the Board of 
Governors of the Federal Reserve System (``Regulation T'').\6\ These 
rules promulgate the margin requirements that determine the amount of 
collateral customers are expected to maintain in their margin accounts, 
including strategy-based margin accounts and portfolio margin accounts. 
Maintenance margin requirements for equity, fixed income, warrants and 
option securities also are established under these rules.
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    \6\ See Regulation T, 12 CFR 220.4.
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Rule Structure

    FINRA proposes to combine NASD Rules 2520, 2521, 2522 and IM-2522 
into the single consolidated margin rule, FINRA Rule 4210. In addition, 
FINRA proposes to re-structure the rule to improve its organization and 
make it easier to read. First, FINRA proposes to incorporate NASD Rule 
2521 (Margin--Exemption for Certain Members) as FINRA Rule 4210(h), 
which provides that any member for which another self-regulatory 
organization acts as the designated examining authority is exempt from 
FINRA Rule 4210. Second, FINRA proposes to incorporate NASD Rule 2522 
(Definitions Related to Options, Currency Warrants, Currency Index 
Warrants and Stock Index Warrant Transactions) as FINRA Rule 
4210(f)(2)(A), which contains definitions regarding margining options, 
currency warrants, currency index warrants and stock index warrant 
transactions.\7\ In so doing, FINRA proposes to delete extraneous 
definitions and retain only those definitions that are pertinent to the 
new rule. Third, FINRA proposes to combine the margin provisions 
regarding currency warrants, currency index warrants and stock index 
warrants from NASD Rule 2520(f)(10) together with similar sections in 
paragraph (f)(2) of FINRA Rule 4210. All margin provisions regarding 
such warrants were combined in a single section in corresponding 
Incorporated NYSE Rule 431(f)(2), and FINRA proposes to follow this 
model. FINRA believes combining all provisions in a single section 
regarding such warrants will make the rule easier to read. Finally, 
FINRA proposes to incorporate NASD IM-2522 (Computation of Elapsed 
Days) as Supplementary Material to FINRA Rule 4210, which provides 
illustrations on how to calculate the number of elapsed days for 
accrued interest on Treasury bonds or notes.
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    \7\ In this regard, FINRA proposes to adopt the model of 
Incorporated NYSE Rule 431 of consolidating relevant definitions 
into FINRA Rule 4210.
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Net Capital Calculations

    FINRA proposes in several instances in FINRA Rule 4210 \8\ to 
specify that the member should reference SEC Rule 15c3-1 and, if 
applicable, FINRA Rule 4110 (Capital Compliance) when calculating net 
capital, charges against net capital and haircut requirements. Members 
that may be subject to greater net capital requirements pursuant to 
FINRA Rule 4110 would need to ensure they are in compliance with both 
the SEC and FINRA net capital provisions in calculating net capital and 
its impact on margin calculations. In addition,

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consistent with the corresponding Incorporated NYSE Rule 431 
requirements, FINRA proposes to provide in FINRA Rule 4210(e)(5)(A) and 
(B) (regarding specialists' and market makers' accounts), (e)(6)(A) 
(regarding broker-dealer accounts) and (e)(6)(B)(i)c. (regarding joint 
back office arrangements) that when computing charges against net 
capital for transactions in securities covered by FINRA Rule 
4210(e)(2)(F) (regarding transactions with exempt accounts involving 
certain ``good faith'' securities) and FINRA Rule 4210(e)(2)(G) 
(regarding transactions with exempt accounts involving highly rated 
foreign sovereign debt securities and investment grade debt 
securities), absent a greater haircut requirement that may have been 
imposed on such securities pursuant to FINRA Rule 4110(a), the 
respective requirements of those paragraphs may be used, rather than 
the haircut requirements of SEC Rule 15c3-1.
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    \8\ See, e.g., FINRA Rule 4210(e)(2)(D), (e)(2)(F), (e)(2)(G), 
(e)(4), (e)(5) and (e)(6). Incorporated NYSE Rule 431 referenced 
NYSE's net capital rules in these same sections, and FINRA proposes 
to follow this model.
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Joint Accounts Exemption

    FINRA proposes to integrate Incorporated NYSE Rule 431 
Supplementary Material .10 into FINRA Rule 4210(e)(3) regarding joint 
accounts in which the carrying member or a partner or stockholder 
therein has an interest. The provision permits a member to seek an 
exemption under the FINRA Rule 9600 Series if the account is confined 
exclusively to transactions and positions in exempted securities.

