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  • 2008

    • 08-83 FINRA Requests Comment on Proposed FINRA Rule Regarding Front Running of Block Transactions; Comment Period Expires: February 6, 2009

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      Front Running

      Regulatory Notice
      Notice Type

      Request for Comment
      Consolidated FINRA Rulebook
      Referenced Rules & Notices

      FINRA Rule 2010
      NASD IM-2110-3
      NTM 05-51
      NTM 02-73
      NTM 97-57
      NTM 87-69
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Systems
      Trading
      Key Topic(s)

      Front Running

      Executive Summary

      As part of the process of developing a new, consolidated rulebook (the Consolidated FINRA Rulebook), FINRA is requesting comment on proposals relating to FINRA's Front Running Policy in NASD Interpretive Material (IM) 2110-3. The proposed amendments to the Front Running Policy include broadening the scope of the rule beyond certain options and security futures to other types of derivatives, financial instruments and financial contracts, as well as adopting Supplementary Material to the rule to codify exceptions to the prohibitions.

      The text of the proposed rule is set forth in Attachment A.

      Questions concerning this Notice should be directed to the Office of General Counsel at (202) 728-8071.

      Action Requested

      FINRA encourages all interested parties to comment on the proposals. Comments must be received by February 6, 2009.

      Member firms and other interested parties can submit their comments using the following methods:

      • Emailing comments to pubcom@finra.org; or
      •Mailing comments in hard copy to:

      Marcia E. Asquith
      Office of the Corporate Secretary
      FINRA
      1735 K Street, NW
      Washington, DC 20006-1506

      To help FINRA process and review comments more efficiently, persons should use only one method to comment on the proposals.

      Important Notes: The only comments that FINRA will consider are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the FINRA Web site. Generally, FINRA will post comments on its site one week after the end of the comment period.1

      Before becoming effective, a proposed rule change must be authorized for filing with the SEC by the FINRA Board of Governors, and then must be approved by the SEC, following publication for public comment in the Federal Register.2

      Background & Discussion

      Background

      NASD IM-2110-3 (Front Running Policy) states that it is conduct inconsistent with just and equitable principles of trade for a member firm or an associated person of a member firm to buy or sell security futures or certain options for accounts in which the firm or associated person has an interest when the firm or associated person has material, non-public information concerning an imminent block transaction in the underlying security. Similarly, the same prohibition applies in the underlying security when the material, non-public information regarding a block transaction concerns an option or security future on that underlying security. The Front Running Policy also prohibits providing material, non-public information concerning an imminent block transaction to customers who then trade on the basis of the information. The prohibitions in the rule apply until the information concerning the block transaction has been made publicly available.

      Proposed Amendments

      FINRA proposes adopting IM-2110-3 as FINRA Rule 5270 and amending the Front Running Policy in several ways to broaden its scope. First, FINRA proposes extending the prohibitions in the rule. The proposed rule applies to all securities and is broadened to include trading in the same security that is the subject of an imminent block transaction as well as other financial instruments and contracts (i.e., not only options and security futures) that overlay the security that is the subject of an imminent block transaction and that have a value that is materially related to the underlying security. Specifically, FINRA proposes extending the front running prohibitions to cover trading in an option, derivative, or other financial instrument overlying a security that is the subject of an imminent block transaction the value of which is materially related to, or otherwise acts as a substitute for, such security, as well as any contract that is the functional economic equivalent of a position in such security (individually or collectively a "related financial instrument"). This proposed expansion of the rule to include all related financial instruments is intended to capture those instruments (in addition to securities) that could be used to take advantage of the knowledge of an imminent block transaction. This would include, for example, equity swaps, convertible debt, and any other type of financial instrument the value of which is materially related to, or otherwise acts as a substitute for, an underlying security. The reverse would also be true: When the imminent block transaction itself involves a related financial instrument, the proposed rule prevents trading in the underlying security. Although FINRA believes that this type of trading would generally violate existing FINRA rules, such as FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade),3 FINRA proposes broadening the language of the Front Running Policy to apply equally to all related financial instruments rather than limiting it to security futures and certain options. Because some related financial instruments may not themselves result in publicly available trading information being made available, FINRA is also proposing that the prohibitions be in place until the material, non-public information is either publicly available or "otherwise becomes stale or obsolete."

      Second, FINRA proposes deleting several existing provisions in the Front Running Policy and adopting new provisions as Supplementary Material to proposed FINRA Rule 5270. Specifically, FINRA proposes deleting the existing exceptions in the Front Running Policy for certain transactions in automatic execution systems and for positioning the other side of certain orders when a member firm receives a customer's block order relating to both an option and the underlying security or a security future and the underlying security. FINRA proposes replacing these specific exceptions with new Supplementary Material addressing permitted transactions. FINRA has long acknowledged that member firms are permitted to trade ahead of a customer's block order when the purpose of such trading is to fulfill the customer order and when the customer has authorized such trading, including that the firm has disclosed to the customer that it may trade ahead of, or alongside of, the customer's order.4

      The proposed Supplementary Material codifies this position and notes that a member firm may engage in hedging and other positioning activity that could affect the market for the security that is the subject of the customer's block order provided that the firm has received the customer's affirmative written consent prior to receipt and/or execution of the order.5 In those instances, the firm must still refrain from any conduct that could disadvantage or harm the execution of the customer's order or place the firm's financial interests ahead of those of its customer. In addition, FINRA has noted that trading ahead is permitted in other limited circumstances (e.g., trades to correct a bona fide error or to offset an odd lot order). FINRA proposes continuing to permit trading ahead in these limited circumstances, as well as trading done on a riskless principal basis, by codifying this guidance in Supplementary Material to proposed FINRA Rule 5270.

      Request for Comment

      In connection with the proposal, FINRA requests comment on certain aspects of proposed Rule 5270. Specifically, FINRA is requesting comment on the following:

      • FINRA proposes to expand the scope of the current Front Running Policy so that Rule 5270 includes all "related financial instruments."As noted above, the proposed definition is intended to capture those financial instruments that could be used to take advantage of knowledge of an imminent block transaction in an underlying security (or vice versa). Does the proposed definition capture all such instruments? Does the proposed definition capture financial instruments that should not be included?
      • As noted above, FINRA proposes replacing the two existing exceptions in the Front Running Policy with new Supplementary Material. Should FINRA retain either or both existing exceptions? Does the proposed Supplementary Material concerning permitted transactions adequately cover those types of transactions that should be excepted from the Front Running Policy?
      • The proposed Supplementary Material regarding permitted transactions requires that firms receive affirmative written consent from a customer before engaging in hedging or other positioning activity that could affect the market for the security that is the subject of a customer's block order. Is affirmative written consent the appropriate requirement or should oral consent be permitted? Is disclosure sufficient? As noted above, consent is not required on a transaction-by-transaction basis; however, firms should at least annually take steps to have their customers reaffirm their consent. Should the rule include a reaffirmation requirement? If so, what should the frequency be?

      In addition to the specific questions listed above, FINRA is also interested in any other issues that commenters may wish to address relating to the proposal.


      1 FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Persons should submit only information that they wish to make publicly available. See NASD Notice to Members 03-73 (November 2003) (NASD Announces Online Availability of Comments) for more information.

      2 Section 19 of the Securities Exchange Act of 1934 (Exchange Act) permits certain limited types of proposed rule changes to take effect upon filing with the SEC. The SEC has the authority to summarily abrogate these types of rule changes within 60 days of filing. See Exchange Act Section 19 and rules thereunder.

      3 The SEC recently approved the adoption of NASD Rule 2110 as FINRA Rule 2010, without substantive change, effective December 15, 2008. See Regulatory Notice 08-57 (October 2008).

      4 See NASD Notice to Members 05-51 (August 2005); NASD Notice to Members 97-57 (September 1997).

      5 This position was discussed with respect to volume-weighted average price transactions in NASD Notice to Members 05-51 (August 2005). As stated in that Notice, member firms need not obtain affirmative consent on a transaction-by-transaction basis; however, firms should at least annually take steps to have their customers reaffirm their consent.


      Attachment A

      Below is the text of the proposed rule change. New language is underlined; deletions are in brackets.

      * * * * *

      PROPOSED FRONT RUNNING RULE AND SUPPLEMENTARY MATERIAL

      [IM-2110-3]5270. Front Running of Block Transactions [Policy]1

      (a) [It shall be considered conduct inconsistent with just and equitable principles of trade for a] No member or person associated with a member shall cause to be executed, for an account in which such member or person associated with a member has an interest, for an account with respect to which such member or person associated with a member exercises investment discretion, or for [certain] the accounts of customers noted below [accounts, to cause to be executed]:
      ([a]1) an order to buy or sell a security or a related financial instrument [an option or a security future] when such member or person associated with a member causing such order to be executed has material, non-public market information concerning an imminent block transaction in [the underlying] that security, related financial instrument or a security underlying a related financial instrument, or when a customer has been provided such material, non-public market information by the member or any person associated with a member, prior to the time information concerning the block transaction has been made publicly available or has otherwise become stale or obsolete; [or]
      ([b]2) an order to buy or sell an underlying security when such member or person associated with a member causing such order to be executed has material, non-public market information concerning an imminent block transaction in a related financial instrument [an option or a security future overlying that security], or when a customer has been provided such material, non-public market information by the member or any person associated with a member; prior to the time information concerning the block transaction has been made publicly available or has otherwise become stale or obsolete.
      (b) For purposes of this Rule, the term "related financial instrument" shall mean any option, derivative, or other financial instrument overlying a security, the value of which is materially related to, or otherwise acts as a substitute for, such security, as well as any contract that is the functional economic equivalent of a position in such security.

      •••Supplementary Material:--------------

      .01 Knowledge of Block Transactions. The violative practices in Rule 5270 [noted above] may include transactions [which] that are executed based upon knowledge of less than all of the terms of the block transaction, so long as there is knowledge that all of the material terms of the transaction have been or will be agreed upon imminently.

      [The general prohibitions stated above shall not apply to transactions executed by member participants in automatic execution systems in those instances where participants must accept automatic executions.]

      [These prohibitions also do not include situations in which a member or person associated with a member receives a customer's order of block size relating to both an option and the underlying security or both a security future and the underlying security. In such cases, the member and person associated with a member may position the other side of one or both components of the order. However, in these instances, the member and person associated with a member would not be able to cover any resulting proprietary position(s) by entering an offsetting order until information concerning the block transaction involved has been made publicly available.]

      [The application of this front running policy is limited to transactions that are required to be reported on the last sale reporting systems administered by Nasdaq, Consolidated Tape Association (CTA), or Option Price Reporting Authority (OPRA). The front running policy also applies to security futures transactions regardless of whether such products are reported pursuant to such systems.]
      .02 Publicly Available Information. Information as to a block transaction shall be considered to be publicly available when it has been disseminated via a last sale reporting system [the tape] or high speed communications line of one of those systems, a similar system of a national securities exchange under Section 6 of the Exchange Act, an alternative trading system under SEC Regulation ATS, or by a third-party news wire service. The requirement that information concerning the block transaction be made publicly available will not be satisfied until the entire block transaction has been completed and publicly reported.
      .03 Definition of Block Transaction. A transaction involving 10,000 shares or more of a security, an underlying security, or [options or security futures covering] a related financial instrument overlying such number of shares, is generally deemed to be a block transaction, although a transaction of less than 10,000 shares could be considered a block transaction [in appropriate cases]. A block transaction that has been agreed upon does not lose its identity as such by arranging for partial executions of the full transaction in portions which themselves are not of block size if the execution of the full transaction may have a material impact on the market. [In this situation, the requirement that information concerning the block transaction be made publicly available will not be satisfied until the entire block transaction has been completed and publicly reported.]
      .04 Permitted Transactions. Rule 5270 does not preclude trading activity executed for the purpose of fulfilling the customer block order or trading activity where the member can demonstrate it is unrelated to the material, non-public information received in connection with the customer order. For example, the prohibition in Rule 5270 does not apply to (a) transactions related to a prior customer order; (b) bona fide hedge transactions that the member can demonstrate are unrelated to the material, non-public information received in connection with the customer order and where the member has information barriers established to prevent internal disclosure of such information; (c) "black box"orders where the member has no actual knowledge that the customer order has been routed for execution; (d) trades to correct bona fide errors; and (e) odd-lot transactions to offset odd-lot orders.

      A member also may engage in hedging and other positioning activity that could affect the market for the security that is the subject of the customer order provided that the member has received the customer's affirmative written consent prior to receipt and/or execution of the order. If the member obtains the customer's consent, the member must still refrain from any conduct that could disadvantage or harm the execution of the customer's order or place the member's financial interests ahead of those of its customer.
      .05 Facilitation on a Riskless Principal Basis of Customer Order. The prohibition in Rule 5270 shall not apply to transactions that are executed to facilitate the execution, on a riskless principal basis, of a customer's block order. A member that relies on this exception must give the customer's order the same per-share price at which the member accumulated or sold shares to satisfy the customer's order, exclusive of any markup or markdown, commission equivalent or other fee.
      .06 Front Running of Non-Block Transactions. Although the prohibitions in Rule 5270 are limited to imminent block transactions, the front running of other types of orders that place the financial interests of the member or persons associated with a member ahead of those of its customer or the misuse of knowledge of an imminent customer order may violate other FINRA rules, including Rule 2010, or provisions of the federal securities laws.

      1 The draft text is marked to show changes between IM-2110-3 and Proposed FINRA Rule 5270.

    • 08-82 FINRA Reminds Firms of Their Sales Practice Obligations with Regard to Cash Alternatives

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      Cash Alternatives

      Regulatory Notice
      Notice Type

      Special Alert
      Referenced Rules & Notices

      NASD IM-2210-1
      NASD Rule 2210
      NASD Rule 2310
      Suggested Routing

      Advertising
      Compliance
      Legal
      Senior Management
      Training
      Key Topic(s)

      Cash Alternatives
      Disclosure

      Executive Summary

      FINRA is issuing this Notice to remind firms of their obligations in the sale of investments as alternatives to cash holdings.1 This Notice provides guidance to firms concerning the requirements to:

      1. avoid overstating a product's similarities to a cash holding and provide balanced disclosure of the risks and returns associated with a particular product;
      2. conduct adequate due diligence to understand the features of a product;
      3. conduct appropriate suitability analyses;
      4. monitor market and economic conditions that may cause the description of an investment as a cash alternative to become inaccurate or misleading, and adopt procedures reasonably designed to ensure that the firm responds to those changing conditions; and
      5. train registered persons regarding the features, risks and suitability of these products.

      Questions concerning this Notice should be directed to Angela C. Goelzer, Associate Vice President and Counsel, at (202) 728-8120.

      Background & Discussion

      In recent years, firms have sold a wide variety of investments as alternatives to cash holdings. These cash alternatives can represent an important component of an investment portfolio. Although they typically offer lower rates of return than longer-term equity or fixed-income securities, they provide a level of liquidity and price stability typically not available to these other investments. The types of investments that have been sold as cash alternatives include:

      • Auction rate preferred or fixed income securities;
      • Bank certificates of deposit;
      • Bank money market accounts;
      • Bankers' acceptances;
      • Commercial paper;
      • Federal agency short-term securities;
      • Fixed rate and step-up callable corporate securities;
      • Floating rate funds;
      • Guaranteed investment contracts;
      • Money market mutual funds;
      • Municipal notes;
      • Repos and swaps;
      • Structured investment vehicles;
      • Treasury bills;
      • Ultra-short bond mutual funds or exchange traded funds; and
      • Variable rate demand notes.

      Many of these products are well-known. Some, such as bank certificates of deposit and bank money market accounts, offer the protection of federal deposit insurance on accounts up to $100,000.2 U.S. Treasury bills are backed by the full faith and credit of the United States government. Money market mutual funds, though traditionally lacking federal insurance and not without risk, are highly regulated under federal law and historically have provided a dependable level of stability and liquidity.3 Information about the advantages and disadvantages of each of these types of cash alternatives is readily available.

      Other investments that are marketed and sold as cash alternatives may not be as well-understood by the financial markets and may present risks that are less apparent to some investors. Recent experience with auction rate securities is a case in point.

      Since their development in the 1980s, some firms have sold these securities as a cash alternative, and in recent years they became a popular choice among both retail and institutional investors. Developments in the credit markets led many auctions to fail in recent months. As a result, many investors who believed their auction rate securities holdings to be almost as conservative and liquid as cash found themselves with illiquid holdings of uncertain value.

      Similarly, some investors may have failed to appreciate the differences between ultra-short bond funds and money market mutual funds. Ultra-short bond funds, like money market funds, are mutual funds that generally invest in fixed-income securities with short maturities. In some cases, firms have sold these funds as "cash-enhanced" products. However, money market funds may only invest in certain high-quality, short-term investments issued by the U.S. government, U.S. corporations and state and local governments and they are subject to strict diversification and maturity standards. Ultra-short bond funds are not subject to these requirements and typically pursue strategies aimed at producing higher yields by investing in securities with higher risks. The net asset value (NAV) of an ultra-short bond fund will fluctuate, while money market funds seek to maintain a stable NAV of $1 per share. Indeed, during the recent credit crisis, some ultra-short bond funds experienced a dramatic increase in redemptions and decline in their share price.

      Communications with the Public

      Sales materials and oral presentations regarding cash alternatives must present a fair and balanced picture regarding both the risks and benefits of investing in these products. FINRA reminds firms that NASD Rule 2210 and IM-2210-1 require firms to ensure that statements are not misleading within the context in which they are made, and that firms must consider the nature of the audience to which a communication is directed. In virtually all cases, a statement to retail investors that an investment is a "cash equivalent," that it is as "safe as cash" or that it carries no market or credit risk would raise serious questions under FINRA's advertising rules.

      Firms must take reasonable steps to ensure that any communication that presents an investment as a cash alternative discloses, if applicable, that it is not federally guaranteed and that it is possible to lose money with the investment. Firms may not claim that a product is an alternative to cash unless the statement is fair and accurate. When it is appropriate to describe a product as a cash alternative, this description must be balanced with disclosures of the corresponding risks and limitations of the product. In the case of cash alternatives, this includes, but is not limited to, factors that could reasonably be anticipated to affect the liquidity or price stability of the investment, as well as the ability of the issuer to repay its obligation in full. In the event that market or economic developments affect the continued accuracy of a characterization of a product as a cash alternative, firms should promptly review their promotional materials and promptly make the necessary changes to ensure that investors are not misled.

      FINRA reminds firms, however, that simply providing a prospectus or offering memorandum does not cure unfair or unbalanced sales or promotional materials.

      Due Diligence/Reasonable-Basis Suitability

      Performing appropriate due diligence is crucial to a firm's obligation to undertake its required reasonable-basis suitability analysis under FINRA's suitability rule, NASD Rule 2310. A reasonable-basis suitability determination helps ensure that an investment is suitable for at least some investors (as opposed to a customer-specific suitability determination, which is undertaken on a customer-by-customer basis). A reasonable-basis suitability analysis requires a firm to understand the investment products it sells. Accordingly, a firm must perform appropriate due diligence to ensure that it understands the nature of a product that it is recommending, including its potential risks and rewards.

      A firm must have a reasonable basis for characterizing an investment as a cash alternative, and it is not sufficient simply to rely upon a third-party's characterization. The firm also must monitor market and economic developments that may affect the continued accuracy of a characterization of an investment as a cash alternative, and have procedures to quickly alert its sales and marketing staff to developments that will make such a characterization unwarranted. The fact that a firm intends to describe an investment as a cash alternative only to institutional investors does not relieve the firm of its responsibility to conduct due diligence and a reasonable-basis suitability analysis.

      Customer-Specific Suitability

      Firms must reasonably believe that a product is suitable for a customer seeking a cash alternative before recommending it as such. FINRA cautions firms that the fact that an investment may meet established accounting standards for treatment as a cash holding in a financial statement does not conclusively establish that the investment is an appropriate cash alternative for a particular investor. To ensure that a particular investment is suitable as a cash alternative for a specific customer, firms and their registered persons must examine the customer's need for liquidity and price stability, and the ability of the investment to meet that need. As with other suitability determinations, the following factors are relevant:

      • the customer's financial status;
      • the customer's tax status;
      • the customer's investment objectives; and
      • such other information used or considered to be reasonable by the firm or registered representative in making recommendations to the customer.

      Training

      Firms must train registered persons about the characteristics, risks and rewards of each product before they allow registered persons to recommend that product to investors. Likewise, firms should train registered persons about the factors that would make such products either suitable or unsuitable for certain investors. In the case of a cash alternative, training should encourage extreme caution in characterizing a product to an investor as an alternative to cash.


      1 Regulatory Notice 08-81, also issued December 16, 2008, addresses firms' sales practice obligations with regard to the sale of securities in a high-yield environment.

      2 Under FDIC coverage, if a bank or savings association fails, each depositor generally is insured for up to $100,000 ($250,000 effective October 3, 2008, through December 31, 2009) for non-retirement accounts, and up to $250,000 for IRAs and certain other retirement accounts. The FDIC coverage does not insure securities or mutual funds. More information can be found at www.fdic.gov or by contacting the FDIC at (877) ASK-FDIC.

      3 Recent events demonstrate that money market funds are not risk-free investments. On September 16, 2008, The Reserve announced that the Reserve Primary Fund, a money market fund, had fallen below $1 per share. The U.S. Treasury Department has established a Temporary Guarantee Program to ensure that investors in participating funds will receive $1 for each money market fund share held as of close of business on September 19, 2008.

    • 08-81 FINRA Reminds Firms of Their Sales Practice Obligations with Regard to the Sale of Securities in a High Yield Environment

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      High Yield Securities

      Regulatory Notice
      Notice Type

      Special Alert
      Referenced Rules & Notices

      NASD IM-2210-1
      NASD Rule 2210
      NASD Rule 2310
      Notice to Members 05-59
      Notice to Members 04-30
      Notice to Members 03-71
      Suggested Routing

      Advertising
      Compliance
      Legal
      Senior Management
      Training
      Key Topic(s)

      Bond Funds
      Bonds
      Disclosure
      Non-Conventional Investments
      Structured Products
      Yield

      Executive Summary

      FINRA is issuing this Notice to remind firms of their obligations in the sale of securities such as bonds, bond funds, structured products and non-conventional investments, in a high-yield environment.1 The yield on many of these instruments in late 2008 reached unusually high levels, which may increase their appeal to some investors. FINRA reiterates the guidance set forth in previous Notices and reminds firms that they are obligated to balance any discussion of yield with an appropriate discussion of the features of these instruments and the risks presented.2

      Questions concerning this Notice should be directed to Angela C. Goelzer, Associate Vice President, Investment Company Regulation, at (202) 728-8120.

      Background & Discussion

      Notice to Members 04-30 reminds firms that while bonds and bond funds can play an important role in stabilizing diversified portfolios, neither product is risk-free. Terms, conditions, risks, and returns vary widely, and in some cases risks may be substantial. The Notice reminds firms of their responsibility to take appropriate steps to ensure that their associated persons understand and present balanced discussions about the risks as well as the returns of the products that they sell.3 Notices to Members 05-59 and 03-71 provides comparable guidance to firms concerning, respectively, the sale of structured products and non-conventional investments.

      Higher yield may make an investment more appealing to some investors. However, firms must take appropriate steps to understand the terms, conditions, risks and rewards of any security that they sell to retail customers by performing a "reasonable-basis suitability analysis." Firms also must determine that such an investment is appropriate for a particular customer before recommending it to that customer by performing a "customer-specific suitability analysis." Both the reasonable-basis and customer-specific suitability analyses require consideration of the various risks associated with any security, including a security that is sold for its high yield.4

      Sales materials and oral presentations must present a fair and balanced picture regarding both the risks and benefits of investing in these products. FINRA reminds firms that NASD Rule 2210 and IM-2210-1 require firms to ensure that statements are not misleading within the context in which they are made, and that firms must consider the nature of the audience to which a communication is directed. Firms must take appropriate steps to ensure that any discussion between an associated person and a customer concerning the high yield associated with a particular security is balanced with a discussion of its risks. Firms must avoid encouraging a customer to place undue reliance on yield as a factor to be considered in selecting an investment.

      For example, any presentation to a customer concerning an investment's yield should be balanced with a discussion of any applicable credit risk or risk of default associated with the issuer, and how that risk might affect the safety of the invested principal. Similarly, a presentation concerning the high yield of a bond fund should be balanced by a discussion concerning the credit risk associated with the fund's portfolio and the risk that the fund's net asset value could decline. The discussion also should address interest rate risk—the risk that interest rate changes might affect the market value of an instrument prior to its call or maturity date.

      Finally, the firm should consider the liquidity risk that might be associated with the product. Since many bonds and unconventional products trade infrequently or irregularly (and not like exchange traded equities), customers should be made aware that their sales may not always be executed immediately or that sales may occur at prices well below a customer's purchase price or anticipated market price.

      Firms also must adequately train and supervise employees who sell these securities, and implement adequate supervisory controls to reasonably ensure compliance with FINRA and SEC sales practice rules.

      Firms are encouraged to review the previous FINRA guidance referenced in this Notice for a fuller discussion of applicable sales practice obligations.


      1 Regulatory Notice 08-82, also issued December 16, 2008, addresses firms' sales practice obligations with regard to cash alternatives.

      2 See NASD Reminds Firms of Sales Practice Obligations in Sale of Bonds and Bond Funds, NTM 04-30 (April 2004). See also NASD Provides Guidance Concerning the Sale of Structured Products, NTM 05-59 (September 2005) and NASD Reminds Members of Obligations When Selling Non-Conventional Investments, NTM 03-71 (November 2003).

      3 A pending FINRA Rule proposal would require enhanced disclosure to customers at confirmation of transactions in certain TRACE-eligible debt securities. The disclosure would provide transaction-specific information relating to charges, credit ratings, the availability of last-sale transaction information, and certain interest and call provisions. The proposal also would require that customers in these securities receive notice of the availability of "Important Information You Need to Know About Investing in Corporate Bonds," authored by FINRA. See Securities Act Rel. No. 56661 (October 19, 2007).

      4 See Rule 2310. For municipal securities, see Municipal Securities Rulemaking Board (MSRB) Rule G-19 (Suitability of Recommendations and Transactions; Discretionary Accounts) and G-17 (Conduct of Municipal Securities Activities).

    • 08-80 FINRA Requests Comment on Proposed FINRA Rule Addressing Best Execution; Comment Period Expires: January 29, 2009

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      Best Execution

      Regulatory Notice
      Notice Type

      Request for Comment
      Consolidated FINRA Rulebook
      Referenced Rules & Notices

      NASD Rule 2320
      NASD Rule 3110(b)
      NASD IM-2320
      NTM 00-78
      NTM 01-22
      Regulatory Notice 07-40
      Suggested Routing

      Compliance
      Legal
      Operations
      Registered Representatives
      Senior Management
      Systems
      Trading
      Key Topic(s)

      Best Execution
      Directed Orders
      Foreign Securities
      Three Quote Rule

      Executive Summary

      As part of the process of developing a new, consolidated rulebook (the Consolidated FINRA Rulebook), FINRA is requesting comment on proposals relating to FINRA's rule on best execution and interpositioning. There are four primary proposed amendments that are described in this Notice:

      1. the adoption of a new provision providing that a member firm has met its best execution obligations regarding orders for foreign securities with no U.S. market if certain conditions are met;
      2. the replacement of NASD Rule 2320(g) with Supplementary Material addressing a member firm's best execution obligations when handling orders for securities with limited quotation information;
      3. the codification of a member firm's obligation to regularly and rigorously review execution quality; and
      4. the adoption of Supplementary Material addressing a member firm's obligations when handling an order that the customer has instructed the firm to route to a particular market for execution.

      The text of the proposed rule is set forth in Attachment A.

      Questions concerning this Notice should be directed to the Office of General Counsel, at (202) 728-8071.

      Action Requested

      FINRA encourages all interested parties to comment on the proposals. Comments must be received by January 29, 2009.

      Member firms and other interested parties can submit their comments using the following methods:

      •  Emailing comments to pubcom@finra.org; or
      •  Mailing comments in hard copy to:

      Marcia E. Asquith
      Office of the Corporate Secretary
      FINRA
      1735 K Street, NW
      Washington, DC 20006-1506

      To help FINRA process and review comments more efficiently, persons should use only one method to comment on the proposals.

      Important Notes: The only comments that FINRA will consider are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the FINRA Web site. Generally, FINRA will post comments on its site one week after the end of the comment period.1

      Before becoming effective, a proposed rule change must be authorized for filing with the SEC by the FINRA Board of Governors, and then must be approved by the SEC, following publication for public comment in the Federal Register.2

      Background & Discussion

      Proposed Amendments

      FINRA is proposing to adopt new FINRA Rule 5310 to address a member firm's best execution obligations. FINRA Rule 5310 would be based largely on NASD Rule 2320 (Best Execution and Interpositioning), and IM-2320 (Interpretive Guidance with Respect to Best Execution Requirements) would be retained as Supplementary Material to the rule.3 FINRA is proposing four notable changes as part of the adoption of FINRA Rule 5310:

      •  Creating a new provision providing that a member firm has met its best execution obligations regarding orders for foreign securities with no U.S. market if certain conditions are met;
      •  Replacing NASD Rule 2320(g) (Three Quote Rule) with Supplementary Material that emphasizes that member firms must ensure that they meet their best execution obligations with respect to orders involving illiquid securities with non-transparent pricing;
      •  Codifying existing guidance regarding the regular and rigorous review of execution quality; and
      •  Creating Supplementary Material addressing a member firm's best execution obligations when a customer has instructed the firm to route the order to a particular market for execution.
      1. Orders for Foreign Securities with No U.S. Market

      NASD Rule 2320 does not distinguish between orders for domestic securities and orders for foreign securities, even if there is no U.S. market for the security. Despite Rule 2320's identical requirements for transactions in domestic and foreign securities, markets in foreign jurisdictions often do not have identical best execution requirements as those imposed by Rule 2320 and, in many cases, may not have comparable pre-trade transparency. Consequently, FINRA has determined that continuing to apply a "one-size-fits-all" approach to the handling of all foreign and domestic orders may no longer be appropriate.

      As part of transferring NASD Rule 2320 into the Consolidated FINRA Rulebook, FINRA is proposing to adopt a new provision addressing orders for foreign securities with no U.S. market. Under the proposed provision, a firm would be deemed to have met its best execution obligations with respect to an order if:
      (1) the order is for a non-U.S. traded security (defined as any non-exchange-listed security issued by a corporation or other entity incorporated or organized under the laws of any foreign country for which there is no quotation or indication of interest displayed in any quotation medium in the U.S. at the time the member firm receives the order);
      (2) the firm has adopted written policies and procedures regarding its handling of orders for non-U.S. traded securities that are reasonably designed to obtain the most favorable terms available for the customer;
      (3) the firm reviews those policies and procedures at least annually, or more frequently as appropriate, to assess the quality of the execution venues included in the firm's policies and procedures to determine whether they provide for the most favorable terms reasonably available and whether the policies and procedures need to be updated or revised;
      (4) the firm has obtained its customers' consent to its policies and procedures regarding the handling of orders for non-U.S. traded securities;4 and
      (5) the firm handles the order in accordance with its policies and procedures.
      2. Three Quote Rule

      The Three Quote Rule generally requires member firms that execute transactions in non-exchange-listed securities on behalf of customers to contact a minimum of three dealers (or all dealers if three or fewer) and obtain quotations from those dealers if there are fewer than two quotations displayed on an inter-dealer quotation system that permits quotation updates on a real-time basis. Since the adoption of the Three Quote Rule over twenty years ago, the market for non-exchange-listed securities has changed dramatically. FINRA has found that in certain circumstances the Three Quote Rule can hinder, rather than further, investor protection by causing significant delays in obtaining execution of customer orders. As a result, FINRA has created several exclusions to the Three Quote Rule since it was adopted. For example, in 2000, FINRA determined that where there were two transparent, firm quotes for a security, the costs associated with delayed executions resulting from Three Quote Rule compliance outweighed the benefits of obtaining three telephone quotes.5 Consequently, the Three Quote Rule currently applies only to non-exchange-listed securities with one or no public quotation. In 2007, the SEC approved amendments to the Three Quote Rule to exclude certain transactions in non-exchange-listed securities of foreign issuers that are part of the FTSE All-World Index and to exclude certain transactions in Canadian securities executed on a Canadian exchange.6

      FINRA believes that, although the concerns addressed by the Three Quote Rule are still valid, the current requirements in the Three Quote Rule are overly prescriptive and can often result in unnecessary delay in the execution of a customer's order. Thus, rather than maintain the Three Quote Rule and the various exclusions in their current format, FINRA is proposing to replace the Three Quote Rule with Supplementary Material to proposed FINRA Rule 5310 that emphasizes a firm's best execution obligations when handling an order involving a non-exchange-listed security for which there is limited pricing information available.7 The Supplementary Material would require that member firms have written policies and procedures in place to address the steps the firm will take to determine the best market for such a security in the absence of multiple quotations and require that firms document how they complied with those policies and procedures.8 The Supplementary Material would specifically note that, when handling orders for such securities, firms should generally seek out other sources of potential liquidity and may need to contact and obtain quotations from other dealers (e.g., other firms that the member firm has traded with in the past in the security).
      3. Regular and Rigorous Review of Execution Quality

      FINRA is also proposing to add Supplementary Material to proposed FINRA Rule 5310 that would codify a member firm's obligation to regularly and rigorously review execution quality likely to be obtained from different market centers. This longstanding obligation has been published and explained in SEC releases and NASD Notices to Members.9 FINRA is proposing to codify this guidance as Supplementary Material to the best execution rule so that the obligation appears in the Consolidated FINRA Rulebook itself and can be addressed in a single place. The proposed Supplementary Material would not alter existing requirements; it would merely codify previously published SEC and FINRA guidance on the subject.
      4. Customer Instructions Regarding the Routing of Orders

      When placing an order with a member firm, customers may specifically instruct the firm to route to a particular market for execution.10 FINRA is proposing to include Supplementary Material to proposed FINRA Rule 5310 that addresses situations where the customer has, on an unsolicited basis, specifically instructed the firm to route its order to a particular market. Under those circumstances, the firm would not be required to make a best execution determination beyond that specific instruction; however, the Supplementary Material would make clear that firms are still required to process the customer's order promptly and in accordance with the terms of the order. The Supplementary Material would also make clear that where a customer has directed a firm to route an order to another broker-dealer that is also a FINRA member firm, the exception for directed orders would not apply to the receiving broker-dealer to which the order was directed. For example, if a customer of Firm A directs Firm A to route an order to Firm B, Firm B would continue to have best execution obligations to that customer order received from Firm A.

      1 FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Persons should submit only information that they wish to make publicly available. See NASD Notice to Members 03-73 (November 2003) (NASD Announces Online Availability of Comments) for more information.

      2 Section 19 of the Securities Exchange Act of 1934 (Exchange Act) permits certain limited types of proposed rule changes to take effect upon filing with the SEC. The SEC has the authority to summarily abrogate these types of rule changes within 60 days of filing. See Exchange Act Section 19 and rules thereunder.

      3 FINRA has filed proposed amendments to the interpositioning provision of the rule (NASD Rule 2320(b)) to move that provision into the broader best execution obligations set forth in NASD Rule 2320(a). The proposed rule change was filed with the SEC on November 27, 2007, but has not yet been published for comment in the Federal Register. See SR-FINRA-2007-024.

      4 A firm could receive its customers' consent in any reasonable manner, including negative written consent.

      5 See NASD Notice to Members 00-78 (November 2000).

      6 See Regulatory Notice 07-40 (August 2007).

      7 NASD Rule 2320(g)(2) requires members that display priced quotations on a real-time basis for a non-exchange-listed security in two or more quotation mediums that permit quotation updates on a real-time basis to display the same priced quotation in each medium. Paragraph (g)(4) of the rule includes definitions of terms used in paragraph (g)(2). FINRA is proposing to retain paragraph (g)(2) and the relevant definitions in paragraph (g)(4), but move the provisions into the FINRA Rule 6400 Series (Quoting and Trading in OTC Equity Securities) as FINRA Rule 6480.

      8 NASD Rule 3110(b) (Books and Records) generally requires members to indicate on the customer order ticket how they complied with the Three Quote Rule, if applicable. FINRA is proposing to replace this provision with a more general documentation requirement in the Supplementary Material to proposed FINRA Rule 5310.

      9 See, e.g., Securities Exchange Act Release No. 37619A (September 6, 1996), 61 FR 48290 (September 12, 1996); NASD Notice to Members 01-22 (April 2001).

      10 When the order is for an NMS security, these orders are often referred to as "directed orders." See 17 CFR § 242.600(b)(19). Of note, directed orders are excluded from the order routing statistics required to be produced under Rule 606 of Regulation NMS. See 17 CFR § 242.606.


      Attachment A

      Below is the text of the proposed rule change. New language is underlined; deletions are in brackets.

      * * * * *

      PROPOSED BEST EXECUTION RULE AND SUPPLEMENTARY MATERIAL

      [2320] 5310. Best Execution and Interpositioning1

      (a)
      (1) In any transaction for or with a customer or a customer of another broker-dealer, a member and persons associated with a member shall use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. Among the factors that will be considered in determining whether a member has used "reasonable diligence" are:
      ([1]A) the character of the market for the security[,] (e.g., price, volatility, relative liquidity, and pressure on available communications);
      ([2]B) the size and type of transaction;
      ([3]C) the number of markets checked;
      ([4]D) accessibility of the quotation; and
      ([5]E) the terms and conditions of the order which result in the transaction, as communicated to the member and persons associated with the member.
      (2) In any transaction for or with a customer or a customer of another broker-dealer, no member or person associated with a member shall interject a third party between the member and the best market for the subject security in a manner inconsistent with paragraph (a)(1) of this Rule.
      [(b) In any transaction for or with a customer, no member or person associated with a member shall interject a third party between the member and the best available market except in cases where the member can demonstrate that to his knowledge at the time of the transaction the total cost or proceeds of the transaction, as confirmed to the member acting for or with the customer, was better than the prevailing inter-dealer market for the security. A member's obligations to his customer are generally not fulfilled when he channels transactions through another broker/dealer or some person in a similar position, unless he can show that by so doing he reduced the costs of the transactions to the customer.]
      ([c]b) When a member cannot execute directly with a market [maker] but must employ a broker's broker or some other means in order to [i]ensure an execution advantageous to the customer, the burden of showing the acceptable circumstances for doing so is on the [retail firm] member. [Examples of acceptable circumstances are where a customer's order is "crossed" with another retail firm which has a corresponding order on the other side, or where the identity of the retail firm, if known, would likely cause undue price movements adversely affecting the cost or proceeds to the customer.]
      ([d]c) Failure to maintain or adequately staff an over-the-counter order room or other department assigned to execute customers' orders cannot be considered justification for executing away from the best available market; nor can channeling orders through a third party as described above as reciprocation for service or business operate to relieve a member of [his] its obligations under this Rule. However, the channeling of customers' orders through a broker's broker or third party pursuant to established correspondent relationships under which executions are confirmed directly to the member acting as agent for the customer, such as where the third party gives up the name of the [retail] firm, are not prohibited if the cost of such service is not borne by the customer.
      ([e]d) A member through [whom] which an [retail] order is channeled, as described above, and [who] that knowingly is a party to an arrangement whereby the initiating member has not fulfilled [his] its obligations under this Rule, will also be deemed to have violated this Rule.
      ([f]e) The obligations described in paragraphs (a) through ([e]d) above exist not only where the member acts as agent for the account of [his] its customer but also where [retail] transactions are executed as principal and contemporaneously offset. Such obligations [do not relate to] are distinct from the reasonableness of commission rates, markups or markdowns, which are governed by NASD Rule 2440 and IM-2440.
      (f)
      (1) A member will be deemed to have met the obligations described in paragraphs (a) through (e) above with respect to an order if:
      (A) the order is for a non-U.S. traded security;
      (B) the member has adopted written policies and procedures regarding its handling of orders for non-U.S. traded securities that are reasonably designed to obtain the most favorable terms available for the customer;
      (C) the member reviews those policies and procedures at least annually, or more frequently as appropriate, to assess the quality of execution venues included in the member's policies and procedures to determine whether they provide for the most favorable terms reasonably available and whether the policies and procedures need to be updated or revised;
      (D) the member has obtained the consent of the customer to the member's policies and procedures regarding its handling of orders for non-U.S. traded securities; and
      (E) the member handles the order in accordance with its policies and procedures.
      (2) For purposes of this paragraph (f):
      (A) the term "non-U.S. traded security" means any non-exchange-listed security issued by a corporation or other entity incorporated or organized under the laws of any foreign country for which there is no quotation or indication of interest displayed in any quotation medium in the United States at the time the member receives the order; and
      (B) the term "quotation medium" means any system of general circulation to brokers or dealers that regularly disseminates quotations of identified brokers or dealers or any publication or electronic communications network or other device that is used by brokers or dealers to make known to others their interest in transactions in any security, including offers to buy or sell at a stated price or otherwise, or invitations of offers to buy or sell.
      [(g)
      (1) Except as provided in subparagraph (3) below, in any transaction for or with a customer pertaining to the execution of an order in a non-exchange-listed security (as defined in the Rule 6600 Series), a member or person associated with a member shall contact and obtain quotations from three dealers (or all dealers if three or less) to determine the best inter-dealer market for the subject security.]
      [(2) Members that display priced quotations on a real-time basis for a non-exchange-listed security in two or more quotation mediums that permit quotation updates on a real-time basis must display the same priced quotations for the security in each medium.]
      [(3) The requirements described in subparagraph (1) above shall not apply:]
      [(A) when two or more priced quotations for a non-exchange-listed security are displayed in an inter-dealer quotation system that permits quotation updates on a real-time basis; or]
      [(B) to any transaction for or with a customer pertaining to the execution of an order in a non-exchange-listed security of a foreign issuer that is part of the FTSE All-World Index if such transaction is executed during the regular business hours of the foreign market for the foreign security and no trading halt or other similar trading or quoting restriction is in effect in any foreign market on which such foreign security is listed; or]
      [(C) to any transaction for or with a customer pertaining to the execution of an order in a non-exchange-listed security that is listed on a Canadian exchange, provided that (i) such order is executed by the member or a person associated with the member on a Canadian exchange in an agency or riskless principal capacity; and (ii) the member or a person associated with the member conducts, pursuant to NASD Rule 2320(a) and the duty of best execution, regular and rigorous reviews of the quality of the execution of such orders in such securities.]
      [(4) Definitions]

      [For purposes of this paragraph (g):]
      [(A) The term "inter-dealer quotation system" means any system of general circulation to brokers or dealers that regularly disseminates quotations of identified brokers or dealers.]
      [(B) The term "quotation medium" means any inter-dealer quotation system or any publication or electronic communications network or other device that is used by brokers or dealers to make known to others their interest in transactions in any security, including offers to buy or sell at a stated price or otherwise, or invitations of offers to buy or sell.]
      [(5) Pursuant to the Rule 9600 Series, the staff, for good cause shown, after taking into consideration all relevant factors, may exempt any transaction or classes of transactions, either unconditionally or on specified terms, from any or all of the provisions of this paragraph if it determines that such exemption is consistent with the purpose of this Rule, the protection of investors, and the public interest.]

      * * * * *

      [IM-2320. Interpretive Guidance with Respect to Best Execution Requirements]2

      • • • Supplementary Material:

      [Rule 2320(a) requires, among other things, that a member or person associated with a member comply with Rule 2320(a) when customer orders are routed to it from another broker/dealer for execution. This Interpretive Material addresses certain interpretive questions concerning the applicability of the best execution rule.]

      .01 Execution of Customer Market Orders.—A member must make every effort to execute a customer market order that it receives fully and promptly.
      .02 Definition of "Market."—[The term "market" has been in the text of Rule 2320 since its adoption, but it is an undefined term.] For the purposes of Rule 5310 and the accompanying Supplementary Material [2320], the term "market" or "markets" is to be construed broadly, and it encompasses a variety of different venues, including, but not limited to, market centers that are trading a particular security. This expansive interpretation is meant to both inform broker[/]-dealers as to the breadth of the scope of venues that must be considered in the furtherance of their best execution obligations and to promote fair competition among broker[/]-dealers, exchange markets, and markets other than exchange markets, as well as any other venue that may emerge, by not mandating that certain trading venues have less relevance than others in the course of determining a firm's best execution obligations.
      .03 Best Execution and Debt Securities.—Rule 5310(a)(1)(D) [2320(a)(4)] provides that one of the factors used to determine if a member has used reasonable diligence in exercising best execution is the "accessibility of the quotation." ["location and accessibility to the customer's broker/dealer of primary markets and quotations sources."] In the context of the debt market, this means that, when quotations are available, [NASD] FINRA will consider the ["]accessibility of such quotations["] when examining whether a member has used reasonable diligence. For purposes of debt securities, the term "quotation" refers to either dollar (or other currency) pricing or yield pricing. [NASD notes, however, that a]Accessibility is only one of the non-exhaustive reasonable diligence factors set out in Rule 5310(a)(1) [2320]. In the absence of accessibility, members are not relieved from taking reasonable steps and employing their market expertise in achieving the best execution of customer orders.
      .04 Best Execution and Executing Brokers.—[Lastly, NASD is clarifying that a] A member's duty to provide best execution in any transaction "for or with a customer of another broker[/]-dealer" does not apply in instances when another broker[/]-dealer is simply executing a customer order against the member's quote. [Stated in another manner, t]The duty to provide best execution to customer orders received from other broker[/]-dealers arises only when an order is routed from the broker[/]-dealer to the member for the purpose of order handling and execution. This clarification is intended to draw a distinction between those situations in which the member is acting solely as the buyer or seller in connection with orders presented by a broker[/]-dealer against the member's quote, as opposed to those circumstances in which the member is accepting order flow from another broker[/]-dealer for the purpose of facilitating the handling and execution of such orders.
      .05 Use of a Broker's Broker.—Paragraph (b) of the Rule provides that when a member cannot execute directly with a market but must employ a broker's broker or some other means in order to ensure an execution advantageous to the customer, the burden of showing the acceptable circumstances for doing so is on the member. Examples of acceptable circumstances are where a customer's order is "crossed" with another firm that has a corresponding order on the other side, or where the identity of the firm, if known, would likely cause undue price movements adversely affecting the cost or proceeds to the customer.
      .06 Orders Involving Non-Exchange-Listed Securities with Limited Quotation Information.—Although the best execution requirements in Rule 5310 apply to orders in all securities, markets for securities differ dramatically. One of the areas in which a member must be especially diligent in ensuring that it has met its best execution obligations is with respect to customer orders involving non-exchange-listed securities for which there are limited quotations available. Each member must have written policies and procedures in place that address the steps the member will take to determine the best inter-dealer market for such a security in the absence of multiple quotations and must document its compliance with those policies and procedures. For example, a member should analyze pricing information based on other data, such as previous trades in the security, to determine whether the resultant price to the customer is as favorable as possible under prevailing market conditions. In these instances, a member should generally seek out other sources of potential liquidity, which may include contacting and obtaining quotations from other dealers (e.g., other firms that the member has traded with in the past in the security).
      .07 Customer Instructions Regarding Order Handling.—If a member receives an unsolicited instruction from a customer to route that customer's order to a particular market for execution, the member is not required to make a best execution determination beyond the customer's specific instruction. Members are, however, still required to process that customer's order promptly and in accordance with the terms of the order. Where a customer has directed that an order be routed to another specific broker-dealer that is also a FINRA member, the receiving broker-dealer to which the order was directed would be required to meet the requirements of Rule 5310 with respect to its handling of the order.
      .08 Regular and Rigorous Review of Execution Quality.—
      (a) No member can transfer to another person its obligation to provide best execution to its customers' orders. A member that routes customer orders to other broker-dealers for execution on an automated, non-discretionary basis, as well as a member that internalizes customer order flow, must have procedures in place to ensure the member periodically conducts regular and rigorous reviews of the quality of the executions of its customers' orders (as opposed to an order-by-order review). The review must be conducted on a security-by-security, type-of-order bases (e.g., limit order, market order, and market on open order). At a minimum, a member should conduct such reviews on a quarterly basis; however, members should consider, based on the firm's business, whether more frequent reviews are needed.
      (b) In conducting its regular and rigorous review, a member must determine whether any material differences in execution quality exist among the markets trading the security and, if so, modify the member's routing arrangements or justify why it is not modifying its routing arrangements. To assure that order flow is directed to markets providing the most beneficial terms for their customers' orders, the analysis must compare, among other things, the quality of the executions the member is obtaining via current order routing and execution arrangements (including the internalization of order flow) to the quality of the executions that the member could obtain from competing markets. In reviewing and comparing the execution quality of its current order routing and execution arrangements to the execution quality of other markets, a member should consider the following factors:
      (1) material price improvement opportunities (i.e., the difference between the execution price and the best quotes prevailing at the time the order is received by the market);
      (2) material differences in price disimprovement (i.e., situations in which a customer receives a worse price at execution than the best quotes prevailing at the time the order is received by the market);
      (3) the likelihood of execution of limit orders;
      (4) the speed of execution;
      (5) the size of execution;
      (6) transaction costs;
      (7) customer needs and expectations; and
      (8) the existence of internalization or payment for order flow arrangements.
      (c) An introducing firm that routes its order flow to its clearing firm or other executing broker-dealer can rely on the clearing or executing firm's regular and rigorous review as long as the statistical results and rationale of the review are fully disclosed to the introducing firm and the introducing firm periodically reviews how the clearing or executing firm is conducting that review, as well as the results of that review.

      * * * * *

      PROPOSED FINRA MULTIPLE QUOTATION RULE

      6480. Displaying Priced Quotations in Multiple Quotation Mediums3

      (a) Members that display priced quotations on a real-time basis for a non-exchange-listed security in two or more quotation mediums that permit quotation updates on a real-time basis must display the same priced quotations for the security in each medium.
      (b) For purposes of paragraph (a), the term "quotation medium" means any system of general circulation to brokers or dealers that regularly disseminates quotations of identified brokers or dealers or any publication or electronic communications network or other device that is used by brokers or dealers to make known to others their interest in transactions in any security, including offers to buy or sell at a stated price or otherwise, or invitations of offers to buy or sell.

      1 The draft text is marked to show changes between NASD Rule 2320 and proposed FINRA Rule 5310. FINRA has previously filed proposed amendments to the interpositioning provisions of NASD Rule 2320 with the SEC. See SR-FINRA-2007-024. The proposed amendments to the interpositioning provisions of the rule, which are also reflected in the draft text, have not been noticed for comment by the SEC. FINRA is not seeking comment on the proposed amendments to the interpositioning provisions of the rule.

      2 The draft text is marked to show changes between IM-2320 and the Supplementary Material to proposed FINRA Rule 5310.

      3 Proposed FINRA Rule 6480 adopts the requirements previously codified in NASD Rule 2320(g)(2) and (g)(4).

    • 08-79 SEC Approves Rules Establishing Procedures for Arbitrators Considering Expungement Requests; Effective Date: January 26, 2009

      View PDF

      Expungement

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      NASD Rule 2130
      FINRA Rule 12800
      FINRA Rule 12805
      FINRA Rule 13800
      FINRA Rule 13805
      NTM 04-16
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Registration
      Senior Management
      Key Topic(s)

      Arbitration
      Central Registration Depository
      Code of Arbitration Procedure
      Dispute Resolution
      Expungement

      Executive Summary

      Effective January 26, 2009, FINRA will implement new procedures for arbitrators to follow when considering requests for expungement relief under NASD Rule 2130. The SEC approved new FINRA Rule 12805 of the Code of Arbitration Procedure for Customer Disputes and new FINRA Rule 13805 of the Code of Arbitration Procedure for Industry Disputes.1 Accordingly, arbitrators considering a request for expungement relief under Rule 2130 are required to:

      • Hold a recorded hearing session by telephone or in person;
      • In cases involving a settlement, review the settlement documents to examine the amount paid to any party and any other terms and conditions of the settlement;
      • Provide a brief written explanation of the reasons for ordering expungement; and
      • Assess forum fees for hearing sessions held solely for the purpose of considering expungement against the parties requesting the relief.

      The text of Rules 12805 and 13805 is set forth in Attachment A. The rules apply to expungement orders issued by arbitrators on or after January 26, 2009.

      Questions concerning this Notice should be directed to: Richard W. Berry, Vice President and Director of Case Administration, FINRA Dispute Resolution, at (212) 858-4307 or richard.berry@finra.org; or Margo A. Hassan, Counsel, FINRA Dispute Resolution, at (212) 858-4481 or margo.hassan@finra.org.

      Background & Discussion

      Background

      Members of the securities industry, state and federal regulators, and self-regulatory organizations use the Central Registration Depository (CRD® or CRD system). CRD, an online registration and licensing system, contains administrative and disclosure information about broker-dealers and associated persons. Although public investors cannot access CRD, much of the information in that system is available to them through FINRA BrokerCheck.2 Accurate and complete reporting in CRD, including the reporting of required customer dispute information, is an important aspect of investor protection.

