[Federal Register Volume 79, Number 43 (Wednesday, March 5, 2014)]
[Notices]
[Pages 12551-12553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-04794]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71625; File No. SR-FINRA-2014-009]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend FINRA Rule 5131 (New Issue Allocations 
and Distributions) To Provide FINRA With General Exemptive Authority

February 27, 2014.
    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 February 14, 2014, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') 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. FINRA has 
designated the proposed rule change as ``constituting a stated policy, 
practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule'' under Section 
19(b)(3)(A)(i) of the Act \3\ and Rule 19b-4(f)(1) thereunder,\4\ which 
renders the proposal effective upon receipt of this filing by the 
Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 5131 (New Issue Allocations 
and Distributions) to provide FINRA with general exemptive authority 
under the rule.
    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
    On September 29, 2010, the SEC approved new FINRA Rule 5131 (New 
Issue Allocations and Distributions) (the ``Rule''), which addresses 
potential abuses in the allocation and distribution of ``new issues.'' 
\5\ The Rule also is intended to sustain public confidence in the IPO 
process, which is critical to the continued success of the capital 
markets.
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    \5\ Rule 5131 provides that ``new issue'' shall have the same 
meaning as in Rule 5130(i)(9).
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    Rule 5131(a) (Quid Pro Quo Allocations) prohibits quid pro quo 
arrangements by providing that no member or person associated with a 
member may offer or threaten to withhold shares it allocates of a new 
issue as consideration or inducement for the receipt of compensation 
that is excessive in relation to the services provided by the member.
    Paragraph (b) (Spinning) addresses the practice of ``spinning,'' 
where a member allocates shares of a new issue to an executive officer 
or director of a recent, current or potential investment banking client 
as an award for retaining the member for investment banking business. 
Specifically, Rule 5131(b) generally provides that no member may 
allocate new issue shares to any account in which an executive officer 
or director of a public company or a covered non-public company has a 
beneficial interest: (1) if the company is currently an investment 
banking services client of the member or the member has received 
compensation from the company for investment banking services in the 
past 12 months; (2) if the person responsible for making the allocation 
decision knows or has reason to know that the member intends to 
provide, or expects to be retained by the company for, investment 
banking services within the next 3 months; or (3) on the express or 
implied condition that such executive officer or director, on behalf of 
the company, will retain the member for the performance of future 
investment banking services.\6\
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    \6\ The spinning provision excepts allocations to certain types 
of accounts (the accounts described in Rule 5130(c)(1) through (3) 
and (5) through (10)) as well as any other account in which the 
beneficial interests of executive officers and directors of the 
company in the aggregate do not exceed 25% of such account.
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    Paragraph (c) (Policies Concerning Flipping) addresses the 
imposition of penalties on an associated person in cases where the 
purchaser of shares of a new issue engages in ``flipping.'' \7\ 
Specifically, the Rule provides that no member or person associated 
with a member may directly or indirectly recoup, or attempt to recoup, 
any portion of a commission or credit paid or awarded to an associated 
person for selling shares of a new issue that subsequently are flipped 
by a customer, unless the managing underwriter has assessed a penalty 
bid on the entire syndicate.\8\ Thus, for example, a member may not 
penalize an associated person by reclaiming a sales commission where 
the associated person's customer sells the new issue shares within a 
short period of the offering, unless the managing underwriter has 
assessed a penalty bid on the entire syndicate.
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    \7\ Rule 5131(e)(4) defines ``flipped'' as the initial sale of 
new issue shares purchased in an offering within 30 days following 
the offering date of such offering.
    \8\ The flipping provision also provides that, in addition to 
any obligation to maintain records relating to penalty bids under 
Rule 17a-2(c)(1) under the Act, a member shall promptly record and 
maintain information regarding any penalties or disincentives 
assessed on its associated persons in connection with a penalty bid. 
Rule 5131(c).
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    Rule 5131(d) (New Issue Pricing and Trading Practices) generally 
requires: (1) the provision of specified information to the issuer 
regarding investor interest in the offering, including reports on 
indications of interest received and final allocations; (2) that lock-
up agreements or other restrictions on the transfer of the issuer's 
shares by officers and directors of the issuer entered into in 
connection with a new issue also must apply to any issuer-directed 
shares and further must provide that the book-running lead manager will 
notify the issuer of the impending release or waiver and announce the 
impending release or waiver through a major news service.\9\
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    \9\ This requirement does not apply to a release or waiver 
effected solely to permit a transfer of securities that is not for 
consideration and where the transferee has agreed in writing to be 
bound by the same lock-up agreement terms in place for the 
transferor. See Rule 5131(d)(2)(B).
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    In addition, paragraph (d) provides that the agreement between the 
book-running lead manager and other syndicate members must require, to 
the extent not inconsistent with SEC Regulation M, that any shares 
trading at a premium to the public offering price that are returned by 
a purchaser to a syndicate member after secondary market trading 
commences must be