Additional Requirements on Control and Restricted Securities and 
Relationship to FINRA Rule 4120 (Regulatory Notification and Business 
Curtailment)

    FINRA proposes to adopt provisions from Incorporated NYSE Rule 431 
pertaining to deductions from net capital on control and restricted 
securities, which are not contained in NASD Rule 2520.\9\ These 
provisions, which would be set forth in FINRA Rule 4210(e)(8)(C)(ii), 
(iii) and (v), require that a member make deductions from its net 
capital if it extends credit over specified thresholds, discussed 
below, on control and restricted securities, and it must take such 
deductions into account when determining if it has reached any of the 
financial triggers specified in FINRA Rule 4120.\10\ The proposed rule 
change also would make conforming amendments to FINRA Rule 
4120(a)(1)(F) and (c)(1)(F) (Regulatory Notification and Business 
Curtailment) to clarify that a member must take into account the 
special deductions from net capital set forth in FINRA Rule 
4210(e)(8)(C) in determining its status under FINRA Rule 4120.
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    \9\ See Incorporated NYSE Rule 431(e)(8)(C)(ii), (iii) and (v).
    \10\ FINRA Rule 4120 is based on Incorporated NYSE Rules 325 and 
326, which were referenced in Incorporated NYSE Rule 
431(e)(8)(C)(ii), (iii) and (v).
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Day Trading

    FINRA proposes to adopt Supplementary Material .30 and .60 from 
Incorporated NYSE Rule 431 regarding day trading in proposed FINRA Rule 
4210(f)(8)(B). FINRA proposes to integrate Supplementary Material .60 
from Incorporated NYSE Rule 431 in FINRA Rule 4210(f)(8)(B)(iii) to 
provide that the day-trading buying power for non-equity securities may 
be computed using the applicable special maintenance margin 
requirements pursuant to other provisions of the margin rule. In 
addition, FINRA proposes to adopt Supplementary Material .30 from 
Incorporated NYSE Rule 431 as FINRA Rule 4210(f)(8)(B)(iv)b. to provide 
that in the event that the member at which a customer seeks to open an 
account or resume day trading in an existing account, knows or has a 
reasonable basis to believe that the customer will engage in pattern 
day trading, then the minimum equity required ($25,000) must be 
deposited in the account prior to commencement of day trading. FINRA 
also proposes to relocate paragraph (f)(8)(C) of NASD Rule 2520 into 
FINRA Rule 4210(f)(8)(B)(iii) that specifies that day trading 
deficiencies must be met within five business days of the trade date.

Portfolio Margining

    FINRA proposes to amend FINRA Rule 4210(g)(5) to highlight to 
members that portfolio margin-eligible participants, in addition to 
being required to be approved to engage in uncovered short option 
contracts pursuant to FINRA Rule 2360, must be approved to engage in 
security futures transactions pursuant to FINRA Rule 2370.