      FINRA operates CRD pursuant to policies developed jointly with the North American Securities Administrators Association (NASAA). FINRA works with the SEC, NASAA, other members of the regulatory community, and broker-dealer firms to establish policies and procedures reasonably designed to ensure that information submitted to and maintained in the CRD system is accurate and complete. These procedures, among other things, cover expungement of information from CRD. FINRA implemented Rule 2130 (effective April 12, 2004) to govern the expungement of customer dispute information from the CRD system.3 In connection with the implementation of Rule 2130, FINRA required all arbitrators on its roster to take mandatory training on the requirements of Rule 2130.

      Discussion

      FINRA has adopted FINRA Rules 12805 and 13805 to establish specific procedures that arbitrators must follow before ordering expungement of customer dispute information from the CRD system consistent with NASD Rule 2130. The new procedures ensure that arbitrators have the opportunity to consider the facts that support or weigh against a decision to grant expungement. The procedures add transparency to the process and safeguards designed to ensure that the extraordinary relief of expungement is granted only under appropriate circumstances.

      The following questions and answers provide more detail on the purpose of the rules and how they will be applied.

      What steps must the arbitration panel take before it may order expungement of information related to arbitration cases from an associated person's CRD record?

      • The arbitration panel must hold a recorded hearing session by telephone or in person regarding the appropriateness of expungement.
      • In cases involving settlements, the arbitration panel must review the settlement documents, consider the amount paid to any party, and consider any other terms and conditions of the settlement that might raise concerns about the associated person's involvement in the alleged misconduct before awarding expungement.
      • The arbitration panel must indicate which of the grounds for expungement under Rule 2130(b)(1)(A)–(C) serve as the basis for their expungement order, and provide a brief written explanation of the reasons for ordering expungement.
      • The arbitration panel must assess against the parties requesting expungement relief all forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement.

      What are the grounds for expungement under Rule 2130(b)(1)(A)–(C)?

      (A) The claim, allegation, or information is factually impossible or clearly erroneous;
      (B) The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; or
      (C) The claim, allegation, or information is false.

      What will happen if, on the effective date of the rule, arbitrators are about to issue an award containing an order to expunge customer dispute information from the CRD system, but no hearing was held on the expungement issue?

      Such an award must comply with the new procedures. In this situation, FINRA will require the arbitrators to convene (or reconvene) the parties for a telephone or in-person hearing to resolve the expungement issue. In cases involving settlements, the arbitrators will be required to review the settlement documents and consider the amount of payments made to any party and any other terms and conditions of the settlement. The arbitrators will be required to assess all forum fees for the hearing session against the parties that requested expungement relief, and to provide a brief written explanation of the reasons for ordering expungement.

      What happens when an expungement request is made in a Simplified Arbitration case?

      In cases being administered under FINRA Rules 12805 or 13805 (Simplified Arbitration), a hearing on the merits normally is held only at the request of a customer or claimant, respectively. Rules 12805 and 13805 make it clear that, if parties request expungement relief in such cases, the arbitrator will hold a hearing session to determine the appropriateness of the request even if the customer or claimant did not request a hearing on the merits. The arbitrator will assess any forum fees for hearing sessions associated with a request for expungement against the parties making the request.

      Do the new rules apply to expungement of non-customer dispute information in intra-industry disputes?

      No, the new rules only apply to the expungement of customer dispute information. The rules do not affect FINRA's current practice of permitting expungement, without judicial intervention, of information from CRD as directed by arbitrators in intra-industry arbitration awards in which the arbitration panel states that expungement relief is being granted because of the defamatory nature of the information ordered expunged.4

      Are arbitrators required to complete training or otherwise familiarize themselves with the new rules (and accompanying procedures) prior to considering a request for expungement relief under Rule 2130?

      Yes, FINRA is requiring arbitrators to certify that they have familiarized themselves with new Rules 12805 and 13805. FINRA is revising its online expungement training module and is encouraging every arbitrator to take this free training course. In addition, arbitrators must certify that they have completed one or more of the training methods listed below.

      • Reviewing written correspondence with a question and answer that FINRA is sending to every arbitrator explaining the new rules.
      • Reviewing a broadcast email with the same content as the written correspondence that FINRA is sending to every arbitrator.
      • Listening to the audio workshop on expungement that FINRA broadcasted on December 10, 2008 (available at www.finra.org/ArbitrationMediation/Neutrals/Education/P009530).
      • Reading this Regulatory Notice.
      • Taking the revised online expungement training module that will be available in January 2009.
      • Reading an article on expungement that will be published in the arbitrator and mediator newsletter, The Neutral Corner, in January 2009.

      How will arbitrators certify that they have completed the required training?

      FINRA sent a letter to every arbitrator explaining how to fulfill the training requirement concerning the new expungement rules.5 Attached to the letter was a certification form for arbitrators to sign and return to FINRA. Arbitrators can also certify online by selecting the "Expungement Refresher Training" certification link located on FINRA's Web site (www.finra.org).

      Effective Date Provisions

      Rules 12805 and 13805 will become effective on January 26, 2009, and will apply to expungement orders issued by arbitrators on or after the effective date.


      1 Exchange Act Release No. 58886(October 30, 2008), 73 Federal Register 66086 (November 6, 2008) (File No. SR-FINRA-2008-010).

      2 FINRA BrokerCheck (www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm) is a free online tool to help investors check the background of current and former FINRA-registered securities firms and brokers.

      3 See NASD Notice to Members 04-16 (March 2004).

      4 See Notice to Members 04-16.

      5 All active arbitrators on FINRA's roster have already completed the online expungement training that has been required since 2004.


      ATTACHMENT A

      Code of Arbitration Procedure for Customer Disputes and Code of Arbitration Procedure for Industry Disputes

      ***

      Customer Code

      12805. Expungement of Customer Dispute Information under Rule 2130

      In order to grant expungement of customer dispute information under Rule 2130, the panel must:

      (a) Hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement. This paragraph will apply to cases administered under Rule 12800 even if a customer did not request a hearing on the merits.
      (b) In cases involving settlements, review settlement documents and consider the amount of payments made to any party and any other terms and conditions of a settlement.
      (c) Indicate in the arbitration award which of the Rule 2130 grounds for expungement serve(s) as the basis for its expungement order and provide a brief written explanation of the reason(s) for its finding that one or more Rule 2130 grounds for expungement applies to the facts of the case.
      (d) Assess all forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement against the parties requesting expungement relief.

      Industry Code

      13805. Expungement of Customer Dispute Information under Rule 2130

      In order to grant expungement of customer dispute information under Rule 2130, the panel must:

      (a) Hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement. This paragraph will apply to cases administered under Rule 13800 even if a claimant did not request a hearing on the merits.
      (b) In cases involving settlements, review settlement documents and consider the amount of payments made to any party and any other terms and conditions of a settlement.
      (c) Indicate in the arbitration award which of the Rule 2130 grounds for expungement serve(s) as the basis for its expungement order and provide a brief written explanation of the reason(s) for its finding that one or more Rule 2130 grounds for expungement applies to the facts of the case.
      (d) Assess all forum fees for hearing sessions in which the sole topic is the determination of the appropriateness of expungement against the parties requesting expungement relief.

    • 08-78 FINRA Announces SEC Approval and Effective Date for New Consolidated FINRA Rules Relating to Warrants, Options and Security Futures; Effective Date: February 17, 2009

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      SEC Approves New Consolidated FINRA Rules

      Regulatory Notice
      Notice Type

      Rule Approvals
      Consolidated Rulebook
      Referenced Rules & Notices

      FINRA Rule 2300 Series
      FINRA Rule 2350 Series
      FINRA Rule 2351
      FINRA Rule 2352
      FINRA Rule 2353
      FINRA Rule 2354
      FINRA Rule 2355
      FINRA Rule 2356
      FINRA Rule 2357
      FINRA Rule 2358
      FINRA Rule 2359
      FINRA Rule 2360
      FINRA Rule 2370
      Information Notice 03/12/08
      Information Notice 10/06/08
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topic(s)

      Effective Dates of Consolidated Rules
      FINRA Manual
      Options
      Rulebook Consolidation
      Security Futures
      Warrants

      Executive Summary

      Following the consolidation of NASD and the member regulation, enforcement and arbitration functions of NYSE Regulation into FINRA, FINRA established a process to develop a new consolidated rulebook (Consolidated FINRA Rulebook), which FINRA has discussed in previous Information Notices.1 In recent months, FINRA began proposing new consolidated rules in phases for approval by the SEC as part of the Consolidated FINRA Rulebook.2 In November 2008, the SEC approved the new consolidated FINRA Rules relating to warrants, options and security futures, which will take effect on February 17, 2009.

      Questions regarding this Notice should be directed to Kathryn Moore, Assistant General Counsel, Office of General Counsel (OGC), at (202) 974-2974 or to Erika L. Lazar, Senior Attorney, OGC, at (646) 315-8512.

      Discussion

      In November 2008, the SEC approved the following FINRA Rules for adoption as part of the Consolidated FINRA Rulebook:3

      • Rule 2351 (General Provisions Applicable to Trading in Index Warrants, Currency Index Warrants and Currency Warrants);
      • Rule 2352 (Account Approval);
      • Rule 2353 (Suitability);
      • Rule 2354 (Discretionary Accounts);
      • Rule 2355 (Supervision of Accounts);
      • Rule 2356 (Customer Complaints);
      • Rule 2357 (Communications with the Public and Customers Concerning Index Warrants, Currency Index Warrants and Currency Warrants);
      • Rule 2358 (Maintenance of Records);
      • Rule 2359 (Position and Exercise Limits; Liquidations);
      • Rule 2360 (Options); and
      • Rule 2370 (Security Futures).

      The attachment to this Notice sets forth additional information regarding these new consolidated rules and includes a hyperlink to the related rule filing. The filing provides, among other things, FINRA's statement of the purpose of the rule changes and, where applicable, exhibits showing the changes between the new rule text and the text of the NASD and/or Incorporated NYSE Rules as they exist in the Transitional Rulebook. Also, the text of the new FINRA Rules is available in the online FINRA Manual at www.finra.org/finramanual.4

      Rule Conversion Chart

      As discussed in additional detail in Information Notice 10/06/08 and Regulatory Notice 08-57, FINRA has posted a Rule Conversion Chart on FINRA's Web site to help firms become familiar with the new rules and show how the new rules relate to the NASD and/or Incorporated NYSE Rules in the Transitional Rulebook that they will replace.

      Firms should be aware that the chart is intended as a reference aid only. FINRA reminds firms that the chart does not in any way serve as a substitute for diligent review of the relevant new rule language. The Rule Conversion Chart is located at www.finra.org/ruleconversionchart.


      1 See Information Notice 10/06/08 (Rulebook Consolidation Process: Effective Dates of New Consolidated Rules; Introduction of Rule Conversion Chart); see also Information Notice 03/12/08 (Rulebook Consolidation Process).

      2 The current FINRA rulebook includes (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 member firms, the Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (Dual Members). The new FINRA Rules apply to all member firms, unless such rules have a more limited application by their terms. As the Consolidated FINRA Rulebook expands with the SEC's approval and with the new FINRA Rules taking effect, the rules in the Transitional Rulebook that address the same subject matter of regulation will be eliminated. When the Consolidated FINRA Rulebook is completed, the Transitional Rulebook will have been eliminated in its entirety.

      3 See Exchange Act Release No. 58932 (November 12, 2008), 73 FR 69696 (November 19, 2008) (Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval to a Proposed Rule Change, as Modified by Amendment No. 1; File No. SR-FINRA-2008-032).

      4 FINRA updates the rule text on its online Manual within two business days of SEC approval of changes to the rule text.


      Attachment A:

      List of Approved FINRA Rules (and Related Rule Filing)

      The SEC approved the following new FINRA Rules in November 2008. The effective date of these rules is February 17, 2009. The hyperlink to the rule filing is included.

      FINRA Rule Filing SR-FINRA-2008-032

      www.finra.org/Industry/Regulation/RuleFilings/2008/P038811

      The rule change adopts, with minor changes (1) NASD Rules 2840 through 2853 (regarding Trading in Index Warrants, Currency Index Warrants and Currency Warrants) as FINRA Rules 2350 through 2359; (2) NASD Rule 2860 (Options) as FINRA Rule 2360; and (3) NASD Rule 2865 (Security Futures) as FINRA Rule 2370. The rule change deletes the corresponding provisions in Incorporated NYSE Rules 414 (Index and Currency Warrants), 424 (Report of Options) and the Rule 700 Series (Option Rules).

      The warrants, options and security futures rules were adopted by FINRA to address the specific risks that pertain to these derivative securities, and to implement provisions of the federal securities laws and SEC rules.1 These rules include, among other things, provisions requiring specific disclosure documents, additional diligence in approving the opening of accounts, and specific requirements for confirmations, account statements, suitability, recordkeeping and reporting. The rules also contain provisions imposing limits on the size of an options or warrant position and on the number of options contracts or warrants that can be exercised during a fixed period.

      Rule/Series No. Rule Title
      Rule 2300 Series Special Products
      Rule 2350 Series Trading in Index Warrants, Currency Index Warrants and Currency Warrants
      Rule 2351 General Provisions Applicable to Trading in Index Warrants, Currency Index Warrants and Currency Warrants
      Rule 2352 Account Approval
      Rule 2353 Suitability
      Rule 2354 Discretionary Accounts
      Rule 2355 Supervision of Accounts
      Rule 2356 Customer Complaints
      Rule 2357 Communications with the Public and Customers Concerning Index Warrants, Currency Index Warrants and Currency Warrants
      Rule 2358 Maintenance of Records
      Rule 2359 Position and Exercise Limits; Liquidations
      Rule 2360 Options
      Rule 2370 Security Futures

      1 For example, SEA Rule 9b-1(d) requires a broker-dealer to furnish a customer with a copy of the options disclosure document before accepting an options order from a customer.

    • 08-77 Customer Account Statements: FINRA Provides Guidance on Estimated Annual Income and Estimated Yield

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      Customer Account Statements

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      NASD Rule 2210
      Suggested Routing

      Compliance
      Registered Representatives
      Key Topic(s)

      Customer Account Statements
      Estimated Annual Income
      Estimated Yield

      Executive Summary

      In recent years, broker-dealers have begun to provide estimates of income, dividend and yield information concerning specific securities in their customers' accounts. According to some broker-dealers that prepare and distribute customer account statements, customers consider this information important data in their customer account statements. Some customers may use the estimated annual income (EAI)1 and estimated yield (EY) to monitor and review the income and yield of securities they hold, while other customers may use EAI as a financial planning tool to estimate annual cash flow. FINRA is concerned that some customers might confuse EY with the actual performance of their investments, although EY is not designed to depict total investment returns or actual yields.

      This Notice provides guidance on how broker-dealers can best meet their responsibilities with respect to the presentation of estimated annual income and estimated yield in customer account statements. FINRA strongly encourages all broker-dealers that present EAI and EY in customer account statements to review this Notice carefully and take any necessary action.

      Questions concerning this Notice should be directed to Tom Pappas, Vice President and Director, Advertising Regulation, at (240) 386-4553.

      Background & Discussion

      Broker-dealers voluntarily provide estimated annual income (EAI) and estimated yield (EY) in customer account statements for a wide variety of securities that produce income, such as dividend-paying common stock, preferred stock, bonds, mutual funds, unit investment trusts, closed-end funds, direct participation programs and collateralized mortgage obligations.

      The manner in which EAI and EY are presented in customer account statements could raise a variety of regulatory concerns. By their very nature, EAI and EY merely "estimate" the income that a particular security will distribute every year, and the yield based on that estimated annual income and current price. This estimation of annual income and yield is often rough. If a customer trades the shares, then the number of shares that are owned at the time the statement is produced, a factor in the calculation of EAI, may vary from the number that will be held in the future. If the amount or frequency of an issuer's dividend payments fluctuate, then the actual income and yield of the security will fluctuate accordingly.

      EAI does not reflect the amount of income that the customer has already earned during the previous year from a particular security, and EY does not reflect the yield that the customer has already earned on that security. The number of units or shares that the customer owns at the time the statement is produced, a factor in the calculation of EAI and EY, may not be the same number that the customer owned throughout the year. Additionally, a decline in the share or unit price of a security, such as a bond fund share, will typically cause the EY to increase.

      Data Vendors

      Vendors that compile dividend and income data relevant to particular securities supply the dividend and income information to broker-dealers. In some cases, the vendor uses this data to calculate EAI and EY for their broker-dealer customers. In other cases, broker-dealers use this data to calculate EAI and EY themselves.

      Broker-dealers that include EAI and EY on customer account statements should be familiar with the criteria imposed by their vendors in order to understand the types of data they will receive and the extent to which the conversion of that data into EAI and EY is reasonable.

      The vendors often impose their own criteria on when they will provide the data to broker-dealers or when they will calculate EAI and EY. For example, a vendor may provide a broker-dealer with an indicated annual dividend (IAD) calculated by using either a projected or historical methodology. In a "projected" methodology, the vendor uses the latest regular cash dividend and the number of scheduled payments in any twelve-month period to determine the IAD; this is often the method used for equities. In a "historical" methodology, the vendor bases the IAD on the accumulated regular cash dividends paid during the previous twelve months or some other recent historical time period. The EAI is then derived by multiplying the total units of a given security in a customer's account by the annual interest or dividend figure for that security. EY typically is calculated by dividing the EAI by the product of (1) the price per share or unit owned and (2) the number of shares or units owned.2

      Therefore, broker-dealers should be familiar with those criteria, and should:

      • Request that their vendor provide them with the methodology used to derive dividend, income and yield data and require the vendor to update the broker-dealer if, and when, the vendor makes a significant change to this methodology.
      • Request that their vendor provide them with the manner in which the vendor classifies specific data (such as classification of income as capital gains, income or return of principal), the source of the data, and the manner in which dividend, income and yield data provided by the vendor are computed. Such computation information should provide sufficient detail for the broker-dealer to assess the appropriateness of the data for presentation or as the basis for computation of EAI or EY in a customer account statement.
      • To the extent feasible, include a requirement that the vendor provide this information in the broker-dealer's contract with the vendor.

      Disclosure

      Consistent with the standards of NASD Rule 2210(d)(1), broker-dealers should present EAI and EY in a fair and balanced manner and provide an appropriate context in which customers can evaluate this information. For example, the presentation of EAI and EY on customer account statements should be clearly distinguished from income received by the customer or the performance of a security (e.g., total return or actual yield). Language used to describe EAI and EY should not create confusion about the type, characteristics or significance of the EAI and EY information being presented.

      FINRA is particularly concerned with the reclassification of previously issued dividends as a return of principal with respect to some securities, such as closed-end investment companies, direct participation programs and real estate investment trusts. Even when the vendor or product sponsor, and not the broker-dealer, makes this reclassification, the resulting EAI and EY figures could confuse customers.

      In order to help customers more clearly understand EAI and EY, broker-dealers should, at a minimum, provide in substance the following disclosure in customer account statements that present EAI and EY data:

      • EAI and EY for certain types of securities could include a return of principal or capital gains in which case the EAI and EY would be overstated.
      • EAI and EY are estimates and the actual income and yield might be lower or higher than the estimated amounts.
      • EY reflects only the income generated by an investment. It does not reflect changes in its price, which may fluctuate.

      Calculation Methodologies

      Broker-dealers are responsible for using a method to calculate EAI and EY that is reasonable given that customers may rely on this information. The presentation of EAI and EY should reflect any change that can be reasonably known about a security, such as a scheduled change to the coupon rate of a debt security or a change in the dividend paid by an equity security.

      Several circumstances could undermine a broker-dealer's ability to meet its responsibilities to present EAI and EY in a fair and balanced manner, such as the inclusion of a special one-time dividend in the EAI calculation, which by its nature, is not expected to recur. Other examples include calculating EAI for:

      • A security that does not pay a dividend on a regular basis.
      • An issue in default.
      • A fixed income security that has paid its last coupon prior to maturity.

      If the broker-dealer believes there is a high probability that these concerns will arise and can not address the concerns by reasonably designed procedures, providing EAI or EY usually would not be appropriate.


      1 For purposes of this Notice, income and dividend information are referred to as "estimated annual income".

      2 EAI is typically calculated as follows:

      EAI = S*IAD

      Where:

      • S = number of shares or units owned on the day of the calculation; and
      • IAD = the indicated annual dividend.

      For example, if a customer owns 100 shares of an equity security for which the announced quarterly dividend is $.30 per share, then the customer's EAI will be presumed to be $120 per year (100 shares * $1.20).

      EY is typically calculated as follows:

      EY = EAI/(Ps * S)

      Where:

      • EAI = Estimated Annual Income;
      • Ps = Price per share or unit owned on the day of the calculation; and
      • S = Number of shares owned on the day of the calculation.

      For example, if a customer owns 100 shares of an equity security and has an EAI of $100 and if the price of each share as of the day of the calculation is $15, then the customer's yield would be presumed to be 6.7 percent. This is derived from the following calculation: $100 ÷ ($15*100) = .067.

    • 08-76 Technology Changes for Reporting Clearing Methods and Arrangements; Effective Date: December 15, 2008

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      Reporting Clearing Arrangements

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      NASD Rule 3230
      NYSE Rule 382
      NYSE Rule 416A
      NYSE Rule 407A
      SEA Rule 15c3-3
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Systems
      Key Topic(s)

      Electronic Filing Requirements
      Firm Clearing Arrangement Filings
      NYSE Electronic Filing Platform
      NYSE Firm Profiler

      Executive Summary

      As part of FINRA's ongoing effort to integrate NASD and NYSE technology systems, FINRA is revising the information reporting process regarding firms' clearing arrangements, memberships in clearing organizations and certain other information described in this Notice.

      Effective December 15, 2008, member firms that carry accounts and/or clear transactions or act as an intermediary to facilitate the clearance of accounts through another firm must report their clearing method and clearing arrangements through the FINRA Firm Gateway, a tool that provides firms consolidated access to FINRA applications. Firms that are members of both FINRA and the NYSE must report their clearing method and arrangements under Incorporated NYSE Rule 416A. FINRA-only member firms are requested to provide this information on a voluntary basis. However, as part of FINRA's rulebook consolidation, FINRA staff anticipates proposing a similar rule that would apply to all FINRA member firms.

      Member firms that do not carry accounts, clear transactions or act as an intermediary in a clearing arrangement are not subject to this reporting obligation. Such firms will, however, be able to view information pertaining to them that has been filed by the reporting firms and will receive an email notice if a reporting firm adds or removes them as a correspondent.

      Questions related to the information to be reported under this Notice should be directed to Ornella Bergeron at ornella.bergeron@finra.org or (646) 315-8410. Technical questions should be directed to Elena Shuvalov at elena.shuvalov@finra.org or (240) 386-4747.

      Background & Discussion

      Beginning December 15, 2008, firms that carry accounts and/or clear transactions or act as an intermediary to facilitate the clearance of accounts through another firm must use the FINRA Firm Clearing Arrangement Form to report their clearing data, including (as applicable):

      • Firm clearing method and clearing arrangement details**;
      • Memberships in clearing organizations;
      • SEA Rule 15c3-3 reserve bank account information; and
      • EDP System/Books and Records Information.

      FINRA will pre-populate the Firm Clearing Arrangement Form with information that it has in its possession.1 Firms must either update the pre-populated information in the new system or make their initial submission of the Firm Clearing Arrangement Form information—available through the Firm Gateway at https://firms.finra.org— by January 31, 2009. Firms also must update the form on an ongoing basis with any changes no later than 30 days after the information has changed. All information collected through the Firm Clearing Arrangement Form may be accessed by firms through a new Firm Profile on the Firm Gateway.2

      FINRA Firm Clearing Arrangements Form Data Elements

      The FINRA Firm Clearing Arrangements Form (see Attachment A) incorporates the data elements that are currently collected via the NYSE Firm Profiler system3 related to a firm's clearing arrangements and membership in clearing organizations and also includes additional data elements that were not previously included in the NYSE Firm Profiler system or any NASD system.

      The following is a list of the data elements:

      Firm Clearing Method

      • How a firm clears and settles transactions. Options include:
      • Carries accounts or maintains funds or securities or provides clearing services for a correspondent/introducing broker-dealer.
      • Carries and clears futures accounts or provides clearing services as a futures commission merchant under the Commodity Exchange Act.
      • Acts as a broker for municipal securities brokers and clears municipal accounts.
      • Clears fixed income transactions broker-to-broker.
      • Self clears and carries general securities accounts, which may include mutual funds or variable annuities.
      • Self clears but does not carry general securities accounts, which may include mutual funds or variable annuities.
      • Self clears only redeemable shares of registered investment companies or of interests or participations in an insurance company separate account directly from or to the issuer on other than a subscription way basis.
      • Is either an introducing or self-clearing firm and also acts as an intermediary to a clearing firm for the purpose of clearing or settling accounts for another broker or dealer.

      Firm Clearing Arrangement Details

      • If a firm clears transactions for other firms, a list of the introducing firms, including Introducing Firm CRD#, Introducing Firm Name, Approximate Number of Accounts, Type of Arrangement (Omnibus or Fully Disclosed), Type of Accounts (Proprietary, Customer or Dealer), Type of Firm (Foreign or Domestic) and Arrangement Effective Date.
      • If a firm acts as an intermediary to a clearing firm for the purpose of settling accounts for another broker or dealer, a list of the introducing firms including Firm CRD#, Firm Name and Arrangement Effective Date.
      • If a firm clears fixed income transactions broker-to-broker, a list of the banks where the transaction(s) are cleared including Bank Name and Effective Date.

      Clearing Organization Membership Details

      • Whether the firm is a member of National Securities Clearing Corporation (NSCC), Fixed Income Clearing Corporation (GSD or MBSD), Options Clearing Corporation (OCC) or a FUND/SERV Participant.
      • Clearing Organization Member Identifiers
      • NSCC Number(s).
      • FICC Number(s).
      • OCC Number(s).
      • FUND/SERV Participation Level

      SEA Rule 15c3-3 (Reserve) Bank Account Information

      • Indication of whether firm maintains a SEA Rule 15c3-3 (Reserve) bank account.
      • Name(s) of bank(s) where a SEA Rule 15c3-3 bank account is held.

      Electronic Data Processing System Information

      • Name of the electronic data processing system(s).
      • Description of the electronic data processing system(s).
      • Effective date when system was deployed.

      Pre-populating of Clearing Arrangement Details and Memberships in Clearing Organizations

      FINRA has certain information regarding firms' clearing arrangement details and memberships in clearing organizations, obtained from the NYSE Firm Profiler system and Rule 3230(c) filings made by firms. Each clearing firm for which FINRA has such information, received a spreadsheet listing such information and was requested to verify the accuracy of the spreadsheet and add any missing data prior to December 15. The information in these spreadsheets and any other updates provided by firms will be used to pre-populate the FINRA Firm Clearing Arrangement Form data elements.

      Submitting the FINRA Firm Clearing Arrangements Form

      Clearing, carrying and intermediary firms will have access to the FINRA Firm Clearing Arrangement Form and will be able to submit information from the "'Forms and Filings" tab on the FINRA Firm Gateway.

      FINRA will grant access to the Firm Clearing Arrangement Form to those individuals designated by firms as firm administrators for purposes of accessing the FINRA FOCUS applications. The firm administrator(s) should assign access privileges to the FINRA Firm Clearing Arrangement Form to other users at their firm. Any firm that is required to file the form and has not been granted the firm administrator privilege must request the new privilege as soon as possible, but no later than January 15, 2009, by contacting the FINRA Call Center at (301) 869-6699.

      Notification Sent to Introducing /Correspondent Firms

      When a clearing firm files the form adding or removing an arrangement with an introducing/correspondent firm, the chief compliance officer and chief financial officer listed in the FINRA Contact System for the introducing/correspondent firm will receive an email informing them of the clearing firm's filing. The email will list the change (addition or deletion) by the clearing firm and contain information on how to resolve any discrepancies. These emails will also be sent to the introducing firm's chief compliance officer and chief financial officer when an intermediary firm files the FINRA Firm Clearing Arrangement Form, adding or removing the introducing firm.

      New Firm Profile Information Available on the Firm Gateway on December 15, 2008

      All member firms will have access to the new Firm Profile information available on the Firm Gateway system effective December 15, 2008. The Firm Profile compiles information contained in various FINRA systems, including the information required to be submitted via the Firm Clearing Arrangement Form. In addition to the Firm Clearing Arrangement Form, firms may also use Firm Profile to view and update their information. Introducing firms should contact their clearing firm if they have questions about the details of the clearing arrangement contained in their Firm Profile.

      Retirement of the NYSE Firm Profiler System

      All NYSE member firms are expected to file their final electronic certification for the fourth quarter of 2008 through the NYSE Firm Profiler system by December 31, 2008. The NYSE Firm Profiler system will be retired in January 2009.

      Other data collected in the NYSE Firm Profiler system will be collected and maintained in the following FINRA systems and form filings upon retirement of that system.

      Contact Information

      The FINRA Contact System will serve as the reporting system for all key contact information required by FINRA rules. The contact information that currently exists in the NYSE Firm Profiler system will not be migrated to the FINRA Contact System.

      NYSE Rule 407A Information

      All NYSE Rule 407A information that is currently filed in the NYSE Firm Profiler system will be migrated to the FINRA Firm Gateway. NYSE members that are required to report account information pursuant to NYSE Rule 407A will have access to the NYSE Rule 407A form via the Firm Gateway system beginning December 15, 2008. NYSE members will be able to access and submit this filing from the Forms and Filings tab on the Firm Gateway.

      Firm Name, Address, Legal Type, Owner and Control Affiliates

      Information pertaining to a firm's owners and officers, name and address information, legal entity type, and control affiliates information will be maintained via Form BD in the Web CRD system, which is also accessible from the Firm Gateway.


      ** The FINRA Firm Clearing Arrangement Form provides an electronic notification of current and new arrangements; the FINRA Firm Clearing Arrangement Form does not replace the review and/or approval requirements of NYSE Rule 382 or NASD Rule 3230. Firms should continue to follow their current process for obtaining regulatory approval of their clearing arrangements in accordance with NYSE Rule 382 or NASD Rule 3230.

      1 See "Pre-populating of Clearing Arrangement Details and Memberships in Clearing Organizations" section of this Notice.

      2 See "New Firm Profile Information Available on the Firm Gateway on December 15, 2008" section of this Notice.

      3 See "Retirement of the NYSE Firm Profiler System" section of this Notice.


      ATTACHMENT A

      FIRM NAME:
      ____________________________________________________________________

      FIRM CRD#:
      ____________________________________________________________________

      FIRM CLEARING ARRANGEMENTS

      Firm Clearing Method

      Select how your firm clears and settles transactions:

      a. Carries accounts or maintains funds or securities or provides clearing services for a correspondent/introducing broker-dealer
      b. Carries and clears futures accounts or provides clearing services as a futures commission merchant under the Commodity Exchange Act
      c. Acts as a municipal securities brokers' broker and clears municipal accounts
      d. Clears fixed income transactions broker-to-broker
      e. Self clears and carries general securities accounts, which may include mutual funds or variable annuities
      For customer accounts
      For proprietary accounts
      f. Self clears but does not carry general securities accounts, which may include mutual funds or variable annuities
      g. Self clears only redeemable shares of registered investment companies or of interests or participations in an insurance company separate account directly from or to the issuer on other than a subscription way basis
      h. Introduces to a clearing firm
      i. Is either an introducing or self-clearing firm and also acts as an intermediary to a clearing firm for the purpose of settling accounts for another broker or dealer
      j. Relies on an intermediary to facilitate the clearance of its accounts by a clearing and carrying firm
      k. No Clearing Arrangement—If No Clearing Arrangement, explain:
      ________________________________________________________________ ________________________________________________________________
      l. Other—If Other, explain:
      ________________________________________________________________ ________________________________________________________________

      The Tri-Party Firm Details will display and be required if the option i is selected from the above list.

      Tri-Party Firm Details

      Provide the CRD number and name of the firm(s) for whom you act as an intermediary to facilitate the clearance of accounts by a clearing and carrying firm:

      CRD# Firm Name Effective Date
           
           

      The Introducing/Correspondent Firm Details and Electronic Data Processing System Details sections will display and be required if option a is selected from above list

      Introducing/Correspondent Firm Details

      Provide the CRD number, name, approximate number of accounts, the type of accounts and the effective date of the firm(s) for whom you carry or clear transactions:

      CRD# Firm Name Approximate# of Accounts Foreign or Domestic Type of Arrangement Type of Accounts Effective Date
            Foreign
      Domestic
      Omnibus
      Fully Disclosed
      Proprietary
      Customer
      Dealer
       
            Foreign
      Domestic
      Omnibus
      Fully Disclosed
      Proprietary
      Customer
      Dealer
       

      Electronic Data Processing System Details

      Provide the Name and Description for all of your Electronic Data Processing Systems:

      Electronic Data Processing System Name System Description Effective Date
           
           

      The Fixed Income Transaction Details section will display and be required if the option d is selected from the above list

      Fixed Income Transaction Details

      Provide the name of the bank where the transactions are cleared:

      Bank Name Effective Date
         

      Clearing Organization Membership Details

      Select whether your firm is a member of the following:

      National Securities Clearing Corporation (NSCC)
      Provide your firm's NSCC Number(s):
      NSCC# ___________________________ NSCC# ________________________________
      NSCC# ____________________________NSCC# ________________________________

      Government Securities Division of Fixed Income Clearing Corporation (FICC)

      Mortgage-Backed Securities Division of Fixed Income Clearing Corporation (FICC)
      Provide your firm's FICC Number(s):
      FICC# ___________________________FICC# _________________________________
      FICC# ___________________________FICC# _________________________________

      Options Clearing Corporation (OCC)
      Provide your firm's OCC Number(s):
      OCC# ______________________________OCC# _______________________________
      OCC# ______________________________OCC# _______________________________

      FUND/SERV Participant
      Indicate the Level(s) that your firm participates in FUND/SERV:

      Level Zero

      Level One

      Level Two

      Level Three

      Level Four

      Does your firm maintain a 15c3-3(Reserve) bank account(s)? Yes No

      If yes, provide the name of the bank where the account is held:

      Bank Name
      ________________________________________________________________________

      Name of Person Filing Form:
      ________________________________________________________________________

      Title of Person Filing Form:
      ________________________________________________________________________

      Date:
      ________________________________________________________________________

    • 08-75 Guaranteed Senior Unsecured Debt Is a TRACE-Eligible Security

      View PDF

      FDIC-Guaranteed Securities and TRACE Eligibility

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      FINRA Rule 6210(a)
      Section 4(2) of the Securities Act
      Securities Act Rule 144A
      Suggested Routing

      Compliance
      Executive Representatives
      Fixed Income
      Legal
      Operations
      Systems
      Trading
      Training
      Key Topic(s)

      FDIC-Guaranteed Securities
      TRACE-Eligible Securities

      Under a new Federal Deposit Insurance Corporation (FDIC) program, the "Temporary Liquidity Guarantee Program"(Program), certain senior unsecured debt securities that are issued by eligible financial institutions, such as insured U.S. depository institutions and U.S. bank holding companies, which comply with the applicable regulations of the Program and the Debt Guarantee component of the Program, are fully and unconditionally guaranteed by the FDIC (FDIC—Guaranteed Senior Unsecured Debt).

      FDIC—Guaranteed Senior Unsecured Debt is a TRACE-eligible security if it is registered under the Securities Act of 1933 or issued pursuant to Section 4(2) of the Securities Act and purchased or sold pursuant to Securities Act Rule 144A and otherwise complies with NASD Rule 6210(a).1 Firms must report transactions in such FDIC-Guaranteed Senior Unsecured Debt to TRACE, including transactions that were executed prior to this Notice.

      Questions concerning this Notice should be directed to:

      •  FINRA Operations, at (866) 776-0800;
      •  Patrick S. Geraghty, Director, Fixed Income, Market Regulation, at (240) 386-4973;
      •  Elliot R. Levine, Chief Counsel, Transparency Services, at (202) 728-8405; or
      •  Sharon Zackula, Associate Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-8985.

      1 FINRA is aware that on November 24, 2008, the staff of the Securities and Exchange Commission (SEC), Division of Corporate Finance, issued an interpretation that the FDIC-Guaranteed Senior Unsecured Debt would be "considered guaranteed by an instrumentality of the United States for purposes of Section 3(a)(2) of the Securities Act of 1933." See Letter from Thomas J. Kim (Kim), Chief Counsel and Associate Director, Division of Corporation Finance, SEC, to Federal Deposit Insurance Corporation (FDIC), Attn: John V. Thomas (Thomas), Acting General Counsel, dated November 24, 2008 (SEC Interpretive Letter), responding to a letter from Thomas, Acting General Counsel, FDIC, to Kim, Chief Counsel and Associate Director, Division of Corporate Finance, SEC, dated November 24, 2008 (FDIC Letter).

      The terms and conditions of the FDIC's "Temporary Liquidity Guarantee Program," including the Debt Guarantee Program component of the Program, are set forth in final rules at 12 CFR Part 370, "Temporary Liquidity Guarantee Program," which were adopted on November 21, 2008. 12 CFR §§ 370.1 et seq. See 73 FR 72244 (November 26, 2008).

    • 08-74 FINRA Provides Guidance on Amendments to FINRA Rules Relating to SEC Regulation M; Effective Date: December 15, 2008

      View PDF

      Regulation M

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      FINRA Rule 5110
      FINRA Rule 5190
      FINRA Rule 6275
      FINRA Rule 6420
      FINRA Rule 6470
      FINRA Rule 6540
      NYSE Rule 392
      NASD Rule 2710
      NASD Rule 4619A
      NASD Rule 6610
      Regulatory Notice 08-57
      SEC Regulation M
      Suggested Routing

      Compliance
      Corporate Financing
      Executive Representatives
      Legal
      Senior Management
      Trading
      Training
      Key Topic(s)

      Alternative Display Facility
      Distributions
      NMS Stocks
      OTC Equity Securities
      PIPEs
      SEC Regulation M
      Securities Offerings
      Shelf Offerings

      Executive Summary

      FINRA is issuing this Notice to provide additional information and guidance on the new FINRA Rules governing notification requirements and marketplace-specific rules relating to Regulation M under the Securities Exchange Act of 1934.1 As announced in Regulatory Notice 08-57, the FINRA Rules become effective December 15, 2008.

      The text of the amendments is set forth in Attachment A of this Notice. The forms firms must use to notify FINRA under the amendments are provided in Attachment B of this Notice and are available (along with any updates) online at www.finra.org/RegM.

      Questions regarding this Notice may be directed to:

      •  Scott Trilling, Market Regulation Department, at (240) 386-5113;
      •  Melissa Springer, Market Regulation Department, at (240) 386-5088;
      •  FINRA's Regulation M Filings General Inquiry Line, at (240) 386-5560; or
      •  Office of General Counsel, at (202) 728-8071.

      Background and Discussion

      On September 11, 2008, the SEC approved a proposed rule change that, among other things: (1) adopts new FINRA Rule 5190, which includes the Regulation M-related notification requirements applicable to firms participating in securities offerings; (2) adopts new FINRA Rule 6470, which includes certain Regulation M-related requirements that are currently in the OTC Bulletin Board (OTCBB) rules and applies to all OTC Equity Securities;2 and (3) makes conforming amendments to the Regulation M-related rules applicable to the Alternative Display Facility (ADF).3

      Regulation M is designed to prevent manipulation by persons with an interest in the outcome of an offering and prohibits activities and conduct that could artificially influence the market for an offered security.4 In this regard, Regulation M generally prohibits underwriters, broker-dealers, issuers and other persons participating in a distribution from directly or indirectly bidding for or purchasing the offered security (or inducing another person to do so) during the applicable "restricted period." The restricted period commences on the later of either one or five business days prior to the determination of the offering price or such time that a person becomes a distribution participant, and ends upon such person's completion of participation in the distribution.5 For purposes of determining when the applicable restricted period under Regulation M commences, or whether no restricted period applies because the "actively traded" exception can be relied upon, the SEC has adopted a dual standard of the value of the worldwide average daily trading volume (ADTV) of the offered security and public float value of the issuer.6

      Regulation M also governs certain market activities (i.e., stabilizing bids, syndicate covering transactions and penalty bids)7 in connection with an offering and requires that notification of such activity be provided to the relevant self-regulatory organization or, in the case of stabilizing bids, the market where the stabilizing bid is to be posted. Finally, Regulation M prohibits any person from selling short a security that is the subject of a public offering and purchasing the security in the offering, if such short sale was effected during the restricted period (which, for purposes of the short sale restrictions, generally is the five-day period prior to pricing).8

      Firms are reminded that certain rules under Regulation M apply to some, but not all, offerings, e.g., SEC Rule 101 applies only to "distributions." A distribution under Regulation M is distinguished from ordinary trading transactions by the "magnitude of the offering" and the presence of "special selling efforts and selling methods."9 The types of offerings that can satisfy the definition of "distribution" under Regulation M include public offerings, private placements, shelf offerings, mergers and other acquisitions, exchange offers and at-the-market offerings.10 In addition, certain activities are excepted from the rules under Regulation M. For example, transactions in Rule 144A securities during a distribution of such securities are not prohibited under SEC Rule 101, subject to certain conditions set forth in the rule.11

      As part of FINRA's program to monitor for compliance with Regulation M, FINRA's Market Regulation Department reviews over-the-counter (OTC) trading and quoting activity for prohibited purchases, bids or attempts to induce bids or purchases during the applicable restricted period and for prohibited short sales during the five-day period prior to the pricing of an offering. Pursuant to its rules, FINRA must receive pertinent distribution-related information in a timely fashion to facilitate this component of its Regulation M compliance program.12

      The guidance in this Notice relates only to firms' Regulation M-related notification obligations under FINRA rules and does not address other obligations that may apply, e.g., the FINRA transaction reporting rules or the Regulation M-related rules of a national securities exchange.

      New FINRA Rule 5190

      New FINRA Rule 5190 (Notification Requirements for Offering Participants) consolidates some of the Regulation M-related notification requirements that currently are found in NASD Rule 2710 and Incorporated NYSE Rule 392 (Notification Requirements for Offerings of Listed Securities). Unlike FINRA's current rules, the new rule applies uniformly to distributions of listed and unlisted securities.

      Requirements applicable to distributions subject to a restricted period (Rule 5190(c)(1))

      Rule 5190(c)(1) sets forth the notification requirements applicable to distributions of listed and unlisted securities that are "covered securities"13 subject to a restricted period under Rule 101 or 102 of Regulation M.

      Specifically, firms must determine, in accordance with Regulation M, whether the applicable restricted period commences one day or five days prior to pricing (a "one-day" or "five-day" restricted period), and notify FINRA in writing of the firm's determination and the basis for such determination.14 Additionally, firms are required to include in the written notification the contemplated date and time of commencement of the restricted period,15 and identify the distribution participants and affiliated purchasers.16 Under the new rule, firms are not required to submit a copy of the registration statement or other offering documents to FINRA's Market Regulation Department.

      While the new rule places the responsibility of determining the applicable restricted period on the firm, as a practical matter, FINRA will accept a firm's notification that the five-day restricted period applies to a prospective distribution without providing the basis for that determination. If, on the other hand, a firm asserts that a one-day or no restricted period applies to a particular distribution, FINRA will require that the firm demonstrate the basis for that determination. (As discussed below, firms must notify FINRA that the "actively traded securities" exception applies, and hence there is no restricted period, under new Rule 5190(d).)17

      Firms must provide notification no later than the business day prior to the first complete trading session of the applicable restricted period, unless later notification is necessary under specific circumstances.18 Where the principal market closes early (e.g., for a holiday), the shortened session would constitute a complete trading session for purposes of the rule.

      In addition, firms must notify FINRA upon pricing a distribution that is subject to a restricted period under Regulation M.19 The notification must include the following pricing-related information:

      •  Security name and symbol;
      •  Type of security (e.g., common stock, preferred security, etc.);
      •  Number of shares offered;
      •  Offering price;
      •  Last sale before the distribution (i.e., the last sale before pricing);
      •  Pricing basis (e.g., a discount to the last sale price, a negotiated price, best efforts at the market, etc.);
      •  SEC effective date and time (i.e., the date and time the SEC declares the offering effective),20
      •  Trade date (i.e., the first trade date that the shares from the distribution are available for trading in the aftermarket);21 and
      •  Restricted period (i.e., the first and last trade dates of the actual restricted period).

      Firms also are required to identify the distribution participants and affiliated purchasers.

      Firms must submit the notification no later than the close of business the next business day following the pricing of the distribution, unless later notification is necessary under specific circumstances.22 This requirement ensures that FINRA gets timely pricing information in instances where a distribution does not terminate for weeks or even months after pricing, as might be the case, for example, in a shelf offering.

      Finally, firms must notify FINRA in writing if they cancel or postpone any distribution for which prior notice of commencement of the restricted period has been provided to FINRA.23 Firms must provide such notification immediately upon the cancellation or postponement of the distribution.

      Requirements applicable to issuers or selling security holders subject to a restricted period (Rule 5190(c)(2))

      Rule 5190(c)(2) requires that any firm that is an issuer or selling security holder in a distribution of a security, including an "actively traded" security, subject to a restricted period under Rule 102 of Regulation M comply with the notification requirements of Rule 5190(c)(1), discussed above. This requirement ensures that FINRA is notified of any distribution in which a firm is participating as an issuer or selling security holder, to the extent that notice of such distribution has not already been provided under Rule 5190.

      Requirements applicable to distributions of "actively traded" securities (Rule 5190(d))

      Rule 5190(d) sets forth the notification requirements applicable to distributions of listed and unlisted securities that are considered "actively traded" securities and thus are not subject to a restricted period under Rule 101 of Regulation M.24

      In connection with such distributions, firms must notify FINRA in writing of the firm's determination that no restricted period applies and the basis for such determination.25 Firms must notify FINRA at least one business day prior to the pricing of the distribution, unless later notification is necessary under specific circumstances.26

      Upon pricing a distribution of a security that is considered "actively traded," firms must provide written notification to FINRA, including the pricing-related information required under Rule 5190(c)(1)(B), discussed above, and identify the distribution participants and affiliated purchasers.27 Firms must notify FINRA no later than the close of business the next business day following the pricing of the distribution, unless later notification is necessary under specific circumstances.28

      Penalty bids and syndicate covering transactions in OTC Equity Securities (Rule 5190(e))

      Rule 5190(e) requires firms to notify FINRA of penalty bids or syndicate covering transactions in connection with an offering of an OTC Equity Security. Firms must notify FINRA of their intention to conduct such activity prior to imposing the penalty bid or engaging in the first syndicate covering transaction, and identify the security and its symbol and the date such activity will occur. In addition, firms are required to subsequently confirm such activity within one business day of completion, and identify the security and its symbol, the total number of shares and the date(s) of such activity.

      These requirements are substantially similar to the current OTCBB rules; however, the amendments clarify that they apply to distributions of all OTC Equity Securities and are not limited to distributions of OTCBB-eligible securities.

      Submission of notice to FINRA under Rule 5190

      Pursuant to paragraphs (c)(1) and (d) of Rule 5190, the member firm acting as manager (or in a similar capacity) is responsible for notifying FINRA of the distribution. However, if no member firm is acting as manager (or in a similar capacity), then each firm that is a distribution participant or affiliated purchaser is required to notify FINRA, unless another member firm has assumed responsibility in writing for compliance with the notification requirement. Pursuant to Rule 5190(c)(2), a firm that is an issuer or selling security holder must comply with the notification requirements of paragraph (c)(1), unless another member firm has assumed responsibility in writing for compliance with those requirements. Similarly, pursuant to Rule 5190(e), a firm that intends to impose a penalty bid or effect a syndicate covering transaction is responsible for notifying FINRA, unless another member firm has assumed responsibility in writing for compliance with the rule.

      Firms must use the following forms to provide notification under Rule 5190:

      Notification Requirement Rule Form
      Determination of applicable restricted period, including contemplated commencement of restricted period 5190(c)(1)(A) Regulation M Restricted Period Notification
      Determination that no restricted period applies under the "actively traded" securities exception 5190(d)(1) Regulation M Restricted Period Notification
      Pricing of distribution (applicable to distributions subject to a restricted period and distributions of "actively traded" securities) 5190(c)(1)(B)
      5190(d)(2)
      Regulation M Trading Notification
      Cancellation or postponement of distribution (applicable where prior notice of commencement of restricted period has been provided) 5190(c)(1)(C) Regulation M Restricted Period Notification
      Intent to effect syndicate covering transaction 5190(e)(1) Regulation M Notice of Intent to Impose a Penalty Bid and/or Effect a Syndicate Covering Transaction
      Confirmation of syndicate covering transaction 5190(e)(2) Regulation M Trading Notification
      Intent to impose penalty bid 5190(e)(1) Regulation M Notice of Intent to Impose a Penalty Bid and/or Effect a Syndicate Covering Transaction
      Confirmation of penalty bid 5190(e)(2) Regulation M Trading Notification

      All notices under Rule 5190 must be submitted to FINRA's Market Regulation Department via email to secondaryofferings@finra.org; fax to (301) 339-7403; or a third-party vendor (e.g., Dealogic, Ipreo), within the time periods prescribed by the rule. The notification required under Rule 5190 must not be sent to FINRA's Corporate Financing Department. Submission to the Corporate Financing Department does not constitute compliance with Rule 5190.

      Firms are reminded that they must update any notification submitted to the Market Regulation Department, as necessary (e.g., a manager would update the notification if distribution participants were added after the restricted period commenced or if a deal was oversubscribed and the over-allotment option was exercised).

      Nasdaq Stock Exchange rules impose certain notification requirements that are similar to those of Rule 5190. Firms that have an obligation under both FINRA and Nasdaq Stock Exchange rules are not required to submit two separate filings to FINRA's Market Regulation Department to satisfy those rules; rather, the forms that have been designed to satisfy FINRA rules also include fields for purposes of compliance with the comparable Nasdaq Stock Exchange rules.29 Firms that are not subject to Nasdaq Stock Exchange rules would not be required to complete those additional fields.

      Amendments to Marketplace Rules

      FINRA's OTCBB and ADF marketplace rules include certain Regulation M-related requirements. Consistent with the amendments discussed above, and as part of the rule change approved by the SEC, FINRA has clarified the scope and application of these marketplace-specific requirements.

      New FINRA Rule 6470 Relating to OTC Equity Securities

      New FINRA Rule 6470 (Withdrawal of Quotations in an OTC Equity Security in Compliance with SEC Regulation M) requires that, in connection with a distribution of an OTC Equity Security, a firm must withdraw its quotations in the offered security to comply with the applicable restricted period under Regulation M. In addition, Rule 6470 prohibits the entry of stabilizing bids for OTC Equity Securities pursuant to Rule 104 of Regulation M. Because firms can withdraw their quotes in OTC Equity Securities without first requesting excused withdrawal status (as required under ADF rules), there is no notification requirement under Rule 6470.

      Rule 6470 is substantially similar to current OTCBB rules; however, the amendments clarify that the requirements apply not only to OTCBB-eligible securities, but to all OTC Equity Securities quoted in any inter-dealer quotation system (e.g., OTCBB and Pink Sheets).

      Amendments to FINRA Rule 6275 relating to ADF Market Makers

      FINRA Rule 6275(f) (previously NASD Rule 4619A(f)) has been amended to conform to the language and structure of new Rule 6470. As amended, Rule 6275 requires that, in connection with a distribution of an NMS stock, an ADF Market Maker must submit a written request to ADF Operations and FINRA's Market Regulation Department to withdraw its quotations in the offered security in the ADF to comply with the applicable restricted period under Regulation M.30 The request must be submitted no later than the business day prior to the first complete trading session of the restricted period under Regulation M, unless later notification is necessary under the specific circumstances.31

      An ADF Market Maker also must submit a written request to ADF Operations and FINRA's Market Regulation Department to rescind the firm's excused withdrawal status. As part of that request, the firm must notify FINRA of the date and time of the pricing of the offering, the offering price and the time the offering terminated.32 The request must be submitted no later than the close of business the next business day following the pricing of the distribution.

      The obligation to request excused withdrawal status and to subsequently rescind excused withdrawal status is on the ADF Market Maker that is posting quotations in the ADF; however, another member firm can assume responsibility—which must be in writing—for compliance on the ADF Market Maker's behalf. As amended, the rule no longer requires the manager of the distribution to submit the request on behalf of each firm participating in the distribution (of course, under the rule, a member firm acting as manager can agree, in writing, to do so on behalf of the firms).

      Firms must use the following forms to satisfy their notification obligations under Rule 6275:

      Notification Requirement Rule Form
      Request for excused withdrawal status 6275(f)(1) Regulation M Restricted Period Notification
      Request to rescind excused withdrawal status 6275(f)(2) Regulation M Trading Notification

      Firms must submit notification forms under Rule 6275 to FINRA's Market Regulation Department via email to secondaryofferings@finra.org; fax to (301) 339-7403; or a third party vendor (e.g., Dealogic, Ipreo), and to ADF Operations via email to FINRAOperations@finra.org or fax to (240) 386-6225, within the time periods prescribed by the rule.

      To further assist firms, FINRA will publish a set of Frequently Asked Questions (FAQ) to facilitate firms' compliance with the amendments and the FAQ will be available on FINRA's Web site.

      The rule amendments become effective on December 15, 2008.