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used to offset the existing syndicate short position. However, if no 
syndicate short position exists, the member must either: (1) offer the 
returned shares at the public offering price to unfilled customer 
orders pursuant to a random allocation methodology, or (2) sell the 
returned shares on the secondary market and donate profits from the 
sale to an unaffiliated charitable organization with the condition that 
the donation be treated as an anonymous donation to avoid any 
reputational benefit to the member. Finally, Rule 5131(d)(4) (Market 
Orders) prohibits the acceptance of a market order for the purchase of 
shares of a new issue in the secondary market prior to the commencement 
of trading of such shares in the secondary market.
    Since Rule 5131 became effective,\10\ FINRA states they have 
received numerous operational and interpretive questions regarding the 
Rule's various provisions. Most recently, FINRA proposed, and the 
Commission approved, a new exemption for allocations to certain funds-
of-funds.\11\ The new exception, codified in Supplementary Material 
.02, was narrowly tailored to address prevalent operational burdens on 
members in connection with allocations to certain investment funds, 
even under circumstances that did not present the concerns that the 
spinning provision was designed to address. FINRA determined that, in 
this case, the concerns raised by members and other industry 
participants concerning the spinning provision could efficiently be 
addressed through a general exemption to the rule with a common set of 
conditions designed to provide relief, while also ensuring that 
allocation activity is not likely to result in the harms sought to be 
prevented by the Rule.
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    \10\ Most of the provisions of Rule 5131 became effective on May 
27, 2011, except for paragraphs (b) and (d)(4), which became 
effective on September 26, 2011. See Regulatory Notices 10-60 
(November 2010) and 11-29 (June 2011).
    \11\ See Securities Exchange Act Release No. 70312 (September 4, 
2013), 78 FR 55322 (September 10, 2013) (Notice of Filing File No. 
SR-FINRA-2013-037); Securities Exchange Act Release No. 70957 
(November 27, 2013), 78 FR 72946 (December 4, 2013) (Order Approving 
File No. SR-FINRA-2013-037).
    Rule 5131(b) previously addressed operational burdens associated 
with some accounts with a large and diverse ownership base where the 
potential for spinning is minimal through a series of exemptions for 
purchasers such as mutual funds, insurance company general accounts 
and various employee benefit plans. See supra note 6. Private funds, 
however, are not a category of purchasers for which a general 
exemption exists.
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    However, FINRA believes there may be other circumstances where 
relief is warranted on a case-by-case basis--likewise where the 
concerns the Rule was designed to address are not present. Therefore, 
FINRA believes it is appropriate to obtain the authority to, in 
exceptional and unusual circumstances, taking into consideration all 
relevant factors, exempt a person unconditionally or on specified terms 
from any or all of the provisions of this Rule that it deems 
appropriate consistent with the protection of investors and the public 
interest. Exemptive authority would permit members to apply for relief 
from Rule 5131, pursuant to the Rule 9600 Series, similar to the 
exemptive authority that exists for FINRA Rule 5130 (Restrictions on 
the Purchase and Sale of Initial Equity Public Offerings), which shares 
several attributes with Rule 5131.\12\ The 9600 Series sets forth the 
manner in which application for relief must be made, including that the 
applicant must provide a detailed statement of the grounds for granting 
the exemption. FINRA proposes that it would use its exemptive authority 
only in circumstances that are truly unique.
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    \12\ See FINRA Rule 5130(h) (Exemptive Relief).
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    The implementation date for the proposed rule change will be the 
date of filing.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\13\ 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 adopting an exemptive authority 
provision furthers these purposes by promoting capital formation and 
aiding member compliance efforts, while maintaining investor confidence 
in the capital markets by preserving the efficacy of the rule while 
permitting members to request an exemption from Rule 5131, where the 
harms the rule was designed to prevent are not present.
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    \13\ 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 results in any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act in that the proposed rule 
permits members to apply for (and FINRA to grant) exemptive relief 
under Rule 5131, in exceptional and unusual circumstances, to the 
extent that such exemption would be consistent with the purposes of the 
Rule, the protection of investors and the public interest.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Not applicable.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \14\ and paragraph (f)(1) of Rule 19b-4 
thereunder.\15\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act. If 
the Commission takes such action, the Commission shall institute 
proceedings to determine whether the proposed rule should be approved 
or disapproved.
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(1).
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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 email to [email protected]. Please include 
File Number SR-FINRA-2014-009 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-2014-009. This 
file number should be included on the subject line if email 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

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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 Web site viewing and printing 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-2014-009 and should be submitted on or before March 26, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-04794 Filed 3-4-14; 8:45 am]
BILLING CODE 8011-01-P