Conforming Amendments

    FINRA proposes to add the terms ``approved market maker,'' ``market 
maker'' and ``market making'' to FINRA Rule 4210(f)(10)(F) to conform 
to rule changes made by the NYSE.\11\ FINRA also proposes amending the 
definitions of the same terms used in FINRA Rule 4210(e)(5)(A) and 
(f)(10)(E) for consistency purposes.
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    \11\ See Securities Exchange Act Release No. 59077 (December 10, 
2008), 73 FR 76691 (December 17, 2008) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change by New York Stock 
Exchange LLC Amending Exchange Rule 104T to Make a Technical 
Amendment to Delete Language Relating to Orders Received by NYSE 
Systems and DMM Yielding; Clarifying the Duration of the Provisions 
of Rule 104T; Making Technical Amendments to Rule 98 and Rule 123E 
to Update Rule References for DMM Net Capital Requirements; 
Rescinding Paragraph (g) of Rule 123; and Making Conforming Changes 
to Certain Exchange Rules to Replace the Term ``Specialist'' with 
``DMM''; File No. SR-NYSE-2008-127).
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Clarifying and Technical Amendments

    Finally, FINRA proposes to make several technical changes to the 
margin rule text to update terminology and similar clarifications. 
First, FINRA proposes to add definitions to FINRA Rule 4210(f)(2)(A) 
regarding ``listed'' and ``OTC'' options and employ such terms 
throughout FINRA Rule 4210(f)(2). FINRA is not proposing any 
substantive changes to the margin requirements for listed or over-the-
counter options; rather, the proposed rule change would make the rule 
easier to read by creating such definitions and using the terms 
consistently throughout the rule text.
    Second, in proposed FINRA Rule 4210(f)(2)(I)(iv), FINRA proposes 
several clarifications to terminology where no margin may be required 
if the specified options or warrants are carried ``short'' in the 
account of a customer, against an escrow agreement, and either are held 
in the account at the time the options or warrants are written, or 
received in the account promptly thereafter. The proposed rule change 
would clarify that with respect to such options or warrants, an escrow 
agreement is used, in a form satisfactory to FINRA, issued by a third 
party custodian bank or trust company, and in compliance with the 
requirements of Rule 610 of The Options Clearing Corporation. The 
corresponding provisions in Incorporated NYSE Rule 431 \12\ used the 
terms ``letter of guarantee'' and ``escrow receipt'' while NASD Rule 
2520 used the term ``letter of guarantee.'' While in this context such 
terms generally were used interchangeably, FINRA proposes to use the 
term ``escrow agreement'' to eliminate any potential confusion.\13\ The 
proposed rule change also would replace the term ``guarantor'' with the 
term ``custodian'' to more accurately reflect the third party's role. 
In addition, the proposed rule change would revise the definition of 
what constitutes a qualified security by eliminating the reference to 
the list of Over-the-Counter Margin Stocks published by the Board of 
Governors of the Federal Reserve

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System as the Federal Reserve no longer publishes such a list.
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    \12\ See Incorporated NYSE Rule 431(f)(2)(H)(iv).
    \13\ Such approach also is consistent with the CBOE rules. See 
CBOE Rule 12.3(d).
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    Third, the proposed rule change would insert the term ``aggregate'' 
before exercise price throughout proposed FINRA Rule 4210(f)(2)(H) and 
(f)(2)(N) to clarify a calculation must be made in the strategies and 
spreads that are noted (i.e., offsets, reverse conversions, butterfly 
spread, etc.). Finally, the proposed rule change would make various 
non-substantive changes to reflect the formatting, presentation and 
style conventions used in the Consolidated FINRA Rulebook.

Daily Record of Margin Requirements--Incorporated NYSE Rule 432(a)

    FINRA proposes to adopt Incorporated NYSE Rule 432(a) (Daily Record 
of Required Margin) as FINRA Rule 4220 in substantially the form it 
exists today. Incorporated NYSE Rule 432(a) sets forth the requirements 
for daily recordkeeping of initial and maintenance margin calls that 
are issued pursuant to Regulation T and the margin rules. There is no 
corresponding NASD rule. FINRA believes that this is an important 
requirement to heighten FINRA's ability to monitor members' margin call 
practices. In addition, Incorporated NYSE Rule 432(b) prohibits a 
member from allowing a customer to make a practice of satisfying 
initial margin calls by the liquidation of securities. However, this 
provision is substantially similar to the provision in proposed FINRA 
Rule 4210(f)(7), except that the proposed FINRA rule provision does not 
contain the exception for omnibus accounts. Accordingly, FINRA proposes 
to eliminate Incorporated NYSE Rule 432(b) and modify paragraph (f)(7) 
of FINRA Rule 4210 to add that the prohibition on liquidations shall 
not apply to any account carried on an omnibus basis as prescribed by 
Regulation T.