      1 17 CFR §242.100 to 105.

      2 "OTC Equity Security," as defined in FINRA Rule 6420 (formerly NASD Rule 6610), includes all non-exchange-listed securities, such as OTCBB and Pink Sheets securities.

      3 See Securities Exchange Act Release No. 58514 (September 11, 2008), 73 FR 54190 (September 18, 2008) (order approving SR-FINRA-2008-039). See also Regulatory Notice 08-57 (October 2008).

      4 See Securities Exchange Act Release No. 38067 (December 20, 1996), 62 FR 520 (January 3, 1997) (File No. S7-11-96) (Anti-Manipulation Rules Concerning Securities Offerings; Final Rules). See also generally SEC Staff Legal Bulletin No. 9, Frequently Asked Questions About Regulation M (April 12, 2002 update) at http://www.sec.gov/interps/legal/mrslb9.htm.

      5 See 17 CFR §242.100 (definition of "restricted period").

      6 The exception for "actively traded" securities removes from Rule 101 of Regulation M securities with an ADTV value of at least $1 million where the issuer's common equity securities have a public float value of at least $150 million. For all other securities, the following standards apply in determining when the applicable restricted period commences: (1) for a distribution of a security with an ADTV value of at least $100,000, whose issuer has outstanding common equity securities having a public float value of at least $25 million, the restricted period begins one business day prior to pricing (or the date on which the person becomes a distribution participant), and (2) for a distribution of any other security, the restricted period begins five business days prior to pricing (or the date on which the person becomes a distribution participant). See 17 CFR §242.100 (definition of "restricted period") and 17 CFR §242.101(c)(1) ("actively traded" securities exception).

      7 See 17 CFR §242.100 (definitions of "stabilizing," "syndicate covering transaction," and "penalty bid"). In general terms, a "stabilizing bid" is a bid that is intended to maintain the price of the offered security and is necessary to prevent or retard a decline in the security's price. A "penalty bid" allows a lead underwriter to reclaim a selling concession paid to a syndicate member if that member's customers sell their allocated shares in the immediate aftermarket. A "syndicate covering transaction" is generally defined as placing a bid or effecting a purchase to reduce a syndicate short position.

      8 See Securities Exchange Act Release No. 56206 (August 6, 2007), 72 FR 45094 (August 10, 2007) (File No. S7-20-06) (Short Selling in Connection With a Public Offering; Final Rule).

      9 See 17 CFR §242.100 (definition of "distribution").

      10 See Securities Exchange Act Release No. 38067 (December 20, 1996), 62 FR 520 (January 3, 1997) (File No. S7-11-96) (Anti-Manipulation Rules Concerning Securities Offerings; Final Rules).

      11 See 17 CFR §242.101(b)(10).

      12 FINRA's Member Regulation Department also monitors for compliance with Regulation M in the context of member firm exams.

      13 See 17 CFR §242.100 (definition of "covered securities").

      14 Rule 5190(c)(1)(A).

      15 The contemplated date and time of commencement of the restricted period is to be based upon the firm's projected pricing date as of the date of submission of notice under this rule. FINRA recognizes that conditions may arise that may affect when or whether the offering actually prices.

      16 See 17 CFR §242.100 (definitions of "distribution participant" and "affiliated purchaser").

      17 With respect to distributions of Nasdaq-listed securities, firms can rely on an Underwriting Activity Report (UAR) generated by FINRA's Market Regulation Department as the basis for determining the applicable restricted period.

      18 In most instances, FINRA would expect to receive notification within the prescribed time frame, but may permit later notification in limited circumstances. Such determination would be made by FINRA's Market Regulation Department on a case-by-case basis. For example, there may be instances where the nature of the transaction has made it impossible to provide timely notice (e.g., a private investment in public equity (PIPE) offering is commenced and priced on the same day, and thus the firm could not have provided notice on the business day prior to the first complete trading session of the applicable restricted period).

      19 Rule 5190(c)(1)(B).

      20 In certain instances, e.g., PIPEs, this requirement may not be applicable.

      21 In certain instances, e.g., PIPEs, this requirement may not be applicable.

      22 See supra note 18.

      23 Rule 5190(c)(1)(C).

      24 See supra note 6.

      25 Rule 5190(d)(1).

      26 See supra note 18.

      27 Rule 5190(d)(2).

      28 See supra note 18.

      29 Firms must nonetheless comply with requirements under the Nasdaq Stock Exchange rules to provide notice to Nasdaq or Nasdaq MarketWatch, as applicable.

      30 Rule 6275(f)(1).

      31 See supra note 18.

      32 Rule 6275(f)(2).


      ATTACHMENT A

      Below is the text of the rule change. New language is underlined; deletions are in brackets.1

      * * * * *

      5000. SECURITIES OFFERING AND TRADING STANDARDS AND PRACTICES

      5100. SECURITIES OFFERINGS, UNDERWRITING AND COMPENSATION

      * * * * *

      5190. Notification Requirements for Offering Participants

      (a) General

      This Rule 5190 sets forth the notice requirements applicable to all members participating in offerings of securities for purposes of monitoring compliance with the provisions of SEC Regulation M. In addition to the requirements under this Rule 5190, members also must comply with all applicable rules governing the withdrawal of quotations in accordance with SEC Regulation M.
      (b) Definitions

      For purposes of this Rule, the following terms shall have the meanings as set forth in Rules 100 and 101 of SEC Regulation M: "actively traded," "affiliated purchaser," "covered security," "distribution," "distribution participant," "offering price," "penalty bid," "restricted period," "selling security holder," and "syndicate covering transaction."
      (c) Notice Relating to Distributions of Securities Subject to a Restricted Period Under SEC Regulation M
      (1) A member acting as a manager (or in a similar capacity) of a distribution of any security that is a covered security subject to a restricted period under Rule 101 of SEC Regulation M shall provide written notice to FINRA, in such form as specified by FINRA, of the following:
      (A) the member's determination as to whether a one-day or five-day restricted period applies under Rule 101 of SEC Regulation M and the basis for such determination, including the contemplated date and time of the commencement of the restricted period, the security name and symbol, and identification of the distribution participants and affiliated purchasers, no later than the business day prior to the first complete trading session of the applicable restricted period, unless later notification is necessary under specific circumstances;
      (B) the pricing of the distribution, including the security name and symbol, the type of security, the number of shares offered, the offering price, the last sale before the distribution, the pricing basis, the SEC effective date and time, the trade date, the restricted period, and identification of the distribution participants and affiliated purchasers, no later than the close of business the next business day following the pricing of the distribution, unless later notification is necessary under specific circumstances; and
      (C) the cancellation or postponement of any distribution for which prior notification of commencement of the restricted period has been submitted under paragraph (c)(1)(A) above, immediately upon the cancellation or postponement of such distribution.
      If no member is acting as a manager (or in a similar capacity) of such distribution, then each member that is a distribution participant or affiliated purchaser shall provide the notice required under this paragraph (c)(1), unless another member has assumed responsibility in writing for compliance therewith.
      (2) Any member that is an issuer or selling security holder in a distribution of any security that is a covered security subject to a restricted period under Rule 102 of SEC Regulation M shall comply with the notice requirements of paragraph (c)(1), unless another member has assumed responsibility in writing for compliance therewith.
      (d) Notice Relating to Distributions of "Actively Traded" Securities Under SEC Regulation M

      A member acting as a manager (or in a similar capacity) of a distribution of any security that is considered an "actively traded" security under Rule 101 of SEC Regulation M shall provide written notice to FINRA, in such form as specified by FINRA, of the following:
      (1) the member's determination that no restricted period applies under Rule 101 of SEC Regulation M and the basis for such determination, including the security name and symbol, at least one business day prior to the pricing of the distribution, unless later notification is necessary under specific circumstances; and
      (2) the pricing of the distribution, including the security name and symbol, the type of security, the number of shares offered, the offering price, the last sale before the distribution, the pricing basis, the SEC effective date and time, the trade date, and identification of the distribution participants and affiliated purchasers, no later than the close of business the next business day following the pricing of the distribution, unless later notification is necessary under specific circumstances.
      If no member is acting as a manager (or in a similar capacity) of such distribution, then each member that is a distribution participant or an affiliated purchaser shall provide the notice required under this paragraph (d), unless another member has assumed responsibility in writing for compliance therewith.
      (e) Notice of Penalty Bids and Syndicate Covering Transactions in OTC Equity Securities

      A member imposing a penalty bid or engaging in a syndicate covering transaction in connection with an offering of an OTC Equity Security, as defined in Rule 6420, pursuant to Rule 104 of SEC Regulation M shall, unless another member has assumed responsibility in writing for compliance with this paragraph (e), provide written notice to FINRA, in such form as specified by FINRA, of the following:
      (1) the member's intention to conduct such activity, prior to imposing the penalty bid or engaging in the first syndicate covering transaction, including identification of the security and its symbol and the date such activity will occur; and
      (2) confirmation that the member has imposed a penalty bid or engaged in a syndicate covering transaction, within one business day of completion of such activity, including identification of the security and its symbol, the total number of shares and the date(s) of such activity.

      * * * * *

      6000. QUOTATION AND TRANSACTION REPORTING FACILITIES

      * * * * *

      6200. ALTERNATIVE DISPLAY FACILITY

      * * * * *

      6220. Definitions

      (a) No Change.
      (1) through (15) No Change.
      [(16) "Rule 100," "Rule 101," "Rule 103," and "Rule 104" mean the rules adopted by the SEC under Regulation M.]
      [(17) "Stabilizing bid" means the terms "stabilizing" or to "stabilize" as defined in Rule 100 of SEC Regulation M.]
      (18) through (19) redesignated as (16) through (17)
      [(20) "Underwriting Activity Report" is a report provided by the Market Regulation Department of NASD in connection with a distribution of securities subject to Rule 101 of SEC Regulation M pursuant to NASD Rule 2710(b)(11).]
      (b) For purposes of Rule[s] 6275 [and 6279], the following terms shall have the meanings as defined in Rule 100 of SEC Regulation M: "affiliated purchaser," "covered security," "distribution," "distribution participant," ["independent bid," "net purchases," "passive market maker," "penalty bid," "reference security,"] "restricted period," and "selling security holder." ["subject security," and "syndicate covering transaction."]

      * * * * *

      6275. Withdrawal of Quotations

      (a) through (e) No change.
      (f) Excused withdrawal status may be granted by ADF Operations to a Registered Reporting ADF Market Maker that is a distribution participant, [or an] affiliated purchaser, selling security holder or issuer [in order to comply with] of a distribution of a security that is a covered security subject to a restricted period under Rule 101 or 102 of SEC Regulation M on the following conditions:
      (1) [A member acting as a manager (or in a similar capacity) of a distribution of a security that is a subject security or reference security under Rule 101 of SEC Regulation M and any member that is a distribution participant or an affiliated purchaser in such a distribution that does not have a manager] Such Registered Reporting ADF Market Maker shall, unless another member has assumed responsibility in writing for compliance with this Rule, provide a written [notice] request to FINRA, in such form as specified by FINRA, to withdraw the Registered Reporting ADF Market Maker's quotations, [to ADF Operations and the Market Regulation Department of FINRA] no later than the business day prior to the first [entire] complete trading session of the one-day or five-day restricted period under Rule 101 or 102 of SEC Regulation M, unless later notification is necessary under the specific circumstances.
      [(A) The notice required by paragraph (f)(1) of this Rule shall be provided by submitting to ADF Operations a written request on behalf of each market maker that is a distribution participant or an affiliated purchaser to withdraw the market maker's quotations.]
      [(B) The managing underwriter shall advise each Registered Reporting ADF Market Maker that it has been identified as a distribution participant or an affiliated purchaser to ADF Operations and that its quotations will be automatically withdrawn, unless a market maker that is a distribution participant (or an affiliated purchaser of a distribution participant) notifies ADF Operations as required by paragraph (f)(2), below.]
      [(2) A Registered Reporting ADF Market Maker that has been identified to ADF Operations as a distribution participant (or an affiliated purchaser of a distribution participant) shall promptly notify ADF Operations and the manager of its intention not to participate in the prospective distribution in order to avoid having its quotations withdrawn.]
      ([3]2) [A member acting as a manager (or in a similar capacity) of a distribution subject to paragraph (f)(1) of this Rule] Such Registered Reporting ADF Market Maker shall submit a written request to [ADF Operations and the Market Regulation Department of] FINRA, in such form as specified by FINRA, to rescind the Registered Reporting ADF Market Maker's excused withdrawal status [of distribution participants and affiliated purchasers], which request shall include the date and time of the pricing of the offering[,] and the offering price, [and the time the offering terminated, and, if not in writing, shall be confirmed in writing] no later than the close of business the [day the offering terminates] next business day following the pricing of the distribution. [The request referenced in this subparagraph may be submitted on the Underwriting Activity Report or by other written means.]
      (g) No change.

      * * * * *

      6400. QUOTING AND TRADING IN OTC EQUITY SECURITIES

      * * * * *

      6470. Withdrawal of Quotations in an OTC Equity Security in Compliance with SEC Regulation M

      (a) A member that is a distribution participant, affiliated purchaser, selling security holder or issuer in a distribution of an OTC Equity Security that is a covered security subject to Rule 101 or 102 of SEC Regulation M and is entering quotations in such security shall, unless another member has assumed responsibility in writing for compliance with this Rule:
      (1) withdraw all quotations in the OTC Equity Security to comply with the applicable restricted period under Rule 101 or 102 of SEC Regulation M; and
      (2) not enter a stabilizing bid for the OTC Equity Security pursuant to Rule 104 of SEC Regulation M.
      (b) For purposes of this Rule, the following terms shall have the meanings as defined in Rule 100 of SEC Regulation M: "affiliated purchaser," "covered security," "distribution," "distribution participant," "restricted period," "selling security holder," and "stabilizing."

      * * * * *

      6500. OTC BULLETIN BOARD® SERVICE

      * * * * *

      6540. Requirements Applicable to Market Makers

      (a) through (c) No Change.
      (d) No Change.
      (1) Permissible Quotation Entries
      (A) through (C) No Change.
      [(D) Any member that intends to be a distribution participant in a distribution of securities subject to Rule 101 of Regulation M, or is an affiliated purchaser in such distribution, and is entering quotations in an OTCBB-eligible security that is the subject security or reference security of such distribution shall, unless another member has assumed responsibility for compliance with this paragraph:]
      [(i) provide written notice to Operations Department prior to the pricing of the distribution that includes the intended date and time of the pricing of the offering;]
      [(ii) withdraw all quotations in the OTCBB-eligible security to comply with the applicable restricted period under Rule 101 of SEC Regulation M and not enter a stabilizing bid pursuant to Rule 104 of Regulation M in the OTCBB;]
      [(iii) provide written notice to the Corporate Financing Department of FINRA of its intention to impose a penalty bid or to conduct syndicate covering transactions pursuant to Rule 104 of SEC Regulation M prior to imposing the penalty bid or engaging in the first syndicate covering transaction. Such notice shall include information as to the date the penalty bid or first syndicate covering transaction will occur; and]
      [(iv) provide written notice to the Market Regulation Department by the close of business on the day the offering terminates that includes the date and time of the pricing of the offering, the offering price, and the time the offering terminated.]
      [(E) The written notice required by paragraphs (d)(1)(D)(i), (iii) and (iv) of this Rule may be submitted on the Underwriting Activity Report provided by the Market Regulation Department.]
      [(F) For purposes of paragraph (d)(1)(D), Rules 100, 101, 103 and 104 are rules of the SEC adopted under Regulation M and the following terms shall have the meanings as defined in Rule 100 of Regulation M: "affiliated purchaser," "distribution," "distribution participant," "penalty bid," "reference security," "restricted period," "stabilizing," "subject security," and "syndicate covering transaction."]
      (2) through (5) No Change.
      (e) No Change.

      * * * * *


      1. This Attachment A reflects the amendments adopted pursuant to SR-FINRA-2008-039, as well as certain non-substantive technical changes to the underlying rule text adopted pursuant to SR-FINRA-2008-057 (filed for immediate effectiveness on December 3, 2008). Those rule filings are available at http://www.finra.org/Industry/Regulation/RuleFilings/2008/P038926 and http://www.finra.org/Industry/Regulation/RuleFilings/2008/P117483, respectively.


      ATTACHMENT B

      Underwriting Activity Report Request Form

      Attention: FINRA Market Regulation Department

      Please provide the following information (preferably at least two (2) business days prior to commencement of the restricted period or, if no restricted period applies, at least one (1) business day prior to pricing the distribution)

      1. Issuer name and symbol:_______________________________________

      Acting in our capacity as manager of a potential secondary distribution of securities that are listed on the Nasdaq Stock Market, we request an underwriting activity report for the above covered security (subject and reference securities, as defined under SEC Regulation M Rule 100).

      Submitted by

      Firm name:____________________________________________________________________________

      Date:_________________________________________________________________________________

      Signature:______________________________________ Print name:_______________________________

      Title:________________________________________________________________________________

      Contact (if different from above):___________________________________________________________

      Telephone number:________________________________ Fax number:____________________________

      Email address:__________________________________________________________________________

      Regulation M—Restricted Period Notification Form

      Attention: FINRA Market Regulation Department; FINRA ADF Operations; Nasdaq Marketwatch Department

      Please provide the following information

      Original notification: yes no

      Amended notification: yes no

      1. Issuer name and symbol:___________________________________________
      2. Symbol(s) of covered securities
      (subject and reference securities, as defined under SEC Regulation M Rule 100): ___________________
      3. "Actively traded" securities exception under SEC Regulation M Rule 101: applies does not apply
      4. Restricted period: 1 day 5 day not applicable
      5. Basis for determination of restricted period or applicability of "actively traded" securities exception:

      UAR (for a security listed on the Nasdaq Stock Market). Date of UAR:________________

      5 day default

      The following:
      1. The ADTV as defined under SEC Regulation M Rule 100:______________________________________________________

      The source of this information:______________________________________________________
      2. The public float value as this term is defined under SEC Regulation M Rule 100:_________________

      The source of this information:_______________________________________________

      Other:_______________________________________________________________
      6. Type of transaction:__________________________________________________________
      (e.g., block offering, public offering, private placement, etc.)
      7. Commencement of the restricted period: (date) at (time)
      _____________________________________________
      8. Anticipated pricing date:_______________________________________
      9. Cancellation or postponement of Regulation M restricted period

      Pursuant to FINRA Rule 5190(c)(1)(A), FINRA Rule 6275(f)(1), and/or NASDAQ Rule 4619(e)(1), we advise you that the following dealers are distribution participants, or affiliated purchasers. Additionally, for the dealers that are market makers, we request an excused withdrawal or, for Nasdaq-listed securities only, to be designated as passive market maker, as indicated:1

      Member Firm MPID(s) Passive or Excused
      1. ____________________________ ______________ ____________________________
      2. ____________________________ ______________ ____________________________
      3. ____________________________ ______________ ____________________________
      4. ____________________________ ______________ ____________________________
      5. ____________________________ ______________ ____________________________
      6. ____________________________ ______________ ____________________________
      7. ____________________________ _______________ ____________________________
      8. ____________________________ _______________ ____________________________

      Submitted by

      Firm name:_________________________________________________________________________

      Date:__________________________________________________________________________________

      Signature:_____________________________________ Print name:____________________________

      Title:__________________________________________________________________________________

      Contact (if different from above):_______________________________________________________

      Telephone number:____________________________ Fax number:____________________________

      Email address:_________________________________________________________________________

      Regulation M—Notice of Intent to Impose a Penalty Bid And/Or Engage In a Syndicate Covering Transaction

      Attention: FINRA Market Regulation Department; Nasdaq Marketwatch Department

      Please provide the following information

      Original notification: yes no

      Amended notification: yes no

      1. Issuer name and symbol: _____________________________________

      Pursuant to the provisions of FINRA Rule 5190(e)(1) for OTC equity securities or NASDAQ Rule 4624(a) for Nasdaq-listed securities, you are advised of our intention to engage in the listed activity on the date(s) shown:

      Activity Date(s)
      Syndicate covering transaction: _____________________________________________
      Imposition of penalty bid: ______________________________________________
      2. Additional information about the activity:____________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

      Submitted by

      Firm name:___________________________________________________________________________

      Date____________________________________________________________________________

      Signature:_________________________________ Print name:______________________

      Title:____________________________________________________________________________

      Contact (if different from above):_________________________________________________________

      Telephone number:_______________________________ Fax number:__________________________

      Email address:____________________________________________________________________________

      Regulation M—Trading Notification Form

      Attention: FINRA Market Regulation Department; FINRA ADF Operations; Nasdaq Marketwatch Department

      Please provide the following information

      Original notification: yes no

      Amended notification: yes no

      Issuer name and symbol:________________________________________________

      Pursuant to the provisions of FINRA Rule 5190(c)(1)(B), FINRA Rule 5190(d)(2), FINRA Rule 6275(f)(2), and/or NASDAQ Rule 4619(e)(5), you are advised of the following information regarding the pricing of a distribution of securities. Additionally, for the distribution participants and/or affiliated purchasers identified below, to the extent that they are market makers, we request that you rescind the excused withdrawal status or passive market making status:

      1. Type of security offered:______________________________
      2. Number of shares offered:______________________________________
      3. Offering price:______________________________________
      4. Last sale before distribution:___________________________
      5. Pricing basis:______________________________________
      (e.g., last sale, discount to last sale, negotiated, at the market, etc.)
      6. Pricing date:______________________________________
      7. SEC effective date and time:___________________(date)___________________(time)
      8. Trade date:______________________________________
      9. Restricted period:___________________(commencement date)________________________(end date)
      10. Distribution participants and/or affiliated purchasers:___________________________________________
      Member Firm MPID(s)
      1. __________________________________________ ________________________
      2. __________________________________________ ________________________
      3. __________________________________________ ________________________
      4. __________________________________________ ________________________
      5. __________________________________________ ________________________
      6. __________________________________________ ________________________
      7. __________________________________________ ________________________
      8. __________________________________________ ________________________

      Pursuant to the provisions of FINRA Rule 5190(e)(2), you are advised of the listed activity on the date shown:

      Activity Date(s) of Activity Aggregate # of Shares
      Engaged in a syndicate covering transaction: __________________________________ __________________________________
      Imposition of penalty bid: _________________________________ _________________________________

      Submitted by

      Firm name:____________________________________________________________

      Date: ________________________________________________________________________________

      Signature: _______________________________Print name: ____________________________

      Title:____________________________________________________________

      Contact (if different from above):________________________________________

      Telephone number:____________________Fax number:____________________

      Email address:____________________________________________________________


      1 Please indicate 'Excused' for dealers that are not market makers.

    • 08-73 SEC Approves Amendments to NASD Rule 2220 to Update the Standards for Options Communications Effective Date: March 4, 2009

      View PDF

      Options Communications

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      NASD Rule 2210
      NASD Rule 2211
      NASD Rule 2220
      NASD Rule 2860
      NASD Rule 3010
      Suggested Routing

      Advertising
      Compliance
      Institutional
      Legal
      Operations
      Options
      Senior Management
      Key Topic(s)

      Advertising
      Communications with the Public
      Correspondence
      Institutional Sales Material
      Options
      Options Communications with the Public
      Sales Literature

      Executive Summary

      Effective March 4, 2009, FINRA has amended the provisions of NASD Rule 2220 to achieve greater consistency with FINRA's general communications rule (NASD Rule 2210) and the options communications rules of other self-regulatory organizations (SROs).1 As amended, NASD Rule 2220, among other things: (1) uses, to the extent appropriate, the same terminology and definitions as in FINRA's general rules on communications with the public; (2) makes the requirements for principal review of correspondence concerning options the same as for correspondence generally; and (3) updates the standards on the content of communications that precede the delivery of the options disclosure document (ODD).2 The amendments to NASD Rule 2220 are set forth in Attachment A of this Notice.

      FINRA also is providing guidance to firms regarding ODD delivery via hyperlink in two situations.

      Questions concerning this Notice should be directed to:

      •  Patricia Albrecht, Assistant General Counsel, Office of General Counsel (OGC), at (202) 728-8026;
      •  Amy C. Sochard, Director, Programs & Investigations, Advertising Regulation, at (240) 386-4508; or
      •  Matthew E. Vitek, Counsel, OGC, at (202) 728-8156.

      Background & Discussion

      FINRA has revised NASD Rule 2220 (Options Communications with the Public) to make it more consistent with FINRA's general rules on communications with the public and the options communications rules of other SROs. The changes to NASD Rule 2220 are described in detail below.

      NASD Rule 2220(a) Definitions

      Amended NASD Rule 2220(a) adopts definitions of "advertisement," "sales literature," "independently prepared reprint," "correspondence," "institutional sales material," and "existing retail customer" that are consistent with those terms as they are defined in FINRA's general advertising rules, NASD Rule 2210 (Communications with the Public) and NASD Rule 2211 (Institutional Sales Material and Correspondence).3 Amended NASD Rule 2220(a)'s definition of "public appearance"4 is also consistent with that term as it is defined in NASD Rule 2210, with the exception that NASD Rule 2220(a) includes the writing of a print media article.5 With respect to the definition of "sales literature," NASD Rule 2220(a)(1)(B) makes clear that worksheet templates, which are commonly used in the marketing of options, are included within the definition.6 In addition, FINRA eliminated from NASD Rule 2220, the definition of "educational material," which is a term unique to options communications. Communications that would previously have been considered "educational material" are now classified as either "advertisements" or "sales literature."

      Additionally, NASD Rule 2220(a)(3) defines the term "standardized option" to mean any option contract issued, or subject to issuance, by The Options Clearing Corporation (OCC), that has standardized terms for the strike price, expiration date and amount of the underlying security, and is traded on a national securities exchange registered pursuant to Section 6(a) of the Securities Exchange Act of 1934 (Exchange Act). This definition will help firms understand the meaning of this term as it is used in new NASD Rule 2220(d)(1), which details the standards applicable to communications regarding standardized options exempted under Rule 238 of the Securities Act of 1933 (Securities Act) that are used prior to delivery of the ODD, and to communications regarding standardized options not exempted under Rule 238 that are used prior to delivery of a prospectus that meets the requirements of Section 10(a) of the Securities Act.

      Finally, NASD Rule 2220(a)(4) and (5) adopt the definitions of "options" and "options disclosure document" as those terms are defined in NASD Rule 2860 (Options).7 Adopting NASD Rule 2860's definitions of those terms not only clarifies the meaning of "options" and "options disclosure document" as they are used in NASD Rule 2220, it also promotes consistency between the two rules.

      NASD Rule 2220(b) Approval by a Registered Options Principal and Recordkeeping

      Amended NASD Rule 2220(b) adds "independently prepared reprints" to the types of options communications that require pre-use approval by a Registered Options Principal and deletes the outdated term "educational material" from that requirement. Amended NASD Rule 2220(b) also excludes "completed worksheets" from those materials requiring approval of a Registered Options Principal. FINRA excluded completed worksheets because the definition of "sales literature" includes "worksheet templates." The amendment clarifies that only the templates, and not each subsequent worksheet with data, must be approved by an options principal.

      In addition, amended NASD Rule 2220(b) includes new requirements for principal review of correspondence that are consistent with previously amended correspondence principal approval requirements in NASD Rule 2211.8 NASD Rule 2220 adopts NASD Rule 2211's definition of "correspondence," which classifies correspondence as any written letter or electronic mail message distributed by a firm to one or more of its existing retail customers and to fewer than 25 prospective retail customers within any 30 calendar-day period.9 Accordingly, correspondence does not need to be approved by an options principal prior to use unless such correspondence is distributed to 25 or more existing retail customers within any 30 calendar-day period and makes any financial or investment recommendation or otherwise promotes a product or service of the firm. Also consistent with NASD Rule 2210, any written letters, emails, or instant messages to 25 or more prospective retail customers within any 30 calendar-day period are deemed "sales literature" and, as such, must be approved prior to use by an options principal. Finally, as with NASD Rule 2211, NASD Rule 2220(b)(2) makes clear that all correspondence concerning options is subject to NASD Rule 3010(d)'s supervision and review requirements.

      Amended NASD Rule 2220(b) also includes new requirements for principal review of institutional sales material that are consistent with the principal review requirements for general institutional sales material in NASD Rule 2211. As noted above, NASD Rule 2220 adopts NASD Rule 2211's definition of "institutional sales material," which classifies institutional sales material as any communication that is distributed or made available only to institutional customers.10 NASD Rule 2220(b)(3) requires each firm to establish written procedures that are appropriate for its business size, structure, and customers for the review by a Registered Options Principal of institutional sales material used by the firm and its registered representatives as described in NASD Rule 2211(b)(1)(B).11

      NASD Rule 2220(b)(4) also requires that a firm retain copies of the options communications in accordance with Rule 17a-4 of the Exchange Act. Additionally, a firm must retain the names of the persons who prepared the communications and the source of any recommendations contained in the communications and keep them in the form and for the time period required for options communications in Rule 17a-4 of the Exchange Act.

      NASD Rule 2220(c) Association Approval Requirements and Review Procedures

      Previously, NASD Rule 2220(c)(1) required firms to submit all options advertisements and educational material to FINRA's Advertising Regulation Department for approval at least ten days prior to use (or such shorter period as FINRA may allow) but did not require firms to submit sales literature. The effect has been that widely disseminated communications (i.e., advertisements and educational material) used prior to delivery of the ODD are filed for approval while more targeted communications (i.e., sales literature, as previously defined) that must be preceded or accompanied by the ODD are exempted from filing.

      Amended NASD Rule 2220(c) follows a similar approach. Communications that are likely to be widely disseminated such as advertisements, sales literature (as newly defined), and independently prepared reprints are subject to the filing requirements of NASD Rule 2220(c)(1). In contrast, more targeted communications—generally correspondence—that will be used once the applicable ODD or prospectus has been delivered continue to be exempt from the filing requirements. NASD Rule 2220(c)(1) also clarifies that an options communication that falls within the filing requirements must be filed at least ten calendar days prior to use (or such shorter period as FINRA staff may allow in particular instances).

      NASD Rule 2220(d) Standards Applicable to Communications

      FINRA has made several changes to the standards applicable to options communications contained in NASD Rule 2220(d), including adding new NASD Rule 2220(d)(1) (Communications Regarding Standardized Options used Prior to Delivery of Options Disclosure Document) to clarify and update the standards limiting the content of communications regarding standardized options. Specifically, NASD Rule 2220(d)(1)(A) provides that communications regarding standardized options exempted under Securities Act Rule 238 that are used prior to delivery of the ODD must be limited to general descriptions of the options being discussed. This text, however, may contain a brief description of options, including a statement that identifies the registered clearing agency for options and a brief description of the general attributes and method of operation of the exchanges on which such options are traded, including a discussion of how an option is priced. Additionally, such options communications must contain contact information for obtaining a copy of the ODD and must not contain recommendations or past or projected performance figures, including annualized rates of return, or names of specific securities. These options communications may also include any statement required by any state law and administrative authority and may include any advertising designs and devices, provided such material is not misleading.12

      Additionally, new NASD Rule 2220(d)(1)(B) provides that options communications regarding options not exempted under Securities Act Rule 238 that are used prior to delivery of a prospectus that meets the requirements of Section 10(a) of the Securities Act must conform to Securities Act Rules 134 or 134a, as applicable.

      The approved rule amendments also make several changes to the content standards in NASD Rule 2220(d)(2) (General Standards) that apply to all options communications. First, NASD Rule 2220(d)(2) no longer refers to disclaimers or the outdated term "hedge clauses" and instead generally prohibits the use of illegible, misleading or inconsistent cautionary statements or caveats.13 Second, amended NASD Rule 2220(d)(2) requires all options communications, with the exception of institutional sales material, to include a statement that supporting documentation for any claims (including any claims made on behalf of options programs or the options expertise of sales persons), comparison, recommendations, statistics or other technical data, will be supplied upon request.14 Previously, only sales literature was required to include this statement. In addition, NASD Rule 2220(d) no longer requires institutional sales material to disclose that options are not suitable for all investors.15 This disclaimer appears unnecessary in institutional sales material as, for purposes of this rule, institutions are viewed to be sufficiently sophisticated to be aware that options are not suitable for all investors.

      In addition, the approved amendments make certain changes to the restrictions on the use of historical and performance figures. Previously, only communications defined as sales literature could contain projected and historical performance figures. However, NASD Rules 2220(d)(3) and (d)(4) now permit this information in any options communications provided that all such communications regarding standardized options must be preceded or accompanied by the ODD. The other restrictions on the use of historical and performance figures generally remain the same as they were prior to the amendments.16

      Finally, NASD Rule 2220(d)(6) mandates that any violation by a firm or associated person of any rule or requirement of the SEC or any rule of the Securities Investor Protection Corporation applicable to firm communications regarding options will be deemed a violation of NASD Rule 2220. This approach is consistent with NASD Rule 2210.17

      Hyperlink Delivery of the ODD

      FINRA is also providing guidance regarding hyperlink delivery of the ODD in two situations. First, FINRA deems communications that contain clear and prominent hyperlinks to the ODD to be preceded or accompanied by the ODD. Second, a firm may effect delivery of the ODD via a hyperlink to that document if a customer has consented to receive documents electronically from the firm.18


      1 See Securities Exchange Act Release No. 58738 (October 6, 2008), 73 FR 60371 (October 10, 2008) (SR-FINRA-2008-013).

      2 Id.

      3 See NASD Rule 2210(a)(1), (2) and (6)(A); NASD Rule 2211(a)(1), (2) and (4).

      4 See NASD Rule 2210(a)(5). Options communications that qualify as public appearances (e.g., seminars, radio, forums) may also qualify as other forms of options communications (e.g., advertisements, sales literature). For example, the writing of a print media article would generally qualify as both an advertisement and a public appearance. Seminar scripts, handouts, slides, or other visual presentations would also generally be deemed to be sales literature

      5 The term "public appearance" as defined in NASD Rule 2711 (Research Analysts and Research Reports) also includes the writing of a print media article, in which a research analyst makes a recommendation or offers an opinion concerning an equity security. See NASD Rule 2711(a)(5).

      6 The definition of "sales literature" in NASD Rule 2210(a)(2) includes many examples but does not include worksheets. In view of the fact that other SROs' definitions of "sales literature" include "worksheets," FINRA expressly included "worksheet templates" in the definition of sales literature in NASD Rule 2220(a)(1)(B) to ensure consistency and avoid any ambiguity.

      7 See NASD Rule 2860(a) and (b)(2)(T).

      8 See Securities Exchange Act Release No. 54217 (July 26, 2006), 71 FR 43831 (August 2, 2006) (SR-NASD-2006-011); NASD Rule 2211(b)(1).

      9 Previously, such material would have been examined to determine whether it should be considered and advertisement, sales literature, or educational material.

      10 Id.

      11 NASD Rule 2211(b)(1)(B) requires such procedures to be in writing and be designed to reasonably supervise each registered representative. Where such procedures do not require review of all institutional sales material prior to use or distribution, they must include provision for the education and training of associated persons as to the firm's procedures governing institutional sales material, documentation of such education and training, and surveillance and follow-up to ensure that such procedures are implemented and adhered to. Evidence that these supervisory procedures have been implemented and carried out must be maintained and made available to FINRA upon request.

      12 NASD Rule 2220(d)(1)(A)(i) through (v).

      13 NASD Rule 2220(d)(2)(A)(iii).

      14 NASD Rule 2220(d)(2)(A)(viii).

      15 See NASD Rule 2220(d)(2)(B).

      16 See NASD Rule 2220(d)(3)(B) through (H) and NASD Rule 2220(d)(4)(B) through (H).

      17 See NASD Rule 2210(e).

      18 Delivery of the ODD for purposes of NASD Rule 2860(b)(11) also can be satisfied by a hyperlink to the ODD. See Notice to Members 98-03 (January 1998) (member firms may electronically transmit documents that they are required or permitted to furnish to customers under NASD Rules, including the delivery of the ODD required by NASD Rule 2860(b)(11)); see also Securities Exchange Act Release No. 39356 (November 25, 1997); 62 FR 64421 (December 5, 1997) (Order approving SR-NASD-97-57).


      Attachment A

      New language is underlined, deletions are in brackets.

      * * * * *

      2220. Options Communications [with the Public]

      (a) Definitions

      For purposes of this Rule and any interpretation thereof:
      (1) "Options communications" consist of:
      (A) "Advertisement." Any "Advertisement" as defined in Rule 2210(a)(1) concerning options.[shall include any material that reaches a mass audience through public media such as newspapers, periodicals, magazines, radio, television, telephone recording, motion picture, audio or video device, telecommunications device, billboards, signs or through written sales communications to customers or the public that are not required to be accompanied or preceded by one or more current options disclosure documents.]
      [(2) "Educational material" shall include any explanatory material distributed or made generally available to customers or the public that is limited to information describing the general nature of the standardized options markets or one or more strategies.]
      [(3)](B) "Sales literature." Any "Sales Literature" as defined in Rule 2210(a)(2) concerning options including worksheet templates.[shall include any written communication (not defined as an "advertisement" or as "educational material") distributed or made generally available to customers or the public that contains any analysis, performance report, projection or recommendation with respect to options, underlying securities or market conditions, any standard forms of worksheets, or any seminar text which pertains to options and which is communicated to customers or the public at seminars, lectures or similar such events.]
      (C) "Correspondence." Any "Correspondence" as defined in Rule 2211(a)(1) concerning options.
      (D) "Institutional sales material." Any "Institutional Sales Material" as defined in Rule 2211(a)(2) concerning options.
      (E) "Public appearance." Any participation in a seminar, forum (including an interactive electronic forum), radio, television or print media interview, or other public speaking activity, or the writing of a print media article, concerning options.
      (F) "Independently prepared reprint." Any "Independently Prepared Reprint" as defined in Rule 2210(a)(6)(A) concerning options.
      (2) "Existing retail customer" as is defined in Rule 2211(a)(4).
      (3) "Standardized option." means any option contract issued, or subject to issuance, by The Options Clearing Corporation, that has standardized terms for the strike price, expiration date, and amount of the underlying security, and is traded on a national securities exchange registered pursuant to section 6(a) of the Act.
      (4) "Options" as is defined in Rule 2860(a).
      (5) "Options disclosure document" has the same meaning as the term "disclosure document" as defined in Rule 2860(b)(2)(T).
      (b) Approval by a Registered Options[ and Security Futures] Principal and Recordkeeping
      (1) Advertisements, Sales Literature, and Independently Prepared Reprints. All advertisements, sales literature (except completed worksheets), [and educational material] and independently prepared reprints issued by a member [or member organization pertaining to] concerning options shall be approved in advance by a Registered Options[ and Security Futures] Principal designated by the member's written supervisory procedures.
      (2) Correspondence. Correspondence need not be approved by a Registered Options Principal prior to use, unless such correspondence is distributed to 25 or more existing retail customers within any 30 calendar-day period and makes any financial or investment recommendation or otherwise promotes a product or service of the member. All correspondence is subject to the supervision and review requirements of Rule 3010(d).
      (3) Institutional Sales Material. Each member shall establish written procedures that are appropriate to its business, size, structure, and customers for the review by a Registered Options Principal of institutional sales material used by the member and its registered representatives as described in Rule 2211(b)(1)(B).
      (4) Copies [thereof] of the options communications shall be retained by the member in accordance with SEC Rule 17a-4 of the Act. [, together with t]The names of the persons who prepared the options communications [material], the names of the persons who approved the options communications [material] and,[in the case of sales literature,] the source of any recommendations contained therein, shall be retained by the member[or member organization] and be kept [at an easily accessible place for examination by the NASD for a period of three years] in the form and for the time period required for options communications by SEC Rule 17a-4 of the Act.
      (c) Association Approval Requirements and Review Procedures
      (1) In addition to the approval required by paragraph (b) of this Rule, [every] all advertisements, [and all educational material] sales literature, and independently prepared reprints [of] issued by a member [or member organization pertaining to] concerning standardized options used prior to delivery of the applicable current options disclosure document or prospectus shall be submitted to the Advertising[/Investment Companies] Regulation Department of the Association [*](the "Department") at least ten calendar days prior to use (or such shorter period as the [Association] Department may allow in particular instances) for approval and, if changed or expressly disapproved by the [Association] Department, shall be withheld from circulation until any changes specified by the [Association] Department have been made or, in the event of disapproval, until such options communication[ the advertisement or educational material] has been resubmitted for, and has received, [Association] Department approval.
      (2)
      (A) Notwithstanding the foregoing provision, the Department, upon review of a member's options [advertisements, educational material and/or sales literature] communications, and after determining that the member [will again] has departed from the standards of this Rule, may require that such member file some or all options [advertisements, educational material and/or sales literature,] communications or the portions of such member's [material] communications that [is] are related to options [any specific types or classes of securities or services,] with the Department, at least ten calendar days prior to use.
      (B) The Department shall notify the member in writing of the types of options communications [material] to be filed and the length of time such requirement is to be in effect. The requirement shall not exceed one year, however, and shall not take effect until 21 calendar days after service of the written notice, during which time the member may request a hearing under Rules 9551 and 9559.
      (3) In addition to the foregoing requirements, every member's options [advertising and sales literature] communications shall be subject to a routine spot-check procedure. Upon written request from the [Association] Department, each member shall promptly submit the communications [material] requested. Members will not be required to submit communications [material] under this procedure that have[s] been previously submitted pursuant to one of the foregoing requirements.
      (4) The requirements of this paragraph (c) shall not be applicable to:
      (A) options communications [advertisements or educational material] submitted to another self-regulatory organization having comparable standards pertaining to such communications [advertisements or educational material, and];
      (B) [advertisements] communications in which the only reference to options is contained in a listing of the services of [a] the member[organization.];
      (C) the options disclosure document; and
      (D) the prospectus.
      [(5) Except as otherwise provided in subparagraphs (d)(2)(B) and (C), no written material respecting options may be disseminated to any person who has not previously or contemporaneously received one or more current options disclosure documents.]
      (d) Standards Applicable to Communications[with the Public]
      (1) [General Standards]Communications Regarding Standardized Options used Prior to Delivery of Options Disclosure Document
      (A) Options communications regarding standardized options exempted under SEC Rule 238 under the Securities Act of 1933 used prior to options disclosure document delivery:
      (i) must be limited to general descriptions of the options being discussed. The text may also contain a brief description of options, including a statement that identifies registered clearing agencies for options and a brief description of the general attributes and method of operation of the exchanges on which such options are traded, including a discussion of how an option is priced;
      (ii) must contain contact information for obtaining a copy of the options disclosure document;
      (iii) must not contain recommendations or past or projected performance figures, including annualized rates of return, or names of specific securities;
      (iv) may include any statement required by any state law or administrative authority;
      (v) may include advertising designs and devices, including borders, scrolls, arrows, pointers, multiple and combined logos and unusual type faces and lettering as well as attention-getting headlines and photographs and other graphics, provided such material is not misleading; and
      (B) Options communications regarding options not exempted under SEC Rule 238 under the Securities Act of 1933 used prior to delivery of a prospectus that meets the requirements of Section 10(a) of said Act must conform to SEC Rule 134 or 134a under said Act, as applicable.
      (2) General Standards
      (A) No member [or member organization]or associated person of the member [associated with a member] shall use[tilize any advertisement, educational material, sales literature,] any [or other] options communications [to any customer or member of the public concerning options] which:
      [(A)]
      (i) contains any untrue statement or omission of a material fact or is otherwise false or misleading;
      [(B)]
      (ii) contains promises of specific results, exaggerated or unwarranted claims, opinions for which there is no reasonable basis or forecasts of future events which are unwarranted or which are not clearly labeled as forecasts;
      [(C)]
      (iii) contains [hedge clauses or disclaimers which are not legible, which attempt to disclaim responsibility for the content of such literature or for opinions expressed therein, or which are otherwise inconsistent with such communication] cautionary statements or caveats that are not legible, are misleading, or are inconsistent with the content of the material;[or]
      [(D)]
      (iv) would constitute a prospectus as that term is defined in the Securities Act of 1933, unless it meets the requirements of Section 10 of said Act[.];
      (v) contains statements suggesting the certain availability of a secondary market for options;
      [(2) Specific Standards
      (A)]
      (vi) fails to reflect [T]the[special] risks attendant to options transactions and the complexities of certain options investment strategies [shall be reflected in any advertisement, educational material or sales literature which discusses the uses or advantages of options.];
      (vii) [Such communications shall] fails to include a warning to the effect that options are not suitable for all investors or contains suggestions to the contrary[. In the preparation of written communications respecting options, the following guidelines shall be observed:]; or
      (viii) fails to include a statement that supporting documentation for any claims (including any claims made on behalf of options programs or the options expertise of sales persons), comparison, recommendations, statistics, or other technical data, will be supplied upon request.
      (B) Subparagraphs (vii) and (viii) above shall not apply to institutional sales material as defined in paragraph (a) of this Rule.
      (C)
      [(i)] Any statement in any options communications referring to the potential opportunities or advantages presented by options shall be balanced by a statement of the corresponding risks. The risk statement shall reflect the same degree of specificity as the statement of opportunities, and broad generalities [should] must be avoided. [Thus, a statement such as "with options, an investor has an opportunity to earn profits while limiting his risk of loss," should be balanced by a statement such as "of course, an options investor may lose the entire amount committed to options in a relatively short period of time."]
      [(ii) It shall not be suggested that options are suitable for all investors.]
      [(iii) Statements suggesting the certain availability of a secondary market for options shall not be made.]
      [(B) Advertisements pertaining to options shall conform to the following standards:]
      [(i) Advertisements may only be used (and copies of the advertisements may be sent to persons who have not received one or more options disclosure documents) if the material meets the requirements of SEC Rule 134 under the Securities Act of 1933, as that Rule has been interpreted as applying to options. Under Rule 134, advertisements must be limited to general descriptions of the security being offered and of its issuer. Advertisements under this Rule shall state the name and address of the person from whom a current options disclosure document(s) may be obtained. Such advertisements may have the following characteristics:]
      [a. The text of the advertisement may contain a brief description of such options, including a statement that the issuer of every such option is the Options Clearing Corporation. The text may also contain a brief description of the general attributes and method of operation of the exchange or exchanges on which such options are traded and of the Options Clearing Corporation, including a discussion of how the price of an option is determined on the trading floor(s) of such exchange(s);]
      [b. The advertisement may include any statement required by any state law or administrative authority;]
      [c. Advertising designs and devices, including borders, scrolls, arrows, pointers, multiple and combined logos and unusual type faces and lettering as well as attention-getting headlines and photographs and other graphics may be used, provided such material is not misleading.]
      [(ii) The use of recommendations or of past or projected performance figures, including annualized rates of return, is not permitted in any advertisement pertaining to options.]
      [(C) Educational material, including advertisements, pertaining to options may be used if the material meets the requirements of SEC Rule 134A under the Securities Act of 1933. Those requirements are as follows:]
      [(i) The potential risks related to options trading generally and to each strategy addressed are explained;]
      [(ii) No past or projected performance figures, including annualized rates of return are used;]
      [(iii) No recommendation to purchase or sell any option contract is made;]
      [(iv) No specific security is identified other than:]
      [a. a security which is exempt from registration under the Act, or an option on such exempt security;]
      [b. an index option, including the component securities of the index; or]
      [c. a foreign currency option; and]
      [(v) The material contains the name and address of a person or persons from whom the appropriate current Options Disclosure Document(s), as defined in SEC Rule 9b-1 of the Act, may be obtained.]
      [(D) Sales literature pertaining to options shall conform to the following standards:]
      [(i) Sales literature shall state that supporting documentation for any claims (including any claims made on behalf of options programs or the options expertise of sales persons), comparisons, recommendations, statistics or other technical data, will be supplied upon request.]
      [(ii) Such communications may contain projected performance figures (including projected annualized rates of return), provided that:]
      (3) Projections

      Options communications may contain projected performance figures (including projected annualized rates of return) provided that:
      (A) all such communications regarding standardized options are accompanied or preceded by the options disclosure document;
      (B)
      [a.] no suggestion of certainty of future performance is made;
      (C)
      [b.] parameters relating to such performance figures are clearly established (e.g., to indicate exercise price of option, purchase price of the underlying stock and its market price, option premium, anticipated dividends, etc.);
      (D)
      [c.] all relevant costs, including commissions, fees, and interest charges ([if] as applicable[with regard to margin transactions]) are disclosed and reflected in the projections;
      (E)
      [d.] such projections are plausible and are intended as a source of reference or a comparative device to be used in the development of a recommendation;
      (F)
      [e.] all material assumptions made in such calculations are clearly identified (e.g., "assume option expires," "assume option unexercised," "assume option exercised," etc.);
      (G)
      [f.] the risks involved in the proposed transactions are also disclosed; and
      (H)
      [g.] in communications relating to annualized rates of return, that such returns are not based upon any less than a sixty-day experience; any formulas used in making calculations are clearly displayed; and a statement is included to the effect that the annualized returns cited might be achieved only if the parameters described can be duplicated and that there is no certainty of doing so.
      (4) Historical Performance
      [(iii) Such]Options communications may feature records and statistics that portray the performance of past recommendations or of actual transactions, provided that:
      (A) all such communications regarding standardized options are accompanied or preceded by the options disclosure document;
      (B)
      [a.] any such portrayal is done in a balanced manner, and consists of records or statistics that are confined to a specific "universe" that can be fully isolated and circumscribed and that covers at least the most recent 12-month period;
      (C)
      [b.] such communications include the date of each initial recommendation or transaction, the price of each such recommendation or transaction as of such date, and the date and price of each recommendation or transaction at the end of the period or when liquidation was suggested or effected, whichever was earlier; provided that if the communications are limited to summarized or averaged records or statistics, in lieu of the complete record there may be included the number of items recommended or transacted, the number that advanced and the number that declined, together with an offer to provide the complete record upon request;
      (D)
      [c.] [such communications disclose] all relevant costs, including commissions, [and interest charges (if applicable with regard to margin transactions) and,] fees, and daily margin obligations (as applicable) are disclosed and reflected in the performance;
      (E) whenever such communications contain annualized rates of return [are used], all material assumptions used in the process of annualization are disclosed;
      (F)
      [d.] an indication is provided of the general market conditions during the period(s) covered, and any comparison made between such records and statistics and the overall market (e.g., comparison to an index) is valid;
      (G)
      [e.] such communications state that the results presented should not and cannot be viewed as an indicator of future performance; and
      (H)
      [f.] a Registered Options Principal determines that the records or statistics fairly present the status of the recommendations or transactions reported upon and so initials the report.
      (5) Options Programs
      [(iv) In the case of]In communications regarding an options program (i.e., an investment plan employing the systematic use of one or more options strategies), the cumulative history or unproven nature of the program and its underlying assumptions shall be disclosed.
      [(v) Standard forms of options worksheets utilized by member organizations, in addition to complying with the requirements applicable to sales literature, must be uniform within a member organization.]
      [(vi) If a member organization has adopted a standard form of worksheet for a particular options strategy, nonstandard worksheets for that strategy may not be used.]
      [(vii) Communications that portray performance of past recommendations or actual transactions and completed worksheets shall be kept at a place easily accessible to the sales office for the accounts or customers involved.]
      (6) Violation of Other Rules

      Any violation by a member or associated person of any rule or requirement of the SEC or any rule of the Securities Investor Protection Corporation applicable to member communications concerning options will be deemed a violation of this Rule 2220.

      [*This department located at 1735 K Street, N.W., Washington, D.C. 20006.]

    • 08-72 FINRA Provides Guidance Concerning the Types of Securities Transactions Subject to the Regulatory Transaction Fee

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      Regulatory Transaction Fee

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      FINRA Rule 6110
      FINRA Rule 6220
      FINRA Rule 6281
      FINRA Rule 6282
      FINRA Rule 6310
      FINRA Rules 6380A, 6380B, 6380C
      FINRA Rule 6420
      FINRA Rule 6600
      Series NTM 96-81
      NTM 02-63
      NTM 04-63
      NTM 05-11
      NTM 06-39
      Regulatory Notice 08-51
      Section 3 of Schedule A to the FINRA By-Laws
      Section 31 of the Securities Exchange Act of 1934
      Suggested Routing

      Compliance
      Finance
      Legal
      Operations
      Senior Management
      Key Topic(s)

      Regulatory Transaction Fee
      Section 3 of Schedule A to the FINRA By-Laws
      Section 31 of the Securities Exchange Act of 1934

      Executive Summary

      FINRA is publishing this Notice to provide additional guidance on the types of securities transactions that are subject to a regulatory transaction fee under Section 3 of Schedule A to the FINRA By-Laws (Section 3).1

      The regulatory transaction fee generally applies to sales of equity securities that are required to be promptly reported to the OTC Reporting Facility (ORF) (that is, subject to the 90-second reporting requirement), and to sales that are required to be reported to either the Alternative Display Facility (ADF) or a FINRA Trade Reporting Facility (TRF).2

      Questions concerning this Notice should be directed to Kathleen A. O'Mara, Associate General Counsel, Finance, at (240) 386-5309, or Brant K. Brown, Associate General Counsel, Office of General Counsel, at (202) 728-6927.

      Background & Discussion

      Section 31 of the Securities Exchange Act of 1934 (Act) requires FINRA and the national securities exchanges to pay transaction fees and assessments to the Securities and Exchange Commission (SEC). The fees are designed to recover the costs related to the government's supervision and regulation of the securities markets and securities professionals. Pursuant to Section 31 of the Act (Section 31), FINRA is required to pay fees to the SEC for sales of securities subject to prompt last sale reporting (pursuant to the rules of the SEC or FINRA) or registered on a national securities exchange when those sales are transacted by or through its member firms otherwise than on a national securities exchange. This includes sales transacted by or through a member in securities that are off-exchange trades of exchange-registered securities, sometimes referred to as third market transactions, and to sales of equity securities that are non-exchange-registered securities that are subject to prompt last sale reporting. To recover the costs of FINRA's Section 31 obligation, FINRA assesses a regulatory transaction fee on firms under Section 3, the amount of which is set in accordance with Section 31.

      The transactions that are assessable under Section 3 are reported to FINRA through one of FINRA's trade reporting facilities: the ORF, the ADF, or one of three TRFs.3 FINRA uses the transaction data reported to these automated facilities for billing purposes.4 As a general matter, FINRA charges the regulatory transaction fee to the clearing firm on the sell side of a transaction. If no FINRA member firm is on the sell side of a covered transaction (e.g., when a member firm is buying a security from a customer), the regulatory transaction fee is charged to the FINRA member firm on the buy side of the transaction.

      The Section 3 regulatory transaction fee applies only to sales transactions effected otherwise than on a national securities exchange. However, not all sales transactions effected otherwise than on a national securities exchange are subject to a regulatory transaction fee. Certain sales transactions are expressly exempt from Section 31 and are, therefore, not subject to a regulatory transaction fee pursuant to Section 3. The following types of sales transactions are exempt from Section 31 and, consequently, from the regulatory transaction fee in Section 3:5

      • Sales of a security offered pursuant to an effective registration statement under the Securities Act of 1933 (Securities Act) (except a sale of a put or call option issued by the Options Clearing Corporation) or offered in accordance with an exemption from registration afforded by Section 3(a) or 3(b) of the Securities Act (or a rule thereunder);
      • Sales of a security by an issuer not involving any public offering within the meaning of Section 4(2) of the Securities Act;
      • Sales of a security pursuant to, and in consummation of, a tender or exchange offer;
      • Sales of a security upon the exercise of a warrant or right (except a put or call), or upon the conversion of a convertible security;
      • Sales of a security that are executed outside the United States and are not reported, or required to be reported, to a transaction reporting association as defined in SEC Rule 600 and any approved plan filed thereunder;
      • Sales of an option on a security index (including both a narrow-based security index and a non-narrow-based security index);
      • Sales of a bond, debenture, or other evidence of indebtedness; and
      • Any recognized riskless principal sale.

      Accordingly, in general, FINRA is responsible for paying fees for sales transacted by or through its member firms otherwise than on a national securities exchange. The fees apply to equity securities subject to prompt last sale reporting, including sales transacted by or through its member firms in equity securities that are off-exchange trades of exchange-registered securities. This Notice explains how FINRA determines which transactions are subject to the regulatory transaction fee in Section 3.

      Off-Exchange Trades of Exchange Registered Securities

      As noted above, the regulatory transaction fee is applicable to off-exchange trades of exchange-registered securities. Member firms are required to report such trades (i.e., trades in NMS stocks, as defined in SEC Rule 600(b)(47), effected otherwise than on an exchange) within 90 seconds to the ADF or to a TRF.6 For purposes of assessing the regulatory transaction fee on trades involving exchange-registered securities, FINRA relies on the primary listing market's classification of the security to determine whether the trade is subject to the regulatory transaction fee. For instance, if the primary listing market considers transactions in a particular security to be subject to Section 31, "FINRA will also assess the regulatory transaction fee on off-exchange trades of that security. FINRA believes that reliance on the primary listing market's classification of an exchange-registered security is necessary to ensure consistent treatment of transactions involving the same security for Section 31 purposes across self-regulatory organizations.

      Trades of Non-Exchange Registered Securities

      The regulatory transaction fee is also applicable to sales of equity securities that are traded otherwise than on a national securities exchange and are subject to prompt last sale reporting pursuant to the rules of the SEC or FINRA. With a few exceptions, FINRA Rule 6622 requires firms to submit tape reports to the ORF for over-the-counter (OTC) transactions in OTC Equity Securities within 90 seconds of execution. Most OTC trades in OTC Equity Securities are subject to prompt last sale reporting and, accordingly, are subject to the regulatory transaction fee.7 In accordance with FINRA Rule 6622, the types of equity securities subject to prompt last sale reporting and, thus, the regulatory transaction fee include: common, preferred, warrants, rights, units, American Depositary Receipts (ADRs) and foreign issues.8 This includes many of the securities that are quoted in the OTC market (such as those quoted in the OTC Bulletin Board or the Electronic Pink Sheets). The types of transactions currently excluded from the 90-second reporting requirement include:

      • trades in PORTAL securities (as defined in FINRA Rule 6631);9
      • trades in direct participation program securities (as defined in FINRA Rule 6642);10 and
      • trades in non-exchange-listed convertible bonds, which are subject to the 15-minute trade reporting requirements under the Trade Reporting and Compliance Engine (TRACE) rules.11

      Debt Securities

      As expressly stated in the Act, sales of bonds, debentures, or other evidence of indebtedness (debt securities) are excluded from Section 31.12 Because of this exclusion from Section 31, transactions in debt securities are not subject to the regulatory transaction fee under Section 3.

      As noted above, for securities that are registered on an exchange, FINRA will defer to the primary listing market to determine whether a particular security is a debt security or an equity security for purposes of assessing the regulatory transaction fee on off-exchange trades of those securities.

      To determine whether a non-exchange-registered security is an equity security or a debt security for purposes of assessing the regulatory transaction fee, FINRA relies on the facility to which the transaction is reported. If the transaction must be reported to the ORF, the transaction is treated as one involving an equity security and is subject to the regulatory transaction fee. If the transaction must be reported to TRACE, the transaction is treated as one involving a debt security and thus is not subject to the regulatory transaction fee.


      1 See NASD Notice to Members 06-39 (SEC Approves Amendments Relating to Automated Reporting of Transactions Subject to Regulatory Transaction Fee) (August 2006); NASD Notice to Members 05-11 (NASD Issues Further Guidance Regarding Members' Obligations Under Section 3 of Schedule A to the NASD By-Laws; NASD Also Seeks Member Comment on Related Automation Issues) (February 2005); NASD Notice to Members 04-63 (New SEC Procedures Relating to Section 31 of the Securities Exchange Act of 1934) (August 2004); see also NASD Member Alert (June 27, 2007) (NASD Reiterates Guidance Regarding Member's Disclosure of Regulatory Transaction Fees under Section 3 of Schedule A to the NASD By-Laws).

      2 Currently, there are three TRFs in operation: the FINRA/NASDAQ TRF, the FINRA/NSX TRF, and the FINRA/NYSE TRF.

      3 The ORF is used to report transactions in OTC Equity Securities, subject to certain exclusions. See FINRA Rules Rule 6420(d), 6622. The ADF and the TRFs are used to report over-the-counter transactions in NMS stocks, as defined in SEC Rule 600(b)(47). See FINRA Rules 6220(a)(2), 6281, 6310A, 6310B, 6310C. The SEC recently approved the adoption of the NASD Marketplace Rules as FINRA Rules, without substantive change, effective December 15, 2008. See Regulatory Notice 08-57 (October 2008). Although the NASD Marketplace Rules remain in effect until December 16, 2008, references in this Notice are to the new FINRA rules.

      4 Section 3 requires that transactions subject to the regulatory transaction fee be submitted to FINRA in an automated manner. Transactions reported on Form T are also assessed a regulatory transaction fee.

      5 See SEC Rule 31(a)(11), 17 CFR 240.31(a)(11). Some of these transactions are not required to be reported to FINRA. For example, among others, transactions that are part of a primary distribution by an issuer and transactions made in reliance on Section 4(2) of the Securities Act of 1933 are expressly excluded from FINRA's trade reporting rules. See FINRA Rules 6282(i), 6380A(e), 6380B(e), 6380C(e), 6622(e).

      6 See FINRA Rules 6110, 6282, 6380A, 6380B, and 6380C.

      7 The regulatory transaction fee applies to all transactions in non-exchange registered equity securities that are subject to prompt last sale reporting, regardless of when the transaction occurs. The fee, therefore, applies to transactions in these securities executed outside normal trading hours that would be subject to prompt last sale reporting if the transactions were executed during normal trading hours. See Securities Exchange Act Release No. 38133 (January 7, 1997), 62 FR 1940 (January 14, 1997) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change by NASD Relating to SEC Transaction Fees) (File No. SR-NASD-96-57).

      8 Foreign equity securities became subject to prompt last sale reporting on October 27, 2008. See Regulatory Notice 08-51 (September 2008).

      9 See FINRA Rule 6633.

      10 See FINRA Rule 6643.

      11 Although convertible debt falls within the definition of "equity security" in Section 3(a)(11) of the Act, FINRA has historically treated unlisted convertible debt as debt for purposes of trade reporting and, consequently, has not assessed a regulatory transaction fee on trades in unlisted convertible debt. See Securities Exchange Act Release No. 38133 (January 7, 1997), 62 FR 1940 (January 14, 1997) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change by NASD Relating to SEC Transaction Fees) (File No. SR-NASD-96-57); see also Trade Reporting Notice (February 22, 2008); Special NASD Notice to Members 96-81 (December 3, 1996). Similarly, FINRA has treated convertible debt as a debt security for purposes of the Trading Activity Fee in Section 1(b) of Schedule A. See NASD Notice to Members 02-63 (September 2002).

      12 See 15 U.S.C. 78ee(b), (c); see also SEC Rule 31(a)(11)(vii).

    • 08-71 FINRA Requests Comment on Proposed Consolidated FINRA Rule Governing Reporting Requirements; Comment Period Expired: December 29, 2008

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      Reporting Requirements

      Regulatory Notice
      Notice Type

      Request for Comment
      Consolidated FINRA Rulebook
      Referenced Rules & Notices

      NASD Rule 3070
      NYSE Rule 351
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Systems
      Key Topic(s)

      Customer Complaints
      Disciplinary-Related Events
      Regulatory Actions
      Reporting Requirements
      Statistical Information

      Executive Summary

      As part of the process of developing a new, consolidated rulebook (the Consolidated FINRA Rulebook),1 FINRA is requesting comment on a proposal relating to the FINRA reporting requirements.

      The text of the proposed rule is set forth in Attachment A.

      Questions regarding this Notice should be directed to Afshin Atabaki, Assistant General Counsel, Office of General Counsel, at (202) 728-8902.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by December 29, 2008.

      Member firms and other interested parties can submit their comments using the following methods:

      •  Emailing comments to pubcom@finra.org; or
      •  Mailing comments in hard copy to:

      Marcia E. Asquith
      Office of the Corporate Secretary
      FINRA
      1735 K Street, NW
      Washington, DC 20006-1506

      To help FINRA process and review comments more efficiently, persons should use only one method to comment on the proposal.

      Important Notes:

      The only comments that FINRA will consider are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the FINRA Web site. Generally, FINRA will post comments on its site one week after the end of the comment period.2

      Before becoming effective, a proposed rule change must be authorized for filing with the SEC by the FINRA Board of Governors, and then must be approved by the SEC, following publication for public comment in the Federal Register.3

      Background

      NASD Rule 3070 (Reporting Requirements) and Incorporated NYSE Rule 351 (Reporting Requirements)4 require member firms to report to FINRA certain specified events (e.g., regulatory actions) and quarterly statistical information regarding written customer complaints.5 (The similarities and differences between the rules are described in greater detail in the table below.) FINRA uses the reported information for regulatory purposes. Among other things, the information assists FINRA to identify and investigate firms, offices and associated persons that may pose a regulatory risk.

      Proposal

      FINRA proposes replacing NASD Rule 3070 and NYSE Rule 351 with a single rule, proposed FINRA Rule 4530 (Reporting Requirements),6 in the Consolidated FINRA Rulebook. Proposed FINRA Rule 4530 is based in large part on NASD Rule 3070, taking into account requirements under NYSE Rule 351. The proposed rule also includes a "Supplementary Material" section that contains certain clarifications and definitions as well as codifications of existing staff guidance. The most significant proposed changes are described generally below. However, FINRA urges firms to carefully review the entire attached proposed rule text to understand the full extent of the proposed changes.

      External Findings (Proposed FINRA Rule 4530(a)(1)(A))

      NASD Rule 3070(a)(1) requires that a firm report whenever the firm or an associated person of the firm has been found to have violated, among other things, "any" rule or standard of conduct of any governmental agency, self-regulatory organization (SRO), or financial business or professional organization, or engaged in conduct that is inconsistent with just and equitable principles of trade. This provision requires firms to report findings of violations by an external body.

      The proposal generally retains the requirement under NASD Rule 3070(a)(1), though it limits the scope of reportable findings of violation by an external body to violations of any securities, insurance, commodities, financial or investment-related laws, rules, regulations or standards of conduct of any domestic or foreign regulatory body, SRO or business or professional organization. FINRA believes that defining the scope of the rule in this manner will make it more effective and relevant to FINRA's program, as well as enhance firms' ability to more accurately report such information.

      Internal Conclusions (Proposed FINRA Rule 4530(a)(3))

      NYSE Rule 351(a)(1) requires that a firm report whenever it or its associated persons have violated, among other things, "any" rule or standard of conduct of any governmental agency, SRO, or business or professional organization, or engaged in conduct that is inconsistent with just and equitable principles of trade. This provision requires firms to report their internal conclusions of the enumerated violative conduct.

      The proposal generally incorporates the requirement under NYSE Rule 351(a)(1). Similar to the scope of proposed FINRA Rule 4530(a)(1)(A) discussed above, the proposed rule requires a firm to report whenever the firm has concluded on its own that an associated person of the firm or the firm itself has violated any securities, insurance, commodities, financial or investment-related laws, rules, regulations or standards of conduct of any domestic or foreign regulatory body or SRO. However, the requirement to report certain internal conclusions of violations would not extend to violations of rules or standards of conduct of business or professional organizations. In addition, proposed Supplementary Material .01 states that FINRA does not expect a firm to report an isolated violation by the firm or an associated person of the firm that can be reasonably viewed as a ministerial violation of the applicable rules that did not result in customer harm and was remedied promptly upon discovery.

      Reporting Obligation (Proposed FINRA Rule 4530(d))

      The proposal clarifies that a firm has an obligation to report under the rule the specified events and quarterly statistical information regarding written customer complaints, regardless of whether such information is reported or disclosed pursuant to any other rule or requirement, including the requirements of the Forms BD (Uniform Application for Broker-Dealer Registration), U4 (Uniform Application for Securities Industry Registration or Transfer) or U5 (Uniform Termination Notice for Securities Industry Registration) (collectively referred to as the Uniform Forms). (FINRA notes that it will work toward the goal of eliminating duplicative reporting of information disclosed on the Uniform Forms.)

      Reporting Deadline (Proposed FINRA Rule 4530(a))

      Consistent with the requirements of NYSE Rule 351, the proposal extends the time period for reporting any of the specified events to no later than 30 calendar days after the firm knows or should have known of the existence of the event (rather than the 10 business days currently provided under NASD Rule 3070(b)).

      Domestic and Foreign Actions (Proposed FINRA Rule 4530)

      Currently, both NASD Rule 3070 and NYSE Rule 351 make frequent reference to, for example, "any" regulatory or self-regulatory body, without denoting that it includes both domestic and foreign regulators. The proposal clarifies that the rule applies to both domestic and foreign actions and that it applies to actions by a "regulatory body," which includes governmental regulatory bodies and authorized non-governmental regulatory bodies, such as the Financial Services Authority.

      Civil Litigation or Arbitration; Other Claims for Damages (Proposed FINRA Rule 4530(a)(1)(G))

      The proposal merges for simplification the reporting provisions pertaining to any securities or commodities-related civil litigation or arbitration and any other claim for damages disposed of by judgment, award or settlement for certain monetary thresholds (current NASD Rules 3070(a)(7) and (a)(8) and NYSE Rules 351(a)(7) and (a)(8)). In addition, consistent with other provisions of the current rules, the proposal extends the provision to include any insurance-related civil litigation or arbitration.

      Statutory Disqualifications (Proposed FINRA Rule 4530(a)(1)(H))

      Consistent with NYSE Rule 351(a)(9), the proposal requires a firm to report whenever the firm itself is subject to a "statutory disqualification" and clarifies that a firm is required to report whenever an associated person of the firm is subject to a "statutory disqualification." The proposal also replaces the requirement in NASD Rule 3070(a)(9) and NYSE Rule 351(a)(9) to report whenever a firm or an associated person of the firm "is associated in any business or financial activity" with a person subject to a "statutory disqualification" with a requirement to report whenever the firm or an associated person of the firm "is involved in the sale of any financial instrument, the provision of any investment advice or the financing of any such activities" with a person subject to a "statutory disqualification." FINRA believes that this change provides greater clarity as to the scope of the provision.

      Internal Disciplinary Actions Against Associated Persons (Proposed FINRA Rule 4530(a)(2))

      Similar to NASD Rule 3070(a)(10) and NYSE Rule 351(a)(10), the proposal continues to require a firm to report certain disciplinary actions taken by the firm against its associated persons. However, the proposal clarifies that any such disciplinary action involving the withholding of compensation or of any other remuneration (not just commissions) in excess of $2,500 is a reportable event.

      Elimination of the Exemption for Dual Members Subject to Another SRO's Rule

      NASD Rule 3070(e) provides an exemption for firms subject to substantially similar reporting requirements of another SRO. This provision is intended to exempt Dual Members subject to the reporting requirements of NYSE Rule 351. The proposal eliminates this exemption since FINRA proposes creating a single rule and deleting the applicable reporting requirements of NYSE Rule 351 (as noted below). Accordingly, all FINRA member firms will be subject to proposed FINRA Rule 4530.

      Filing of Related Documents with FINRA (Proposed FINRA Rule 4530(e))

      NASD Rule 3070(f) requires firms to file copies of certain criminal and civil complaints and arbitration claims with FINRA, including copies of any securities or commodities-related private civil complaint or arbitration claim filed against the firm in any forum other than FINRA Dispute Resolution. Consistent with revisions discussed above, the proposal extends such filing requirement to copies of insurance-related private civil complaints and arbitration claims.

      Addition of Supplementary Material

      FINRA also proposes adding supplementary material to, among other things:

      •  Clarify the distinction between a firm's internal conclusion of violative conduct and an external finding of violative conduct;
      •  Define the term "found" as used in the rule generally consistent with the definition of the term in the Uniform Forms, and clarify that the term also includes any formal finding (regardless of whether the finding will be appealed), but that it does not include a minor rule violation involving a fine of $2,500 or less;
      •  Clarify that when calculating the monetary thresholds for reporting civil litigations, arbitrations or other claims for damages, firms must include any attorneys fees and interest in the total amount;
      •  Clarify the application of the rule to former associated persons;
      •  Codify existing staff guidance regarding a firm's obligation to report quarterly statistical information with respect to written customer complaints alleging theft or misappropriation of funds or securities, or forgery;7 and
      •  Codify existing staff guidance regarding the calculation of the monetary thresholds when the parties are subject to "joint and several" liability.8

      FINRA proposes to delete paragraphs (a) through (d) of NYSE Rule 351 and NYSE Rules 351.10 and 351.13 relating to the reporting of specified events and quarterly statistical information regarding written customer complaints because these provisions are substantially similar to the provisions of proposed FINRA Rule 4530.

      Similar Requirements

      Description Applicable NASD/NYSE Provisions
      NASD Rule 3070 and NYSE Rule 351 require a firm to promptly report to FINRA whenever the firm or an associated person of the firm is:  
      the subject of a written customer complaint alleging theft or misappropriation of funds or securities, or forgery; NASD Rule 3070(a)(2) NYSE Rule 351(a)(2)
      named as a defendant or respondent in any proceeding brought by a regulatory body or SRO alleging the violation of the federal or state securities, insurance or commodities laws or the by-laws, rules and regulations of any securities, insurance or commodities regulatory body or SRO; NASD Rule 3070(a)(3) NYSE Rule 351(a)(3)
      denied registration or expelled, enjoined, directed to cease and desist, suspended or otherwise disciplined by any securities, insurance or commodities industry regulatory body or SRO or denied membership or continued membership in any such SRO, or barred from becoming associated with any member of any such SRO; NASD Rule 3070(a)(4) NYSE Rule 351(a)(4)
      indicted or convicted of, pleaded guilty or no contest to any felony, certain enumerated misdemeanors or substantially equivalent activity; NASD Rule 3070(a)(5) NYSE Rule 351(a)(5)
      a director, controlling stockholder, partner, officer or sole proprietor of, or an associated person with, a financial institution that was suspended, expelled or had its registration denied or revoked or is associated in such a capacity with a bank, trust company or other financial institution that was convicted of or pleaded no contest to any felony or misdemeanor; NASD Rule 3070(a)(6) NYSE Rule 351(a)(6)
      a defendant or respondent in any securities or commodities-related civil litigation or arbitration that has been disposed of by judgment, award or settlement for certain monetary thresholds; NASD Rule 3070(a)(7) NYSE Rule 351(a)(7)
      the subject of any other claim for damages by a customer or broker-dealer that is settled for certain monetary thresholds; NASD Rule 3070(a)(8) NYSE Rule 351(a)(8)
      associated in any business or financial activity with any person who is subject to a "statutory disqualification"; or, NASD Rule 3070(a)(9) NYSE Rule 351(a)(9)
      the subject of any disciplinary action by the employing member firm involving suspension, termination, the withholding of commissions or fines in excess of $2,500, or involving a significant limitation on the associated person's activities. NASD Rule 3070(a)(10) NYSE Rule 351(a)(10)
      NASD Rule 3070 and NYSE Rule 351 require an associated person to promptly report to the firm the existence of any of the specified events described above. NASD Rule 3070(b) NYSE Rule 351(b)
      NASD Rule 3070 and NYSE Rule 351 also require firms to report to FINRA quarterly statistical information regarding written customer complaints. NASD Rule 3070(c) NYSE Rules 351(d) and 351.13

      Differing Requirements

      Description Applicable NASD/NYSE Provisions
      NASD Rule 3070 requires a firm to promptly report to FINRA whenever the firm or an associated person of the firm has been found by a court, governmental agency, SRO or financial business or professional organization to have violated the securities laws, any rule or standards of conduct of any governmental agency, SRO or financial business or professional organization, or to have engaged in conduct that is inconsistent with just and equitable principles of trade. NASD Rule 3070(a)(1)
      NYSE Rule 351 requires a firm to promptly report to FINRA whenever it has concluded that the firm or an associated person of the firm has violated any provision of the securities laws, any agreement with, rule or standards of conduct of any governmental agency, SRO or business or professional organization, or has engaged in conduct that is inconsistent with just and equitable principles of trade or detrimental to the interests or welfare of the NYSE. NYSE Rule 351(a)(1) NYSE Information Memorandum 06-11
      NYSE Rule 351 requires a firm to report whenever the firm itself is subject to a "statutory disqualification." NYSE Rule 351 also requires an "approved person" to promptly report to the firm whenever such person is subject to a "statutory disqualification" and further requires the firm to so notify the NYSE.9 NYSE Rules 351(a)(9) and (c)
      NYSE Rule 351 requires firms to report the specified events within 30 days of their occurrence; NASD Rule 3070 requires a firm to report an event not later than 10 business days after the firm knows or should have known of the event's existence. NYSE Information Memorandum 90-17 NASD Rule 3070(b)
      NASD Rule 3070 provides an exemption from the reporting requirements of the rule for firms subject to substantially similar reporting requirements of another SRO. (As noted above, this provision is intended to exempt Dual Members subject to the reporting requirements of NYSE Rule 351.) NASD Rule 3070(e)
      NASD Rule 3070 requires firms promptly to file with FINRA copies of certain criminal and civil complaints and arbitration claims, including, but not limited to, any securities or commodities-related private civil complaint or arbitration claim filed against the firm (other than arbitration claims that are originally filed in the FINRA Dispute Resolution forum). NASD Rule 3070(f)

      1 The current FINRA rulebook includes (1) NASD Rules and (2) rules incorporated from NYSE (Incorporated NYSE Rules). 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 Information Notice 03/12/08 (Rulebook Consolidation Process).

      2 FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Persons should submit only information that they wish to make publicly available. See NASD Notice to Members 03-73 (November 2003) (NASD Announces Online Availability of Comments) for more information.

      3 Section 19 of the Securities Exchange Act of 1934 (SEA) permits certain limited types of proposed rule changes to take effect upon filing with the SEC. The SEC has the authority to summarily abrogate these types of rule changes within 60 days of filing. See SEA Section 19 and rules thereunder.

      4 For convenience, Incorporated NYSE Rule 351 is hereinafter referred to as "NYSE Rule 351."

      5 NYSE Rule 351(e) and NYSE Rule Interpretation 351(e)/01 (Reports of Investigation) govern trade investigation reporting requirements. NYSE Rules 351(f), 351.11 and 351.12 govern the annual attestation requirement of the research analyst conflict of interest rules. These provisions will be addressed as part of the supervision rules and research analyst conflict of interest rules, respectively. See Regulatory Notice 08-24 (May 2008) (Proposed Consolidated FINRA Rules Governing Supervision and Supervisory Controls) and Regulatory Notice 08-55 (October 2008) (FINRA Requests Comment on Proposed Research Registration and Conflict of Interest Rules).

      6 The proposed rule may be renumbered as part of the final Consolidated FINRA Rulebook.

      7 See NASD Notice to Members 96-85 (December 1996) (Customer Complaint Reporting Rule Update).

      8 See id.

      9 As defined under the NYSE Rules, an "approved person" is a person who either controls a member or is engaged in a securities or kindred business and is controlled by or under common control with a member.


      ATTACHMENT A

      Below is the text of the proposed rule change. New language is underlined; deletions are in brackets.1

      [3070]4530. Reporting Requirements

      (a) Each member shall promptly report to FINRA, [the Association whenever such member or person associated with the member] but in any event not later than 30 calendar days, after the member knows or should have known of the existence of any of the following:
      (1) the member or an associated person of the member:
      (A) has been found to have violated any securities, insurance, commodities, financial or investment-related [provision of any securities] laws, rules, [or] regulations[, any rule] or standards of conduct of any domestic or foreign [governmental agency,] regulatory body, self-regulatory organization[,] or [financial] business or professional organization[, or engaged in conduct which is inconsistent with just and equitable principles of trade; and the member knows or should have known that any of the aforementioned events have occurred];
      [(2)]
      (B) is the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery;
      [(3)]
      (C) is named as a defendant or respondent in any proceeding brought by a domestic or foreign regulatory body or self-regulatory [body] organization alleging the violation of any provision of the Exchange Act, or of any other federal, [or] state or foreign securities, insurance[,] or commodities statute, or of any rule or regulation thereunder, or of any provision of the [B]by-laws, rules or similar governing instruments of any securities, insurance or commodities domestic or foreign regulatory body or self-regulatory organization;
      [(4)]
      (D) is denied registration or is expelled, enjoined, directed to cease and desist, suspended or otherwise disciplined by any securities, insurance or commodities industry domestic or foreign regulatory body or self-regulatory organization or is denied membership or continued membership in any such self-regulatory organization; or is barred from becoming associated with any member of any such self-regulatory organization;
      [(5)]
      (E) is indicted, or convicted of, or pleads guilty to, or pleads no contest to, any felony; or any misdemeanor that involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds, or securities, or a conspiracy to commit any of these offenses, or substantially equivalent activity in a domestic, military[,] or foreign court;
      [(6)]
      (F) is a director, controlling stockholder, partner, officer or sole proprietor of, or an associated person with, a broker, dealer, investment company, investment advisor, underwriter or insurance company [which] that was suspended, expelled or had its registration denied or revoked by any domestic or foreign [agency] regulatory body, jurisdiction or organization or is associated in such a capacity with a bank, trust company or other financial institution [which] that was convicted of or pleaded no contest to, any felony or misdemeanor in a domestic or foreign court;
      [(7)]
      (G) is a defendant or respondent in any securities, insurance or commodities-related civil litigation or arbitration, or is the subject of any other claim for damages by a customer, broker or dealer [which] that has been disposed of by judgment, award or settlement for an amount exceeding $15,000. However, when the member is the defendant or respondent or is the subject of any claim for damages by a customer, broker or dealer, then the reporting to [the Association] FINRA shall be required only when such judgment, award[,] or settlement is for an amount exceeding $25,000; or
      [(8) is the subject of any claim for damages by a customer, broker, or dealer which is settled for an amount exceeding $15,000. However, when the claim for damages is against a member, then the reporting to the Association shall be required only when such claim is settled for an amount exceeding $25,000;]
      [(9)]
      (H) is, or is involved [associated] in the sale of any [business or] financial [activity] instrument, the provision of any investment advice or the financing of any such activities with any person who is, subject to a "statutory disqualification" as that term is defined in the Exchange Act[, and the member knows or should have known of the association]. The report shall include the name of the person subject to the statutory disqualification and details concerning the disqualification;
      [(10)]
      (2) an associated person of the member is the subject of any disciplinary action taken by the member [against any person associated with the member] involving suspension, termination, the withholding of [commissions] compensation or of any other remuneration in excess of $2,500, [or] the imposition of fines in excess of $2,500[,] or is otherwise disciplined in any manner [which] that would have a significant limitation on the individual's activities on a temporary or permanent basis[.]; or
      (3) the member has concluded that an associated person of the member or the member itself has violated any securities, insurance, commodities, financial or investment-related laws, rules, regulations or standards of conduct of any domestic or foreign regulatory body or self-regulatory organization.
      (b) Each person associated with a member shall promptly report to the member the existence of any of the [conditions] events set forth in paragraph (a)(1) of this Rule. [Each member shall report to the Association not later than 10 business days after the member knows or should have known of the existence of any of the conditions set forth in paragraph (a) of this rule.]
      (c) Each member shall report to [the Association] FINRA statistical and summary information regarding customer complaints in such detail as [the Association] FINRA shall specify by the 15th day of the month following the calendar quarter in which customer complaints are received by the member. For the purposes of this paragraph, "customer" includes any person other than a broker or dealer with whom the member has engaged, or has sought to engage, in securities activities, and "complaint" includes any written grievance by a customer involving the member or person associated with [a] the member.
      (d) Nothing contained in this Rule shall eliminate, reduce[,] or otherwise abrogate the responsibilities of a member or person associated with a member to promptly [file with full disclosure,] disclose required [amendments to] information on the Forms BD, [Forms] U[-]4 [and] or U[-]5, as applicable, [or] to make any other required filings[, and] or to respond to [NASD] FINRA with respect to any customer complaint, examination[,] or inquiry. In addition, members are required to comply with the reporting obligations under paragraphs (a) and (c) of this Rule, regardless of whether the information is reported or disclosed pursuant to any other rule or requirement, including the requirements of the Forms BD, U4 or U5.
      [(e) Any member subject to substantially similar reporting requirements of another self-regulatory organization of which it is a member is exempt from paragraphs (a), (b) and (c) of this Rule.]
      [(f)](e) Each member shall promptly file with [NASD] FINRA copies of:
      (1) any indictment, information or other criminal complaint or plea agreement for conduct reportable under paragraph (a)[(5)](1)(E) of this Rule;
      (2) any complaint in which a member is named as a defendant or respondent in any securities, insurance or commodities-related private civil litigation;
      (3) any securities, insurance or commodities-related arbitration claim filed against a member in any forum other than the [NASD] FINRA Dispute Resolution forum;
      (4) any indictment, information or other criminal complaint, any plea agreement, or any private civil complaint or arbitration claim against a person associated with a member that is reportable under question 14 on Form U[-]4, irrespective of any dollar thresholds Form U[-]4 imposes for notification, unless, in the case of an arbitration claim, the claim has been filed in the [NASD] FINRA Dispute Resolution forum.
      [(g)](f) Members shall not be required to comply separately with paragraph [(f)] (e) in the event that any of the documents required by paragraph [(f)] (e) have been the subject of a request by [NASD] FINRA's Registration and Disclosure staff, provided that the member produces those requested documents to the Registration and Disclosure staff not later than 30 days after receipt of such request. This paragraph does not supersede any [NASD] FINRA rule or policy that requires production of documents specified in paragraph [(f)] (e) sooner than 30 days after receipt of a request by the Registration and Disclosure staff.

      •  •  •  Supplementary Material: ---------

      .01 Reporting of Firms' Conclusions of Violations. For purposes of paragraph (a)(3) of this Rule, with respect to violative conduct by an associated person, the reporting obligation under paragraph (a)(3) must be read in conjunction with the reporting obligation under paragraph (a)(2) of this Rule. If a member has concluded that an associated person has engaged in violative conduct and imposes the discipline set forth under paragraph (a)(2) of this Rule, then the member is required to report the event under paragraph (a)(2), and it need not report the event under paragraph (a)(3). In addition, for purposes of paragraph (a)(3) of this Rule, FINRA does not expect a member to report an isolated violation by the member or an associated person of the member that can be reasonably viewed as a ministerial violation of the applicable rules that did not result in customer harm and was remedied promptly upon discovery.
      .02 Firms' Conclusions of Violations versus External Findings. Members should be aware that paragraph (a)(3) of this Rule is limited to situations where the member has concluded on its own that violative conduct has occurred. Paragraph (a)(1)(A) of this Rule is limited to situations where there has been a finding of violative conduct by an external body, such as a court, domestic or foreign regulatory body, self-regulatory organization or business or professional organization.
      .03 Meaning of "Found." The term "found" as used in paragraph (a)(1)(A) of this Rule includes among other formal findings, adverse final actions, including consent decrees in which the respondent has neither admitted nor denied the findings, but does not include informal agreements, deficiency letters, examination reports, memoranda of understanding, cautionary actions, admonishments and similar informal resolutions of matters. For example, a Letter of Acceptance, Waiver and Consent or an Offer of Settlement is considered an adverse final action. The term "found" also includes any formal finding, regardless of whether the finding will be appealed. The term "found" does not include a violation of a self-regulatory organization rule that has been designated as "minor" pursuant to a plan approved by the SEC, if the sanction imposed consists of a fine of $2,500 or less, and if the sanctioned person does not contest the fine.
      .04 Meaning of "Regulatory Body." For the purposes of this Rule, the term "regulatory body" refers to governmental regulatory bodies and authorized non-governmental regulatory bodies, such as the Financial Services Authority.
      .05 Reporting of Individual and Related Events. With respect to a reportable event under paragraph (a) of this Rule, members should not report the same event under more than one subparagraph. Members should report the event under the most appropriate subparagraph. However, members should be aware that they may be required to report related events under more than one subparagraph. For instance, if a member is named as a respondent in a proceeding brought by a self-regulatory organization alleging the violation of the self-regulatory organization's rules, the member would be required to report that event under paragraph (a)(1)(C) of this Rule. In addition, if the member subsequently is found to have violated the self-regulatory organization's rules, the member would be required to report that finding under paragraph (a)(1)(A) of this Rule.
      .06 Calculation of Monetary Thresholds. For purposes of paragraph (a)(1)(G) of this Rule, when determining the dollar amount that would require a report, members must include any attorneys fees and interest in the total amount. In addition if the parties are subject to "joint and several" liability, the amount for each party must be aggregated and reported, if above the dollar thresholds under paragraph (a)(1)(G), as if each party is separately liable for the aggregated amount. For instance, if two parties have "joint and several" liability for $40,000, the amount reported would be $40,000 for each party.
      .07 Former Associated Persons. For purposes of paragraphs (a) and (c) of this Rule, members should report an event relating to a former associated person if the event occurred while the individual was associated with the member.
      .08 Customer Complaints. Any written customer complaint reported under paragraph (a)(1)(B) of this Rule also must be reported pursuant to paragraph (c) of this Rule. Members also should be aware that pursuant to Rule 3110(b)(5), their supervisory procedures must include procedures to capture, acknowledge and respond to all written (including electronic) customer complaints.

      1 Attachment A sets forth the text of current NASD Rule 3070 marked to show changes between NASD Rule 3070 and proposed FINRA Rule 4530. The proposal would delete NASD Rule 3070, paragraphs (a) through (d) of NYSE Rule 351 and NYSE Rules 351.10 and 351.13. Proposed Supplementary Material .08 reminds firms of their obligations under proposed FINRA Rule 3110(b)(5), which is part of the proposed supervision rules. See Regulatory Notice 08-24 (May 2008) (Proposed Consolidated FINRA Rules Governing Supervision and Supervisory Controls).

    • 08-70 FINRA Provides Guidance Regarding Credit for Extraordinary Cooperation

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      FINRA Investigations

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules and Notices

      NASD Rule 3070(a)
      NASD Rule 8210
      NYSE Rule 351(a)
      NYSE Information Memorandum 05-65
      Suggested Routing

      Compliance
      Internal Audit
      Legal
      Key Topics

      Investigations
      Self-reporting

      Executive Summary

      FINRA is issuing this guidance to apprise firms of the circumstances in which extraordinary cooperation by a firm or individual may directly influence the outcome of an investigation. The types of extraordinary cooperation by a firm or individual that could result in credit can be categorized as follows: (1) self-reporting before regulators are aware of the issue; (2) extraordinary steps to correct deficient procedures and systems; (3) extraordinary remediation to customers; and (4) providing substantial assistance to FINRA's investigation. These steps alone or taken together can be viewed in a particular case as extraordinary cooperation and, depending on the facts and circumstances, can have an impact on FINRA's enforcement decisions.1

      Questions regarding this Notice, should be directed to Susan Merrill, Executive Vice President, Enforcement, at (646) 315-7300.

      Background & Discussion

      The cornerstone of the investigative and enforcement authority of self-regulatory organizations in the securities industry is the requirement that firms and individuals employed in the industry comply with regulatory requests for information or testimony.2 Notwithstanding this obligation, in certain situations, actions taken by firms or individuals go far beyond such compliance and rise to the level of extraordinary cooperation. Depending on the facts and circumstances, there are instances where cooperation by a firm or individual is so extraordinary that it should be taken into consideration in determining the appropriate regulatory response.

      There is significant regulatory value in crediting conduct that rises to the level of extraordinary cooperation.3 Such cooperation may put the regulator on notice of regulatory problems before it finds them during an examination or investigation or assist the regulator in resolving matters more quickly, thereby allowing it to deploy regulatory resources more efficiently. This enables FINRA to achieve its mission of investor protection and market integrity more effectively.

      Credit for extraordinary cooperation in FINRA matters may be reflected in a variety of ways, including a reduction in the fine imposed, eliminating the need for or otherwise limiting an undertaking, and including language in the settlement document and press release that notes the cooperation and its positive effect on the final settlement by FINRA Enforcement. In an unusual case, depending on the facts and circumstances involved, the level of extraordinary cooperation could lead FINRA to determine to take no disciplinary action at all.

      By publishing these standards of cooperation, FINRA seeks to increase transparency as to the basis for sanctions imposed in cases and to encourage firms to root out, correct and remediate violative behavior. By making clear that FINRA has given credit for extraordinary cooperation in a particular case, FINRA will inform firms and associated persons of the types of conduct considered and the degree to which such actions are to the individual or firm's benefit.

      It is important to note that the level of cooperation is just one factor to be considered in determining the appropriate disciplinary action and sanctions. Other factors include the nature of the conduct, the extent of customer harm, the duration of the misconduct, and the existence of prior disciplinary history, all of which impact the appropriate sanction in any particular matter.

      FINRA will consider the following factors in assessing cooperation:

      1. Self-Reporting of Violations

      FINRA will consider credit for self-reporting of violations before any regulatory inquiry into the conduct at issue has begun and before the violation otherwise comes to the regulator's attention. The self-reporting must be prompt, detailed, complete and straightforward in order to warrant special consideration. The type of reporting that is contemplated here is beyond that which is otherwise required to be reported pursuant to regulatory reporting requirements.4
      2. Extraordinary Steps to Correct Deficient Procedures and Systems

      FINRA may credit correction of procedures that occurs prior to detection by FINRA and, in appropriate circumstances, even after detection by FINRA. In order to encourage firms to take immediate, proactive steps to correct systems, procedures and controls that may have contributed to problems that occurred at the firm, FINRA considers it appropriate to credit such steps in reaching its decision regarding the appropriate regulatory response.

      Credit for correction of procedures prior to regulatory detection is consistent with the FINRA Sanction Guidelines and cases that FINRA has recently brought. Firms that have found a problem and fully corrected related procedures before the examination or investigation began have received credit in the form of a reduction of the sanction imposed in the disciplinary action.

      Credit for remediation of procedures post-detection by FINRA would be appropriately limited to those situations where, notwithstanding the fact that the firm did not discover the problem on its own, the firm nevertheless promptly and completely remediated the deficient procedures as soon as it became aware of the problem without prompting by FINRA or another regulator or law enforcement agency.5 To qualify for credit for extraordinary cooperation, the post-detection remediation must be taken early on, well before completion of FINRA's investigation. Steps taken later in the investigation to correct procedures will not be considered extraordinary steps and would not yield credit in the sanction determination, because a firm has a duty to correct deficient procedures.6
      3. Extraordinary Remediation to Customers

      FINRA recognizes that credit should be given for extraordinary steps taken to remediate customers, including promptly and immediately identifying injured customers and making such investors whole.7 FINRA also will consider the extent to which a firm proactively identifies and provides restitution to injured customers that goes beyond the universe of customers and transactions covered by the staff's investigation.8
      4. Providing Substantial Assistance to FINRA Investigations

      FINRA recognizes that receiving substantial assistance from firms during an investigation can assist FINRA in efficiently resolving investigations into violative conduct. Such assistance can have far-reaching benefits, including, among other things, shortening investigations and enhancing FINRA's ability to effectively and efficiently investigate large scale and complicated systemic failures, thereby reducing the regulatory burden on firms and FINRA resources. Examples of the types of substantial assistance that may, depending on the circumstances, warrant credit include:
      •  Providing access to individuals or documents outside FINRA's jurisdiction that are critical to a full investigation of violative conduct.
      •  Providing extraordinary assistance with the investigation. Upon learning of a problem, firms often undertake comprehensive internal investigations, and then brief FINRA staff on their findings. FINRA has credited these proactive undertakings by firms that greatly assisted the staff's investigations.9
      •  Cooperation with FINRA to uncover substantial industry wrongdoing. When on-going violative conduct has numerous participants yet is difficult to uncover, collaboration with the regulator can have a dramatic impact on regulatory consequences. This can include apprising FINRA of wrongdoing beyond the scope of the original investigation and alerting staff to industry-wide, systemic problems. When a firm or individual brings to the regulator's attention a pattern or practice of which the regulator was unaware, or is the first to come forward to cooperate in a widespread, industry-wide investigation and thereby assists the regulator in understanding, scoping and resolving the investigation, this assistance should be credited. Conditions for such credit include: (i) cooperation with the regulator to uncover related industry wrongdoing; (ii) providing substantial assistance in furtherance of the resulting investigation; and (iii) cooperating in all relevant respects.

      Conclusion

      Crediting extraordinary cooperation by firms and individuals in appropriate situations advances important regulatory goals. Among other things, it can shorten investigations, thereby reducing regulatory burdens on firms and FINRA resources, as well as apprise FINRA staff of wrongdoing beyond the scope of the original investigation and alerting staff to industry-wide, systemic problems. Encouraging firms and individuals to take immediate, proactive and meaningful steps and appropriately acknowledging the cooperative conduct in settlement documents may encourage others to take similar steps and will provide transparency into sanction terms and how the conduct was actually credited.

      While FINRA staff will continue to assess the particular facts and circumstances in each case, including the nature of the conduct, the extent of customer harm, the duration of the misconduct and the existence of disciplinary history, the extent of a firm's extraordinary cooperation will be an important factor in determining the appropriate disciplinary action and the sanctions that will be sought by FINRA Enforcement.


      1 This Regulatory Notice is intended to provide member firms and their associated persons with guidance concerning the factors that FINRA Enforcement considers when assessing the sanctions it will seek in the context of settlement discussions that precede the filing of a formal disciplinary action. Nothing herein is intended to alter the guidance for adjudicators set forth in the Principal Considerations in Determining Sanctions contained in FINRA's Sanction Guidelines.

      2 NASD Rule 8210.

      3 The FINRA Sanction Guidelines recognize that certain proactive, corrective measures taken by firms and individuals involved in the disciplinary process may have an impact on sanction determinations. Specifically, the Principal Considerations under the Guidelines provide for consideration in determining sanctions of, among other factors, self-reporting, corrective measures, and restitution prior to detection by the firm (in the case of an individual) or by a regulator (in the case of a firm), as well as substantial assistance to FINRA in its examination and/or investigation of the conduct. These Guidelines and Principal Considerations provide a foundation for much of what we say here, although it is important to note that they apply, strictly speaking, to adjudicators in contested matters.

      The relevant Principal Considerations that apply to adjudicators in determining sanctions in contested matters are:

      2. Whether an individual or member firm respondent accepted responsibility for and acknowledged the misconduct to his or her employer (in the case of an individual) or a regulator prior to detection and intervention by the firm (in the case of an individual) or a regulator.
      3. Whether an individual or member firm respondent voluntarily employed subsequent corrective measures, prior to detection or intervention by the firm (in the case of an individual) or by a regulator, to revise general and/or specific procedures to avoid recurrence of misconduct.
      4. Whether the respondent voluntarily and reasonably attempted, prior to detection and intervention, to pay restitution or otherwise remedy the misconduct.
      12. Whether the respondent provided substantial assistance to FINRA in its examination and/or investigation of the underlying misconduct, or whether the respondent attempted to delay FINRA's investigation, to conceal information from FINRA, or to provide inaccurate or misleading testimony or documentary information to FINRA.

      4 NYSE Rule 351(a) and NASD Rule 3070(a) both require firms to report certain violations to FINRA but at different times. These rules will be harmonized in the rulebook consolidation project. The type of self-reporting contemplated as extraordinary and deserving of credit would go significantly beyond these regulatory requirements. For example, a firm may satisfy its reporting requirement under Rule 351(a) by filing a brief RE-3 with FINRA. Self-reporting deserving of credit for cooperation would, at a minimum, have to include a detailed account of the discovered conduct and an offer to explain in complete detail all aspects of the conduct and provide relevant documents. See, NYSE Information Memorandum 05-65.

      5 See, e.g., DOE v. Morgan Stanley DW, Inc., AWC Action No. EAF0301160001 (Aug. 1, 2005) (The press release states: "In sanctioning Morgan Stanley, NASD took into account the firm's demonstrable steps, undertaken shortly after NASD's inquiry began, to enhance its system and procedures and which led to the firm's identification and removal of large numbers of accounts for which the Choice program was not appropriate."); DOE v. CIBC World Markets Corp, AWC Action No. 2006004464101 (Jan. 8, 2008) (The press release states: "The fine for CIBC was reduced in recognition of the firm's actions in reporting the problem to FINRA and taking prompt remedial actions to correct the problem.")

      6 This is not meant to suggest that a firm or individual cannot defend an Enforcement investigation into deficient policies and procedures. A firm that believes its procedures are adequate and does not change them promptly or until the very end of an investigation should not expect to receive a sanction reflecting credit for extraordinary cooperation in any settlement.

      7 See, e.g., DOE v. Northwestern Mutual Investment Services, LLC, AWC Action No. 2006005084401 (June 28, 2007) (The press release states: "NASD imposed a reduced fine in recognition of the firm's prompt remedial steps after an NASD examination to assess client harm and provide remediation to eligible clients.")

      8 See, e.g., DOE v. AXA Advisors, LLC AWC Action No. 2005002269401 (Sept. 5, 2007) (The press release states: "FINRA ordered AXA Advisors to return $1.4 million in fees to approximately 1800 customers. AXA Advisors voluntarily refunded an additional $1.2 million to customers... AXA Advisors also unilaterally took steps to enhance its systems and procedures and to close accounts that were not appropriate for the fee based program. FINRA considered these steps in determining the sanctions in this case."); DOE v. Banc of America Investment Services, Inc., AWC Action No. EAF0401010002 (Nov. 21, 2006) (The press release states: "In connection with the sanctions imposed in this AWC, NASD has taken into account certain demonstrable steps undertaken by BAIS, shortly after NASD issued Notice to Members 03-68, to update and enhance its systems and procedures relating to fee-based accounts. NASD also considered BAIS's self-reporting of certain conduct... [O]n its own initiative, BAIS identified the customers affected by this conduct and has reimbursed the customers the amounts they were charged for the transactions at issue.")

      9 See, e.g., DOE v. Instinet/Island, AWC Action No. 2004200002601 (Oct. 3, 2005) and DOE v. Piper Jaffrey, AWC Action No. 2006006755701 (Dec 18, 2007). Firms often assert attorney-client privilege in connection with a firm's internal investigation. Such a firm could still receive credit for extraordinary cooperation if it found other ways to inform FINRA staff of pertinent facts without waiving the privilege. Indeed, consistent with FINRA's duty "to provide a fair procedure for the disciplining of members and persons associated with members," FINRA as a general matter recognizes the attorney-client privilege in its adjudicatory forum. Securities Exchange Act of 1934, 15 U.S.C. § 78(o)-3. Therefore, the waiver or non-waiver of the privilege itself will not be considered in connection with granting credit for cooperation. Moreover, it is not the waiver of attorney-client privilege that warrants credit for cooperation but rather the extraordinary assistance to the staff in uncovering the facts in an investigation that yields the benefit.

    • 08-69 Alert to Member Firms About the Federal Trade Commission's FACT Act Regulations and the Announcement of the FTC's Decision to Delay Enforcement of the Red Flags Rule until May 1, 2009

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      FTC Announces Expanded Business Education Campaign on 'Red Flags' Rule

      Fair and Accurate Credit Transactions Act of 2003

      Regulatory Notice
      Notice Type

      Guidance
      Special Alert
      Key Topics

      Changes of Address
      Consumer Reports
      Covered Accounts
      Creditors
      FACT Act
      Financial Institutions
      Identity Theft
      Notice of Address Discrepancy
      Privacy
      Red Flags
      Transaction Accounts
      Suggested Routing

      Compliance
      Internal Audit
      Legal
      Operations
      Senior Management
      Systems
      Training
       

      Executive Summary

      FINRA is issuing this Notice to alert member firms about the Federal Trade Commission's (FTC's) Fair and Accurate Credit Transactions Act of 2003 (FACT Act) regulations and the FTC's decision to delay enforcement of the Red Flags Rule until May 1, 2009, to give member firms additional time to develop and implement their procedures. By that date, member firms subject to these regulations must have in place a written program to identify, detect and respond to patterns, practices or specific activities that could indicate identity theft.

      The mandatory compliance date for the other FTC regulations approved at the same time as the Red Flags Rule remains November 1, 2008. Those regulations require any member firms that issue credit or debit cards to have reasonable policies and procedures to assess the validity of change-of-address notifications. Also, member firms that use consumer reports must develop reasonable policies and procedures to respond to the receipt of a consumer reporting agency's notice of address discrepancy. This Notice describes these FTC rules. Member firms are reminded that these are not FINRA Rules, and except as noted below, questions concerning these rules should be directed to the FTC.

      To view the Federal Register notice of the FACT Act Regulations go to www.ftc.gov/os/fedreg/2007/november/071109redflags.pdf.

      Background & Discussion

      The Federal Trade Commission (FTC) and the federal banking regulators have issued joint regulations1 implementing Sections 114 and 315 of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act).2 As discussed in greater detail below, the FTC's regulations, which apply to most member firms, require that:

      • Each financial institution or creditor develop and implement a written program to detect, prevent and mitigate identity theft in connection with the opening of certain accounts or the maintenance of certain existing accounts (referred to as the Red Flags Rule);
      • Each credit and debit card issuer assess the validity of change-of-address notifications; and
      • Each user of consumer reports develop reasonable policies and procedures to respond to the receipt of a consumer reporting agency's notice of a consumer address discrepancy.

      Member firms should understand that the purpose of this Notice is informational only. Its purpose is solely to inform member firms about federal regulations, which FINRA has neither engaged in rulemaking nor has the authority to interpret. Nevertheless, given the importance and possible application of these regulations to member firms, FINRA believes it is important to provide this Notice in addition to what has been published in the Federal Register. Member firms should not rely on this Notice as a substitute for their understanding and application of these regulations and should seek their own counsel to address any issues under these regulations. As noted at the conclusion of this Notice, the FTC has indicated its willingness to work with FINRA in addressing industry-wide questions pertaining to the application of these provisions to member firms.