Required Submissions of Requests for Extension of Time Under Regulation 
T and SEC Rule 15c3-3--NASD Rule 3160 and Incorporated NYSE Rule 434

    FINRA proposes to adopt NASD Rule 3160 (Extensions of Time Under 
Regulation T and SEC Rule 15c3-3) as FINRA Rule 4230 with one 
modification discussed below and delete the substantively similar 
Incorporated NYSE Rule 434 (Required Submission of Requests for 
Extensions of Time for Customers). NASD Rule 3160 and Incorporated NYSE 
Rule 434 set forth requirements governing members' requests for 
extensions of time, as permitted in accordance with Regulation T and 
SEC Rule 15c3-3(n). These rules provide that when FINRA is the 
designated examining authority for a member, requests for extensions of 
time must be submitted to FINRA for approval, in a format FINRA 
requires. In addition, NASD Rule 3160 requires each clearing member 
that submits extensions of time on behalf of broker-dealers for which 
it clears to submit a monthly report to FINRA that indicates overall 
ratios of requested extensions of time to total transactions that have 
exceeded a percentage specified by FINRA.\14\ FINRA monitors the number 
of Regulation T and SEC Rule 15c3-3 extension requests for each firm to 
determine whether to impose prohibitions on further extensions of 
time.\15\
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    \14\ See Notice to Members 06-62 (November 2006). FINRA would 
retain the reporting threshold specified in Notice to Members 06-62 
of requiring a report for all introducing or correspondent firms 
that have overall ratios of requests for extensions of time to total 
transactions for the month that exceed 2%. In the event FINRA 
adjusts the reporting threshold, or the limitation threshold stated 
in note 15 below, it would advise members of the new parameters in a 
Regulatory Notice.
    \15\ See supra note 14. FINRA will continue to prohibit further 
extension of time requests for (1) introducing or correspondent 
firms that exceed a 3% ratio of the number of extension of time 
requests to total transactions for the month and (2) clearing firms 
that exceed a 1% ratio of extension of time requests to total 
transactions.
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    FINRA proposes to add a provision to proposed FINRA Rule 4230 to 
clarify that for the months when no broker-dealer for which a clearing 
member clears exceeds the extension of time ratio criteria (i.e., 2%), 
the clearing member must submit a report indicating such. FINRA had 
previously requested such submissions but believes the submissions are 
essential to ensure FINRA has a complete and accurate understanding of 
correspondent firm extension requests.
    As stated in the notice, FINRA represented that it 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.

III. Commission Findings

    After careful consideration of the proposal, the Commission finds 
that the proposed rule change is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to a 
national securities association.\16\ In particular, the Commission 
finds that the proposal is consistent with Section 15A(b)(6) of the 
Act,\17\ which requires, among other things, that FINRA's rules 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 the 
proposed rule change will further the purposes of the Act by, among 
other things, clarifying and streamlining the margin requirements 
applicable to its members, as well as rules addressing extension of 
time requests under Regulation T and Commission Rule 15c3-3 and daily 
record of required margin. The Commission therefore believes that it is 
appropriate and consistent with the Act for FINRA to adopt FINRA Rule 
4210 (Margin Requirements), FINRA Rule 4220 (Daily Record of Required 
Margin) and FINRA Rule 4230 (Required Submissions for Requests for 
Extensions of Time under Regulation T and SEC Rule 15c3-3) in the 
Consolidated FINRA Rulebook.
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    \16\ 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).
    \17\ 15 U.S.C. 78o-3(b)(6).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-FINRA-2010-024) be, and 
hereby is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-17356 Filed 7-15-10; 8:45 am]
BILLING CODE 8010-01-P