      A. Red Flags Rule

      The FTC's Red Flags Rule requires a member firm that is a "financial institution" or "creditor" offering or maintaining "covered accounts" to develop, implement and administer a Written Identity Theft Prevention Program (Program) to detect, prevent and mitigate identity theft in connection with the opening of a covered account or the maintenance of any existing covered account. The Red Flags Rule also requires every member firm that is a financial institution or creditor (even those that have initially determined that they do not need to have a Program) to periodically reassess whether it offers or maintains covered accounts that would require it to have in place a written Program.
      1. Determining the Applicability of the Red Flags Rule to Member Firms

      There are several key definitions to determine whether the Red Flags Rule applies to a member firm. Specifically, the Red Flags Rule applies to a "financial institution" or "creditor." As a threshold matter, the member firm must first determine whether it is a financial institution or creditor. The term "financial institution" means a depository institution or any other person that, directly or indirectly, holds a transaction account belonging to a consumer.3 The term "transaction account" means an account that permits the account holder to make withdrawals for payment or transfer to third parties of funds via telephone transfers, check, debit card or other similar items.4 The term "consumer" as used in the definition of financial institution reaches only individuals.5 As a result, a member firm without any individuals as clients would not be deemed to be a financial institution.

      The term "creditor" means any person who regularly extends, renews, or continues credit or regularly arranges for the extension, renewal or continuation of credit.6 Therefore, if a member firm, acting as either an introducing or clearing firm, provides a customer with margin—a form of credit—it will be deemed to be a creditor for purposes of the Red Flags Rule. A member firm also will be deemed to be a creditor if it extends credit, or arranges to extend credit, to any of its customers in any other context, such as, arranging loans. A member firm that is not considered a financial institution because it has only institutional customers could still be a creditor if it extends credit, or arranges to extend credit, for any of its customers.

      Once a member firm determines that it is either a financial institution or creditor, it must then analyze whether it has "covered accounts." The term "covered accounts" is defined as (1) an account offered or maintained primarily for personal, family or household purposes that is designed to permit multiple payments or transactions; or (2) any other account for which there is a reasonably foreseeable risk to customers or safety and soundness of the member firm from identity theft, including financial, operational, compliance, reputation or litigation risks.7

      Each member firm that is a financial institution or creditor should carefully analyze its customers and accounts to determine the extent to which it must comply with the FTC's Red Flags Rule.8 While the definition of "covered accounts" in clause (1) generally applies only to retail accounts, the alternative definition in clause (2) would include any type of account (including institutional accounts) if the member firm determines that those accounts pose a reasonably foreseeable risk to its customers or to its own safety or soundness from identity theft.

      Member firms should also be aware that a firm that determines it is not a financial institution or creditor for purposes of the FTC's regulations should consider having procedures in place to reassess that determination if there is a change in business operations, such as a change of business model or the offering of a new business line or product.
      2. Development and Implementation of the Program; Consideration of Guidelines

      A member firm subject to the Red Flags Rule as discussed above, must develop and implement a Written Identity Theft Program that is appropriate to that firm's size and complexity and the nature and scope of its business. At a minimum, the Program must include reasonable policies and procedures to:
      • Identify relevant red flags for the covered accounts that the member firm offers or maintains and incorporate those red flags into its Program;
      • Detect red flags that have been incorporated into the Program;
      • Respond appropriately to any red flags that are detected to prevent and mitigate identity theft; and
      • Ensure the Program (including the red flags determined to be relevant) is updated periodically to reflect changes in risks to customers and to the safety and soundness of the member firm from identity theft.9
      A member firm that is required to implement a Program must also consider the Interagency Guidelines on Identity Theft Detection, Prevention and Mitigation (Guidelines) and include in its Program those guidelines that are appropriate.10 These guidelines are intended to assist financial institutions and creditors in formulating and maintaining a Program. In addition, member firms should review, and implement where appropriate, the supplement to the Guidelines, which contains 26 illustrative examples of red flags.11 Member firms already may be engaged in detecting some red flags through their requisite anti-fraud and anti-money laundering procedures. Accordingly, a member firm may consider whether such procedures can be adapted, to the extent appropriate, into its Program.12
      3. Administration of the Program

      A member firm that is required to develop and implement a Program must provide for its continued administration13 and must:
      • Obtain approval of the initial written Program from either its board of directors, an appropriate committee thereof, or (if there is no board of directors) a designated employee at the level of senior management;
      • Involve the board of directors, an appropriate committee thereof or a designated employee at the level of senior management in the oversight, development implementation and administration of the Program;
      • Train staff, as necessary, to effectively implement the Program; and
      • Exercise appropriate and effective oversight of service provider arrangements.14
      Member firms should also be aware of their obligations with respect to third-party service providers. Specifically, whenever a member firm engages a service provider to perform an activity to which the requirements of the Program would apply if the firm itself was performing the activity, the member firm must ensure that the service provider's activity is conducted in accordance with reasonable policies and procedures designed to detect, prevent and mitigate the risk of identity theft.15 For example, a member firm could contractually require the service provider to have policies and procedures to detect relevant red flags that may arise in the performance of its activities and either report the red flags to the member firm or to take appropriate steps to prevent or mitigate identity theft.16
      4. Periodic Identification of Covered Accounts

      Member firms that are financial institutions or creditors under the Red Flags Rule must periodically determine whether they offer or maintain covered accounts.17 Further, as a part of this determination, the member firm must conduct a risk assessment to determine whether it offers or maintains covered accounts for which there is a reasonably foreseeable risk to customers or to the safety and soundness of the member firm from identity theft, taking into consideration:
      • The methods it provides to open its accounts;
      • The methods it provides to access its accounts; and
      • Its previous experiences with identity theft.18
      B. Special Rules for Card Issuers

      The FTC also issued rules that require any member firm considered to be a financial institution or creditor, as defined above, that issues credit or debit cards to have reasonable policies and procedures to assess the validity of any address change notifications the member firm receives.19 Specifically, a member firm that receives an address change notification and, within at least 30 days, a request for an additional or replacement card, may not issue an additional or replacement card until it has either:
      • Notified the cardholder of the request at the cardholder's former address or via any other means of communication that the member firm and the cardholder have previously agreed to use, and provided the cardholder with a reasonable means of promptly reporting incorrect address changes; or
      • Otherwise assessed the validity of the change of address in accordance with the policies and procedures established in its Program.20
      A member firm's notice to the cardholder, regardless of whether it is in either written or electronic form, must be clear and conspicuous and be provided separately from the member firm's regular correspondence with the cardholder.21

      A member firm may also comply with these validation requirements if it validates an address using the methods described above before it receives a request for an additional or replacement card.22
      C. Special Rules for Users of Consumer Reports

      The FTC also has issued rules requiring any member firm requesting a consumer report on an individual from a consumer reporting agency (CRA) to develop reasonable policies and procedures to use if it receives a notice of address discrepancy23 from the CRA. The policies and procedures should be designed to enable the member firm to form a reasonable belief that it has the correct consumer report.24 This obligation exists regardless of whether the member firm receives the notice of address discrepancy for a consumer report requested in connection with the opening of an account or in other circumstances in which the member firm already has a relationship with the consumer, such as when the customer applies for margin privileges for an existing account.25 Therefore, if a member firm requests a consumer report about a new or existing customer and receives a notice of address discrepancy, the member firm must be able to form a reasonable belief that the consumer report actually relates to the customer in question.

      The FTC's rules provide examples of reasonable policies and procedures member firms can use to form a reasonable belief about the identity of the customer. One method would be to verify the information in the consumer report directly with the customer.26 Alternatively, a member firm could compare the information in the consumer report with:
      • Information obtained and used to verify the individual's identity in accordance with the requirements of the member firm's Customer Information Program (CIP);27
      • Information maintained in its own records, such as applications, change-of-address notifications, other customer account records or retained CIP documentation; or
      • Information obtained from third-party sources.28
      Generally, a member firm should use its CIP information to form a reasonable belief about an individual's identity only in connection with an account opening. However, if the member firm has received a notice of address discrepancy regarding a consumer report about an existing customer and the member firm has already met its CIP obligations, the member firm should use the other examples listed above (e.g., verifying the information directly with the customer, information obtained from third-party sources, etc.) to form its reasonable belief that the consumer report is about the correct individual.29

      If a member firm cannot establish a reasonable belief that it has received the correct consumer report, the member firm should not use that report.30 A member firm should be aware that other laws may also apply to a situation where it has received an incorrect consumer report. For example, in the case of account openings, if the member firm cannot establish a reasonable belief that it knows the true identity of the customer, it will need to follow its CIP obligations, which may involve not opening the account.31 Additionally, a notice of address discrepancy may be a red flag and require an appropriate response under the member firm's Written Identity Theft Prevention Program.32

      Finally, a member firm must furnish a consumer's address that it has reasonably confirmed is accurate to the CRA from which it received a notice of address discrepancy when the member firm:
      • Can form a reasonable belief that the consumer report relates to the individual about whom the member firm requested the report;
      • Establishes a continuing relationship with the customer; and
      • Regularly and in the ordinary course of business furnishes information to the CRA.33
      A member firm may reasonably confirm an address is correct by:
      • Verifying the address with the customer;
      • Reviewing its own records to verify the address of the customer;
      • Verifying the address through a third-party; or
      • Using other reasonable means.34

      Future Interpretive Guidance

      As previously noted, this Notice describes rules of the Federal Trade Commission, and the FTC is responsible for interpreting and applying these rules. Nevertheless, the FTC has indicated a willingness to work with FINRA to resolve on a consistent and industry-wide basis, interpretive questions that arise under these rules as applied to broker-dealers. Accordingly, FINRA invites member firms to contact FINRA's Office of General Counsel at (202)728-8071 with any questions regarding the regulations that pose significant interpretive challenges. Questions about compliance with the FACT Act Rules generally should be directed to the FTC.

      Mandatory Compliance Date

      Full compliance with the FTC's regulations was originally required by November 1, 2008. However, during the course of the FTC's education and outreach efforts following publication of the regulations, the FTC learned that some industries and entities within the FTC's jurisdiction were confused and uncertain about their coverage under the rule, especially the Red Flags Rule. Many entities also noted that because they generally are not required to comply with FTC rules in other contexts, they had not followed or even been aware of the rulemaking, and therefore learned of the requirements of the rule too late to be able to comply by November 1, 2008. Given this confusion and uncertainty, the FTC has delayed the enforcement of the Red Flags Rule until May 1, 2009, to allow these entities to develop and implement their programs.


      1 See Identity Theft Red Flags and Address Discrepancies Under the Fair and Accurate Credit Transactions Act of 2003, 72 FR 63718 (November 9, 2007) (Joint Final Rules and Guidelines of the FTC, Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), Office of Thrift Supervision (OTS), and National Credit Union Administration (NCUA)).

      2 See Pub. L. 108–159 (amending Section 615 of the Fair Credit Reporting Act of 1970 (FCRA) and adding new Section 605(h)(2)).

      3 The term "financial institution" is specifically defined as "a State or National bank, a State or Federal savings and loan association, a mutual savings bank, a State or Federal credit union, or any other person that, directly or indirectly, holds a transaction account . . . belonging to a consumer." 16 CFR 681.2(b)(7); 15 U.S.C. 1681a(t).

      4 A "transaction account" is specifically defined as "a deposit or account on which the depositor or account holder is permitted to make withdrawals by negotiable or transferable instrument, payment orders of withdrawal, telephone transfers, or other similar items for the purpose of making payments or transfers to third persons or others. Such term includes demand deposits, negotiable order of withdrawal accounts, savings deposits subject to automatic transfers, and share draft accounts." 12 U.S.C. 461(b)(1)(C).

      5 15 U.S.C. 1681a(c).

      6 The term "creditor" specifically means "any person who regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit." See 16 CFR 681.2(b)(5); 15 U.S.C. 1681a(r)(5); and 15 U.S.C. 1691a(e).

      7 The term "covered account" specifically means:

      (i) An account that a financial institution or creditor offers or maintains, primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions, such as a credit card account, mortgage loan, automobile loan, margin account, cell phone account, utility account, checking account, or savings account; and
      (ii)any other account that the financial institution or creditor offers or maintains for which there is a reasonably foreseeable risk to customers or to the safety and soundness of the financial institution or creditor from identity theft, including financial, operational, compliance, reputational, or litigation risk.

      16 CFR 681.2(b)(3).

      8 Member firms, are reminded that the just and equitable principles of trade underpinning NASD Rule 2110 prohibit conduct that, to any degree, is illegal under any applicable law. Accordingly, a member firm subject to the FTC's Red Flags Rule that does not comply with the Red Flags Rule will be considered to have violated NASD Rule 2110.

      9 16 CFR 681.2(d)(2)(i)–(iv).

      10 16 CFR 681.2(f).

      11 See supra note 2 at 63773–63774 (Appendix A to Part 681—Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation and Supplement A to Appendix A).

      12 See supra note 2 at 63728.

      13 16 CFR 681.2(e).

      14 16 CFR 681.2(e)(1)–(4).

      15 16 CFR 681.2(e)(4).

      16 See supra note 2 at 63773–74.

      17 16 CFR 681.2(c).

      18 16 CFR 681.2(c)(1)–(3).

      19 16 CFR 681.3.

      20 16 CFR 681.3(c).

      21 16 CFR 681.3(e).

      22 16 CFR 681.3(d).

      23 A "notice of address discrepancy" means "a notice sent to a user by a consumer reporting agency pursuant to 15 U.S.C. 1681c(h)(1), that informs the user of a substantial difference between the address for the consumer that the user provided to request the consumer report and the address(es) in the agency's file for the consumer." 16 CFR 681.1(b).

      24 16 CFR 681.1(c)(1).

      25 See supra note 2 at 63736 (it is important for a user to form a reasonable belief that the consumer report relates to the consumer about whom it has requested the report both in the connection with the opening of an account and in other circumstances when the user already has a relationship with the consumer, such as when the consumer applies for an increased credit line).

      26 16 CFR 681.1(c)(2)(ii).

      27 31 CFR 103.121.

      28 16 CFR 681.1(c)(2)(i)(A)–(C).

      29 See supra note 2 at 63737.

      30 See id.

      31 See supra note 2 at 63737; see also 31 CFR 103.121(b)(2)(iii).

      32 See supra note 2 at 683737.

      33 16 CFR 681.1(d)(1).

      34 16 CFR 681.1(d)(2)(i)–(iv).

    • 08-68 FINRA Requests Comment on Proposed FINRA Rule Addressing the Circulation of Rumors; Comment Period Expires: December 18, 2008

      View PDF

      Circulation of Rumors

      Regulatory Notice
      Notice Type

      Request for Comment
      Consolidated FINRA Rulebook
      Referenced Rules & Notices

      FINRA Rule 6140
      NASD Rule 5120
      Incorporated NYSE Rule 435(5)
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Senior Management
      Key Topic(s)

      Circulation of Rumors

      Executive Summary

      As part of the process of developing a new, consolidated rulebook (the Consolidated FINRA Rulebook), FINRA is requesting comment on a proposed FINRA Rule relating to the circulation of rumors. The proposed rule is based on FINRA Rule 6140 and Incorporated NYSE Rule 435(5).1

      Questions concerning this Notice should be directed to Brant Brown, Associate General Counsel, Office of General Counsel, at (202) 728-6927.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by December 18, 2008.

      Member firms and other interested parties can submit their comments using the following methods:

      •  Emailing comments to pubcom@finra.org; or
      •  Mailing comments in hard copy to:

      Marcia E. Asquith
      Office of the Corporate Secretary
      FINRA
      1735 K Street, NW
      Washington, DC 20006-1506

      To help FINRA process and review comments more efficiently, persons should use only one method to comment on the proposal.

      Important Notes: The only comments that FINRA will consider are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the FINRA Web site. Generally, FINRA will post comments on its site one week after the end of the comment period.2

      Before becoming effective, a proposed rule change must be authorized for filing with the SEC by the FINRA Board of Governors, and then must be approved by the SEC, following publication for public comment in the Federal Register.3

      Background & Discussion

      Proposal

      FINRA is proposing Rule 2030, a new, stand-alone rule, that combines aspects of Incorporated NYSE Rule 435(5) and FINRA Rule 6140(e) and that extends the prohibition on the origination or circulation of rumors to cover all securities.4 FINRA is proposing to replace Rule 6140(e) and Incorporated NYSE Rule 435(5), as well as the Interpretation to Incorporated NYSE Rule 435(5), with the following:

      Rule 2030. Circulation of Rumors
      No member shall originate or circulate in any manner a rumor concerning any security which the member knows or has reasonable grounds for believing is false or misleading or would improperly influence the market price of such security. A member must promptly report to FINRA any circumstance which reasonably would lead the member to believe that any such rumor might have been originated or circulated.

      The proposed rule includes standards and obligations derived from both existing rules. Aspects of the proposed rule are described more fully below.

      •  Use of the term "rumor." As noted above, although Rule 6140(e) does not use the term "rumor," Incorporated NYSE Rule 435(5) specifically refers to the circulation of "rumors." FINRA is proposing to adopt this term into Rule 2030 without the qualification in Incorporated NYSE Rule 435(5) that the rumor be "of a sensational character" and "reasonably be expected to affect market conditions on the Exchange." Instead, FINRA is proposing to maintain the standard in Rule 6140 that the member know or have reasonable grounds for believing that the rumor is "false or misleading or would improperly influence the market price of such security."
      •  Scope of the proposed rule. FINRA is proposing that Rule 2030 apply to all securities, not just those securities reported to the Consolidated Tape. The genesis of Rule 6140 was related to the creation and maintenance of the integrity of the information on the Consolidated Tape, but the conduct addressed in the rule was also subject to the antifraud and antimanipulation provisions of the federal securities laws.5 It is FINRA's view that the origination and circulation of rumors present the same risks to the integrity of the market regardless of whether the security is listed on a national securities exchange or trades solely over the counter. Consequently, FINRA is proposing that Rule 2030 apply to all securities.
      •  Reporting requirement. FINRA is proposing that Rule 2030 include a reporting requirement similar to the reporting requirement in Incorporated NYSE Rule 435(5). The proposed reporting requirement would require firms to report promptly to FINRA any circumstance which reasonably would lead the firm to believe that any rumor covered by the rule might have been originated or circulated. Incorporated NYSE Rule 435(5) includes a reporting provision with respect to securities traded on the NYSE; Rule 6140(e) does not have a reporting provision. FINRA is proposing to include a reporting provision in the new rule; in keeping with Rule 2030's broader reach to all securities, the reporting requirement would similarly be extended to cover all securities.
      •  Unsubstantiated information published by a widely circulated public media. Incorporated NYSE Rule 435(5) includes an exception from the rule for discussions of "unsubstantiated information published by a widely circulated public media" provided that the source of the information and its unsubstantiated nature are disclosed. Rule 6140(e) does not include this exception. FINRA is not proposing to include the exception in Rule 2030. It is not clear that widely circulated rumors in the public media, that would otherwise be covered by the rule, are of less concern in terms of the market integrity concerns related to such rumors.

      Request for Comment

      In connection with the proposal, FINRA is requesting comment on certain aspects of proposed Rule 2030. Specifically, FINRA is requesting comment on the following:

      •  As noted above, FINRA is proposing that Rule 2030 retain the standard in Rule 6140(e) that a rumor not be originated or circulated if the member knows or has reasonable grounds for believing that the rumor is "false or misleading or would improperly influence the market price of such security." Should FINRA continue to use this standard in applying the rule? If not, what standard is appropriate? Should Rule 2030 include the requirement that the rumor be "of a sensational character," as is currently required under Incorporated NYSE Rule 435(5)?
      •  Does the proposed text of Rule 2030 strike the right balance between the existing rule text in Rule 6140(e) and Incorporated NYSE Rule 435(5)? Are there provisions in either rule that FINRA is proposing to retain that should be removed or revised? Should Rule 2030 include an exception for unsubstantiated information published by a widely circulated public media provided that the source of the information and its unsubstantiated nature are disclosed? Are there other provisions in either rule that FINRA is proposing to delete that should be retained?
      •  Should Rule 2030 provide greater emphasis on firms' policies and procedures regarding the circulation of rumors? If so, how specific should any such provisions be? What should be required?

      In addition to the specific questions listed above, FINRA is also interested in any other issues that commenters may wish to address relating to the proposal.


      1 The current FINRA rulebook includes, (1) NASD Rules; and (2) rules incorporated from NYSE (Incorporated NYSE Rules). 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 new FINRA Rules will apply to all member firms, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process, see FINRA Information Notice 03/12/08 (Rulebook Consolidation Process).

      2 FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Persons should submit only information that they wish to make publicly available. See NASD Notice to Members 03-73 (November 2003) (NASD Announces Online Availability of Comments) for more information.

      3 Section 19 of the Securities Exchange Act of 1934 (Exchange Act) permits certain limited types of proposed rule changes to take effect upon filing with the SEC. The SEC has the authority to summarily abrogate these types of rule changes within 60 days of filing. See Exchange Act Section 19 and rules thereunder.

      4 The SEC recently approved the adoption of NASD Rule 5120 as FINRA Rule 6140, without substantive change, effective December 15, 2008. See Regulatory Notice 08-57 (October 2008). Although NASD Rule 5120 remains in effect until December 15, 2008, references in this Notice are to new FINRA Rule 6140.

      5 See NASD Notice to Members 75-42 (June 10, 1975); NASD Notice to Members 74-52 (December 20, 1974).

    • 08-67 FINRA Announces Electronic Filing Process For Qualification Examination Waiver Requests and Series 16 Experience Acceptability Requests Effective Date: January 16, 2009

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      Qualification Examination Waiver and Series 16 Experience Acceptability Requests

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      NYSE Rule 344
      NYSE Rule 345
      NASD Rule 1000 Series
      NASD Rule 1070(d)
      NASD Rule 9600 Series
      Suggested Routing

      Compliance
      Legal
      Operations
      Registration
      Senior Management
      Technology
      Key Topic(s)

      Electronic Filing Platform
      FINRA Firm Gateway
      Qualification Examination Waiver Requests
      Registration
      Series 16 Experience Acceptability Requests

      Executive Summary

      Effective January 16, 2009, member firms must submit all qualification examination waiver requests and Series 16 experience acceptability requests electronically through the FINRA Firm Gateway. This new process will replace the current paper-based submission format and, for Dual Member firms, the electronic submissions via the Electronic Filing Platform (EFP).

      To facilitate the transition, beginning December 1, 2008, member firms may begin submitting qualification examination waiver requests and Series 16 experience acceptability requests electronically via the Firm Gateway. Member firms' Web CRD Primary Account Administrators will receive (or may apply for) entitlement privileges to give the firm's registration and/or compliance personnel the ability to file requests for qualification examination waivers and Series 16 experience acceptability through the Firm Gateway.

      Questions concerning this Notice should be directed to Joe McDonald, Associate Director, Testing and Continuing Education Department, at (240) 386-5065.

      Background & Discussion

      Any person associated with a member firm who is engaged in the securities business of the firm must register with FINRA. As part of the registration process, securities professionals must pass a qualification examination to demonstrate competence in each area in which they intend to work. NASD Rules and Incorporated NYSE Rules set forth the registration and qualification requirements for FINRA firms.1

      Examination Waiver Requests

      The NASD Rule 1000 Series specifies, among other things, registration and qualification requirements for registered representatives and principals associated with firms. NASD Rule 1070(d) authorizes FINRA, pursuant to the NASD Rule 9600 Series,2 in exceptional cases and where good cause is shown, to waive qualification examinations (as specified in the NASD Rule 1000 Series) and accept other standards as evidence of an applicant's qualification for registration.3

      With respect to Dual Members, Incorporated NYSE Rule 345 (and its Interpretation) also specifies certain registration and qualification requirements applicable to such members. Similar to NASD Rule 1070(d), Incorporated NYSE Rule 345.15 authorizes FINRA to waive the examination requirement for a candidate for registration, where good cause is shown. While FINRA generally considers requests for examination waivers by Dual Members pursuant to NASD Rule 1070(d), FINRA applies Incorporated NYSE Rule 345.15 when considering requests by Dual Members for waivers of examinations not specified by NASD Rules.4

      Series 16 Experience Acceptability Requests

      Incorporated NYSE Rule 344 (and its Interpretation) requires candidates for the registration category of "supervisory analyst" to take and pass the Series 16 examination and present evidence of three years of appropriate experience, as described in Incorporated NYSE Rule 344.11 and Interpretation 344/03. Currently, firms submit Series 16 experience acceptability requests to FINRA on behalf of "supervisory analyst" candidates to provide evidence of such experience.

      New Electronic Filing Process Through FINRA Firm Gateway

      Before the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange into FINRA, NASD member firms into FINRA, NASD member firms submitted examination waiver requests on behalf of an applicant through a paper-based process, by sending a letter to NASD.5 NYSE member firms submitted examination waiver requests and Series 16 experience acceptability requests via the NYSE's EFP system. Since the consolidation, most examination waiver requests by FINRA member firms (including Dual Members) have been submitted to FINRA through the paper-based process. However, Dual Members have continued to submit certain requests (i.e., Series 7A, Series 14, Series 14A, Series 21 and Series 25 waivers and Series 16 experience acceptability requests) through the EFP.

      Effective January 16, 2009, FINRA will require that member firms submit all requests for qualification examination waivers and Series 16 experience acceptability requests through the Firm Gateway,6 a tool that provides consolidated access to FINRA regulatory and filing applications.

      To facilitate the transition to the Firm Gateway process, beginning December 1, 2008, FINRA will begin accepting electronic examination waiver and Series 16 experience acceptability requests via the Firm Gateway at https://firms.finra.org/examwaivers. Firms will use one online form to submit examination waiver requests and a second online form to request Series 16 experience acceptability. The new process will replace both the paper-based submission process and the EFP system.

      For all examination waiver requests and Series 16 experience acceptability requests, firms must submit a Uniform Application for Securities Industry Registration or Transfer (Form U4) electronically via the Central Registration Depository (CRD®) system at least one business day prior to submitting such requests via the Firm Gateway. The Form U4 must request an open examination window for each examination requested waived and each Series 16 experience acceptability request.

      The new process will require the same information currently required for qualification examination waivers and Series 16 experience acceptability submissions, and will allow firms to attach supporting documentation to such requests.

      For qualification examination waiver requests, the member firm must provide:

      a. Applicant's CRD Number;
      b. Qualification examination(s) for which the waiver is being requested;
      c. Reason for the waiver request; and
      d. Documentation supporting the waiver request.

      For Series 16 experience acceptability requests, the member firm must provide:

      a. Applicant's CRD Number;
      b. Statement on applicant's experience;
      c. Whether applicant is a Chartered Financial Analyst; and
      d. Whether applicant intends to take Part 1, Part 2 or both parts of the Series 16 examination.

      FINRA will continue to convey decisions on waiver requests to firms in writing, along with a courtesy telephone call.

      Entitlements

      By December 1, 2008, each firm's primary account administrator for Web CRD will be automatically granted waiver submission entitlement privileges. Account administrators that do not have entitlement privileges can request them by submitting a FINRA Account Administrator Entitlement Form (AAEF) for Web CRD (see www.finra.org/entitlements). Account administrators may give entitlement privileges to individuals in their organizations who require access to the waiver and Series 16 experience acceptability forms by setting privileges for them through the FINRA Entitlement Account Management Tool. If a member firm employee requires access to the waiver and Series 16 experience acceptability forms but does not know his or her firm's account administrator(s), the employee can call FINRA's Gateway Call Center at (301) 869-6699 to find out the name of the firm's account administrator(s).

      Two types of entitlement privileges may be granted: (1) Create/Submit and (2) Manager. A user with the Create/Submit privilege will be able to complete and submit examination waiver and Series 16 experience acceptability requests. A Manager will be able to complete and submit examination waiver and Series 16 experience acceptability requests and, in addition, view waiver and Series 16 experience acceptability requests submitted by other users within the firm.

      Transition Schedule

      The transition of all examination waiver and Series 16 experience acceptability requests to Firm Gateway will occur as follows:

      • December 1, 2008—Firms can begin to submit waiver and Series 16 experience acceptability requests through Firm Gateway.
      • December 19, 2008—Last day for Dual Member firms to submit waiver and Series 16 experience acceptability requests through EFP.
      • January 15, 2009—Last day to submit paper-based waiver and Series 16 experience acceptability requests.
      • January 16, 2009—All examination waiver and Series 16 experience acceptability requests must be made through the Firm Gateway.

      1 The current FINRA rulebook includes, in addition to FINRA Rules, (1) NASD Rules and (2) rules incorporated from NYSE (Incorporated NYSE Rules), together 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 03/12/08 (Rulebook Consolidation Process).

      2 The SEC recently approved the adoption of new FINRA Rules, including the adoption of the NASD Rule 9600 Series as the FINRA Rule 9600 Series without substantive change. See Exchange Act Release No. 58643 (September 25, 2008), 73 FR 57174 (October 1, 2008) (Order Approving Proposed Rule Change; File Nos. SR-FINRA-2008-021; SR-FINRA-2008-022; SR-FINRA-2008-26; SR-FINRA-2008-028 and SR-FINRA-2008-029). The FINRA Rule 9600 Series will take effect on December 15, 2008. See Regulatory Notice 08-57 (October 2008).

      3 The NASD Rule 9600 Series also sets forth an appeal process for denials of waiver requests submitted pursuant to NASD Rule 1070.

      4 Specifically, FINRA considers requests for waivers of the Series 7A, Series 14, Series 14A, Series 21 and Series 25 examinations pursuant to Incorporated NYSE Rule 345.15. The procedures set forth in the NASD Rule 9600 Series, including applicable appeal processes, do not apply to waivers considered pursuant to the Incorporated NYSE Rules.

      5 FINRA provides guidelines on the qualification examination waiver process on its Web site. For FINRA's Qualification Examination Waiver Guidelines, see www.finra.org/brokerqualifications/waiverguidelines.

      6 NASD Rule 3170 provides that each member shall be required to file with FINRA, or otherwise submit to FINRA, in such electronic format as FINRA may require, all regulatory notices or other documents required to be filed or otherwise submitted to FINRA, as specified by FINRA.

    • 08-66 FINRA Addresses Firms’ Retail Foreign Currency Exchange Activities

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      Retail Foreign Currency Exchange

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      31 CFR 103.19(a) of the Bank Secrecy Act
      NASD Rule 1010(i)
      NASD Rule 1014(a)(3)
      NASD Rule 1017
      NASD Rule 2110
      NASD Rule 2210
      NASD Rule 3011(a)
      Section 15 of the Securities Exchange Act
      Securities Exchange Act Rule 15c3-1
      Suggested Routing

      Advertising
      Legal and Compliance
      Registered Representatives
      Senior Management
      Key Topic(s)

      Anti-Money Laundering
      Communications with the Public
      Customer Protection Rule
      Foreign Currency Exchange
      Just and Equitable Principles of Trade
      Membership Rules
      Net Capital
      Over-the-Counter Market
      Retail Market

      Executive Summary

      The retail over-the-counter foreign currency exchange (retail forex) market is opaque, volatile and risky. Broker-dealers who engage in forex business with their retail customers must comply with the FINRA rules that apply to those activities.

      Questions regarding this Notice should be directed to Laura Gansler, Associate Vice President, Office of Emerging Regulatory Issues, at (202) 728-8275; or Susan DeMando, Associate Vice President, Member Regulation, at (202) 728-8411.

      Background & Discussion

      The primary forex market is the interbank market, in which large banks, financial institutions and other eligible participants trade currencies amongst themselves. In recent years, however, an electronic, secondary over-the-counter (OTC) market has developed. Retail customers participate in the secondary OTC market with retail dealers, albeit typically at different prices and with higher spreads than those that occur in the interbank market. Broker-dealers who participate in this retail market must comply with applicable FINRA rules.

      In the retail market, customers trade currencies through spot, forward and swap transactions with forex dealers acting as counterparties. These transactions are quoted in pairs, with the first currency representing the base currency and the second currency representing the quote currency. The quoted price, or rate, is the amount of the quote currency required to purchase one unit of the base currency. For example, a quote for EUR/USD expresses the price of the Euro in U.S. dollars. If a customer shorts the EUR/USD, then the customer will experience a loss if the Euro gains value relative to the U.S. dollar. A customer who is long the EUR/USD will experience a loss if the Euro loses value relative to the U.S. dollar.

      Most retail trading occurs online through electronic platforms provided by the dealer, who acts as counterparty to the retail customer's trades and sets the execution price and the spread. The retail customer typically does not have pricing information and cannot determine whether the price quoted by the dealer is fair. Moreover, the dealer acts as counterparty and establishes the price, which means that the dealer has a conflict of interest in the transaction. Price comparisons are also complicated by different compensation structures: Some firms charge per-trade commissions, others impose wider spreads, and some do both. Other transaction costs can include account maintenance charges, software licensing fees and commissions paid to introducing brokers or other third-party service providers.

      The currency market is extremely volatile and retail forex customers are exposed to substantial currency risk. Some currencies are significantly more volatile than others. Many forex dealers extend leverage to their customers at ratios of 400:1 or higher, which allows customers to control contracts worth significantly more than their cash investment. The high leverage ratios magnify even minor fluctuations in currency rates, exponentially increasing a customer's losses and gains. Even a small move against a customer's position can result in a significant loss. Unlike margin in a securities account, forex customers are typically closed out of their position once their loss exceeds their initial investment. However, if, for any reason, the position is not closed out at a zero balance, the customer could be liable for additional losses.

      Customers also face counterparty risk, as there is no central clearing organization for forex transactions. Customers may not know where their funds will be held or by whom. They may also not know that, unlike securities, funds deposited into an account with a broker-dealer for investment in any currency, or which are the proceeds of the sale of a currency position, or any currency in an account with a broker-dealer, are not protected by the Securities Investor Protection Corporation (SIPC).

      For all of these reasons, retail forex trading is risky, and the only funds that should be invested in the retail forex market are those that the investor can afford to lose. Nonetheless, retail interest in the market is growing, in part due to aggressive, and sometimes misleading, advertising that minimizes risks and exaggerates potential returns.

      Under the Commodity Exchange Act (CEA), only certain regulated entities may act as counterparty to a retail forex transaction. The approved entities include Futures Commission Merchants (FCMs) registered with the Commodity Futures Trading Commission (CFTC), as well as banks, insurance companies, and registered broker-dealers. The CFTC and the National Futures Association (NFA) oversee the forex-related activities of registered FCMs. In May 2008, Congress amended the CEA to expand and clarify the CFTC's jurisdiction over the retail forex market. Among other things, the amendments:

      • Require CFTC-regulated forex dealers to register with the NFA in the newly created capacity of Retail Foreign Exchange Dealers (RFEDs);
      • Raise net capital requirements for RFEDs to $10 million initially, and to $20 million by May 2009; and
      • Subject RFEDs to anti-fraud and certain other provisions of the CEA.

      However, Congress did not extend these new net capital requirements or other provisions to registered broker-dealers or the other financial institutions that are not subject to CFTC oversight but that may act as counterparties in retail forex transactions. As a result, FINRA has seen an increase in membership applications from firms interested in conducting retail forex business. FINRA has also seen an increase in retail forex activities among current FINRA members, including broker-dealers acquired by forex dealers.

      Applicability of FINRA Rules to Retail Forex Activities of Broker-Dealers

      Just and Equitable Principles of Trade

      NASD Rule 2110, which applies to every FINRA member, requires that firms, in the conduct of their business, observe high standards of commercial honor and just and equitable principles of trade. Rule 2110 applies to all of the business of a broker-dealer, not only to its securities and investment banking business. In determining appropriate standards and principles in the context of retail forex activity, FINRA will look to the forex-related rules and interpretations adopted by the NFA to govern the retail forex activities of its members. Therefore, in order to ensure compliance with Rule 2110, we expect broker-dealers to conduct their retail forex activities in a manner consistent with the regulatory requirements applicable to NFA members that are engaged in the same activities.

      Under this standard, forex-related conduct that would constitute a violation of Rule 2110 includes, but is not limited to:

      • Misappropriating or mishandling customer funds;
      • Failing to disclose that the firm is acting as counterparty to a transaction;
      • Failing to adequately disclose the risks associated with forex trading;
      • Using, selling or leasing electronic trading platforms that allow "slippage" of trade executions in a manner that disproportionately or unfairly affects the customer;
      • Manipulating or displaying false quotes;
      • Offering mock, or "demonstration," accounts that do not accurately reflect the risks of forex trading;
      • Issuing to customers false reports or account statements that represent false profits or that conceal misappropriations or losses;
      • Making post-execution price adjustments that are inappropriate and unfavorable to the customer;
      • Creating false books and records;
      • Failing to adequately disclose to customers the risks and terms of leveraged trading;
      • Soliciting business for and introducing customers to a forex dealer without doing adequate due diligence about the forex dealer, or in a way that misleads the customer about the forex dealer or forex trading, including how customer funds will be held;
      • Failing to conduct due diligence into any solicitors that introduce forex customers to the firm, and failing to supervise any unregistered solicitors that are employees or agents of the firm; and
      • Accepting forex-related trades from an entity or individual that solicits retail forex business on behalf of the firm in a misleading or deceptive way.

      Communications with the Public

      NASD Rule 2210, applicable to all FINRA members, prohibits firms from making any false, exaggerated, unwarranted or misleading statement or claim in any communication with the public. Rule 2210 is not limited to a broker-dealer's securities and investment banking business. A firm's forex-related communications—whether the firm is acting as a dealer or is soliciting forex business for a dealer—must be fair and balanced and based on principles of fair dealing and good faith, and firms must provide a sound basis for evaluating the facts regarding both the forex market generally, as well as the customers' specific transactions. These obligations may not be waived or met by disclaimer.

      New FINRA member firms that engage in forex-related activities must file their advertisements with FINRA. Rule 2210 requires any firm that has not previously filed advertisements with FINRA to file all of its advertisements at least 10 days prior to first use; this filing requirement continues for one year from the first submission. Rule 2210's internal approval, filing requirements and recording-keeping provisions also apply to forex-related communications. The rule requires that a registered principal give written approval of all advertisements and sales literature prior to use.

      Rule 2210 prohibits predictions or projections of performance, or the implication that past performance will recur. Communications used by firms in connection with retail forex activities may not tout future returns. The rule prohibits the omission of material facts or qualifications that would cause a communication to be misleading. Accordingly, firms' communications must adequately disclose the risks associated with forex trading, including the risks of highly leveraged trading. Firms must also make sure that their communications with the public are not misleading regarding, among other things:

      • The likelihood of profits or the risks of forex trading, including leveraged trading;
      • The firm's role in or compensation from the trade;
      • The firm's or the customer's access to the interbank currency market; or
      • The performance or accuracy of electronic trading platforms or software sold or licensed by or through the firm to customers in connection with forex trading, including falsely advertising claims regarding slippage rates.

      FINRA also reminds firms that SIPC rules prohibit references to SIPC membership or protection in communications regarding commodities, including forex.

      Membership Rules

      In accordance with FINRA's membership application process, applicants must include a detailed description of their business plan that adequately and comprehensively describes all material aspects of their business activities, as well as the nature and source of the firm's capital. Applicants must be able to demonstrate their capacity to comport with the federal securities laws and FINRA's rules, and to observe high standards of commercial honor and just and equitable principles of trade. Applicants formerly registered with the CFTC should be aware that NASD Rule 1014(a)(3) lists a range of events, including disciplinary actions and customer claims, or any pending adjudicated or settled regulatory action or investigation by the CFTC, that FINRA considers when weighing whether an applicant can meet these standards.1

      Current FINRA member firms should also be aware that expansion into retail forex constitutes a material change in business operations under NASD Rule 1010(i). Therefore, before engaging in over-the-counter forex business, a firm must first file for and receive approval of change in business operations under NASD Rule 1017. Any such filing will be closely reviewed under the guidelines and standards set forth in this Notice.

      Net Capital Calculations and Customer Protection Rule

      Firm Investment in Forex

      If a firm that must present its financials in U.S. dollars invests in forex, the currency must be converted to U.S. dollars as of the balance sheet date. Further, in computing its net capital, the firm must take a currency charge, the amount of which depends on the currency involved. The charge is not applied for firms with an off-setting liability payable in the same currency. In addition, other off-sets with respect to hedged transactions may be available.

      Receivables Associated with Forex Transactions

      Firms engaged in retail forex should review the requirements of Appendix B of Securities Exchange Act (SEA) Rule 15c3-1, governing net capital calculations for broker-dealers, to ensure the accuracy of their net capital computations. In general, when a customer or counterparty owes the broker-dealer money with respect to a forex transaction, the firm must treat the unsecured portion of the receivable as a non-allowable asset. Appendix B (a)(3)(xviii) of Rule 15c3-1 contains the conditions that must be met in order to consider the receivable secured, and therefore an allowable asset.

      Rule 15c3-3 Reserve Formula Treatment

      In accordance with SEC Release 34-9922, firms are required to include the net balance due to customers in non-regulated commodity accounts, reduced by any deposits of cash or securities with any clearing organization or clearing broker in connection with the open contracts in such accounts. This requirement would also apply to forex transactions.

      Anti-Money Laundering

      NASD Rule 3011(a) requires FINRA member firms to establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of suspicious transactions. Further, 31 CFR 103.19(a) of the Bank Secrecy Act requires broker-dealers to report suspicious transactions, as defined under the Rule, that are conducted or attempted by, at, or through their firm. FINRA member firms engaging in retail forex activities should ensure their Anti-Money Laundering Program addresses the risks associated with the business and includes procedures for monitoring, detecting, and reporting suspicious transactions associated with their retail forex activities.

      Conclusion

      FINRA is concerned about the rapid growth of the retail forex market generally, and about the retail forex activities of broker-dealers in particular. We expect firms to review and monitor their forex activities to ensure compliance with all applicable rules, and FINRA will look to the rules and interpretations issued by the NFA to govern its members' retail forex business as a basis for determining whether the same activities, when conducted by a broker-dealer, meet the high standards of commercial honor and principles of just and equitable trade required under FINRA's rules.


      1 See, e.g., FINRA Notice 04-10 (SEC Approves Amendments to Membership Application and Continuation Rules (Rules 1011, 1014, and 1017)).

    • 08-65 FINRA Grants Additional,Temporary Relief from the Net Capital, Reserve Formula, Non-purpose Loan, & Maintenance Margin Requirements Applicable to Credit Extended on Auction Rate Securities to Broker-Dealers That Agree to Buy Back Auction Rate Securities

      Effective Date: November 4, 2008

      View PDF

      Auction Rate Securities

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      Interpretive Letters dated April 11, 2008, and April 24, 2008
      NASD Rule 2520
      NYSE Rule 431
      Regulation T §§ 220.6
      Regulatory Notice 08-08
      SEA Rules 15c3-1 and 15c3-3
      Suggested Routing

      Compliance
      Legal
      Margin Department
      Operations
      Senior Management
      Key Topic(s)

      Auction Rate Securities
      Maintenance Margin Requirements
      Net Capital
      Reserve Formula

      Executive Summary

      This Notice advises FINRA member firms that FINRA is granting additional, temporary relief from the net capital (SEA Rule 15c3-1), reserve formula (SEA Rule 15c3-3), non-purpose loan (Regulation T 220.6), and maintenance margin requirements (NASD Rule 2520(f)(8)(A) and NYSE Rule 431(f)(8)(A)) applicable to credit extended on auction rate securities (ARS) to broker-dealers who have agreed to implement buyback programs for auction rate securities. Terms of the relief are detailed in a letter to the SEC, included as Attachment A.

      Questions concerning this Notice should be directed to:

      • Yui Chan, Managing Director, Risk Oversight and Operational Regulation, at (646) 315-8426;
      • Glen Garofalo, Director, Credit Regulation, at (646) 315-8464;
      • Rudolph Verra, Managing Director, Risk Oversight and Operational Regulation, at (646) 315-8811; or
      • Steve Yannolo, Principal Credit Specialist, Credit Regulation, at (646) 315-8621.

      Background & Discussion

      In March 2008, FINRA issued Regulatory Notice 08-08, which increased the margin requirements on auction rate securities (ARS), due to concerns about reduced liquidity in the market resulting from failed auctions in such securities.1 Subsequent to Notice 08-08, FINRA granted temporary relief to member firms in order to provide liquidity to customers who owned auction rate preferred securities (ARPS), as detailed in letters to the Securities and Exchange Commission (SEC) dated April 11, 2008,2 and April 24, 2008.3

      Many broker-dealers have recently reached agreements with the SEC, FINRA and various state securities regulators that will require the broker-dealers to buy back the ARS from their customers. As a result, broker-dealers wanted to provide immediate liquidity to customers.

      Based upon discussions with the staff of the SEC and staff of the Federal Reserve Board, FINRA is granting additional relief to those broker-dealers that have agreed to implement buyback programs for ARS. This relief will be available to member firms only with respect to the accounts of retail customers whose account assets do not exceed $10 million, and to any accounts of charitable organizations.4

      Any liquidity loans extended to such customers who ultimately do not agree to participate in the buyback offer for fixed income, non-equity ARS, will remain subject to the conditions outlined in FINRA Notice 08-08 upon expiration of the buyback offer period. Any liquidity loans extended to retail customers who ultimately do not agree to participate in the buyback offer for ARPS will be subject to the conditions outlined in the April 11, 2008, and April 24, 2008, letters upon expiration of the buyback offer period.

      Broker-dealers are reminded that they must report to FINRA, on a monthly basis, the aggregate dollar amount of credit extended to customers on all loans collateralized by ARPS.


      1 See http://www.finra.org/Industry/Regulation/Notices/2008/P038096.

      2 See www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p038317.pdf.

      3 See www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p038387.pdf.

      4 As defined in section 3(c)(10)(D)(iii) of the Investment Company Act of 1940.


      ATTACHMENT A

      September 18, 2008

      Mr. Michael A. Macchiaroli, Esq.
      Associate Director
      Securities and Exchange Commission
      Division of Trading and Markets
      100 F Street, NE
      Washington, DC 20549

      Dear Mike,

      This letter is a follow-up to the various discussions that have recently taken place regarding a request to provide additional, temporary relief from the net capital (SEA Rule 15c3-1), reserve formula (SEA Rule 15c3-3), non-purpose loan (FRB Regulation T) and maintenance margin requirements (NYSE Rule 431 and NASD Rule 2520) applicable to credit extended on auction rate securities (ARS).

      In March 2008, FINRA issued Regulatory Notice 08-08, which increased the margin requirements on ARS, due to concerns about reduced liquidity in the market resulting from failed auctions in such securities.1 In the Notice, firms were advised that the maintenance margin requirement for fixed income based ARS was being increased to 25 percent and were reminded that the maintenance requirement on auction rate preferred securities (ARPS) was 100 percent, as they are not margin eligible under Regulation T.

      In response to the Notice, the Securities Industry Financial Markets Association and representatives from broker-dealers expressed a need to provide liquidity to customers who owned ARPS, and as outlined in a letter to you dated April 11, 2008,2 regulatory relief from the maintenance margin, net capital and reserve formula requirements was provided. The letter stated that, based on discussions with you, the SEC staff agreed that member firms would not be required to apply a charge to their net capital for any margin deficiencies resulting from non-purpose credit extended on ARPS, nor to exclude from the customer reserve formula computation such non-purpose loans to customers, provided that the firms met certain conditions specified in the letter. One of the conditions stipulated in the April 11 letter was that broker-dealers needed to obtain a bank loan equal to the aggregate amount of non-purpose loans made to customers. The bank loans can only be collateralized by the ARPS pledged by the customers, and the bank loans must have a remaining maturity term of no less than six months at the time such credit is extended.

      Subsequent to the April 11 letter, broker-dealers found it difficult to secure bank loans collateralized by ARPS, and therefore were not able to avail themselves of the relief that was provided in the letter. As a result, the terms stipulated in the April 11 letter were revised for those broker-dealers that could not obtain bank loans for the amount of credit extended to customers collateralized by ARPS, and such agreed upon terms were communicated to you in a letter dated April 24, 2008.3

      In recent weeks, many broker-dealers have reached agreements with the SEC and various state securities regulators that will require the broker-dealers to repurchase the ARS from their customers. In some cases, these settlement agreements require that the broker-dealers provide immediate liquidity to such customers, in the form of unconditional, non-recourse loans against ARS holdings, prior to the actual buyback of such holdings. As a result, several broker-dealers have requested additional net capital and maintenance margin relief from the conditions stipulated in the April 24 letter. Member firms have represented that the buyback offer period for retail customers and charitable organizations may extend through January or February 2009, while the buyback offer periods for other customers may extend well into 2010.

      Based upon these recent developments and discussions with you and your staff and staff of the FRB, it has been agreed that additional relief may be granted to those broker-dealers that have agreed to implement buyback programs for ARS. This relief will be available to member firms only with respect to the accounts of retail customers whose account assets do not exceed $10 million, and to any accounts of charitable organizations.4

      Based on our discussions, broker-dealers must satisfy the following conditions with respect to liquidity loans collateralized by ARS securities:

      Liquidity loans collateralized by fixed income, non-equity auction rate securities shall be subject to the following conditions:

      • The loans may be extended as "purpose credit" under Reg T 220.6(a) and in such cases, must be made in a separate Good Faith account;
      • Broker-dealers may waive the collection of the 25 percent maintenance margin requirement, as imposed by FINRA Regulatory Notice 08-08, and extend loans up to 100 percent of the par value of such ARS in a Good Faith account. However, in lieu of collecting the required maintenance margin, broker-dealers must deduct from net capital 25 percent of the par value of such ARS;
      • Broker-dealers may include a debit item in their customer reserve formula computation, up to 75 percent of the aggregate credit extended through such liquidity loans collateralized by fixed income, non-equity, ARS.

      Any liquidity loans extended to such customers who ultimately do not agree to participate in the buyback offer for fixed income, non-equity auction rate securities, will remain subject to the conditions outlined in FINRA Regulatory Notice 08-08 upon expiration of the buyback offer period.

      Liquidity loans collateralized by auction rate preferred securities (ARPS) shall be subject to the following conditions:

      • The loans may only be extended as non-purpose credit, pursuant to Reg T 220.6(e) through a separate Good Faith account. Broker-dealers need not obtain a T-4 form or other statement from customers attesting to the purpose of the loan;
      • Broker-dealers may waive the 100 percent maintenance margin requirement imposed on such securities by FINRA Regulatory Notice 08-08 and extend loans up to 100 percent of the par value of such ARPS. However, broker-dealers must deduct from net capital 25 percent of the par value of such ARPS;
      • The aggregate of all such non-purpose loans shall be considered as a scheduled capital withdrawal under NYSE Rule 326 and NASD Rule 3130, unless otherwise deducted in the computation of net capital;
      • The aggregate amount of credit to be extended on such loans, including those loans subject to the April 11 or April 24 letters, must not exceed 50 percent of the broker-dealer's excess net capital, computed as of the most recent month end and adjusted for any subsequent material decrease at the time such credit is extended;
      • The credit extended to customers on such liquidity loans shall not be included as a debit item in the firm's customer reserve formula computation.

      Any liquidity loans extended to retail customers who ultimately do not agree to participate in the buyback offer for auction rate preferred securities will be subject to the conditions outlined in the April 11 and April 24 letters upon expiration of the buyback offer period.

      Broker-dealers are reminded that they must report to FINRA, on a monthly basis, the aggregate dollar amount of credit extended to customers on all loans collateralized by ARPS.

      We understand that this relief will be temporary, is based solely on the conditions as represented herein, and will be reviewed in consultation with your office for amendment or reconsideration, if and as circumstances may warrant.

      Very truly yours,

      Rudolph Verra

      cc: Scott Holz, Federal Reserve Board
      Tom McGowen, SEC, Division of Trading and Markets
      Bonnie Gauch, SEC, Division of Trading and Markets


      1 See http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p038097.pdf

      2 See http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p038317.pdf

      3 See http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p038387.pdf

      4 As defined in section 3(c)(10)(D)(iii) of the Investment Company Act of 1940.

    • 08-64 Amendments to Incorporated NYSE Rules to Reduce Regulatory Duplication Effective Date: November 11, 2008

      View PDF

      Transitional Rulebook

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      See Attachment A to this Notice.
      Suggested Routing

      Compliance
      Legal
      Operations
      Registered Representatives
      Senior Management
      Trading
      Key Topic(s)

      Acceptability of Supervisors
      Allied Member
      Buy-In Rules
      Discretionary Power in Customers' Accounts
      Employee Registration and Approval
      Limitations—Employment and Association with Member Organizations
      Reporting Requirements
      Sharing in Accounts
      Training Periods

      Executive Summary

      Effective November 11, 2008, certain NYSE rules that have been incorporated by FINRA (Incorporated NYSE Rules) have been amended to relieve those firms that are members of both NYSE and FINRA (Dual Members) of conflicting or unnecessary regulatory burdens in the interim period before the consolidated FINRA rulebook is completed.1 The text of the Incorporated NYSE Rules, as amended, is set forth in Attachment A to this Notice.

      Questions concerning this Notice should be directed to Gary L. Goldsholle, Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8104; or Erika L. Lazar, Senior Attorney, OGC, at (646) 315-8512.

      Background & Discussion

      The SEC recently approved amendments to certain Incorporated NYSE Rules to reduce regulatory disparities between NASD and Incorporated NYSE Rules in the Transitional Rulebook and relieve Dual Members of conflicting or unnecessary regulatory burdens in the interim period before the Consolidated FINRA Rulebook is completed.2 The rule changes described in this Notice affect the Transitional Rulebook in its application to Dual Members only and do not necessarily reflect FINRA's intent or conclusion as to the ultimate rule text for rules that will be part of the Consolidated FINRA Rulebook.3

      Allied Member

      The amendments delete the term "allied member" from the Incorporated NYSE Rules. The allied member designation is a regulatory category based on a person's "control" of a member organization.4 Allied membership, as currently administered, has no direct analogue under the FINRA membership scheme.

      In instances where the term "allied member" appears in a rule to denote an individual's status as a member organization "control person," the newly defined category of "principal executive" is substituted for the term "allied member."5 The definition for "principal executive" is identical to the current definition of "principal executive officer" in NYSE Rule 311(b)(5) with additional language to clarify that the functional equivalents of such persons are also included in this category. As such, the rule change replaces "principal executive officer" with "principal executive."

      Unlike the allied member designation, principal executive does not require a registration process, approval by a self-regulatory organization (SRO) or a particular qualification examination. However, each principal executive is required to take and pass the qualification examination(s) necessary to perform his or her assigned functions. As a result of the elimination of this NYSE registration category, FINRA will preclude broker-dealers from requesting this registration status through the Central Registration Depository (CRD®) system beginning on November 11, 2008.6

      Buy-In Rules7

      The amendments reposition NYSE Rules 283, 285, 286, 287, 288, 289 and 290 into NYSE Rule 282 so that NYSE Rule 282 now serves as a complete, central repository for all requirements and procedures related to transactions subject to the Buy-In Rules. Additionally, the rule change adds the substance of NYSE Rule 140 to NYSE Rule 282.8 Lastly, the amendments harmonize the current text of NYSE Rule 282 with the NASD Rule 11000 Series by: (1) adding language to clarify that fails that are subject to the rules of a Qualified Clearing Agency must comply with the procedures or requirements of the Qualified Clearing Agency and (2) adopting certain provisions of NASD Rule 11810.

      Acceptability of Supervisors

      NYSE Rule 342.13(A) currently requires that persons who are to be assigned certain prescribed supervisory responsibilities9 have a creditable three-year record as a registered representative or have three years of equivalent experience before functioning as a supervisor.10 Amendments to NYSE Rule 342.13(A) and its Interpretation eliminate the prescribed three-year record requirement for supervisory personnel and conform NYSE Rule 342.13(A) to the standard outlined in NASD Rule 1014(a)(10)(D) with respect to firms that are submitting an application to become FINRA members. In such instances, supervisory candidates are required to have one year of "direct experience" or two years of "related experience" in the subject area to be supervised.

      Prescribed Training Periods

      NYSE Rule 345 and its Interpretation11 require prescribed training periods before certain exam-qualified registered persons are approved by the NYSE to perform functions requiring registration. To harmonize NYSE Rule 345 with NASD registration requirements, the amendments eliminate the prescribed training periods in NYSE Rule 345 and its Interpretation. The amendments allow member firms to determine, consistent with their overall supervisory obligations, the extent and duration of training for such registered persons before they are permitted to perform functions requiring registration.

      Presently, when an individual requests a registration category that has a training period, the CRD system prevents that individual from being so registered until the requisite training period has expired. As of the effective date of this rule change, the training period requirement associated with NYSE Rule 345 registration categories will no longer be imposed by the CRD system. As such, these persons will be approved in the CRD system as of the date they pass the applicable qualification examination(s) (provided there are no other outstanding deficiencies) and member firms must determine the appropriate training for such registered persons before they are permitted to perform functions requiring registration.

      Employee Registration and Approval

      NYSE Rule 345(A) currently prohibits member organizations from permitting any natural person to perform regularly the duties customarily performed by a registered representative, a securities lending representative, a securities trader or a direct supervisor of such persons, unless such person is registered with, qualified by and acceptable to the NYSE. FINRA has eliminated the specific registration and qualification requirements in NYSE Rule 345(A) as they pertain to registered representatives, securities traders and their direct supervisors.12 Thus, the provisions in NYSE Rule 345(a) now apply only to securities lending representatives and their direct supervisors.

      NYSE Rule 345(b) also prohibits any natural person, other than a member or allied member, to assume the duties of an officer with the power to legally bind such member or member organization unless such member or member organization has filed an application with and received the approval of the NYSE. The amendments delete NYSE Rule 345(b) in its entirety. There is no similar requirement in any of the NASD Rules.

      Limitations—Employment and Association with Member Organizations

      NYSE Rule 346 sets forth limitations on the outside business activities of member organization employees. The amendments delete NYSE Rule 346(c), which requires that member firms give prompt written notice of control relationships to the NYSE. FINRA believes that this provision is unnecessary as it is a requirement on Form BD that each broker-dealer disclose such control relationships.13

      NYSE Rule 407 provides, in part, that no employee of a member organization shall establish or maintain a securities or commodities account or enter into a private securities transaction without the prior written consent of his or her member organization. The amendments reposition the requirements pertaining to "private securities transactions" (e.g., interests in oil or gas ventures, real estate syndications, tax shelters, etc.) from NYSE Rule 40714 to NYSE Rule 346 since NYSE Rule 346 more directly addresses issues related to the outside activities of registered persons. Additionally, the rule change adopts definitions of the terms "private securities transactions," "selling compensation" and "immediate family members" that are substantially identical to the corresponding definitions in the NASD Rules.15

      NYSE Rule 346(e) currently requires that supervisors devote their entire time during business hours to their member organization, unless otherwise permitted by the NYSE. Amendments to NYSE Rule 346(e) and Supplementary Material section .10 eliminate the SRO approval requirement. Instead, the amended rule requires the prior written approval of the member firm, pursuant to the exercise of appropriate due diligence, for such arrangements. Member firms must obtain the identification of any entity for which the supervisory person will be performing services during business hours and a description of such services. The firm's written approval is required to set forth the approximate amount of time the supervisory person is expected to devote to each entity, with particular attention paid to the approximate time expected to be required for the person, based upon qualifications and experience, to effectively discharge his or her supervisory responsibilities on behalf of the member. In addition, the amended rule requires documentation that the member firm has made a good faith determination that the arrangement will not compromise the protection of investors or the public interest, compromise the supervisor's duties at the member firm or give rise to a material conflict of interest.

      Reporting Requirements

      NYSE Rule 351(d) requires each member organization to report certain statistical information regarding customer complaints. The requirement currently extends to both oral and written complaints. The amendments to Rule 351 limit the definition of the term "customer complaint" to any written statement of a customer, or any person acting on behalf of a customer, other than a broker or dealer, alleging a grievance involving the activities of those persons under the control of a member firm. This definition is substantially similar to the current definition in NASD Rule 3070(c).

      Guarantees, Sharing in Accounts, and Loan Arrangements

      NYSE Rule 352 restricts the extent to which member organization personnel may share in customer account profits or losses. NYSE Rule 352(b) generally prohibits member firms, allied members and registered representatives from sharing profits or losses in any customer account. However, NYSE Rule 352(c) permits such sharing in proportion to financial contributions made to a joint account.

      The rule change amends NYSE Rule 352(c) to exempt from the proportional contribution requirement joint accounts with immediate family members held by principal executives or registered representatives of a member organization. This amendment acknowledges that certain accounts may reasonably entail profit and loss participation on a disproportionate basis, as with joint accounts between husband and wife, while retaining coverage of the rule for other accounts. NASD Rule 2330(f)(1)(A) similarly addresses the circumstances under which a FINRA member or a person associated with a FINRA member firm may share in profits and losses with a customer. NASD Rule 2330(f)(1)(A) permits sharing that is proportionate to the financial contributions of each account holder. NASD Rule 2330(f)(1)(B) exempts from this proportionality requirement accounts shared between an associated person and a customer who is an immediate family member of such associated person. The amendments harmonize the term "immediate family" in NYSE Rule 352(c) with the standard under NASD Rule 2330(f)(1)(B).

      The amendments to NYSE Rule 352(d) streamline the reference in the rule to Rule 205-3 of the Investment Advisers Act of 1940 and better align NYSE Rule 352 with NASD Rule 2330(f).

      Discretionary Power in Customers' Accounts

      NYSE Rule 408 provides, in part, that no employee of a member organization shall exercise discretionary power in any customer's account or accept orders for an account from a person other than the customer without first obtaining written authorization from the customer. The amendments to NYSE Rule 408(A) require member firms to obtain the signature of any person or persons authorized to exercise discretion in such accounts, of any substitute so authorized, and the date such discretionary authority was granted. This rule change conforms NYSE Rule 408(A) to corresponding requirements in NASD Rule 3110(c)(3).

      Deleted NYSE Rules

      The amendments recognize that certain rules are outdated and no longer necessary. For these reasons, the amendments delete paragraph (h) of NYSE Rule 311, which prescribes the number of partners to be named in a member organization in order for it to conduct business, and NYSE Rule 436 (Interest on Credit Balances) and its Interpretation.

      The amendments also delete certain rules because they are sufficiently addressed by NASD rules. Specifically, NYSE Rule 404 (Individual Members Not to Carry Accounts) has been deleted because its requirements duplicate the FINRA Letter of Approval sent to members. NYSE Rule 412 (Customer Account Transfer Contracts) (and its Interpretation) has been deleted because it duplicates NASD Rule 11870 (Customer Account Transfer Contracts). Finally, NYSE Rule 446 (Business Continuity and Contingency Plans) has been deleted as it is nearly identical to NASD Rules 3510 (Business Continuity Plans) and 3520 (Emergency Contact Information).


      1 FINRA is in the process of developing a new consolidated rulebook (Consolidated FINRA Rulebook), which, upon completion, will consist only of FINRA Rules. The current FINRA rulebook includes, in addition to FINRA Rules, (1) NASD Rules and (2) 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 Dual Members. For more information about the rulebook consolidation process, see FINRA Information Notice 3/12/08 (Rulebook Consolidation Process).

      2 See Securities Exchange Act Release No. 58533 (September 12, 2008), 73 FR 54652 (September 22, 2008) (Order Approving Proposed Rule Change Relating to Incorporated NYSE Rules; File No. SR-FINRA-2008-036). See also Securities Exchange Act Release No. 58549 (September 15, 2008), 73 FR 54444 (September 19, 2008) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto Conforming Certain NYSE Rules to Changes to NYSE Incorporated Rules Recently Filed by the Financial Industry Regulatory Authority, Inc.; File No. SR-NYSE-2008-80).

      3 Please note that certain rules discussed in this Notice are subject to further amendments based on the following rule filings relating to the establishment of the Consolidated FINRA Rulebook: see Exchange Act Release No. 58421 (August 25, 2008), 73 FR 51032 (August 29, 2008) (Order Approving Proposed Rule Change; SR-FINRA-2008-025); Exchange Act Release No. 58461 (September 4, 2008), 73 FR 52710 (September 10, 2008) (Order Approving Proposed Rule Change; File No. SR-FINRA-2008-033); Exchange Act Release No. 58514 (September 11, 2008), 73 FR 54190 (September 18, 2008) (Order Approving Proposed Rule Change; SR-FINRA-2008-039); Exchange Act Release No. 58643 (September 25, 2008), 73 FR 57174 (October 1, 2008) (Order Approving Proposed Rule Change; File Nos. SR-FINRA-2008-021; SR-FINRA-2008-022; SR-FINRA-2008-026; SR-FINRA-2008-028 and SR-FINRA-2008-029); Exchange Act Release No. 58660 (September 26, 2008), 73 FR 57393 (October 2, 2008) (Order Approving Proposed Rule Change; File No. SR-FINRA-2008-027); Exchange Act Release No. 58661 (September 26, 2008), 73 FR 57395 (October 2, 2008) (Order Approving Proposed Rule Change; SR-FINRA-2008-030).

      4 See NYSE Rule 304(b) (Allied Members and Approved Persons). FINRA did not incorporate NYSE Rule 304.

      5 See NYSE Rule 311.17.

      6 In addition, on November 11, 2008, FINRA will administratively terminate all approved NYSE allied member registrations. Individuals who currently maintain an allied member registration through the American Stock Exchange (n/k/a NYSE Alternext) or ArcaEX (n/k/a NYSE Arca) will not be affected by this rule change and the allied member registration category will continue to be available through these SROs.

      7 The SRO Operational, Clearing and Settlement Rules are collectively referred to herein as the "Buy-In Rules."

      8 See NYSE Rule 282.15.

      9 In this regard, NYSE Rule 342.13(A) references NYSE Rule 342(d) which requires that "[q]ualified persons acceptable to the Exchange shall be in charge of: (1) any office of a member or member organization, (2) any regional or other group of offices, (3) any sales department or activity."

      10 NYSE Rule 342.13(A) also requires that persons assigned supervisory responsibility pursuant to NYSE Rule 342(d) must pass a qualification examination acceptable to the NYSE that demonstrates competence relevant to assigned responsibilities.

      11 See NYSE Rule Interpretation 345.15/01 and /02.

      12 Accordingly, FINRA will preclude broker-dealers from requesting either the Securities Trader or the Trading Supervisor NYSE registration status through the CRD system beginning November 11, 2008.

      13 See Question 10 on Form BD.

      14 See NYSE Rule 407(b) and section .11 in the Supplementary Material.

      15 See changes to NYSE Rule 346 Supplementary Material.


      ATTACHMENT A

      Referenced Rules

      NASD Rules

      NASD Rule 1014
      NASD Rule 1031
      NASD Rule 2330
      NASD Rule 2370
      NASD Rule 3070
      NASD Rule 3110
      NASD Rule 3510
      NASD Rule 3520
      NASD Rule 11810
      NASD Rule 11870

      NYSE Rules

      NYSE Rule 2
      NYSE Rule 2A
      NYSE Rule 134
      NYSE Rule 140
      NYSE Rule 282
      NYSE Rule 283
      NYSE Rule 285
      NYSE Rule 286
      NYSE Rule 287
      NYSE Rule 288
      NYSE Rule 289
      NYSE Rule 290
      NYSE Rule 304
      NYSE Rule 311 and its Interpretation
      NYSE Rule 312
      NYSE Rule 313
      NYSE Rule 321
      NYSE Rule 342 and its Interpretation
      NYSE Rule 345 and its Interpretation
      NYSE Rule 345A and its Interpretation
      NYSE Rule 346 and its Interpretation
      NYSE Rule 351
      NYSE Rule 352
      NYSE Rule 353
      NYSE Rule 354
      NYSE Rule 401
      NYSE Rule 404
      NYSE Rule 405 and its Interpretation
      NYSE Rule 407
      NYSE Rule 408
      NYSE Rule 409
      NYSE Rule 410
      NYSE Rule 412 and its Interpretation
      NYSE Rule 414
      NYSE Rule 424
      NYSE Rule 431
      NYSE Rule 435
      NYSE Rule 436 and its Interpretation
      NYSE Rule 440F
      NYSE Rule 440G
      NYSE Rule 446
      NYSE Rule 477
      NYSE Rule 704
      NYSE Rule 705
      NYSE Rule 723
      NYSE Rule 724
      NYSE Rule 791

      Below is the text of the proposed rule change. Proposed new language is underlined; proposed deletions are in brackets.

      * * * * *

      Rule 2. "Member," "Membership," "Member Firm," etc.

      (a)–(b) No Change.
      [(c) The term "allied member" means a natural person who is a general partner of a member organization or other employee of a member organization who controls, or is a principal executive officer of, such member organization and who has been approved by the Exchange as an allied member.]
      ([d]c) The term "approved person" means a person, other than a member [or allied member], principal executive or employee of a member organization who controls a member organization or is engaged in a securities or kindred business that is controlled by, or under common control with a member or member organization who has been approved by the Exchange as an approved person.
      ([e]d) The term "person" shall mean a natural person, corporation, limited liability company, partnership, association, joint stock company, trust, fund or any organized group of persons whether incorporated or not.
      ([f]e) The term "control" means the power to direct or cause the direction of the management or policies of a person whether through ownership of securities, by contract or otherwise. A person shall be presumed to control another person if such person, directly or indirectly,
      (i) has the right to vote 25 percent or more of the voting securities,
      (ii) is entitled to receive 25 percent or more of the net profits, or
      (iii) is a director, general partner or principal executive [officer] (or person occupying a similar status or performing similar functions) of the other person.
      Any person who does not so own voting securities, participate in profits or function as a director, general partner or principal executive [officer] of another person shall be presumed not to control such other person. Any presumption may be rebutted by evidence, but shall continue until a determination to the contrary has been made by the Exchange.
      ([g]f) No Change.
      ([h]g) No Change.

      Rule 2A. Jurisdiction

      (a) The Exchange, may, with approval of the Exchange Board of Directors and the NYSE Regulation Board of Directors, adopt, amend or repeal such rules as it may deem necessary or proper, including rules with respect to (i) the making and settling of Exchange Contracts, (ii) the access of members and member organizations and their employees to and the conduct of members, member organizations and their employees upon the floor of the Exchange and their use of Exchange facilities, (iii) insolvency of member organizations, (iv) the formation of member organizations, the continuance thereof and the interests of members, [allied members and] principal executives or other persons therein, (v) the partners, officers, directors, stockholders and employees of member organizations, (vi) the offices of members, [allied members] principal executives and member organizations, (vii) the business conduct of members, [allied members] principal executives and member organizations, (viii) the business connections of members, [allied members] principal executives and member organizations, and their association with or domination by or over corporations or other persons engaged in the securities business, (ix) capital requirements for member organizations, (x) the procedure for arbitration and dispute resolution, (xi) trading licenses and the transfers thereof, (xii) types, terms, conditions and issuance of securities by member organizations and trading in such securities, (xiii) the conduct and procedure for disciplinary hearings and reviews there from, (xiv) the location and use on the floor of the Exchange of such facilities as may be approved by the Exchange to permit members to send orders from the floor to other markets and receive orders on the floor from other markets for the purchase or sale of securities traded on the Exchange, (xv) options and other derivative trading, (xvi) matters related to non-member broker-dealers that choose to be regulated by the Exchange, and (xvii) any other matter relevant to the conduct of the business of a securities exchange and self-regulatory organization.
      (b) No Change.
      (c) The Exchange shall have general supervision over members, [allied members and] principal executives, member organizations, employees of member organizations and over approved persons in connection with their conduct of the business of member organizations. The Exchange shall have general supervision over other broker-dealers that choose to be regulated by the Exchange. The Exchange may examine into the business conduct and financial condition of members, [allied members,] principal executives, member organizations, employees of member organizations, approved persons and other broker-dealers that choose to be regulated by the Exchange. It shall have supervision over partnership and corporate arrangements and over all offices of such members and member organizations, whether foreign or domestic, and over all persons employed by such members organizations, and other broker-dealers that choose to be regulated by the Exchange and may adopt such rules with respect to the employment, compensation and duties of such employees as it may deem appropriate. It shall have supervision over all matters relating to the collection, dissemination and use of quotations and of reports of prices on the Exchange. It shall have the power to approve or disapprove any connection or means of communication with the floor and may require the discontinuance of any such connection or means of communication. It may disapprove any member acting as a specialist or odd-lot dealer.
      (d) The Exchange shall adopt such rules as it deems necessary or appropriate for the discipline of members, member organizations, [allied members,] principal executives, approved persons, and registered and non-registered employees of member organizations and over other broker-dealers that choose to be regulated by the Exchange for the violation of the Securities Exchange Act of 1934 (the Act), the rules of the Exchange and for such other offenses as may be set forth in the rules of the Exchange. The Exchange shall also adopt such rules as it deems necessary or appropriate governing the conduct of disciplinary proceedings including disciplinary hearings and reviews thereof. The determination and penalty, if any, of the Board after review shall be final and conclusive, subject to the provisions of the Act.
      (e) The Exchange shall have jurisdiction after notice and a hearing to discipline members, member organizations, [allied members,] principal executives, approved persons in connection with their conduct of the business of a member organization, and registered or non-registered employees of member organizations and other broker-dealers that choose to be regulated by the Exchange. The Exchange may impose one or more of the following disciplinary sanctions: expulsion, suspension; limitation as to activities, functions, and operations, including the suspension or cancellation of a registration in, or assignment of, one or more stocks, fine, censure, suspension or bar from being associated with any member or member organization, or any other fitting sanction.
      (f) The Exchange shall have jurisdiction over any and all other functions of its members, member organizations, [allied members,] principal executives and approved persons in connection with the conduct of the business of member organizations, and registered or non-registered employees of members or member organizations and other broker-dealers that choose to be regulated by the Exchange in order for the Exchange to comply with its statutory obligation as a Self Regulatory Organization.

      * * * * *

      Rule 134. Differences and Omissions-Cleared Transactions

      ("QTs")

      (a)–(d) No Change.

      • • • Supplementary Material: ---------

      .10–.40 No Change.

      ---------

      (e)

      No Change.
      (f)
      (i) No Change.
      (ii) Transactions which have been DK'd by a clearing member organization by entering the appropriate response into the System may be closed out by the questioning firm under the provisions of Rule 28[3]2 and the printed record of such response produced by the System shall constitute the notice requirement of Rule 28[3]2.

      * * * * *

      Rule 282. Buy-in Procedures

      A contract in securities, except a contract where its close-out is governed by the rules of a Qualified Clearing Agency, which has not been completed by the seller in accordance with its terms, may be closed-out by the buyer (i.e., the initiating member organization) no sooner than three business days after the due date for delivery, pursuant to the following procedures:

      (a)–(c) No Change.
      (d) Where the buyer is a customer (i.e., other than another member organization), upon failure of a defaulting member organization to effect delivery in accordance with a "buy-in" notice, the contract may be closed-out by purchasing for "cash" in the best available market, or at the option of the initiating member organization, for guaranteed delivery for all or any part of the securities necessary to complete the contract. "Buy-ins" executed in accordance with this paragraph shall be for the account and risk of the defaulting member organization.
      (e) No Change.
      (f) Securities delivered by the defaulting party subsequent to the receipt of the "buy-in" notice should be considered as received pursuant to the "buy-in" notice. Delivery of the requisite number of shares, as stated in the "buy-in" notice, or execution of the "buy-in" will also operate to close-out all contracts covered under re-transmitted notices of "buy-ins" issued pursuant to the original notice of "buy-in," pursuant to [Rule 285] section .25 of this Rule. If a re-transmitted "buy-in" is executed, it will operate to close-out all contracts covered under the re-transmitted notice. A "buy-in" may be executed by the initiating member organization from its long position and/or from customers' accounts maintained with such member organization.
      (g) Prior to the closing of a contract on which a "buy-in" notice has been given, the initiating member organization shall accept any portion of the securities called for by the contract, provided the portion remaining undelivered at the time the initiating member organization proposes to execute the "buy-in" is not an amount [which] that includes an odd-lot which was not part of the original transaction.
      (h)–(j) No Change.
      (k) Fails that are subject to the rules of a Qualified Clearing Agency must comply with the procedures or requirements of the Qualified Clearing Agency.

      • • • Supplementary Material ---------

      .10 Members and member organizations are obligated to comply with the close-out provisions of Regulation SHO, promulgated under the Securities Exchange Act of 1934. Specifically, Exchange "buy-in" rules [(i.e., Rules 282, 283, 285, 286, 287, 288, 289, 290, 291, 292, 293, and 294)] do not abrogate a member's or a member organization's responsibilities or obligations to comply with Regulation SHO, and the close-out provisions of Rule 203(b)(3).
      .15 Closing Contracts—Conditions

      A member organization may close a contract as provided in section .20 of this Rule in the event that:
      (1) it has been advised that the other party to the contract does not recognize the contract; or
      (2) the other party to the contract neglects or refuses to exchange written contracts pursuant to Rule 137.
      .20 Closing Contracts—Procedure

      When Rule 282 permits the closing of a contract, an original party to the contract may close it, provided that notice, either written or oral, shall have been given to the other original party at least thirty minutes before such closing. If a member organization given up by an original party to a contract has been advised that the other party to the contract does not recognize it, or if the other party to the contract neglects or refuses to exchange written contracts, it shall promptly notify the original party who acted for him or it, who may then close the contract as herein provided.
      .25 Notice of Intention to Successive Parties

      Every member organization receiving notice that a contract is to be closed for its account because of non-delivery (including a notice pursuant to the rules of a Qualified Clearing Agency, other than an obligation of the member organization to deliver securities to the Qualified Clearing Agency or under its rules is to be closed-out for its own account) shall immediately re-transmit notice thereof to any other member organization from whom the securities involved are due. Every such re-transmitted notice shall be in writing and shall be delivered at the office of the member organization to whom it is addressed; it shall state the date of the contract upon which the securities are due from such member organization, and the name of the member organization who has given the original notice to close.
      .30 Closing Portion of Contract

      When notice of intention to close a contract, or re-transmitted notice thereof, is given for less than the full amount due, it shall be for not less than one trading unit.
      .35 Liability of Succeeding Parties

      The closing of a contract shall be for the account and liability of each succeeding party with an interest in such contract, and, in case notice that such contract will be closed has been re-transmitted, as provided in this Rule, such closing shall also automatically close all contracts with respect to which such re-transmitted notice shall have been delivered prior to the closing.

      Re-establishment of Contract

      If such re-transmitted notice is sent by a member organization before the contract has been closed, but is not received until after such closing, then the member organization who sent the notice may, unless otherwise agreed, promptly re-establish, by a new sale, the contract with respect to which such notice has been sent.

      Payment of Money Difference

      Any money difference resulting from the closing of a contract, or from the re-establishment of a contract as herein provided, shall be paid not later than 3:00 p.m. ET on the following business day to the member organization entitled to receive the same.
      .40 Notice of Closing to Successive Parties

      When a contract other than a contract the close-out of which is governed by the rules of a Qualified Clearing Agency has been closed the member organization who closed the same, or who gave the order to close the same, shall immediately notify the member organization for whose account the contract was closed. The member organization receiving such a notification or receiving notification that a contract has been closed pursuant to the rules of a Qualified Clearing Agency shall immediately notify each succeeding party in interest and other member organizations to whom re-transmitted notice, as provided for in section .30 of this Rule, has been sent. Statements of resulting money differences, if any, shall also be rendered immediately.
      .45 Must Receive Delivery

      When a member organization has delivered a buy-in notice pursuant to this Rule, or has re-transmitted notice thereof as provided for in section .30 of this Rule, the initiating member organization must receive and pay for those securities subject to the buy-in notice if tendered prior to the buy-in of such contract.

      If the organization that, pursuant to this Rule, is notified prior to the buy-in by a defaulting member organization that some or all of the securities (but not less than one trading unit) are in its physical possession and will be promptly delivered, then the order to buy-in shall not be executed with respect to such securities, and the initiating member organization who has given the original order to buy-in shall accept and pay for such securities, if tendered promptly.

      Damages for Non-delivery

      If such securities are not promptly tendered, the defaulting member organization who has stated that they would be promptly delivered shall be liable for any resulting damages.
      .50 Defaulting Party May Deliver After "Buy-In" Notice

      A defaulting member organization (seller) who has received a "buy-in" notice, pursuant to this Rule, or re-transmitted notice thereof, may deliver the securities to the initiating member organization (buyer) issuing such notice up to 3:00 p.m. ET. The defaulting member organization may deliver such securities after 3:00 p.m. ET on the "effective date" of the buy-in notice if: (i) agreed to by the initiating member organization, (ii) before the execution of the order and (iii) when the defaulting member organization has physical possession of the securities.
      .55 Securities in Transit

      If, prior to the closing of a contract on which a "buy-in" notice has been given, the buyer receives from the seller written or comparable electronic notice stating that the securities are: (1) in transfer; (2) in transit; (3) are being shipped that day; or (4) are due from a depository and giving the certificate numbers (except for those securities due from a depository), then the buyer must extend the execution date of the "buy-in" for a period of seven (7) calendar days from the date delivery was due under the "buy-in." Upon request of the seller, an additional extension of seven (7) calendar days may be granted by the NYSE based upon the circumstances involved.
      .60 "Close-Out" Under NYSE or Other National Securities Exchange Rulings
      (1) When a national securities exchange makes a ruling that all open contracts with a particular member, which is also a member organization of the NYSE, should be closed-out immediately (or any similar ruling), such member organization may close-out contracts as directed by the national securities exchange.
      (2) Whenever the NYSE ascertains that a court has appointed a receiver for any member organization, because of its insolvency or failure to meet its obligations, or whenever the NYSE ascertains, based upon evidence before it, that a member organization cannot meet its obligations as they become due and that such action will be in the public interest, the NYSE may, in its discretion, issue notification that all open contracts with the member organization in question may be closed-out immediately.
      (3) Within the meaning of this section, to close-out immediately shall mean that: (A) "buy-ins" may be executed without prior notice of intent to "buy-in" and (B) "sell-outs" may be executed without making prior delivery of the securities called for.
      (4) All close-outs executed pursuant to the provisions of this section shall be executed for the account and liability of the member organization in question. Notification of all close-outs shall immediately be sent to such member organization.
      .65 Failure to Deliver and Liability Notice Procedures
      (1)
      (A) If a contract is for warrants, rights, convertible securities or other securities which: (i) have been called for redemption; (ii) are due to expire by their terms; (iii) are the subject of a tender or exchange offer; or (iv) are subject to other expiring events such as a record date for the underlying security and the last day on which the securities must be delivered or surrendered (the expiration date) is the settlement date of the contract or later the receiving member organization may deliver a Liability Notice to the delivering member organization as an alternative to the close-out procedures set forth in this Rule. When the parties to a contract are both participants in a Qualified Clearing Agency that has an automated service for notifying a failing party of the liability that will be attendant to a failure to deliver, the transmission of the liability notice must be accomplished through the use of said automated notification service. When the parties to a contract are not both participants in a Qualified Clearing Agency that has an automated service for notifying a failing party of the liability that will be attendant to a failure to deliver, such notice must be issued using written or comparable electronic media having immediate receipt capabilities no later than one business day prior to the latest time and the date of the offer or other event in order to obtain the protection provided by this Rule.
      (B) If the contract is for a deliverable instrument with an exercise provision and the exercise may be accomplished on a daily basis, and the settlement date of the contract to purchase the instrument is on or before the requested exercise date, the receiving member organization may deliver a Liability Notice to the delivering member organization no later than 11:00 a.m. ET on the day the exercise is to be effected. Notice may be redelivered immediately to another member organization but no later than noon on the same day. When the parties to a contract are both participants in a Qualified Clearing Agency that has an automated service for notifying a failing party of the liability that will be attendant to a failure to deliver, the transmission of the liability notice must be accomplished through use of said automated notification service. When the parties to a contract are not both participants in a Qualified Clearing Agency that has an automated service for notifying a failing party of the liability that will be attendant to a failure to deliver, such notice must be issued using written or comparable electronic media having immediate receipt capabilities. If the contract remains undelivered at expiration, and has not been canceled by mutual consent, the receiving member organization shall notify the defaulting member organization of the exact amount of the liability on the next business day.
      (C) In all cases, member organizations must be prepared to document requests for which a Liability Notice is initiated.
      (2) If the delivering member organization fails to deliver the securities on the expiration date, the delivering member organization shall be liable for any damages which may accrue thereby. A Liability Notice delivered in accordance with the provisions of this Rule shall serve as notification by the receiving member organization of the existence of a claim for damages. All claims for such damages shall be made promptly.
      (3) For the purposes of this Rule, the term "expiration date" shall be defined as the latest time and date on which securities must be delivered or surrendered, up to and including the last day of the protect period, if any.
      (4) If the above procedures are not utilized as provided under this Rule, contracts may be "bought-in" without prior notice after normal delivery hours on the expiration date. Such buy-in execution shall be for the account and risk of the defaulting member organization.
      .70 Contracts Made for Cash

      Contracts made for "cash," or made for or amended to include guaranteed delivery on a specified date may be "bought-in" without notice during the normal trading hours on the day following the date delivery is due on the contract; otherwise, the procedures set forth in this Rule shall apply. In all cases, notification of executed "buy-in" must be provided pursuant to this Rule. "Buy-ins" executed in accordance with this paragraph shall be for the account and risk of the defaulting broker/dealer.
      .75 "Buy-In" Desk Required

      Member organizations shall have a "buy-in" section or desk adequately staffed to process and research all "buy-ins" during normal business hours.
      .80 Buy-In of Accrued Securities

      Securities in the form of stock, rights or warrants which accrue to a purchaser shall be deemed due and deliverable to the purchaser on the payable date. Any such securities remaining undelivered at that time shall be subject to the "buy-in" procedures as provided under this Rule.

      [Rule 283. Members Closing Contracts—Procedure]

      Entire text deleted.

      [Rule 285. Notice of Intention to Successive Parties]

      Entire text deleted.

      [Rule 286. Closing Portion of Contract]

      Entire text deleted.

      [Rule 287. Liability of Succeeding Parties]

      Entire text deleted.

      [Rule 288. Notice of Closing to Successive Parties]

      Entire text deleted.

      [Rule 289. Must Receive Delivery]

      Entire text deleted.

      [Rule 290. Defaulting Party May Deliver After "Buy-In" Notice]

      Entire text deleted.

      * * * * *

      Rule 311. Formation and Approval of Member Organizations

      (a) Any person who proposes to form a member organization [or who proposes to become an allied member in an organization for which application is made for approval as a member organization] and any member organization which proposes to admit therein any[:
      (1) allied member
      (2)] approved person
      shall notify the Exchange in writing before any such formation or admission, pay any applicable fee and shall submit such information as may be required by the Rules of the Exchange. No such member organization shall become or remain a member organization unless all persons required to be approved are so approved and execute such agreements with the Exchange as the Rules of the Exchange may prescribe.
      (b) The Board of Directors shall not approve a partnership or corporation as a member organization unless:
      (1) each director of such corporation is a member, [allied member] principal executive or an approved person; and
      (2) every person who controls such corporation is a member, [allied member] principal executive or approved person; and
      (3) every natural person who is a general partner in such partnership is a member or [allied member] principal executive and every other person who controls such partnership is a member, [allied member] principal executive or approved person; and
      (4) every person who engages in a securities or kindred business and is controlled by or under common control with such partnership or corporation is an approved person; and
      (5) The Board of Directors of such corporation designates [its] "principal executives" [officers" who shall be members or allied members and shall exercise senior principal executive responsibility over the various areas of the business of such corporation in such areas as the rules of the Exchange may prescribe, including: operations, compliance with rules and regulations of regulatory bodies, finances and credit, sales, underwriting, research and administration]; and
      (6) such partnership or corporation complies with such additional requirements as the rules of the Exchange may prescribe.
      (7) every employee who is associated as a member with such member organization is designated with a title, such as vice president, consistent with his responsibilities and the usage of titles within such organization.
      (c) In the case of existing corporations making application to become member corporations, there shall be submitted to the Exchange:
      (1) A certified list of all holders of record of each class of stock, giving the name and address of the holder and the number of shares of each class of such stock held;
      (2) A certified list of all persons who are to become members, [allied members,] principal executives, directors or approved persons,
      (3) A certified list of all persons designated as principal executives [officers] of the corporation.
      In the case of corporations proposed to be organized, similar information shall be submitted to the Exchange.
      (d)–(g) No Change.
      [(h) Except as may be otherwise permitted by the Exchange, no member organization or allied member shall conduct business under a firm name unless there exists at least two partners in such firm, nor shall any member firm doing business with the public have less than two general partners who are active in the firm's business; provided however, that if by death or otherwise a member or allied member becomes the sole general partner in a firm, he may continue business under the firm name for such period as may be allowed by the Exchange.]

      • • • Supplementary Material: ---------

      .10–.12 No Change.
      .13 Agreement with the Exchange.—Each member corporation and each member[, allied member] and approved person of the corporation must agree with the Exchange that if any person required to be approved by the Exchange as a member[, allied member] or approved person fails or ceases to be so approved, the corporation may be deprived by the Exchange of all the privileges of a member corporation unless the corporation redeems or converts the stock held by such person as required under Rule 312.
      .14–.16 No Change.
      .17 The term "principal executive" shall include: an employee of a member organization designated to exercise senior principal executive responsibility over the various areas of the business of the member organization including: operations, compliance with rules and regulations of regulatory bodies, finances and credit, sales, underwriting, research and administration; and any employee of a member organization who is a functional equivalent of such person.

      * * * * *

      NYSE Rule Interpretation 311 FORMATION AND APPROVAL OF MEMBER ORGANIZATIONS

      (b)
      (5) OFFICERS
      /01 Principal Executives [Officers]

      General Qualifications

      Principal executives [officers] must satisfy any and all examination requirements necessary to perform their assigned functions. Candidates for such positions must also have work experience and background commensurate with their responsibilities. The Exchange may request information with respect to the experience of anyone appointed or elected to such positions. [Any person having the status or performing the function of "principal executive officer" must qualify as an allied member. (See also Rule 304(b)).]
      /02 Examination Requirements for Chief Financial Officers ("CFO") and Chief Operations Officers ("COO")

      No Change.
      /03 Dual Designation of CFO and COO

      No Change.
      /04 Other Dual or Multi-Designations

      Any assignment of principal executive [officer] dual-designation other than an arrangement described in /03 of this Interpretation, or any multi-designation of principal executive [officer] titles, requires the prior written approval of the Exchange.
      /05 Co-Designation of Principal Executives [Officers]

      The prior written approval of the Exchange is required to assign more than one person to a single "principal executive]officer]" designation pursuant to Rule 311(b)(5). Member organizations seeking approval for such co-designations must submit a written request to the Exchange that sets forth the reason for the co-designation, explains how the arrangement is structured, and makes clear that each co-designee has joint and several responsibility for discharging the duties of that principal executive [officer] designation. However, the Exchange may approve a specific plan identifying the business need and other justification for an arrangement which does not provide for joint and several responsibility for principal executives [officers] other than the chief executive officer and chief financial officer. Such a plan must identify the areas and functions subject to separate supervisory responsibility and make specific provisions for the supervisory responsibility of functions, activities and areas which can be reasonably be expected to overlap. In addition, in the case of co-CCOs, the written approval request submitted in accordance with this Interpretation shall include a representation to the Exchange, to the effect that the CEO's Annual Report and Certification required by Rule 342.30(e) will further state, in addition to the fact that each such CCO has met the qualification requirements set forth at 342.30(d)/01, that the collective authority, accountability, and responsibility of such co-equal CCOs encompasses, without exception, every aspect of the business of such member organization.
      /06 Limitations on Principal Executives [Officers]

      Principal Executives [Officers] may be part-time employees, subject to the prior approval of the [Exchange] member organization pursuant to Rule 346(e).

      * * * * *

      Rule 312. Changes Within Member Organizations

      (a) No Change.
      (b) In addition, in the case of a member corporation, such member corporation shall give written notice (1) of any material change in the stockholdings of any member, [allied member] principal executive or approved person of such member corporation, (2) of any proposed change in the directors or officers, or (3) of any proposed change in the charter, certificate of incorporation, by-laws or other documents on file with the Exchange, or (4) of the failure to comply with all the conditions of approval specified in Rule 311.
      (c) Each member, [allied member] principal executive and approved person of a member corporation shall promptly notify his member corporation of any material acquisition or disposition of shares of stock of such corporation.
      (d) Whenever a person who is required to be approved by the Board as a member, [allied member] principal executive or approved person fails or ceases to be so approved, each member corporation shall promptly redeem or convert to a fixed income security such of its outstanding voting stock as may be necessary to reduce such party's ownership of voting stock in the member corporation below that level which enables such party to exercise controlling influence over the management or policies of such member corporation.
      (e) Unless permitted by the Exchange in order to protect investors and the public interest or to facilitate the administration of the Exchange, no person shall be a member or [allied member] principal executive in a member organization unless all persons required to be approved by the Exchange are so approved.

      * * * * *

      Rule 313. Submission of Partnership Articles—Submission of Corporate Documents

      (a) No Change.
      (b) The charter or certificate of incorporation and all amendments thereto, the by-laws and all amendments thereto, forms of stock certificates and any and all agreements or other documents and amendments thereto relating to the business or affairs of the member corporation between a member corporation and any of its stockholders or between any of the members, [allied members] principal executives or approved persons of a member corporation other than agreements relating to ordinary securities and commodities transactions shall be submitted to and be acceptable to the Exchange prior to becoming effective.
      (c)–(d) No Change.
      (e) Each member corporation shall, at such times as may be required by the Exchange, submit to the Exchange through its chief executive officer a certified list of its members, [allied members] principal executives and approved persons showing to the best of his knowledge and belief the number of shares of each class of stock of such corporation held of record or beneficially or both by each such party.
      (f) No Change.

      • • • Supplementary Material: ---------

      Information Regarding Partnership Articles

      .10–.21 No Change.
      .22 Provisions concerning redemption or conversion.—Each certificate of incorporation of a member corporation shall contain provisions authorizing the corporation to redeem or convert to a fixed income security all or any part of the outstanding shares of voting stock of such member corporation owned by any person required to be approved by the Board of Directors of the Exchange as a member[, allied member] or approved person who fails or ceases to be so approved as may be necessary to reduce such party's ownership of voting stock in the member corporation below that level which enables such party to exercise controlling influence over the management or policies of such member corporation.

      If the certificate of incorporation of a member corporation subject to Rule 325 provides that a stockholder may compel the redemption of his stock such certificate must provide that without the prior written approval of the Exchange, the redemption may only be effected on a date not less than six months after receipt by the member corporation of a written request for redemption given no sooner than six months after the date of the original issuance of such shares (or any predecessor shares). Each member corporation shall promptly notify the Exchange of the receipt of any request for redemption of any stock or if any redemption is not made because prohibited under the provisions of Securities and Exchange Commission Rule 15c3-1 (See 15c3-1(e)).

      Each stock certificate of a member corporation shall carry on its face a statement of the restrictions in SEC Rule 15c3-1(e) relating to the redemption of stock or a full summary thereof.

      * * * * *

      Rule 321. Formation or Acquisition of Subsidiaries

      No Change.

      • • • Supplementary Material: ---------

      Information Regarding Subsidiary Companies of Member Organizations

      .10 Definition of subsidiary.—For purposes of this rule, the term "subsidiary" means an entity engaged in a securities or kindred business that is controlled by a member organization within the meaning of Rule 2. However, control shall not be presumed, for purposes of this rule, merely because a member is a director or principal executive [officer] of another person.

      * * * * *

      Rule 342. Offices—Approval, Supervision and Control

      (a) No Change.
      (b) The general partners or directors of each member organization shall provide for appropriate supervisory control and shall designate a general partner or principal executive [officer] to assume overall authority and responsibility for internal supervision and control of the organization and compliance with securities' laws and regulations. This person shall:
      (1)–(2) No Change.
      (c)–(d) No Change.
      (e) The amounts and types of credit extended by a member organization shall be supervised by members or [allied members] principal executives qualified by experience for such control in the types of business in which the member organization extends credit.

      • • • Supplementary Material: ---------

      .10 Definition of Branch Office.—A "branch office" is any location where one or more associated persons of a member or member organization regularly conduct the business of effecting any transactions in, or inducing or attempting to induce the purchase or sale of any security, or is held out as such, excluding:
      (A)–(G) No Change.
      Notwithstanding the exclusions in subparagraphs 342.10(A)–(G), any location that is responsible for supervising the activities of persons associated with a member or member organization at one or more non-branch locations of such member or member organization is considered to be a branch office.

      For purposes of this Rule, the term "business day" shall not include any partial business day provided that the associated person spends at least four hours on such business day at his or her designated branch office during the hours that such office is normally open for business.

      For purposes of this Rule, the term "associated person of a member or member organization" is defined as a member[, allied member,] or employee associated with a member or member organization.

      For purposes of Rule 342.10(B)(viii), written supervisory procedures shall include criteria for on-site for cause reviews of an associated person's primary residence. Such reviews must utilize risk-based sampling or other techniques designed to assure compliance with applicable securities laws and regulations and with Exchange Rules.

      For purposes of Rule 342.10(B)(viii) and (C), written supervisory procedures for such residences and other remote locations must be designed to assure compliance with applicable securities laws and regulations and with NYSE Rules.

      Factors which should be considered when developing risk-based sampling techniques to determine the appropriateness of on-site for cause reviews of selected residences and other remote locations shall include, but not be limited to, the following: (i) the firm's size; (ii) the firm's organizational structure; (iii) the scope of business activities; (iv) the number and location of offices; (v) the number of associated persons assigned to a location; (vi) the nature and complexity of products and services offered; (vii) the volume of business done; (viii) whether the location has a Series 9/10-qualified person on-site; (ix) the disciplinary history of the registered persons or associated persons, including a review of such person's customer complaints and Forms U4 and U5; and (x) the nature and extent of a registered person's or associated person's outside business activities, whether or not related to the securities business.
      .11 Annual fee.—No Change.
      .12 Foreign branch offices.—No Change.
      .13 Acceptability of supervisors.
      (a) Generally.—Any member[, allied member] or employee who is a candidate for acceptability under (d)(1), (2), or (3) above must have a creditable [three year] record [as a registered representative or equivalent experience,] and must pass the General Securities Sales Supervisor Qualification Examination (Series 9/10) or another examination acceptable to the Exchange which demonstrates competency relevant to assigned responsibilities. The General Securities Principal Examination (Series 24) is an acceptable alternative for persons whose duties do not include the supervision of options or municipal securities sales activity. The examination requirement may be waived at the discretion of the Exchange. In the case of a firm that is applying for registered broker-dealer status, such supervisory candidates, in addition to the requirements outlined above, must also have at least one year of direct experience or two years of related experience in the subject area to be supervised.
      (b) Compliance supervisors.—No Change.
      .14–.20 No Change.
      .21 Trade review and investigation.—In order to help assure its compliance with the provisions of the Securities Exchange Act of 1934, the rules under that act and the rules of the Exchange prohibiting insider trading and manipulative and deceptive devices, each member not associated with a member organization and each member organization, in addition to carrying out such other supervisory procedures as may be necessary to discharge its supervisory responsibilities as to compliance with Federal Securities laws and rules and Exchange rules generally shall:
      (a) Subject trades in NYSE listed securities and in related financial instruments which are effected for the account of the member or member organization or for the accounts of members[, allied members] or employees of the member or member organization and their family members (including trades reported by other members or member organizations pursuant to Rule 407) to review procedures that the member or member organization determines to be reasonably designed to identify trades that may violate the provisions of the Securities Exchange Act of 1934, the rules under that act or the rules of the Exchange prohibiting insider trading and manipulative and deceptive devices, and
      (b) No Change.
      The Exchange, at its discretion, may exclude from these review and investigation requirements particular classes of persons, trades, securities and related financial instruments.
      .22–.26 No Change.
      .30 Annual Report and Certification.—No Change.
      (a)–(c) No Change.
      (i)–(viii) No Change.
      (d) For each member organization, the designation of a general partner or principal executive [officer] as Chief Compliance Officer (which designation shall be updated on Schedule A of Form BD).

      * * * * *

      NYSE Rule Interpretation 342 OFFICES—APPROVAL, SUPERVISION AND CONTROL

      (a) (b)
      /01–/03 No Change.
      (b) BRANCH OFFICES
      /01 Approval

      No Change.
      /02 Acquisition, Merger or Consolidation

      No Change.
      (e) SUPERVISION: EXTENSION OF CREDIT AND CONCENTRATIONS OF RISK
      /01 Application

      The Exchange expects all member organizations to have in place a system whereby the concentrations of risk in proprietary, customer and other accounts and extension of credit to customers and others are under the formal supervision, evaluation and control of one or more general partners or principal executives [officers]. These responsibilities and authority may be delegated to other qualified principals or employees. The general partner or principal executive [officer] shall establish a separate system of follow-up and review to determine whether the delegated authority and responsibility is being properly exercised. Such systems shall be in place for each product line or risk activity, however, one person may be delegated responsibility for more than one product line or risk activity.

      Each member organization should maintain a listing at its principal office each registered branch office and each non-registered location of those individuals designated responsibility for each business activity and product line for review by Exchange examiners.

      The types of product lines and risk activities that should be specifically included in the delegation and review of responsibilities should include, but not be limited to, the following:
      • Trading limits—should be established and reviewed for each trader, department and the organization as a whole;
      • Concentrations—parameters should be established to detect, monitor and evaluate risks of accumulations of large positions in introduced accounts as well as customers, non-customers (e.g. partners and principal [officers] executives), trading brokers and employees;
      • Credit—Procedures should be established to:
      (i) monitor limits and types of credit extended in customers' and noncustomers' and other credit accounts
      (ii) formulate house margin requirements
      (iii) review the need for additional margin, mark-to-market and collateral deposits for all accounts;
      • Compliance—systems should be in place to review compliance with applicable regulatory and in-house requirements;
      • Risk—should include procedures to review risk potential individually and collectively in all types of commitments; and
      • to review risk in all open or unpaid transactions, general ledger accounts and contractual and contingent commitments.
      The above review should include but not be limited to: cleared and uncleared regular way and open contractual commitments including delayed delivery, "DVP", underwriting, when issued/when distributed, repurchase, standbys, commodity spot (cash), futures and forward contracts.

      Supervisory and review procedures shall be maintained in writing, copies of which shall be maintained at the organization's principal office and at each branch office in accordance with existing Exchange interpretations of Rule 342. (See Rule 342.16/02)

      Reports must be made to the Exchange when concentrations in securities or commodities positions, commitments or other contingencies could reasonably be expected to result in a significant loss, capital or liquidity problem.

      See also Rule 401/05—Early Reporting of Developing Problems.
      .10 REGISTERED REPRESENTATIVE OPERATING FROM RESIDENCE
      /01 Special Supervision

      No Change.
      .13 ACCEPTABILITY OF SUPERVISORS
      /01 Qualifications

      Every branch office or sales manager must have [at least three years experience as a registered representative or substantial experience in a related sales or managerial position] a creditable record and must pass the General Securities Sales Supervisor Qualification Examination ("Series 9/10"). [Under this interpretation, a related sales or managerial position would include, for example:
      • A mutual fund salesman or an investment advisor;
      • A position of fiduciary responsibility as in the Trust Department of a bank or an attorney practicing securities law;
      • President of an established company in the financial, real estate or insurance industries.
      In order to qualify as a supervisory person, an allied member should have at least three years experience as a registered representative unless granted an exception based upon experience over a period of years in a position of trust and responsibility.]

      * * * * *

      Rule 345. Employees—Registration, Approval, Records

      (a) No member or member organization shall permit any natural person to perform regularly the duties customarily performed by [(i) a registered representative, (ii)] a securities lending representative[, (iii) a securities trader] or [(iv)] a direct supervisor of [(i), (ii) or (iii) above] such, unless such person [shall have been] is registered with, qualified by and is acceptable to the Exchange.
      [(b) No member or member organization shall permit any natural person, other than a member or allied member, to assume the duties of an officer with the power to legally bind such member or member organization unless such member or member organization has filed an application with and received the approval of the Exchange. (See also Rules 304 (¶2304) and 311 (¶2311).)]

      [(See Rule 346(f) (¶2346(f)) which prohibits association with any natural person or entity subject to a "statutory disqualification".)]

      • • • Supplementary Material: ---------

      Registration of Employees

      .10 Employees required to be registered or approved.—See definitions of "branch office manager", "registered representative" and "registered options representative" contained in Rules 9 (¶2009) and 10 (¶2010) and Rule 700(b)(49) (¶2700) and Rule 342 (2342) for qualification requirements for supervisors.

      A "securities lending representative" is defined as any person who has discretion to commit his member or member organization employer to any contract or agreement (written or oral) involving securities lending or borrowing activities with any other person.

      [A "securities trader" is defined as any person engaged in the purchase or sale of securities or other similar instruments for the account of his employer and who does not transact any business with the public.]
      .11 Investigation and Records
      (a) Members and member organizations shall thoroughly investigate the previous record of persons whom they contemplate employing including, (1) persons required to be registered with the Exchange, (2) persons who regularly handle or process securities or monies or maintain the books and records relating to securities or monies and (3) persons having direct supervisory responsibility over persons engaged in the activities referred to in (1) and (2) above who are not otherwise required to be registered.

      Investigatory requirements for persons required to be registered with the Exchange (referred to in (a)(1) above) shall be satisfied when the member or member organization fulfills its obligation to verify the information contained in the Uniform Application for Securities Industry Registration or Transfer (Form U-4) and reviews the most recent Form U-5, as described below, if applicable.

      In addition, a member or member organization shall obtain from an applicant, if applicable, a copy of his or her Uniform Termination Notice of Securities Industry Registration (Form U-5) and any amendments filed thereto, by the most recent employer. A member or member organization shall request said Form U-5 from any person who was previously registered with the Exchange or other self-regulatory organization that requires its members to provide a copy of Form U-5 to its terminated registered persons. (See also Rule 345.17.)

      The member or member organization shall obtain said Form U-5 no later than sixty (60) days following the filing of the application for registration or demonstrate to the Exchange that it has made reasonable efforts to comply with the requirement. A member or member organization receiving a Form U-5 pursuant to this provision shall review the Form U-5 and any amendment thereto as part of its investigatory process and shall take such action as may be deemed appropriate.

      Investigatory requirements pertaining to persons specified in (a)(2) and (3) above shall be satisfied if a member or member organization verifies the information obtained pursuant to paragraph (c) below. Notwithstanding the above, further inquiry shall be made where appropriate in light of background information developed, the position for which the person is being considered or other circumstances. Investigation and verification shall be done by a member[, allied member] or person designated under the provisions of Rule 342(b)(1).
      (b)–(c) No Change.
      .12 Applications: No Change.
      .13 Agreements.—Prior to the Exchange's consideration of the application, each candidate for registration, other than a member [or allied member] of the Exchange shall sign an agreement(s), on a form(s) prescribed by the Exchange, which includes a pledge that the registered person will abide by the Rules adopted pursuant thereto as these now exist and as from time to time amended.
      .14 Payment of fees.—No Change.
      .15 Qualifications
      (1)
      (a) Candidates for registration.—Candidates for registration, shall qualify by [meeting the training requirement and by] passing a qualification examinations, as applicable, which is acceptable to the Exchange.
      (b) [Training and] Examination waivers.—Where good cause is shown, the [training and/or] examination requirement for a candidate for registration may be waived at the discretion of the Exchange. Consideration may be given to previous related employment and to training and/or examination requirements of other self-regulatory organizations. In such cases, the Exchange must be satisfied that the candidate is qualified for registration.
      (2) Registered representatives.—[The training requirement for registered representative candidates is four months.] Such candidates shall pass a qualifying examination acceptable to the Exchange.
      (3) Limited registration.—Applications as limited purpose registered representative candidates will be considered by the Exchange for those duly qualified persons whose activities are limited solely to the solicitation or handling of the sale or purchase of: investment company securities and variable contracts, insurance premium funding program, direct participation programs, and municipal securities, among other limited registration categories. Limited purpose registered representative candidates shall qualify by [satisfying a two-month training requirement and] passing a qualification examination acceptable to the Exchange.
      (4) Registered options representative.—Each registered representative who transacts any business with the public in option contracts shall qualify as a "Registered Options Representative" by [satisfying the four month training requirement and] passing a qualification examination acceptable to the Exchange. (See Rule 700(b)(49).)
      [(5) Securities traders and their direct supervisors.—Securities traders candidates shall pass a qualification examination acceptable to the Exchange.]
      ([6]5) Commodities solicitors.—Individuals who are engaged in the solicitation or handling of business in, or the sale of, commodities futures contracts shall demonstrate their competency by satisfying a solicitor's examination requirement of a national commodities exchange, which examination is acceptable to the Exchange.

      * * * * *

      NYSE Rule Interpretation 345 EMPLOYEES—REGISTRATION, APPROVAL, RECORDS

      (a) REGISTRATION
      /01 Exceptions

      No Change.
      /02 "Independent Contractors"

      The establishment of "independent contractor" status between a natural person registered with and qualified by the Exchange and a member organization is permitted only if it does not in any way compromise such person's characterization and treatment as an "employee" of their associated member organization for purposes of the Rules of the Exchange. Though not an exhaustive list, the following regulatory requirements must be fulfilled by a member organization that enters into an arrangement with any person asserting independent contractor status:
      1. No Change.
      2. The member organizations must obtain the written concurrence of each individual asserting independent contractor status that he or she will be subject to the direct, detailed supervision, control and discipline of the member organization, and will be bound by the relevant rules, standards and guidelines of the member organization. Further, the prospective independent contractor must attest that he or she will be deemed an employee of the member organization and, as such, will be fully subject to the jurisdiction of the Exchange. The Exchange is a third-party beneficiary of any such attestation. The "Consent to Jurisdiction" form, included below, must be used for this purpose.
      "Consent to Jurisdiction" forms executed pursuant to this Interpretation are not required to be submitted to, or approved by, the Exchange. However, all such forms must be maintained together with the corresponding executed independent contractor agreement and must be promptly provided to the Exchange upon request.

      This Interpretation does not permit the incorporation of registered representatives nor does it permit the assertion of independent contractor status by any principal executive [officer] of a member organization.

      CONSENT TO JURISDICTION

      No Change.
      /03 Registered Persons Who Volunteer or Are Called to Active Military Duty

      No Change.
      (a)
      (i) COMPENSATION
      /01–/03 No Change.
      (b) OFFICERS
      /01–/04 No Change.
      .11 INVESTIGATION AND RECORDS
      /01–/02 No Change.
      .12 APPLICATIONS
      /01 Updating Form U4

      No Change.
      .15 QUALIFICATIONS
      /01 Examination [and Training] Waivers

      Where good cause is shown, the [training and/or] examination requirement for a candidate for registration may be waived at the discretion of the Exchange. The Exchange will review requests for waivers in light of several factors including length and type of previous employment and the requirements of other self-regulatory organizations.

      In addition, registered representative candidates who meet one of the following conditions may request a waiver of the [training and] examination requirements.
      • A former NYSE registered representative who terminated his or her association as such within the last two years, from the date of termination.
      • A former NYSE registered representative who within the last ten years has been continuously employed full-time in a general securities business.
      /02 Categories of Registration

      Registered representative candidates may sit for the Series 7 exam at the first available examination session after they have become employed. [Candidates successfully completing the examination will not, however, receive approval prior to completion of the full four-month training period.] Member organizations are reminded that trainees may not perform the functions of a registered representative until approved by the Exchange. (Also see Rule 345(a)/01, page 3450.)

      Limited registration candidates are those whose activities are limited solely to the solicitation or handling of the sale or purchase of instruments such as investment company securities and variable contracts, insurance premium funding programs, direct participation programs and municipal securities. Limited purpose registered representative candidates must qualify by [satisfying a two-month training requirement and by] passing a qualification examination acceptable to the Exchange.

      Limited registration for floor members and floor clerks would permit floor members and floor clerks who have successfully completed the Series 7A examination module to conduct a public business which is limited to accepting orders directly from professional customers for execution on the trading floor. The Floor Member ("Series 15") Examination and the Trading Assistant ("Series 25") Examination are prerequisites for the Series 7A Examination for floor members and floor clerks, respectively.

      A professional customer includes a bank, trust company, insurance company, investment trust, state or political subdivision thereof, charitable or nonprofit educational institution regulated under the laws of the United States, or any state, or pension or profit sharing plan subject to ERISA or of an agency of the United States or of a state or political subdivision thereof or any person who has a net worth of at least $45 million of which $40 million are financial assets.

      For purposes of the definition of professional customer, the term "person" shall mean the same as that term is defined in Rule 2, except that it shall not include natural persons.

      Registered options representative: Each registered representative who transacts any business with the public in options contracts shall qualify as a "Registered Options Representative" by [satisfying the four-month training requirement and] passing the Series 7 examination.

      [Securities traders and their direct supervisors must pass the Series 7 examination. There is no training requirement imposed by the Exchange.]

      Securities lending representatives and their direct supervisors are not subject to training or examination requirements. Securities lending representatives and their direct supervisors must, however, file a Form U4 and sign a code of ethics agreement (addendum to Form U4).

      See Rule 345.10 for definitions of the term[s "securities trader" and] "securities lending representative."

      * * * * *

      Rule 345A. Continuing Education For Registered Persons

      (a)–(b) No Change.

      • • • Supplementary Material: ---------

      .10 For purposes of this Rule, the term "registered person" means any member, [allied member,] principal executive, registered representative, or other person registered or required to be registered under Exchange rules, but does not include any such person whose activities are limited solely to the transaction of business on the Floor with members or registered broker-dealers.

      * * * * *

      NYSE Rule Interpretation 345A CONTINUING EDUCATION FOR REGISTERED PERSONS

      (a) REGULATORY ELEMENT
      /01 Registration Date

      No Change.
      /02 Application

      The requirements of the Regulatory Element apply to all persons registered or required to be registered under Exchange rules, even if such persons are not required to be qualified by taking and passing an examination e.g., certain [allied members] principal executives and securities lending representatives.

      * * * * *

      Rule 346. Limitations—Employment and Association with Members and Member Organizations

      (a) Every member not associated with a member organization must be a registered broker or dealer unless exempted by the Securities Exchange Act of 1934.
      (b) Without making a written request and receiving the prior written consent of his member or member organization employer, no member[, allied member] or employee of a member or member organization shall at any time be engaged in any other business; or be employed or compensated by any other person; or serve as an officer, director, partner or employee of another business organization; or own any stock or have, directly or indirectly, any financial interest in any other organization engaged in any securities, financial or kindred business; provided however, that such written request and consent shall not be required with regard to stock ownership or other financial interest in any securities, financial or kindred business which is publicly owned unless a control relationship exists.

      (See also requirements of Rules 311, [and] 350 and 407.)
      [(c) Prompt written notice shall be given the Exchange whenever any member or member organization knows, or in the exercise of reasonable care should know, that any person, other than a member, allied member or employee, directly or indirectly, controls, is controlled by or is under common control with such member or member organization. (See also Rule 321.)]
      (c) Where a member organization approves an employee's participation in private securities transactions in which regard the employee has or may receive selling compensation, the transaction shall be recorded on the books and records of the member organization, which shall supervise such participation as if the transaction were executed on its behalf.
      (d) No member shall qualify more than one member organization for membership.
      (e) [Unless otherwise permitted by the Exchange] [e]Every [member, allied member, registered representative and officer] employee of a member organization who is assigned or delegated any responsibility or authority pursuant to Rule 342 shall devote his entire time during business hours to the business of such [member or] member organization unless an alternate arrangement has been approved in writing by the member organization.

      The written approval of such arrangements must identify any entity for which the supervisory person will be performing services during business hours and must specifically describe the nature of such services. The approval must also set forth the approximate amount of time the supervisory person is expected to devote to each entity, with particular attention paid to the approximate time expected to be required for the person, based upon such person's qualifications and experience, to effectively discharge his or her supervisory responsibilities on behalf of any associated person of a member organization.

      In addition, the approval letter must document that the member organization has made a good faith determination that the arrangement will in no way compromise the protection of investors or the public interest; compromise the supervisor's duties at the member organization; or give rise to a material conflict of interest.
      (f) Except as otherwise permitted by the Exchange, no member, member organization, [allied member,] approved person, employee or any person directly or indirectly controlling, controlled by or under common control with a member or member organization shall have associated with him or it any person who is known, or in the exercise of reasonable care should be known, to be subject to any "statutory disqualification" defined in Section 3(a)(39) of the Securities Exchange Act of 1934. Any member organization seeking permission to have such a person continue to be or become associated with it shall pay a fee in an amount to be determined by the Exchange.

      • • • Supplementary Material: ---------

      [.10 In connection with paragraph (e) above, the Exchange will permit a member, allied member, registered representative or officer of a member or member organization who is assigned or delegated any responsibility or authority pursuant to Rule 342 to devote less than his entire time during business hours to the business of the member or member organization in instances where such permission will not impair the protection of investors or the public interest.]
      .11 For the purpose of this rule, control is defined in Rule 2.
      .12 For the purposes of this rule, the term associated with a member or member organization shall have the same meaning as the term "associated with a member" is defined in Section 3(a)(21) of the Securities Exchange Act of 1934.
      .20 Under the appropriate circumstances the Exchange may, in determining control, treat as a single holding stock which is nominally held by different persons or organizations.
      .30 For the purposes of this rule, the term "private securities transaction" shall mean any securities transaction outside the regular course or scope of an associated person's employment with a member organization, including, though not limited to, new offerings of securities which are not registered with the Commission, provided however that transactions subject to the notification requirements of Rule 407, transactions among immediate family members for which no associated person receives any selling compensation, and personal transactions in investment company and variable annuity securities, shall be excluded. The term "immediate family members" means a person's parents, mother-in-law or father-in-law, spouse, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, and children, and any other individual to whom the person provides material support.
      .40 For the purposes of this rule, the term "selling compensation" shall mean any compensation paid directly or indirectly from any source in connection with or as a result of the purchase or sale of a security, including, though not limited to, commissions; finder's fees; securities or rights to acquire securities; rights of participation in profits, tax benefits, or dissolution proceeds, as a general partner or otherwise; or expense reimbursements.

      * * * * *

      NYSE Rule Interpretation 346 LIMITATIONS—EMPLOYMENT AND ASSOCIATION WITH MEMBER ORGANIZATIONS

      /01–/02 No Change.
      [/03 Outside Connections—Supervisory Persons]

      [In unusual circumstances the Exchange will permit member organization personnel who are delegated supervisory responsibilities under Rule 342 to devote a portion of their time to activities outside the member organization, including serving as officers, directors or employees of a secondary affiliation. The Exchange will consider such approvals on a case-by-case basis and will consider, among other factors: whether less than full time activity in the member organization is consistent with the protection of investors or the public interest; the precise nature of the supervisory position in the member organization and the time required to perform it effectively; the degree of control between the member organization and the other entity.]
      /0[4]3 Outside Connections—Legal Limitations

      No Change.

      * * * * *

      Rule 351. Reporting Requirements

      (a) Each member not associated with a member organization and each member organization shall promptly report to the Exchange whenever such member or member organization, or any member[, allied member] or registered or non-registered employee associated with such member or member organization:
      (1)–(10) No Change.
      (b) Each member associated with a member organization and each [allied member or] registered or non-registered employee of a member or member organization shall promptly report the existence of any of the conditions set forth in paragraph (A) of this rule to the member or member organization with which such person is associated.
      (c) Each approved person shall promptly report to the member organization with which such approved person is associated, whenever such approved person becomes subject to a statutory disqualification as defined in Section 3(a)(39) of the Securities Exchange Act of 1934; and upon being so notified, or otherwise learning such fact, the member or member organization shall promptly so advise the Exchange in writing, giving the name of the person subject to the statutory disqualification and details concerning the disqualification.
      (d) No Change.
      (e) Each member not associated with a member organization and a [senior officer or partner] principal executive of each member organization shall take one or both of the following two actions in relation to the trades that are subject to the review procedures required by Rule 342.21(a):
      (i)–(ii) No Change.
      (A)–(C) No Change.
      The statement that subparagraph (i) requires shall read substantially as follows:
      (1)–(3) No Change.
      When a statement pertains to one or more trades that have been the subject of an internal investigation pursuant to Rule 342.21(b) but as to which no internal disciplinary action has been taken and no referral of the matter to the Exchange, to another self-regulatory organization or to a Federal agency has been made, the statement that subparagraph (ii) (C) requires shall be as above, except that it shall refer to the particular trade(s) (rather than to the trades of a particular calendar quarter) and shall omit the clause excepting trades reported as the subject of an investigation. [For the purpose of this paragraph (e), a "senior officer or partner" means (i) the chief executive officer or managing partner or

      (ii) either (A) any other officer or partner who is a member of the member organization's executive or management committee or its equivalent committee or group or (B) if the member organization has no such committee or group, any officer or partner having senior executive or management responsibility who reports directly to the Chief Executive Officer or managing partner. If, in the case of a member organization, its chief executive officer or managing partner does not sign the statement, a copy of the statement shall be provided to the chief executive officer or managing partner.]
      (f) Each member and member organization that prepares, issues or distributes research reports or whose research analysts make public appearances is required to submit to the member's or member organization's Designated Examining Authority, annually, a letter of attestation signed by a [senior officer or partner] principal executive that the member or member organization has established and implemented procedures reasonably designed to comply with the provisions of Rule 472. The attestation must also specifically certify that each research analyst's compensation was reviewed and approved in accordance with the requirements of Rule 472(h)(2) and that the basis for such approval has been documented.

      • • • Supplementary Material: ---------

      .10–.12 No Change.
      .13 The term "customer complaint" shall mean any written statement of a customer, or any person acting on behalf of a customer, other than a broker or dealer, alleging a grievance involving the activities of those persons under the control of a member organization.

      Rule 352. Guarantees, Sharing in Accounts, and Loan Arrangements

      Prohibitions Against Guarantees

      (a) No member organization shall guarantee or in any way represent that it will guarantee any customer against loss in any account or on any transaction; and no member, [allied member,] principal executive, registered representative or officer shall guarantee or in any way represent that either he or she, or his or her employer, will guarantee any customer against loss in any customer account or on any customer transaction. The prohibitions in this paragraph extend to the payment, in whole or in part, of a debit balance.

      Prohibition Against Sharing in Profits and Losses

      (b) Except as otherwise provided by this Rule, no member, member organization, [allied member,] principal executive, officer, or any other person acting in the capacity of a registered representative shall, directly or indirectly, (i) take or receive or agree to take or receive a share in the profits, or (ii) share or agree to share in any losses, in any customer's account or of any transaction effected therein.

      Joint Accounts and Order Errors

      (c) Subject to compliance with paragraph (a), [P]paragraph (b) of this Rule shall not preclude a member not associated with a member organization, or a member organization or, with the prior written authorization of the member organization]consent], a member associated with such member organization, a[n allied member,] principal executive or other person acting in the capacity of a registered representative, from participating with a customer in a joint account and sharing in the profits or losses therein in direct proportion to financial contributions made to such account. Accounts of immediate family members of such persons are exempt from the direct proportionate share limitation. (See Rule 93 for reporting and approval requirements concerning participation in joint accounts by members[,] and member organizations [and allied members].) Nor shall it preclude a member not associated with a member organization or a member organization from sharing or agreeing to share any losses in a customer account if it has been established that the loss was caused in whole or in part by an error resulting from the action or inaction of such member, [allied member,] member organization, or person associated therewith (See also Rule 134).

      For purposes of this section (c), the term "immediate family" shall include parents, mother-in-law or father-in-law, husband or wife, children or any relative to whose support the principal executive or persons acting in the capacity of a registered representative otherwise contributes directly or indirectly.

      Certain Investment Advisory Arrangements

      (d)
      [(1) Section 205 of the Investment Advisers Act of 1940 (the "Advisers Act") and the rules thereunder set forth provisions relating to advisory compensation arrangements applicable to investment advisers registered with the Securities and Exchange Commission ("SEC") unless exempt pursuant to Section 203(b) of the Adviser's Act. Under certain circumstances, such arrangements may provide for the adviser to receive a performance-based fee, e.g., sharing in capital gains or losses of the assets under management. Where a participatory compensation arrangement is entered into by a member organization that itself is registered with the SEC as an investment adviser, and such arrangement complies with Section 205 of the Advisers Act and the rules thereunder, the arrangement will not violate Rule 352(b) if the arrangement arises in the context of such member organization's investment advisory relationship with the customer. Member organizations may not have such participatory compensation arrangements if they are only acting as a broker for the customer.] Notwithstanding the prohibition of paragraph (b), a person acting as an investment adviser (whether or not registered as such) may receive compensation based on a share of profits or gains in an account if all the of the conditions in Rule 205-3 of the Investment Advisers act of 1940 (as may be amended from time to time) are satisfied. All advisory compensation arrangements should be reviewed by member organizations and their counsel in light of applicable State and Federal law (e.g., ERISA).
      [(2) To the extent that any of the above described conditions of paragraph (d)(1) are not fully satisfied, the general Rule 352(b) prohibition will apply. All advisory compensation arrangements should be reviewed by member organizations and their counsel in light of applicable State and Federal law (e.g., ERISA).]

      Limitations on Borrowing From or Lending to Customers

      (e)–(f) No Change.
      (g) For purposes of this Rule, other than in section (c), the term "immediate family" shall include parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and shall also include any other person whom the registered person supports, directly or indirectly, to a material extent.

      Rule 353. Rebates and Compensation

      (a) No member, [allied member,] principal executive, registered representative or officer shall, directly or indirectly, rebate to any person, firm or corporation any part of the compensation he receives for the solicitation of orders for the purchase or sale of securities or other similar instruments for the accounts of customers of his member organization employer, or pay such compensation, or any part thereof, as a bonus, commission, fee or other consideration for business sought or procured for him or for any member or member organization of the Exchange.
      (b) No member, [allied member,] principal executive, registered representative or officer shall be compensated for business done by or through his employer after the termination of his employment except as may be permitted by the Exchange.

      Rule 354. Reports to Control Persons

      (a) No Change.
      (b) For the purpose of paragraph (a), "control person" means a person who controls the member organization within the meaning of Rule 2 otherwise than solely by virtue of being a director, general partner or principal executive [officer] (or person occupying a similar status or performing similar functions) of the member organization.

      * * * * *

      Rule 401. Business Conduct

      (a) Every member, [allied member] principal executive and member organization shall at all times adhere to the principles of good business practice in the conduct of his or its business affairs.

      * * * * *

      [Rule 404. Individual Members Not to Carry Accounts]

      Entire text deleted.

      Rule 405. Diligence as to Accounts

      Every member organization is required through a [general partner, a] principal executive [officer] or a person or persons designated under the provisions of Rule 342(b)(1)[¶2342] to

      (1) No Change.
      (2) Supervision of Accounts

      No Change.
      (3) Approval of Accounts

      Specifically approve the opening of an account prior to or promptly after the completion of any transaction for the account of or with a customer, provided, however, that in the case of branch offices, the opening of an account for a customer may be approved by the manager of such branch office but the action of such branch office manager shall within a reasonable time be approved by a [general partner, a] principal executive [officer] or a person or persons designated under the provisions of Rule 342(b)(1)[¶2342]. The member, [general partner, officer] principal executive or other designated person approving the opening of the account shall, prior to giving his approval, be personally informed as to the essential facts relative to the customer and to the nature of the proposed account and shall indicate his approval in writing on a document which is a part of the permanent records of his office or organization.
      (4) Common Sales Accounts

      No Change.
      a)–e) No Change.

      • • • Supplementary Material: ---------

      .10 Application of Rule 405(1) and (3)[¶2405].—In the case of a margin account carried by a member organization for a non-member corporation, definite knowledge should be had to the effect that the non-member corporation has the right under its charter and by-laws to engage in margin transactions for its own account and that the persons from whom orders and instructions are accepted have been duly authorized by the corporation to act on its behalf. It is advisable in each such case for the carrying organization to have in its possession a copy of the corporate Charter, By-laws and authorizations. Where it is not possible to obtain such documents, a member or [allied member] principal executive in the member organization carrying the account should prepare and sign a memorandum for its files indicating the basis upon which he believes that the corporation may properly engage in margin transactions and that the persons acting for the corporation have been duly authorized to do so.

      In the case of a cash account carried for a non-member corporation, the carrying member organization should assure itself through a general partner or an officer who is a holder of voting stock that persons entering orders and issuing instructions with respect to the account do so upon the proper authority.

      When an agency account is carried by a member organization its files should contain the name of the principal for whom the agent is acting and written evidence of the agent's authority.

      When Estate and Trustee accounts are involved a member organization should obtain counsel's advice as to the documents which should be obtained.

      Information as to the country of which a customer is a citizen is deemed to be an essential fact.

      * * * * *

      NYSE Rule Interpretation 405 DILIGENCE AS TO ACCOUNTS

      /01 Credit Reference—Business Background

      No Change.
      /02 Approval of New Accounts/Branch Offices

      Rule 405(3) provides that a Branch Office Manager may approve the opening of new customer accounts but that such action, within a reasonable period of time, must be approved by a [general partner, a] principal executive [officer] or a person or person(s) designated under the provisions of Rule 342(b)(1). Branch Office Managers may be among the parties designated with authority to make final firm determinations as to

      the opening of new accounts, at the discretion of the member organization acting on an individual basis.

      It is important to note that Rule 342 requires a separate system of follow-up and review to determine that all delegated authority is being properly exercised.

      * * * * *

      Rule 407. Transactions—Employees of Members, Member Organizations and the Exchange

      (a) No member or member organization shall, without the prior written consent of the employer, open a securities or commodities account or execute any transaction in which a member[, allied member] or employee associated with another member or member organization or an employee of the Exchange is directly or indirectly interested.

      In connection with accounts or transactions of members[, allied members] and employees associated with another member or member organization, duplicate confirmations and account statements shall be sent promptly to the employer.
      (b) No member (associated with a member or member organization)[, allied member] or employee associated with a member or member organization shall establish or maintain any securities or commodities account or enter into any [private] securities transaction with respect to which such person has any financial interest or the power, directly or indirectly, to make investment decisions, at another member or member organization, or a domestic or foreign non-member broker-dealer, investment adviser, bank, other financial institution, or otherwise without the prior written consent of another person designated by the member or member organization under Rule 342(b)(1) to sign such consents and review such accounts.

      Persons having accounts or transactions referred to above shall arrange for duplicate confirmations and statements (or their equivalents) relating to the foregoing to be sent to another person designated by the member or member organization under Rule 342(b)(1) to review such accounts and transactions. All such accounts and transactions periodically shall be reviewed by the member or member organization employer (see also Rule 342.21).

      The Exchange may, upon written request, and where good cause is shown, waive any requirements of this Rule.

      • • • Supplementary Material: ---------

      .10 No Change.
      .11 [The "private securities transactions" referred to in Rule 407(b) shall include all transactions in the securities of issuing entities which are not public, whether or not such transactions are negotiated directly with the issuer. They shall include, but not be limited to: interests in oil or gas ventures, and in real estate syndications, participants in tax shelters and in other investment vehicles, and shares issued prior to a public distribution by such issuing entities.]

      The term "securities or commodities accounts" as used in the rule 407(b) shall include, but not be limited to, limited or general partnership interests in investment partnerships.

      Members and member organizations must develop and maintain written procedures for reviewing these accounts and transactions and shall assure that their associated persons are not improperly recommending or marketing these securities or products to others through members or member organizations[, or privately,].
      .12 No Change.
      .13 [f]For the purposes of this Rule, the term "other financial institution" includes, but is not limited to, insurance companies, trust companies, credit unions and investment companies.

      * * * * *

      Rule 408. Discretionary Power in Customers' Accounts

      (a) No member[, allied member] or employee of a member organization shall exercise any discretionary power in any customer's account or accept orders for an account from a person other than the customer without first obtaining written authorization of the customer[.], the signature of the person or persons authorized to exercise discretion in the account (and of any substitute so authorized), and the date such discretionary authority was granted.
      (b) No member[, allied member] or employee of a member organization shall exercise any discretionary power in any customer's account, without first notifying and obtaining the approval of another person delegated under Rule 342(b)(1) with authority to approve the handling of such accounts. Every order entered on a discretionary basis by a member[, allied member] or employee of a member organization must be identified as discretionary on the order at the time of entry. Such discretionary accounts shall receive frequent appropriate supervisory review by a person delegated such responsibility under Rule 342(b)(1), who is not exercising the discretionary authority. A written statement of the supervisory procedures governing such accounts must be maintained.
      (c) No member or [allied member or] employee of a member organization exercising discretionary power in any customer's account shall (and no member organization shall permit any member[, allied member,] or employee thereof exercising discretionary power in any customer's account to) effect purchases or sales of securities which are excessive in size or frequency in view of the financial resources of such customer.

      * * * * *

      Rule 409. Statements of Accounts to Customers

      (a)–(g) No Change.

      • • • Supplementary Material: ---------

      .10 No Change.
      (1)–(6) No Change.
      (7) Upon the written instructions of a customer and with the written approval of a member or [allied member,] supervisor of a member organization, a member organization may hold mail for a customer who will not be at his usual address for the period of his absence, but (A) not to exceed two months if the organization is advised that such customer will be on vacation or travelling or (b) not be exceed three months if the customer is going abroad.

      * * * * *

      Rule 410. Records of Orders

      (a) No Change.
      (1)–(3) No Change.

      Changes In Account Name or Designation

      Before any order covered by (1) or (2) above is executed, there must be placed upon the order slip or other similar record of the member or member organization the name or designation of the account for which such order is to be executed. No change in such account name (including related accounts) or designation (including error accounts) shall be made unless the change has been authorized by a member, [allied member,] principal executive or a person or persons designated under the provisions of Rule 342(b)(1). Such person must, prior to giving his or her approval of the account designation change, be personally informed of the essential facts relative thereto and indicate his or her approval of such change in writing on the order or other similar record of the member or member organization. The essential facts relied upon by the person approving the change must be documented in writing and maintained with the order or other similar record for at least three years, the first two in an easily accessible place as that term is used in Securities Exchange Act Rule 17a-4.

      Exceptions

      Under exceptional circumstances, the Exchange may upon written request waive the requirements contained in (1), (2) and (3) above.

      * * * * *

      [Rule 412. Customer Account Transfer Contracts]

      Entire text deleted.

      * * * * *

      [NYSE Rule Interpretation 412 CUSTOMER ACCOUNT TRANSFER CONTRACTS]

      Entire text deleted.

      * * * * *

      Rule 414. Index and Currency Warrants

      (a)–(b) No Change.

      Position Limits and Reports

      (c) Position Limits Generally
      (i) Except with the prior approval of the Exchange in each instance, no member or member organization shall effect, for any account in which such member or member organization has an interest, for the account of any member[, allied member] or employee of such member or member organization, or for the account of any customer, a transaction (whether on the Exchange or on or through the facilities of, or otherwise subject to the rules of, another national securities exchange or national securities association) in a stock index warrant if the member or member organization has reason to believe that, as a result of such transaction, the member or member organization, the member[, allied member] or employee of such member or member organization, or the customer would, acting alone or in concert with others, directly or indirectly, control any aggregate position in a stock index warrant issue, or in all warrants issued on the same stock index, on the same side of the market, in excess of the position limits specified in subparagraphs (ii) through (iv) of this paragraph (c).
      (ii)–(vi) No Change.
      (A)–(C) No Change.
      (d) Exercise Limits

      Except with the prior approval of the Exchange in each instance, no member or member organization shall exercise, for any account in which such member or member organization has an interest or for the account of any member[, allied member] or employee of such member or member organization or for the account of any customer, a long position in any stock index warrant dealt in on the Exchange if as a result thereof such member or member organization, or member[, allied member] or employee of such member or member organization or customer, acting alone or in concert with others, directly or indirectly, has or will have exercised within any five consecutive business days aggregate long positions in excess of the number of stock index warrants specified in or pursuant to paragraph (c) of this Rule 414 as the position limit for the stock index warrant. The Exchange may from time to time institute other limitations concerning the exercise of stock index warrants. All such exercise limitations are separate and distinct from any other exercise limitations the issuers of stock index warrants may impose.
      (e)–(h) No Change.
      (i) Discretionary Accounts

      Rule 724 (Discretionary Accounts) (and not Rule 408 (Discretionary Power in Customers' Account)) shall apply insofar as a member[, allied member] or employee of a member organization exercises discretion to trade in currency warrants, currency index warrants and/or stock index warrants for customer accounts.

      * * * * *

      Rule 424. Reports of Options

      Each member and member organization shall report to the Exchange such information as may be required with respect to any substantial option relating to listed securities in which such member, member organization or [allied member] principal executive therein is directly or indirectly interested or of which such member, member organization or [allied member] principal executive has knowledge by reason of transactions executed by or through such member or organization.

      The Exchange may disapprove of the connection of any member, member organization or [allied member] principal executive therein with any such option which it shall determine to be contrary to the best interest or welfare of the Exchange or to be likely to create prices which will not fairly reflect market values.

      * * * * *

      Rule 431. Margin Requirements

      (a)–(d) No Change.
      (e) Exceptions to Rule

      No Change.
      (1)–(2) No Change.
      (3) Joint Accounts in Which the Carrying Organization or a Partner or Stockholder Therein Has an Interest.—In the case of a joint account carried by a member organization, in which such organization, or any partner, member, [allied member] principal executive or any stockholder (other than a holder of freely transferable stock only) of such member organization participates with others, each participant other than the carrying member organization shall maintain an equity with respect to such interest pursuant to the margin provisions of the Rule as if such interest were in a separate account.
      (4)–(8) No Change.
      (f) Other Provisions
      (1)–(3) No Change.
      (4) Guaranteed Accounts.—Any account guaranteed by another account may be consolidated with such other account and the margin to be maintained may be determined on the net position of both accounts, provided the guarantee is in writing and permits the member organization carrying the account, without restriction, to use the money and securities in the guaranteeing account to carry the guaranteed account or to pay any deficit therein; and provided further that such guaranteeing account is not owned directly or indirectly by (A) a partner, member[, allied member] or any stockholder (other than a holder of freely transferable stock only) in the organization carrying such account or (b) a member, member organization, a partner[, allied member] or any stockholder (other than a holder of freely transferable stock only) therein having a definite arrangement for participating in the commissions earned on the guaranteed account. However, the guarantee of a limited partner or of a holder of non-voting stock, if based upon his resources other than his capital contribution to or other than his interest in a member organization, is not affected by the foregoing prohibition, and such a guarantee may be taken into consideration in computing margin to be maintained in the guaranteed account.

      When one or more accounts are guaranteed by another account and the total margin deficiencies guaranteed by any guarantor exceeds 10% of the member organization's excess Net Capital, the amount of the margin deficiency being guaranteed in excess of 10% of excess Net Capital shall be deducted in computing the Net Capital of the member organization under the Exchange's Capital Requirements.

      * * * * *

      Rule 435. Miscellaneous Prohibitions

      No member[,] or member organization[, or allied member therein] shall:

      (1)–(7) No Change.

      [Rule 436. Interest on Credit Balances]

      Entire text deleted.

      * * * * *

      [NYSE Rule Interpretation 436 INTEREST ON CREDIT BALANCE]

      Entire text deleted.

      * * * * *

      Rule 440F. Public Short Sale Transactions Effected on the Exchange

      • • • Supplementary Material: ---------

      Reports on Form SS20

      .10 Requirements for filing.—Every ROUND-LOT short sale transaction in stocks (or certificates therefor) or warrants effected on the floor of the Exchange for the accounts of PUBLIC customers is required to be reported on Form SS20. Reports are to be filed by the member organization through which the transaction is cleared/settled.

      Public customers are all customers OTHER THAN NYSE members[, allied members] or member organizations. Included as public are limited/special partners and non-voting stockholders who are not also NYSE members [or allied members]. Also included are employees of member organizations.

      * * * * *

      Rule 440G. Transactions in Stocks and Warrants for the Accounts of Members, [Allied Members] Principal Executives and Member Organizations

      • • • Supplementary Material: ---------

      Reports on Form 121

      .10 Requirements for filing.—Any ROUND-LOT purchase or sale of stock (or certificates therefor) or warrant effected on the floor of the New York Stock Exchange for the accounts of:
      a) NYSE members;
      b) [NYSE Allied members] principal executives; or
      c) NYSE member organizations,
      must be reported on Form 121 regardless of where the order originated or by whom it was executed.

      Instructions.—

      (1) An account is defined as any account in which the member, [allied member or] member organization or principal executive thereof has a direct or indirect beneficial interest. It is not confined only to an account actually in the respondent's name. Generally, a person should include transactions in securities held in the name of a spouse, minor children or other relatives who share the same home as the reporting person, as being beneficially owned by such person. In addition, a person may be regarded as the beneficial owner of securities held in the name of another person, if by reason of any contract, understanding, relationship, agreement or other arrangement he obtains benefits substantially equivalent to those of ownership. This does not, however, include trusts or estates if the person has no power to make investment decisions. In other cases, if special circumstances exist indicating that a member or principal executive does not have a beneficial interest in transactions in an account in the name of members of his family, or if he wishes guidance as to whether he should report transactions in securities held by family members as being beneficially owned by him, he should contact the Member Firm Regulation Division for clarification.
      (2) No Change.
      (a) No Change.
      (b) If the "joint account" consists solely of NYSE members, [allied members or] member organizations or principal executives thereof, it is permissible for one respondent to include in their/his report the full amount of any transactions for the "joint account". In this event, the report should include a notation to that effect, and the other participants should not include such transactions in their/his report.
      (3)–(5) No Change.
      (6) Transactions made in error or to rectify an error:
      (a) are reportable if the original order on which the error was made is reportable (i.e. it was for an NYSE member, [allied member or] member organization or principal executive thereof);
      (b) No Change.
      (7) No Change.
      (a)–(c) No Change.
      (d) for customers other than NYSE members or [allied members] principal executives of the reporting organization;

      * * * * *

      [Rule 446. Business Continuity and Contingency Plans]

      Entire text deleted.

      * * * * *

      Rule 477. Retention of Jurisdiction—Failure to Cooperate

      (a) If, prior to termination, or during the period of one year immediately following the receipt by the Exchange of written notice of the termination, of a person's status as a member, member organization, [allied member,] principal executive, approved person, or registered or non-registered employee of a member or member organization, the Exchange serves (as provided in paragraph (d) of Rule 476) written notice on such person that it is making inquiry into, or serves a Charge Memorandum on such person with respect to any matter or matters occurring prior to the termination of such person's status as a member, member organization, [allied member,] principal executive, approved person, or registered or non-registered employee of a member or member organization, the Exchange may thereafter require such person to comply with any requests of the Exchange to appear, testify, submit books, records, papers, or tangible objects, respond to written requests and attend hearings in every respect in conformance with the Rules of the Exchange in the same manner and to the same extent as if such person had remained a member, member organization, [allied member,] principal executive, approved person, or registered or non-registered employee of a member or member organization.
      (b) Prior to termination, or during the period of one year immediately following the receipt by the Exchange of written notice of the termination of a person's status as a member, member organization, [allied member,] principal executive, approved person, or registered or non-registered employee of a member or member organization, the Exchange may, through the exercise of its jurisdiction, as described in (A) above, require such person to comply with any requests of an organization or association included in Rule 476(a)(11) to appear, testify, submit books, records, papers, or tangible objects, respond to written requests and attend hearings in every respect in conformance with the Rules of the Exchange in the same manner and to the same extent as if such person had remained a member, member organization, [allied member,] principal executive, approved person, or registered or non-registered employee of a member or member organization with respect to any matter or matters occurring prior to the termination of such person's status as a member, member organization, [allied member,] principal executive, approved person, or registered or non-registered employee of a member or member organization.
      (c) If such former member, member organization, [allied member,] principal executive, approved person, or registered or non-registered employee of a member or member organization, provided such notice or Charge Memorandum is or has been served, is adjudged guilty in a proceeding under Rule 476 of having refused or failed to comply with any such requirement, such person may be barred from being a member, member organization, [allied member,] principal executive, approved person, or registered or non-registered employee of a member or member organization permanently, or for such period of time as may be determined, or until such time as the Exchange has completed its investigation into the matter or matters specified in such notice or Charge Memorandum, has determined a penalty, if any, to be imposed, and until the penalty, if any, has been carried out.
      (d) Following the termination of such person's status as a member, member organization, [allied member,] principal executive, approved person, or registered or non-registered employee of a member or member organization, provided such notice or Charge Memorandum is or has been served, such person may also be charged with having committed, prior to termination, any other offense with which such person might have been charged had such status not been terminated. Any such charges shall be brought and determined in accordance with the provisions set forth in Rule 476.

      * * * * *

      Rule 704. Position Limits

      (a) Generally

      Except with the prior written approval of the Exchange in each instance, no member or member organization shall effect, for any account in which such member or member organization has an interest or for the account of any member[, allied member] or employee of such member or member organization or for the account of any customer, an opening transaction (whether on the Exchange or on or through the facilities of, or otherwise subject to the rules of, another Participating Exchange or Association) in an option of any class if the member or member organization has reason to believe that as a result of such transaction the member or member organization or member[, allied member] or employee of such member or member organization or customer would, acting alone or in concert with others, directly or indirectly, control any aggregate position in options (whether long or short) of puts and calls on the same side of the market covering the same underlying stock or underlying stock group that is in excess of;

      * * * * *

      Rule 705. Exercise Limits

      Except with the prior approval of the Exchange in each instance, no member or member organization shall exercise, for any account in which such member or member organization has an interest or for the account of any member[, allied member] or employee of such member or member organization or for the account of any customer, a long position in any option of a class if as a result thereof such member or member organization, or member[, allied member] or employee of such member or member organization or customer, acting alone or in concert with others, directly or indirectly,

      * * * * *

      Rule 723. Suitability

      No member organization or member[, allied member] or employee of such member organization shall recommend to a customer an opening transaction in any option contract unless the person making the recommendation has a reasonable basis for believing, at the time of making the recommendation, that the customer has such knowledge and experience in financial matters that he may reasonably be expected to be capable of evaluating the risks of the recommended transaction, and is financially able to bear the risks of the recommended position in the option contract.

      Rule 724. Discretionary Accounts

      (a) Authorization and Approval Required

      No member[, or allied member] or employee of a member organization shall exercise any discretionary power with respect to trading in option contracts in a customer's account unless such customer has given prior written authorization and the account has been accepted in writing by a Registered Options Principal. The Senior Registered Options Principal shall review the acceptance of each discretionary account to determine that the Registered Options Principal accepting the account had a reasonable basis for believing that the customer was able to understand and bear the risks of the strategies or transactions proposed, and he shall maintain a record of the basis for his determination. Each discretionary order shall be approved and initialed on the day entered by the branch office manager or other Registered Options Principal, provided that if the branch office manager is not a Registered Options Principal, his approval shall be confirmed within a reasonable time by a Registered Options Principal. Every discretionary order shall be identified as discretionary on the order at the time of entry. Discretionary accounts shall receive frequent appropriate supervisory review by the Compliance Registered Options Principal. The provisions of this paragraph shall not apply to discretion as to the price at which or the time when an order given by a customer for the purchase or sale of a definite number of option contracts in a specified security shall be executed.
      (b) Options Programs

      No Change.
      (c) Prohibited Transactions

      No member [or allied member] or employee of a member organization having discretionary power over a customer's account shall, in the exercise of such discretion, execute or cause to be executed therein any purchases or sales of option contracts which are excessive in size or frequency in view of the financial resources in such account.
      (d) Record of Transactions

      A record shall be made of every transaction in option contracts in respect to which a member [or allied member] or employee of a member organization has exercised discretionary authority, clearly reflecting such fact and indicating the name of the customer, the designation and number of the option contracts, the premium and the date and time when such transaction was effected.

      * * * * *

      Rule 791. Communications to Customers

      (a) General Rule

      No member organization or member[, allied member] or employee of such member organization shall utilize any advertisement, educational material, sales literature or other communication to any customer or member of the public concerning options which:

      * * * * *

    • 08-63 Securities Industry/Regulatory Council on Continuing Education Issues Firm Element Advisory Update

      Continuing Education

      Regulatory Notice
      Notice Type

      Guidance
      Key Topics

      Continuing Education
      Firm Element
      Suggested Routing

      Compliance
      Continuing Education
      Legal
      Registration
      Senior Management
       

      Executive Summary

      This Notice advises firms of the fourth-quarter 2008 Securities Industry/Regulatory Council on Continuing Education Firm Element Advisory (FEA), which identifies regulatory and sales practice topics that firms should consider in their Firm Element training plans. Topics updated or added since the prior FEA are indicated in the document as such.

      The updated Firm Element Advisory is available at www.cecouncil.com/publications/council_publications/FEA_Semi_Annual_Update.pdf.

      Questions concerning this Notice should be directed to:

      •  Joseph Sheirer, Director, Continuing Education, FINRA, at (646) 315-8691; or
      •  Roni Meikle, Director, Continuing Education, FINRA, at (646) 315-8688.

      Background & Discussion

      The Securities Industry/Regulatory Council on Continuing Education (the Council) publishes the Firm Element Advisory (FEA) to highlight current regulatory and sales practice issues that firms should consider for possible inclusion in Firm Element training plans. The topics are identified through a review of industry regulatory and self-regulatory organization publications and announcements of significant events.

      The FEA topics are not exhaustive and are intended as a guide to firms when they determine what to include in their training plans. Firms should consider the specific nature of their business, clients, products and services when creating their training plans.

      The updated FEA is available on the Council's Web site at www.cecouncil.com/publications/council_publications/FEA_Semi_Annual_Update.pdf.

      In addition to the FEA, the Council offers the Firm Element Organizer as a resource that can assist firms in developing their Firm Element training plans. The Firm Element Organizer is a Web-based tool that enables users to search an extensive database of regulatory resources related to specific investment products or services and is available at www.cecouncil.com/firm_element/organizer.

      In late October, the Council will survey Continuing Education contacts that each firm has on record with FINRA to further understand how firms use the FEA and the Council's Web site. The electronic survey inquires about usage of and potential improvements to the FEA and the Council Web site. All responses to the survey are confidential.

    • 08-62 SEC Approves Rules Limiting Submissions to Arbitrators in Closed Cases Effective Date: November 24, 2008

      Limit on Closed Case Submissions

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      NASD Rule 12904
      NASD Rule 12905
      NASD Rule 13904
      NASD Rule 13905
      Suggested Routing

      Compliance
      Legal
      Key Topic(s)

      Arbitration
      Closed Cases
      Code of Arbitration Procedure
      Dispute Resolution

      Executive Summary

      Effective November 24, 2008, FINRA will limit the circumstances under which parties may make submissions to arbitrators in closed cases. The SEC approved new Rule 12905 of the Code of Arbitration Procedure for Customer Disputes and new Rule 13905 of the Code of Arbitration Procedure for Industry Disputes (the Codes). As a result, parties may not submit documents to arbitrators in cases that have been closed except under the following limited circumstances: 1) as ordered by a court; 2) at the request of any party within 10 days of service of an award or notice that a matter has been closed, for typographical or computational errors, or mistakes in the description of any person or property referred to in the award; or 3) if all parties agree and submit documents within 10 days of service of an award or notice that a matter has been closed.1

      The text of Rules 12905 and 13905 is set forth in Attachment A. The rules will apply to requests made by parties on or after November 24, 2008.

      Questions concerning this Notice should be directed to: Richard Berry, Vice President and Director of Case Administration, FINRA Dispute Resolution, at (212) 858-4307 or richard.berry@finra.org; or Margo Hassan, Counsel, FINRA Dispute Resolution, at (212) 858-4481 or margo.hassan@finra.org.

      Background & Discussion

      FINRA is adopting new Rules 12905 and 13905 to strictly limit the circumstances under which parties may make submissions to arbitrators in closed cases. Currently, the Codes do not address requests to submit documents to arbitrators in closed cases. Therefore, FINRA staff has in the past solicited responses from parties in closed cases and then forwarded all such requests and responses to the arbitrators regardless of the reason for a request or the amount of time that elapsed since a case was closed. FINRA receives an estimated 150 or more requests each year, some of which involve cases that have long been closed. The arbitrators almost never grant such late requests to reopen cases. FINRA believes that the new rules will reduce the parties' costs associated with responding to such requests and will support the finality of FINRA arbitration awards.

      Under Rules 12905 and 13905, parties may not submit documents to arbitrators in cases that have been closed except under the following limited circumstances:

      1. as ordered by a court;
      2. at the request of any party within 10 days of service of an award or notice that a matter has been closed, for typographical or computational errors, or mistakes in the description of any person or property referred to in the award; or
      3. if all parties agree and submit documents within 10 days of service of an award or notice that a matter has been closed.

      FINRA will forward to the arbitrators all requests made pursuant to a court order and will determine if submissions made pursuant to circumstances 2 and 3 comply with the grounds for submission prior to forwarding the requests to the arbitrators.2 All parties will have an opportunity to respond to requests made under circumstance 2 and the responses will be forwarded to the arbitrators along with the requests. The arbitrators may decline requests made pursuant to circumstances 2 and 3 and such requests will be considered denied unless the arbitrators rule within 10 days after FINRA forwards the documents to them. The new rules do not extend the time period for the payment of any award pursuant to Rules 12905 and 13905.3

      The amendments will become effective on November 24, 2008, and will apply to requests received from parties on or after the effective date.


      1 Exchange Act Release No. 58739 (October 6, 2008), 73 Federal Register 60738 (October 14, 2008) (File No. SR-FINRA-2008-005).

      2 An example of a request relating to a typographical or computational error would be an addition mistake made when computing forum fees. An example of a mistake in the description of a person or property would be an incorrect reference to the title of an account in an award.

      3 Rules 12905(i) and 13905(i) provide that all monetary awards shall be paid within 30 days of receipt unless a motion to vacate has been filed with a court of competent jurisdiction.


      Attachment A

      Code of Arbitration Procedure for Customer Disputes and Code of Arbitration Procedure for Industry Disputes

      Customer Code

      12905. Submissions After a Case Has Closed

      (a) Parties may not submit documents to arbitrator(s) in cases that have been closed except under the following limited circumstances:
      (1) as ordered by a court;
      (2) at the request of any party within 10 days of service of an award or notice that a matter has been closed, for typographical or computational errors, or mistakes in the description of any person or property referred to in the award; or
      (3) if all parties agree and submit documents within 10 days of (1) service of an award or (2) notice that a matter has been closed.
      (b) Parties must make requests under this rule in writing to the Director and must include the basis relied on under this rule for the request. The Director will forward documents submitted pursuant to paragraph (a)(1), along with any responses from other parties, to the arbitrators. The Director will determine if submissions made pursuant to paragraphs (a)(2) and (a)(3) comply with the grounds enumerated in the rule. If the Director determines that the request complies with paragraphs (a)(2) and (a)(3), the Director will forward the documents, along with any responses from other parties, to the arbitrators. The arbitrators may decline to consider requests that the Director forwards to them under paragraphs (a)(2) and (a)(3).
      (c) Unless the arbitrators rule within 10 days after the Director forwards the documents to the arbitrators pursuant to a request made under paragraphs (a)(2) and (a)(3), the request shall be deemed considered and denied.
      (d) Requests under this rule do not extend the time period for payment of any award pursuant to Rule 12904.

      Industry Code

      13905. Submissions After a Case Has Closed

      (a) Parties may not submit documents to arbitrator(s) in cases that have been closed except under the following limited circumstances:
      (1) as ordered by a court;
      (2) at the request of any party within 10 days of service of an award or notice that a matter has been closed, for typographical or computational errors, or mistakes in the description of any person or property referred to in the award; or
      (3) if all parties agree and submit documents within 10 days of (1) service of an award or (2) notice that a matter has been closed.
      (b) Parties must make requests under this rule in writing to the Director and must include the basis relied on under this rule for the request. The Director will forward documents submitted pursuant to paragraph (a)(1), along with any responses from other parties, to the arbitrators. The Director will determine if submissions made pursuant to paragraphs (a)(2) and (a)(3) comply with the grounds enumerated in the rule. If the Director determines that the request complies with paragraphs (a)(2) and (a)(3), the Director will forward the documents, along with any responses from other parties, to the arbitrators. The arbitrators may decline to consider requests that the Director forwards to them under paragraphs (a)(2) and (a)(3).
      (c) Unless the arbitrators rule within 10 days after the Director forwards the documents to the arbitrators pursuant to a request made under paragraphs (a)(2) and (a)(3), the request shall be deemed considered and denied.
      (d) Requests under this rule do not extend the time period for payment of any award pursuant to Rule 13904.

    • 08-61 Proposed Amendments to Qualification Examination Fees in Section 4(c) of Schedule A to the FINRA By-Laws; Proposed Implementation Date: January 2, 2009

      View PDF

      Examination Fees

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      Schedule A of FINRA By-Laws
      Suggested Routing

      Legal & Compliance
      Registration
      Senior Management
      Key Topic(s)

      Qualification Examinations
      Qualification Examination Fees
      Registration

      Proposed Implementation Date: January 2, 20091

      Executive Summary

      FINRA has filed with the SEC a rule change proposing to increase certain qualification examination fees to reflect the rising costs of developing, administering and delivering such examinations.2 Pending SEC approval of the amendments to Section 4(c) of Schedule A to the FINRA By-Laws, the new fees will become effective on January 2, 2009. FINRA is issuing this Notice to alert member firms about this proposed fee change to assist in firms' budget planning processes. The text of Section 4(c) of Schedule A to the FINRA By-Laws,3 as amended, is set forth in Attachment A of this Notice.

      Questions concerning this Notice should be directed to John C. Kalohn, Associate Vice President, Testing and Continuing Education Department, at (240) 386-5800.

      Background & Discussion

      Any person associated with a member firm who is engaged in the securities business of the firm must register with FINRA. As part of the registration process, securities professionals must pass a qualification examination to demonstrate competence in each area in which they intend to work. These mandatory qualification examinations cover a broad range of subjects on the markets, products, a person's responsibilities in a given position, securities industry rules and the regulatory structure. Some qualification examinations are sponsored (i.e., developed) solely by FINRA while others are sponsored by the Municipal Securities Rulemaking Board (MSRB), the North American Securities Administrators Association (NASAA), the National Futures Association (NFA), the Federal Deposit Insurance Corporation (FDIC), other self-regulatory organizations (SROs) or jointly among these entities.4

      FINRA administers qualification examinations via computer through the PROCTOR® system5 at test centers operated by vendors under contract with FINRA. FINRA charges an examination fee to candidates for FINRA-sponsored and co-sponsored examinations. For qualification examinations sponsored by a FINRA client and administered/delivered by FINRA, FINRA charges a delivery fee that represents either a portion of or the entire examination fee for a particular examination.6

      Each year, FINRA conducts a comprehensive review of the examination fee structure, including an analysis of the costs of developing, administering and delivering qualification examinations. FINRA's 2008 review revealed that certain operational costs have increased and will continue to increase over the next few years. In particular, these costs consist of: (1) the cost of providing the extensive network of test delivery centers; and (2) technology costs required to maintain the PROCTOR® system. As a result of these rising costs, FINRA has proposed to increase certain qualification examination fees, effective January 2, 2009 (pending SEC approval), with no single examination increasing more than $20.

      Specifically, examination fees would be increased as follows:

      Series Examination Title Current Fee Proposed Fee
      Series 4 Registered Options Principal (Sponsored jointly by NYSE Alternext, CBOE, FINRA, NYSE Arca and Phlx) $80 $90
      Series 6 Investment Company Products/Variable Contracts Representative $75 $85
      Series 7 General Securities Representative $250 $265
      Series 9 General Securities Sales Supervisor—Options Module (Sponsored jointly by NYSE Alternext, CBOE, FINRA, MSRB, NYSE Arca and Phlx) $60 $70
      Series 10 General Securities Sales Supervisor—General Module (Sponsored jointly by NYSE Alternext, CBOE, FINRA, MSRB, NYSE Arca and Phlx) $100 $110
      Series 11 Assistant Representative—Order Processing $60 $70
      Series 14 Compliance Official $300 $320
      Series 16 Supervisory Analyst $200 $210
      Series 17 Limited Registered Representative $65 $70
      Series 22 Direct Participation Programs Representative $75 $85
      Series 23 General Securities Principal Sales Supervisor Module $75 $85
      Series 24 General Securities Principal $95 $105
      Series 26 Investment Company Products/Variable Contracts Principal $75 $85
      Series 27 Financial and Operations Principal $95 $105
      Series 28 Introducing Broker-Dealer Financial and Operations Principal $75 $85
      Series 37 Canada Module of S7 (Options Required) $150 $160
      Series 38 Canada Module of S7 (No Options Required) $150 $160
      Series 39 Direct Participation Programs Principal $75 $80
      Series 42 Registered Options Representative $60 $65
      Series 55 Limited Representative-Equity Trader $85 $95
      Series 62 Corporate Securities Limited Representative $75 $80
      Series 72 Government Securities Representative $85 $95
      Series 82 Limited Representative—Private Securities Offering $75 $80
      Series 86 Research Analyst—Analysis $150 $160
      Series 87 Research Analyst—Regulatory $105 $115

      The new fees would apply to persons who register for one of these examinations beginning on January 2, 2009. Specifically, the fees would apply for "120-day examination windows" opened in the CRD® on or after January 2, 2009.


      1 Pending approval by the Securities and Exchange Commission (SEC).

      2 See SR-FINRA-2008-053.

      3 Schedule A sets forth examination fees for those examinations that are sponsored or co-sponsored by FINRA and/or that may be required by FINRA for its members.

      4 For example, FINRA administers and delivers the Series 6, 24 and 27 examinations, which are sponsored by FINRA. FINRA also administers and delivers client-sponsored examinations, such as the Series 9 and 10, which are sponsored jointly by several SROs (NYSE Alternext US LLC (NYSE Alternext) (formerly American Stock Exchange), Chicago Board Options Exchange (CBOE), MSRB, FINRA, NYSE Arca, Inc. (NYSE Arca) (formerly Pacific Stock Exchange, Inc.) and NASDAQ OMX PHLX, Inc. (Phlx) (formerly Philadelphia Stock Exchange)).

      5 PROCTOR® is a technology system that supports computer-based testing and training.

      6 FINRA administers and delivers examinations sponsored by NASAA, MSRB, NYSE Alternext, NFA and NYSE Arca that, while not required by FINRA rules, are taken by persons associated with FINRA members to obtain certain licenses. Fees for the following examinations developed by these sponsors will also be adjusted effective January 2, 2009, as follows:

      •  MSRB—Series 51 (Municipal Fund Securities Limited Principal), from $75 to $85; Series 52 (Municipal Securities Representative), from $80 to $95; Series 53 (Municipal Securities Principal), from $80 to $95.
      •  NASAA—Series 63 (Uniform Securities Agent State Law Exam), from $82 to $96; Series 65 (Uniform Combined State Law Exam), from $120 to $135; Series 66 (Investment Advisors Law Exam), from $113 to $128.
      •  NFA—Series 3 (National Commodities Futures), from $95 to $105; Series 30 (Branch Managers Examination—Futures), from $60 to $70; Series 31 (Futures Managed Funds Exam), from $60 to $70; Series 32 (Limited Futures Exam—Regulations), from $60 to $70.
      •  NYSE Alternext—Series 5 (Interest Rate Options), from $60 to $65.
      •  NYSE Arca—Series 44 (Market Maker Authorized Traders Examination), from $88 to $100; Series 45 (Pacific Exchange Floor Broker/Market Maker), from $105 to $115.

      Attachment A

      Below is the text of the proposed rule change. Proposed new language is underlined; proposed deletions are in brackets.

      * * * * *

      Schedule A to the By-Laws of the Corporation

      * * * * *

      Section 4—Fees

      (a) and (b) No change
      (c) The following fees shall be assessed to each individual who registers to take an examination as described below. These fees are in addition to the registration fee described in paragraph (b).

      Series 4 Registered Options Principal [$80] $90
      Series 6 Investment Company Products/Variable Contracts Representative [$75] $85
      Series 7 General Securities Representative [$250] $265
      Series 9 General Securities Sales Supervisor—Options Module [$60] $70
      Series 10 General Securities Sales Supervisor—General Module [$100] $110
      Series 11 Assistant Representative—Order Processing [$60] $70
      Series 14 Compliance Official [$300] $320
      Series 16 Supervisory Analyst [$200] $210
      Series 17 Limited Registered Representative [$65] $70
      Series 22 Direct Participation Programs Representative [$75] $85
      Series 23 General Securities Principal Sales Supervisor Module [$75] $85
      Series 24 General Securities Principal [$95] $105
      Series 26 Investment Company Products/Variable Contracts Principal [$75] $85
      Series 27 Financial and Operations Principal [$95] $105
      Series 28 Introducing Broker[/]-Dealer Financial and Operations Principal [$75] $85
      Series 37 Canada Module of S7 (Options Required) [$150] $160
      Series 38 Canada Module of S7 (No Options Required) [$150] $160
      Series 39 Direct Participation Programs Principal [$75] $80
      Series 42 Registered Options Representative [$60] $65
      Series 55 Limited Representative—Equity Trader [$85] $95
      Series 62 Corporate Securities Limited Representative [$75] $80
      Series 72 Government Securities Representative [$85] $95
      Series 82 Limited Representative—Private Securities Offering [$75] $80
      Series 86 Research Analyst—Analysis [$150] $160
      Series 87 Research Analyst—Regulatory [$105] $115
      (1) through (3) No change
      (d) through (h) No change

      * * * * *

    • 08-60 FINRA Announces Temporary Margin Maintenance, Net Capital and Reserve Formula Requirements Related to Money Market Mutual Funds Effective Date: October 21, 2008

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      Money Market Mutual Funds

      Regulatory Notice
      Notice Type

      Special Alert
      Referenced Rules & Notices

      NASD Rule 2520
      NYSE Rule 431
      Regulation T §§ 220.2
      SEA Rule 15c3-1
      SEA Rule 15c3-3
      Suggested Routing

      Compliance
      Finance
      Legal
      Margin Department
      Operations
      Regulatory Reporting
      Senior Management
      Key Topic(s)

      Customer Protection
      Initial Margin Requirements
      Maintenance Margin Requirements
      Money Market Mutual Funds
      Net Capital

      Executive Summary

      The purpose of this Notice is to advise FINRA firms that pursuant to NASD Rule 2520(f)(8)(A), NYSE Rule 431(f)(8)(A) and SEA Rules 15c3-1 and 15c3-3, FINRA is announcing temporary margin maintenance, net capital and reserve formula requirements related to certain money market mutual funds that have frozen customer redemptions or whose net asset value has declined below $1.00 per share, effective October 21, 2008.

      Questions concerning margin as described in this Notice should be directed to:

      •  Rudolph Verra, Managing Director, Risk Oversight and Operational Regulation, at (646) 315-8811;
      •  Glen Garofalo, Director, Credit Regulation, at (646) 315-8464; or
      •  Steve Yannolo, Principal Credit Specialist, Credit Regulation, at (646) 315-8621.

      Questions concerning net capital and reserve formula as described in this Notice should be directed to:

      •  Yui Chan, Managing Director, Risk Oversight and Operational Regulation, at (646) 315-8426;
      •  Bernadette Chichetti, Director, Risk Oversight and Operational Regulation, at (646) 315-8428; or
      •  Anthony Lucarelli, Director, Risk Oversight and Operational Regulation, at (646) 315-8520.

      Background & Discussion

      Money market mutual funds (MMMF) usually maintain a net asset value (NAV) of $1.00 per share but due to current problems in the credit markets, the NAV of certain funds has declined below $1.00 per share. Several funds have received a significant number of requests for withdrawals, which have caused fund managers to liquidate assets held within the fund at distressed market prices. In an attempt to prevent further price deterioration, and potential losses, certain MMMF's have temporarily suspended redemptions of fund shares. Consequently, holders of such MMMFs may not have access to their funds in order to purchase securities or meet other obligations.

      As a result of the foregoing, several firms have elected to provide their customers with liquidity on their MMMF holdings, despite the funds' suspension of redemptions. Typically, this liquidity has taken two forms:

      •  Firms have permitted customers to purchase securities based on the value of the MMMF held in their account.
      •  Firms have agreed to advance the customers the value of the MMMF that the customer attempted to redeem but couldn't due to the suspension of redemptions by the fund. In these instances, firms have advanced the cash to their customers without having received payment from the MMMFs; this practice has a similar effect on the firm as that of an outright purchase of the MMMF from the customer.

      Although most customers maintain their MMMF in a cash account, the shares may also be held in a margin account and may be used as collateral for a margin loan. A MMMF is margin eligible provided it meets the definition of a margin security under Regulation T 220.2. The current initial and maintenance margin requirement promulgated under NASD Rule 2520 and NYSE Rule 431 is 1 percent of the market value or NAV.

      FINRA has received questions from firms regarding the net capital and customer reserve formula treatment of certain customer account balances resulting from the actions taken by such firms to provide their customers with liquidity on MMMFs that have suspended redemptions. In consultation with the staff of the SEC, FINRA is providing the following guidance:

      1. In instances where the MMMF cannot presently be liquidated, firms may have elected to record entries which reflect the firm purchasing the MMMF from the customers, which would result in a proprietary long position for the firm and a credit to the customer account for the proceeds of the MMMF shares sold to the firm. In computing its net capital pursuant to SEA Rule 15c3-1, the firm must mark to the market the MMMF position and apply a 15 percent haircut on the total market value held in its proprietary account. The foregoing net capital treatment of the MMMF is not limited to positions that firms purchase from their customers but also applies to all proprietary positions held in such funds. In computing its customer reserve formula pursuant to SEA Rule 15c3-3, the firm must include in its computation any remaining balance in the customer's account following the sale of the MMMFs to the firm.
      2. In instances where the MMMF cannot presently be liquidated, firms may have elected to record entries that reflect the redemption of the customers' MMMF, which would result in a receivable from the MMMF and a payable to the customers. For net capital purposes, the firm may treat the receivable from the MMMF as an allowable asset only up to the aggregate of related customer credits that remain in the customers' accounts. However, if the amounts credited to the customers' accounts are withdrawn by the customers or if the credited amounts are used to reduce a debit balance in the customers' accounts, the aggregate amount of such items, relative to the firm's receivable from the MMMF, is to be treated by the firm as if it were a proprietary long position in the MMMF. In computing its net capital, the firm must mark to the market the MMMF and apply a 15 percent haircut. Any credits remaining in the customer accounts must be included in the reserve formula computation. Only the amount of the receivable from the MMMF that equates to the corresponding credits remaining in the customer accounts must be included as a debit in the reserve formula computation.
      3. In instances where the MMMF cannot be liquidated, the position remains in the customer's account, and the customer requests to utilize the MMMF position in his or her account as payment for the purchase of securities, the firm may consider up to 50 percent of the NAV of the MMMF as payment for a new security purchase. This treatment will apply whether the purchase is executed in a cash account or a strategy-based margin account. If the amount due from the purchase exceeds 50 percent of the NAV of the MMMF, the firm must treat the overage amount as an outstanding cash debit or Regulation T call. Therefore, the customer will be required to deposit cash or margin eligible securities to satisfy the outstanding amount due within five business days after the trade date of the purchase. The remaining debit balance can be included in the reserve formula computation. If the customer does not satisfy the amount due within five business days after trade date, the firm will be required to take appropriate action, which may include filing for an extension of time, where applicable. Furthermore, the regulatory maintenance margin requirement on a MMMF that has frozen customer redemptions or whose NAV has declined below $1.00 per share, that are held in a strategy-based margin account, shall be 50 percent of the current NAV of such MMMF.
      4. Several firms have elected to mitigate client losses on their MMMF positions. Those firms must accrue the total amount of their liability to the customer and reflect the expense in their current profit and loss statement. If the firm has not limited the amount of loss it will cover, then it must treat the customer's entire position as a proprietary contractual commitment, mark it to market and apply a 15 percent haircut in computing its net capital.

    • 08-59 Broker-Dealer, Investment Adviser Firm, Agent and Investment Adviser Representative, and Branch Renewals for 2009 Payment Deadline: December 12, 2008

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      BD and IA Renewals for 2009

      Regulatory Notice
      Notice Type

      Renewals
      Referenced Rules & Notices

      NTM 02-48
      Suggested Routing

      Compliance
      Legal
      Operations
      Registered Representatives
      Registration
      Senior Management
      Key Topic(s)

      CRD®
      Renewals
      Registration
      IARD

      Executive Summary

      The 2009 renewal process begins on November 10, 2008, when online Preliminary Renewal Statements are made available to all firms on Web CRD/IARD.

      Firms should note the following key dates in the 2009 renewal process:

      October 27, 2008 Firms may start submitting post-dated Forms U5 and BR Closing/Withdrawal filings via Web CRD.
      November 3, 2008 Firms may start submitting post-dated Form BDW via Web CRD, as well as Form ADV-W via IARD.
        Please Note: Post-dated filings submitted by 11:00 p.m. Eastern Time (ET) November 7, 2008, will not appear on the firm's Preliminary Renewal Statement. The only date that can be used for a post-dated termination filing is December 31, 2008.
      November 10, 2008 Preliminary Renewal Statements are available on Web CRD/IARD.
      December 12, 2008 Full payment of Preliminary Renewal Statements is due.
      January 2, 2009 Final Renewal Statements are available on Web CRD/IARD.

      Member firms are advised that failure of a firm to remit full payment of its Preliminary Renewal Statement to FINRA by December 12, 2008, could cause the firm to become ineligible to do business in the jurisdictions where it is registered, effective January 1, 2009.

      In addition to this Notice, firms should review the instructions posted at www.finra.org/renewals, especially the 2009 Renewal Program Bulletin, the 2009 IARD Renewal Bulletin (if applicable) on the Investment Adviser Web site at www.iard.com/renewals.asp, and any information mailed to ensure continued eligibility to do business as of January 1, 2009.

      Questions concerning this Notice should be directed to the FINRA Gateway Call Center at (301) 869-6699.

      Background & Discussion

      Preliminary Renewal Statements

      Beginning November 10, 2008, Preliminary Renewal Statements are available for viewing and printing on Web CRD/IARD. The statements will include the following fees:

      •  Web CRD system processing fees;
      •  FINRA branch office fees;
      •  FINRA branch renewal processing fees;
      •  American Stock Exchange (AMEX), BATS Exchange, Inc. (BATS), Boston Stock Exchange (BSE), Chicago Board Options Exchange (CBOE), Chicago Stock Exchange (CHX), International Securities Exchange (ISE), NASDAQ Stock Exchange (NQX), New York Stock Exchange (NYSE), NYSE Arca, Inc. (ARCA) and Philadelphia Stock Exchange (PHLX) maintenance fees;
      •  state agent renewal fees;
      •  state BD renewal fees;
      •  state BD branch fees;
      •  investment adviser firm and representative renewal fees, if applicable; and
      •  broker-dealer and/or investment adviser branch renewal fees.

      FINRA must receive full payment of the Preliminary Renewal Statement fees no later than December 12, 2008.

      If payment is not received by the December 12, 2008, payment due date, member firms will be assessed a Renewal Payment Late Fee. This late fee will be included as part of the Final Renewal Statement and will be calculated as follows: 10 percent of a member firm's cumulative final renewal assessment or $100, whichever is greater, with a cap of $5,000. Please see NTM 02-48 for details. In addition, if payment is not received by the deadline, firms also risk becoming ineligible to do business in the jurisdictions where their registrations are not renewed.

      Fees

      A fee of $30 will be assessed for each person who renews his/her registration with any regulator through Web CRD/IARD. Firms can access a listing of agents for whom their firm will be assessed by requesting the Renewals—Firm Renewal Roster.

      For 2009, any investment adviser fees assessed by the North American Securities Administrators Association (NASAA) for state-registered investment adviser firms and investment adviser representatives (RA) who renew through IARD will also be included on the Preliminary Renewal Statement.

      The FINRA branch office assessment fee of $75 per branch, based on the number of active FINRA branches as of December 31, 2008, will be assessed. One branch office assessment fee will be waived per firm.

      The FINRA branch renewal processing fee of $20 per branch, based on the number of active FINRA branches as of December 31, 2008, will be assessed. One branch renewal processing fee will be waived per firm.

      Please note that FINRA personnel assessment fees are not assessed through the annual Renewal Program. FINRA will mail all member firms a separate invoice for these fees. Firms can obtain a listing of agents for whom the firm will be assessed the personnel assessment fee by requesting the Renewals—Firm Renewal Roster.

      Renewal fees for AMEX, ARCA, BATS, BSE, CBOE, CHX, ISE, NQX, NYSE, PHLX and state registrations are also assessed on the Preliminary Renewal Statement. These fees are based on the number of individuals registered in each SRO/jurisdiction.

      Branch office renewal fees will also be collected for those regulators who choose to renew branches registered with them in Web CRD/IARD.

      Some participating jurisdictions may require steps beyond the payment of renewal fees to FINRA to complete the broker-dealer or investment adviser renewal process. Firms should contact each jurisdiction directly for further information on state renewal requirements. A Regulator Directory can be found at www.nasaa.org/QuickLinks/ContactYourRegulator.cfm.

      For detailed information regarding 2009 investment adviser renewals, you may also visit the investment adviser Web site, www.iard.com. A matrix of investment adviser renewal fees for states that participate in the 2009 IARD Investment Adviser Renewal Program is posted at www.iard.com/pdf/rep_fee_sch.pdf.

      Renewal Payment

      Firms have four payment methods available to pay 2009 renewal fees:

      1. Automatic Daily-to-Renewal Account Transfer
      2. Web CRD/IARD E-Pay
      3. Check
      4. Wire Transfer

      Automatic Daily-to-Renewal Account Transfer

      To facilitate renewal payment processing for all firms, FINRA will automatically transfer funds from a firm's Daily Account to its Renewal Account on December 12, 2008, the Preliminary Renewal Statement payment deadline. FINRA will transfer funds only if a firm has sufficient funds available in its Daily Account on December 12 to cover the amount. Please Note: If a firm does not want funds automatically transferred from its Daily Account to its Renewal Account, the firm should ensure that its payment is received in its Renewal Account by the December 12 deadline. Separately, if a firm wishes to transfer funds between affiliated firms, the firm should contact the FINRA Gateway Call Center at (301) 869-6699 for further instructions prior to the renewal deadline.

      Web CRD/IARD E-Pay

      The Web CRD/IARD E-Pay application is accessible from both the Preliminary and Final Renewal Statements and the FINRA (www.finra.org/crd) or IARD (www.iard.com) Web sites and allows a firm to make an ACH payment from a designated bank account to its Web CRD/IARD Renewal Account. Please note that in order for funds to be posted to your firm's Renewal Account by December 12, 2008, payment must be submitted electronically, no later than 8:00 p.m. ET on December 10, 2008.

      Check

      The check must be drawn on the member firm's account, with the firm's CRD number included on the front of the check, along with "Renewal" in the memo line. Firms should mail their renewal payment, along with a print-out of the first page of their Preliminary Renewal Statement, directly to:

      US mail Overnight or Express Delivery
      FINRA
      P.O. Box 7777-8705
      Philadelphia, PA 19175-8705

      (Note: This box will not accept courier or overnight deliveries.)
      FINRA
      8705
      Mellon Bank Room 3490
      701 Market Street
      Philadelphia, PA 19106
      Telephone: (301) 869-6699

      Firms paying by check should account for US Mail processing time when sending payment via US Mail.

      Member firms should use the blue, pre-addressed renewal payment envelope that they will receive in early November, or should use the full address provided in this Notice to ensure prompt processing.

      Please Note: The addresses for renewal payments are different than the addresses for funding firms' Web CRD/IARD Daily Accounts.

      To ensure prompt processing of your renewal payment check:

      •  Include a printout of the first page of your Preliminary Renewal Statement with payment.
      •  Do not include any other forms or fee submissions.
      •  Write your firm's CRD number and "Renewal" on the check memo line.
      •  Send your payment either in the blue pre-addressed renewal payment envelope that will be mailed to you or write the address on an envelope exactly as noted in this Notice.

      Wire Payment

      Firms may wire full payment of the Preliminary Renewal Statement by requesting their bank to initiate the wire transfer to: "Mellon Financial, Philadelphia, PA." Firms should provide their bank the following information:

      Transfer funds to: Mellon Financial, Philadelphia, PA
      ABA Number: 031 000 037
      Beneficiary: FINRA
      FINRA Account Number: 8-234-353
      Reference Number: Firm CRD number and "Renewal"

      To ensure prompt processing of a renewal payment by wire transfer, remember to:

      •  Inform the bank that the funds are to be credited to the FINRA bank account.
      •  Provide the firm's CRD number and "Renewal" as reference only.
      •  Record the confirmation number of the wire transfer provided by the bank.

      Renewal Reports

      Beginning November 10, 2008, the renewal reports will be available to request, print and/or download via Web CRD. Three reports/downloads are available for reconciliation with the Preliminary Renewal Statement:

      •  Firm Renewal Report—applicable to broker-dealer and investment adviser firms. This report lists individuals included in the 2009 Renewal Program and includes billing codes (if they have been supplied by the firm).
      •  Branches Renewal Report—applicable to broker-dealer and investment adviser firms. This report lists each branch registered with FINRA and/or with any other regulator that renews branches registered with the regulator through Web CRD/IARD and for which the firm is being assessed a fee. Firms should use this report to reconcile their records for renewal purposes.
      •  Approved AG Reg without FINRA Approval Report—applicable to FINRA member firms. This report contains all individuals who are not registered with FINRA but are registered with one or more jurisdictions. The report should be used throughout the year, including during the annual Renewal Program, as an aid for firms to reconcile individual registrations. Firms should request this report as soon as possible to determine if any FINRA registrations need to be requested or jurisdictions terminated prior to renewal processing for the Preliminary Renewal Statement available on November 10.

      Post-Dated Form Filings

      This functionality allows firms to file a termination form with a termination date of December 31, 2008. If a Form U5, BDW, BR Closing/Withdrawal or ADV-W indicates a termination date of December 31, 2008, an agent (AG), investment adviser representative (RA), broker-dealer and/or investment adviser (firm) and the branch may continue doing business in that jurisdiction until the end of the calendar year without being assessed 2009 renewal fees. December 31, 2008, is the only date that can be used for a post-dated form filing.

      Firms can begin electronically filing post-dated Forms U5 and BR Closing/Withdrawal via Web CRD on October 27, 2008. Firms can begin electronically filing post-dated Forms BDW and ADV-W via Web CRD/IARD on November 3, 2008. Firms that submit post-dated termination filings by 11:00 p.m. ET November 7, 2008, will not be assessed renewal fees for the terminated registrations on their Preliminary Renewal Statement. Firms that submit post-dated termination filings on or after November 10, 2008, will not be assessed renewal fees for the terminated jurisdictions on the Final Renewal Statement in January 2009. Those firms should see a credit balance on their Final Renewal Statement if the firm has not requested additional registrations during that time period to offset the credit balance.

      Firms should query individual, branch and/or firm registrations after a termination filing has been submitted to ensure that electronic Forms U5, BDW, BR Closing/ Withdrawal and ADV-W are filed by the renewal filing deadline date of 6:00 p.m. ET December 26, 2008.

      Firms should exercise care when submitting post-dated Forms U5, BDW, BR Closing/ Withdrawal and ADV-W. FINRA will systematically process these forms as they are submitted and cannot withdraw a post-dated termination once submitted. A firm that files a post-dated termination in error will have to file a new Form U4, BD Amendment, Form BR or Form ADV when Web CRD/IARD resumes normal processing on January 2, 2009. New registration fees will be assessed as a result.

      Filing Form BDW

      The CRD Phase II Program allows firms requesting broker-dealer termination (either full or partial) to electronically file their Form BDW via Web CRD. Firms that file either a full or partial Form BDW by 11:00 p.m. ET November 7, 2008, will avoid the assessment of the applicable renewal fees on their Preliminary Renewal Statement, provided that the regulator is a CRD Phase II participant. Currently, there are only five regulators that participate in Web CRD renewals for agent fees, but do not participate in CRD Phase II:

      •  American Stock Exchange
      •  Chicago Stock Exchange
      •  National Stock Exchange
      •  NYSE Arca, Inc.
      •  Philadelphia Stock Exchange

      Firms requesting termination with any of the above-listed regulators must submit a paper Form BDW directly to the regulator, as well as submit one electronically to Web CRD.

      The deadline for electronic filing of a Form BDW for any firm that wants to terminate a registration before year-end 2008 is 6:00 p.m. ET December 26, 2008. This same date applies to the filing of any Form BDW with regulators that are not Phase II participants.

      Filing Forms ADV to Cancel Notice Filings or Forms ADV-W to Terminate Registrations

      Firms that file either a Form ADV Amendment, unmarking a state (generating the status of "Removal Requested at End of Year") or a full or partial Form ADV-W by 11:00 p.m. ET November 7, 2008, will avoid the assessment of the applicable renewal fees on their Preliminary Renewal Statement.

      The deadline for electronic filing of Form ADV Amendments or Form ADV-W for firms that want to cancel a notice filing or terminate a state registration before year-end 2008 is 6:00 p.m. ET December 26, 2008.

      Removing Open Registrations

      Throughout the year, firms have access to the "Approved AG Reg Without FINRA Approval" Report via Web CRD. This report identifies agents whose FINRA registrations are either terminated or have been changed to a "purged" status due to the existence of a deficient condition (i.e., exams or fingerprints), but still maintain an approved registration with a jurisdiction. Member firms should use this report to terminate obsolete jurisdiction registrations through the submission of a Form U5 or reinstate the FINRA positions through the filing of a Form U4 Amendment. This report should aid firms in the reconciliation of individual registrations prior to year's end. Firms should request this report as soon as possible so they can identify individuals who can be terminated by November 7, 2008, to avoid being charged for those individuals on their Preliminary Renewal Statement. The Approved AG Reg Without FINRA Approval Report will also advise a firm if there are no agents at the firm within this category.

      Final Renewal Statements

      Beginning January 2, 2009, FINRA will make available Final Renewal Statements via Web CRD/IARD. These statements will reflect the final status of broker-dealer, registered representative (AG), investment adviser firm and investment adviser representative (RA) registrations and/or notice filings as of December 31, 2008. Any adjustments in fees owed as a result of registration terminations, approvals, notice filings or transitions subsequent to the Preliminary Renewal Statement will display on the Final Renewal Statement in Web CRD/IARD.

      •  If a firm has more individuals, branch offices or jurisdictions registered and/or notice filed on Web CRD/IARD at year-end than it did when the Preliminary Renewal Statement was generated, additional renewal fees will be assessed.
      •  If a firm has fewer individuals, branch offices or jurisdictions registered and/or notice filed at year-end than it did when the Preliminary Renewal Statement was generated, a credit/refund will be issued. Please note that overpayments will be systemically transferred to firms' Daily Accounts as of January 2, 2009. Firms that have a credit (sufficient) balance in their Daily Accounts may submit a written refund request signed by an appropriate signatory by mail to the Finance Department, 9509 Key West Avenue, Rockville, MD 20850 or by fax to: (240) 386-5344. The request should include a printout of the firm's credit balance as reflected on Web CRD/IARD.

      On or after January 2, 2009, FINRA member firms and joint BD/IA firms should access the Web CRD reports functionality for the Firm Renewal Report, which will list all individuals renewed with FINRA, AMEX, ARCA, BATS, BSE, CBOE, CHX, ISE, NQX, NYSE, PHLX, and each jurisdiction. Agents and RAs whose registrations are "approved" in any of these jurisdictions during November and December will be included in this roster. Registrations that are "pending approval" or are "deficient" at year's end will not be included in the 2009 Renewal Program. Firms will also be able to request the Branches Renewal Report that lists all branches for which they have been assessed renewal fees. Versions of these reports will also be available for download.

      Firms have until February 4, 2009, to report any discrepancies on the renewal reports. This is also the deadline for receipt of final payment. Specific information and instructions concerning the Final Renewal Statement and renewal reports will be available in a January 2009 Regulatory Notice.

    • 08-58 Guidance on Disclosure Concerning the U.S. Treasury Department's Temporary Guarantee Program for Money Market Mutual Funds

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      Temporary Guarantee Program for Money Market Mutual Funds

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      NASD Rule 2210
      Suggested Routing

      Advertising
      Compliance
      Legal
      Mutual Funds
      Registered Representatives
      Senior Management
      Key Topics

      Money Market Mutual Funds
      Temporary Guarantee Program for Money Market Mutual Funds

      Executive Summary

      FINRA is issuing this Notice to provide guidance to firms regarding disclosure concerning the U.S. Treasury Department's (Treasury) temporary guarantee program for the U.S. money market mutual fund industry (Program). The Program, which was announced by the Treasury on September 19, 2008, covers the shares of a participating money market mutual fund that were owned by a beneficial shareholder as of the close of business on September 19, 2008. The Program will expire on December 18, 2008, unless extended by the Treasury.

      FINRA expects a firm that refers to the Program in its communications to do so in a manner consistent with our rules. FINRA also expects a firm that receives transferred customer accounts during the time the Program is in effect to inform customers that they could lose coverage under the Program if the customers liquidate or transfer their shares in a participating money market mutual fund. Firms should review the Treasury's Web page concerning the Program for more details.1

      Questions concerning this Notice should be directed to Thomas M. Selman, Executive Vice President, Regulatory Policy, at (202) 728-6977, or Joseph P. Savage, Vice President and Counsel, Investment Companies Regulation, at (240) 386-4534.

      Background & Discussion

      On September 19, 2008, the Treasury announced the establishment of a temporary guarantee program for the U.S. money market mutual fund industry.2 Under the Program, the Treasury will guarantee the stable net asset value of any publicly offered eligible money market mutual fund that applies for and pays a fee to participate in the Program. All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940, maintain a stable net asset value, and are publicly offered and registered with the Securities and Exchange Commission (SEC) are eligible to participate in the Program, provided that they elected to do so in accordance with the Treasury's requirements.

      The Program provides coverage to beneficial shareholders for amounts that they held in participating money market mutual funds as of the close of business on September 19, 2008. The guarantee will be triggered if, after the close of business on September 19, 2008, a participating fund's per share net asset value falls below 99.5 percent of the stable share price. Funds whose per share net asset value dropped below 99.5 percent of the stable share price as of or before the close of business on September 19, 2008, may not participate in the Program. The Program will terminate on December 18, 2008, unless extended by the Secretary of the Treasury. In no event will the Program extend beyond September 18, 2009.3

      The scope of coverage under the Program is limited. For example, any increase in the number of shares held in a participating fund after the close of business on September 19, 2008, or an investment in another participating fund after that date, will not be guaranteed. If an investor holds less than the level of shares originally held in the participating fund on September 19, 2008, on the date the guarantee is triggered, only the amount of shares held on that later date will be covered. In addition, if an investor closes an account where the shares were held on September 19, 2008, or transfers shares from such an account to a new account after that date, the shares will not be covered.4

      Member Firm Communications Concerning the Temporary Guarantee Program

      Since the Program was first announced, FINRA has reviewed member firm communications that refer to the Program and its features. While FINRA does not require communications concerning money market mutual funds to discuss the Program, pursuant to NASD Rule 2210 (Communications with the Public) any reference to the Program in communications must be fair and balanced. Communications that mention the Program must describe its scope and limitations accurately, as well as its temporary nature.

      Under Rule 2210 and based upon our discussions with the SEC and Treasury staffs, FINRA expects member firm communications that discuss the Program to provide in substance the following information:

      •  The U.S. Treasury Temporary Guarantee Program provides a guarantee to participating money market mutual fund shareholders based on the number of shares invested in the fund at the close of business on September 19, 2008.
      •  Any increase in the number of shares an investor holds after the close of business on September 19, 2008, will not be guaranteed.
      •  If a customer closes his/her account with a fund or broker-dealer, any future investment in the fund will not be guaranteed.
      •  If the number of shares an investor holds fluctuates over the period, the investor will be covered for either the number of shares held as of the close of business on September 19, 2008, or the current amount, whichever is less.5
      •  The Program expires on December 18, 2008, unless extended by the United States Treasury.6

      Transfer of Customer Brokerage Accounts

      FINRA has also received inquiries from firms concerning any disclosure that should be made to brokerage customers concerning coverage by the Program when a customer transfers an account from one brokerage firm (the carrying firm) to another (the receiving firm), and the customer owns shares of a money market mutual fund that is participating in the Program. If the customer held shares on September 19, 2008, in money market mutual fund(s) that are participating in the Program, and intends to move the account to the receiving firm during the time the Program is in effect, FINRA expects the receiving firm to inform the customer that he or she could lose the benefit of the guarantee upon closure of the account with the carrying firm. The receiving firm should take reasonable steps to provide this information to the customer before he or she closes the account with the carrying firm.

      FINRA recognizes that the receiving firm will not necessarily know what assets a customer holds at the carrying firm, and will not be able to provide disclosure regarding particular money market mutual funds that a customer may own. However, the receiving firm can provide general disclosure to customers regarding this issue at the time an account is transferred, perhaps on its Transfer Initiation Form (TIF) that is submitted to initiate the transfer process.

      At a minimum, the disclosure should refer to the guarantee and inform customers who own shares in a money market mutual fund that is covered by the guarantee that they could lose the benefit of the guarantee in the account transfer upon closure of the account with the carrying firm or upon transfer of the shares to the receiving firm. The disclosure should recommend that any customer who has questions about a potential loss of coverage should contact the carrying firm before closing an account.


      1 See http://www.treas.gov/offices/domestic-finance/key-initiatives/money-market-fund.shtml.

      2 Press Release, U.S. Department of the Treasury, "Treasury Announces Guaranty Program for Money Market Funds" (Sept. 19, 2008).

      3 Press Release, U.S. Department of the Treasury, "Treasury Announces Temporary Guarantee Program for Money Market Funds" (Sept. 29, 2008).

      4 Press Release, U.S. Department of the Treasury, "Frequently Asked Questions About Treasury's Temporary Guarantee Program for Money Market Funds" (Sept. 29, 2008; Media Advisory Oct. 16, 2008).

      5 Id.

      6 This disclosure may be modified to reflect a later date if the Treasury extends the Program past December 18, 2008.

    • 08-57 FINRA Announces SEC Approval and Effective Date for New Consolidated FINRA Rules Effective Date: December 15, 2008

      View PDF

      SEC Approves New Consolidated FINRA Rules

      Regulatory Notice
      Notice Type

      Rule Approvals
      Consolidated Rulebook
      Referenced Rules & Notices

      Information Notice 03/12/08
      Information Notice 10/06/08
      FINRA Rule 0100 Series
      FINRA Rule 2010
      FINRA Rule 2020
      FINRA Rule 2070
      FINRA Rule 3130
      FINRA Rule 3220
      FINRA Rule 4560
      FINRA Rule 5110
      FINRA Rule 5130
      FINRA Rule 5150
      FINRARule 5190
      FINRA Rule 6000 through 7000 Series
      FINRA Rule 6121
      FINRA Rule 6470
      FINRA Rule 8000 Series
      FINRA Rule 9000 Series
      FINRA Rule 10000, 12000, 13000 and 14000 Series
      NASD IM-1013-1
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topic(s)

      FINRA Manual
      Rulebook Consolidation
      Effective Dates of Consolidated Rules

      Executive Summary

      Following the consolidation of NASD and NYSE Regulation into FINRA, FINRA established a process to develop a new consolidated rulebook (Consolidated FINRA Rulebook), which FINRA has discussed in previous Information Notices.1 In recent months, FINRA began proposing new consolidated rules in phases for approval by the SEC as part of the Consolidated FINRA Rulebook.2 The first phase of new consolidated FINRA Rules, approved by the SEC in August and September 2008, will take effect on December 15, 2008.

      Questions regarding this Notice should be directed to Adam H. Arkel, Assistant General Counsel, Office of General Counsel (OGC), at (202) 728-6961; or Matthew E. Vitek, Counsel, OGC, at (202) 728-8156.

      Discussion

      In August and September 2008, the SEC approved the following FINRA Rules and/or Rules Series for adoption as part of the Consolidated FINRA Rulebook:3

      •  Rule 0100 Series (General Standards);
      •  Rule 2010 (Standards of Commercial Honor and Principles of Trade);
      •  Rule 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices);
      •  Rule 2070 (Transactions Involving FINRA Employees);
      •  Rule 3130 (Annual Certification of Compliance and Supervisory Processes);
      •  Rule 3220 (Influencing or Rewarding Employees of Others);
      •  Rule 4560 (Short-Interest Reporting);
      •  Rule 5110 (Corporate Financing Rule—Underwriting Terms and Arrangements);
      •  Rule 5130 (Restrictions on the Purchase and Sale of Initial Public Equity Offerings);
      •  Rule 5150 (Fairness Opinions);
      •  Rule 5190 (Notification Requirements for Offering Participants);
      •  Rule 6121 (Trading Halts Due to Extraordinary Market Volatility);4
      •  Rule 6470 (Withdrawal of Quotations in an OTC Equity Security in Compliance with SEC Regulation M);
      •  Rule 6000 through 7000 Series (generally involving regulatory requirements and fees for quoting, trading, reporting, clearing and comparing over-the-counter transactions);
      •  Rule 8000 Series (Investigations and Sanctions);
      •  Rule 9000 Series (Code of Procedure); and
      •  Rule 10000, 12000, 13000 and 14000 Series (involving Dispute Resolution procedures).

      The Attachment to this Notice sets forth a detailed list of the new consolidated rules recently approved by the SEC. In the Attachment, the new rules are grouped by the rule filing that FINRA submitted to the SEC in connection with the rule change. The hyperlink to each rule filing is included. The filings provide, among other things, FINRA's statement of the purpose of the rule changes and, where applicable, exhibits showing the changes between the new rule text and the text of the NASD and/or Incorporated NYSE Rules as they exist in the Transitional Rulebook. Also, the text of the new FINRA Rules is available in the online FINRA Manual at www.finra.org/finramanual.5

      The Attachment to this Notice further summarizes two additional rule filings relating to the Consolidated FINRA Rulebook approved by the SEC in September 2008. The first addresses the applicability of the new consolidated FINRA Rules to member firms of the NYSE that become members of FINRA pursuant to the membership waive-in process set forth in NASD IM-1013-1 (Membership Waive-In Process for Certain New York Stock Exchange Member Organizations) (such firms are referred to as Waive-In Firms).6 The second addresses FINRA's repeal of NASD Rule 1130 (Reliance on Current Membership List) and Incorporated NYSE Rules 405A (Non-Managed Fee-Based Account Programs—Disclosure and Monitoring), 440F (Public Short Sale Transactions Effected on the Exchange), 440G (Transactions in Stocks and Warrants for the Accounts of Members, Allied Members and Member Organizations) and 477 (Retention of Jurisdiction—Failure to Cooperate) as part of the process of developing the Consolidated FINRA Rulebook.7 The effective date of the rule changes set forth in these two filings is December 15, 2008.

      Rule Conversion Chart

      As an additional resource for member firms and the public, FINRA has created a Rule Conversion Chart on FINRA's Web site designed to help enhance familiarity with the new rules and show how the new rules relate to the NASD and/or Incorporated NYSE Rules in the Transitional Rulebook that they will replace.

      The chart shows how rules from the Transitional Rulebook were either incorporated into the Consolidated FINRA Rulebook (by providing the corresponding new FINRA rule number and related rule filing number), or shows that the substance of the relevant rules from the Transitional Rulebook was not incorporated into the Consolidated FINRA Rulebook. Member firms should be aware that the chart is intended as a reference aid only. Throughout the rulebook consolidation process, member firms should further note that as rules are incorporated into the Consolidated FINRA Rulebook, there frequently will be revisions to existing rule language and changes to the rules' subject matter coverage. Accordingly, the language of the new consolidated rules often will not exactly match the language and coverage of the rules as they exist in the Transitional Rulebook. In some instances, the rules as they exist in the Transitional Rulebook will have been completely rewritten for purposes of the consolidation. Accordingly, FINRA reminds member firms that the chart does not in any way serve as a substitute for diligent review of the relevant new rule language. The Rule Conversion Chart is located at www.finra.org/ruleconversionchart.


      1 See Information Notice 10/06/08 (Rulebook Consolidation Process: Effective Dates of New Consolidated Rules; Introduction of Rule Conversion Chart); see also Information Notice 03/12/08 (Rulebook Consolidation Process).

      2 The current FINRA rulebook includes (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). The new FINRA Rules will apply to all member firms, unless such rules have a more limited application by their terms. As the Consolidated FINRA Rulebook expands with the SEC's approval and with the new FINRA Rules taking effect, the rules in the Transitional Rulebook that address the same subject matter of regulation will be eliminated. When the Consolidated FINRA Rulebook is completed, the Transitional Rulebook will have been eliminated in its entirety.

      3 See Exchange Act Release No. 58421 (August 25, 2008), 73 FR 51032 (August 29, 2008) (Order Approving Proposed Rule Change; File No. SR-FINRA-2008-025); Exchange Act Release No. 58461 (September 4, 2008), 73 FR 52710 (September 10, 2008) (Order Approving Proposed Rule Change; File No. SR-FINRA-2008-033); Exchange Act Release No. 58514 (September 11, 2008), 73 FR 54190 (September 18, 2008) (Order Approving Proposed Rule Change; SR-FINRA-2008-039); Exchange Act Release No. 58643 (September 25, 2008), 73 FR 57174 (October 1, 2008) (Order Approving Proposed Rule Change; File Nos. SR-FINRA-2008-021; SR-FINRA-2008-022; SR-FINRA-2008-026; SR-FINRA-2008-028 and SR-FINRA-2008-029); Exchange Act Release No. 58660 (September 26, 2008), 73 FR 57393 (October 2, 2008) (Order Approving Proposed Rule Change; File No. SR-FINRA-2008-027); Exchange Act Release No. 58661 (September 26, 2008), 73 FR 57395 (October 2, 2008) (Order Approving Proposed Rule Change; File No. SR-FINRA-2008-030).

      4 See Attachment endnote 1.

      5 FINRA updates the rule text in its online Manual within two business days of SEC approval of changes to the rule text.

      6 See Exchange Act Release No. 58643 (September 25, 2008), 73 FR 57174 (October 1, 2008) (Order Approving Proposed Rule Change; File No. SR-FINRA-2008-022).

      7 See Exchange Act Release No. 58643 (September 25, 2008), 73 FR 57174 (October 1, 2008) (Order Approving Proposed Rule Change; File No. SR-FINRA-2008-029).


      Attachment: List of Approved FINRA Rules (and Related Rule Filings)

      The SEC approved the following new FINRA Rules in August and September 2008. The effective date of these rules is December 15, 2008. The new rules are grouped by the rule filing that FINRA submitted to the SEC in connection with the rule change. The hyperlink to each of the rule filings is included.

      FINRA Rule Filing SR-FINRA-2008-021

      www.finra.org/Industry/Regulation/RuleFilings/2008/P038544

      The rule change transfers from the Transitional Rulebook to the Consolidated FINRA Rulebook the NASD Rule 4000 through 14000 Series, with the exception of the Rule 11000 Series (Uniform Practice Code). The NASD Rule 4000 through 7000 Series generally involve regulatory requirements and fees for quoting, trading, reporting, clearing and comparing over-the-counter transactions. The NASD Rule 8000 Series involves investigations and sanctions. The NASD Rule 9000 Series involves disciplinary procedures. The NASD Rule 10000, 12000, 13000 and 14000 Series involve Dispute Resolution (arbitration and mediation) procedures. The rule change adopts these rule series in their entirety as FINRA Rules as part of the Consolidated FINRA Rulebook, with certain non-material changes. The new rules occupy the Rule 6000 through 10000 Series and the Rule 12000 through 14000 Series in the Consolidated FINRA Rulebook as set forth in the tables below.

      I. Rule 6000 Series—Quotation and Transaction Reporting Facilities
      A. Rule 6100 Series—Quoting and Trading in NMS Stocks

      Rule/Series No. Rule/Series Title
      Rule 6110 Trading Otherwise than on an Exchange
      Rule 6120 Trading Halts
      Rule 6121 Trading Halts Due to Extraordinary Market Volatility1
      Rule 6130 Transactions Related to Initial Public Offerings
      Rule 6140 Other Trading Practices
      Rule 6150 Obligation to Provide Information
      Rule 6160 Multiple MPIDs for Trade Reporting Facility Participants
      Rule 6170 Primary and Additional MPIDs for Alternative Display Facility Participants
      Rule 6180 Series Transaction Reporting
      Rule 6181 Timely Transaction Reporting
      Rule 6182 Trade Reporting of Short Sales
      Rule 6183 Exemption from SEC Regulation NMS-Related Trade Reporting Requirements
      B. Rule 6200 Series—Alternative Display Facility

      Rule/Series No. Rule/Series Title
      Rule 6210 General
      Rule 6220 Definitions
      Rule 6230 Use of Alternative Display Facility Data Systems
      Rule 6240 Prohibition from Locking or Crossing Quotations in NMS Stocks
      Rule 6250 Quote and Order Access Requirements
      Rule 6260 Review of Direct or Indirect Access Complaints
      Rule 6270 Series Quoting and Trading in ADF-Eligible Securities
      Rule 6271 Registration as an ADF Market Maker or ADF ECN
      Rule 6272 Character of Quotations
      Rule 6273 Normal Business Hours
      Rule 6274 Clearance and Settlement
      Rule 6275 Withdrawal of Quotations
      Rule 6276 Voluntary Termination of Registration
      Rule 6277 Suspension and Termination of Quotations by FINRA Action
      Rule 6278 Termination of Alternative Display Facility Data System Service
      Rule 6279 Alternative Trading Systems
      Rule 6280 Series Transaction Reporting
      Rule 6281 Reporting Transactions in ADF-Eligible Securities
      Rule 6282 Transactions Reported by Members to TRACS
      C. Rule 6300 Series—Trade Reporting Facilities

      Rule/Series No. Rule/Series Title
      Rule 6300A Series FINRA/NASDAQ Trade Reporting Facility
      Rule 6310A General
      Rule 6320A Definitions
      Rule 6330A Use of FINRA/Nasdaq Trade Reporting Facility on a Test Basis
      Rule 6340A Reports
      Rule 6350A Clearance and Settlement
      Rule 6360A Suspension and Termination by FINRA Action
      Rule 6370A Termination of FINRA/Nasdaq Trade Reporting Facility Service
      Rule 6380A Transaction Reporting
      Rule 6300B Series FINRA/NSX Trade Reporting Facility
      Rule 6310B General
      Rule 6320B Definitions
      Rule 6330B Use of FINRA/NSX Trade Reporting Facility on a Test Basis
      Rule 6340B Reports
      Rule 6350B Clearance and Settlement
      Rule 6360B Suspension and Termination by FINRA Action
      Rule 6370B Termination of FINRA/NSX Trade Reporting Facility Service
      Rule 6380B Transaction Reporting
      Rule 6300C Series FINRA/NYSE Trade Reporting Facility
      Rule 6310C General
      Rule 6320C Definitions
      Rule 6330C Use of FINRA/NYSE Trade Reporting Facility on a Test Basis
      Rule 6340C Reports
      Rule 6350C Clearance and Settlement
      Rule 6360C Suspension and Termination by FINRA Action
      Rule 6370C Termination of FINRA/NYSE Trade Reporting Facility Service
      Rule 6380C Transaction Reporting
      D. Rule 6400 Series—Quoting and Trading in OTC Equity Securities

      Rule No. Rule Title
      Rule 6410 General
      Rule 6420 Definitions
      Rule 6430 Recording of Quotation Information
      Rule 6440 Submission of SEA Rule 15c2-11 Information on Non-Exchange-Listed Securities
      Rule 6450 Minimum Quotation Size Requirements For OTC Equity Securities
      Rule 6460 Trading and Quotation Halt in OTC Equity Securities
      E. Rule 6500 Series—OTC Bulletin Board® Service

      Rule No. Rule Title
      Rule 6510 Applicability
      Rule 6520 Operation of the Service
      Rule 6530 OTCBB-Eligible Securities
      Rule 6540 Requirements Applicable to Market Makers
      Rule 6550 Transaction Reporting
      Rule 6560 Limit Order Protection2
      F. Rule 6600 Series—OTC Reporting Facility

      Rule/Series No. Rule/Series Title
      Rule 6610 General
      Rule 6620 Series Reporting Transactions in OTC Equity Securities
      Rule 6621 Definitions
      Rule 6622 Transaction Reporting
      Rule 6623 Timely Transaction Reporting
      Rule 6624 Trade Reporting of Short Sales
      Rule 6630 Series Reporting Transactions in PORTAL® Securities
      Rule 6631 Definitions
      Rule 6632 Limitations on Transactions in PORTAL Securities
      Rule 6633 Reporting Debt and Equity Transactions in PORTAL Securities
      Rule 6634 Arbitration
      Rule 6635 FINRA Rules
      Rule 6640 Series Reporting Transactions in Direct Participation Program Securities
      Rule 6641 General
      Rule 6642 Definitions
      Rule 6643 Transaction Reporting
      G. Rule 6700 Series—Trade Reporting and Compliance Engine (TRACE)

      Rule No. Rule Title
      Rule 6710 Definitions
      Rule 6720 Participation in TRACE
      Rule 6730 Transaction Reporting
      Rule 6740 Termination of TRACE Service
      Rule 6750 Dissemination of Transaction Information
      Rule 6760 Managing Underwriter or Group of Underwriters Obligation To Obtain CUSIP and Provide Notice
      II. Rule 7000 Series—Clearing, Transaction and Order Data Requirements, and Facility Charges
      A. Rule 7100 Series—Alternative Display Facility/TRACS

      Rule No. Rule Title
      Rule 7110 Definitions
      Rule 7120 Participation in TRACS Trade Comparison Feature by Participants in the Alternative Display Facility
      Rule 7130 Trade Report Input
      Rule 7140 TRACS Processing
      Rule 7150 Obligation to Honor Trades
      Rule 7160 Audit Trail Requirements
      Rule 7170 Termination of TRACS Service
      B. Rule 7200 Series—Trade Reporting Facilities

      Rule/Series No. Rule/Series Title
      Rule 7200A Series FINRA/NASDAQ Trade Reporting Facility
      Rule 7210A Definitions
      Rule 7220A Trade Reporting Participation Requirements
      Rule 7230A Trade Report Input
      Rule 7240A Trade Report Processing
      Rule 7250A Obligation to Honor Trades
      Rule 7260A Audit Trail Requirements
      Rule 7270A Violation of Reporting Rules
      Rule 7280A Termination of Access
      Rule 7200B Series FINRA/NSX Trade Reporting Facility
      Rule 7210B Definitions
      Rule 7220B Trade Reporting Participation Requirements
      Rule 7230B Trade Report Input
      Rule 7240B Trade Report Processing
      Rule 7250B Obligation to Honor Trades
      Rule 7260B Audit Trail Requirements
      Rule 7270B Violation of Reporting Rules
      Rule 7280B Termination of Access
      Rule 7200C Series FINRA/NYSE Trade Reporting Facility
      Rule 7210C Definitions
      Rule 7220C Trade Reporting Participation Requirements
      Rule 7230C Trade Report Input
      Rule 7240C Trade Report Processing
      Rule 7250C Obligation to Honor Trades
      Rule 7260C Audit Trail Requirements
      Rule 7270C Violation of Reporting Rules
      Rule 7280C Termination of Access
      C. Rule 7300 Series—OTC Reporting Facility

      Rule No. Rule Title
      Rule 7310 Definitions
      Rule 7320 Trade Reporting Participation Requirements
      Rule 7330 Trade Report Input
      Rule 7340 Trade Report Processing
      Rule 7350 Obligation to Honor Trades
      Rule 7360 Audit Trail Requirements
      Rule 7370 Violation of Reporting Rules
      Rule 7380 Termination of Access
      D. Rule 7400 Series—Order Audit Trail System

      Rule No. Rule Title
      Rule 7410 Definitions
      Rule 7420 Applicability
      Rule 7430 Synchronization of Member Business Clocks
      Rule 7440 Recording of Order Information
      Rule 7450 Order Data Transmission Requirements
      Rule 7460 Violation of Order Audit Trail System Rules
      Rule 7470 Exemption to the Order Recording and Data Transmission Requirements
      E. Rule 7500 Series—Charges for Alternative Display Facility Services and Equipment

      Rule No. Rule Title
      Rule 7510 System Services
      Rule 7520 Equipment Related Charges
      Rule 7530 Installation, Removal, Relocation or Maintenance
      Rule 7540 Other Services
      Rule 7550 Partial Month Charges
      Rule 7560 Late Fees
      Rule 7570 Minor Modifications in Charges
      F. Rule 7600 Series—Charges for Trade Reporting Facility Services

      Rule/Series No. Rule/Series Title
      Rule 7600A Series Charges for FINRA/NASDAQ Trade Reporting Facility Services
      Rule 7610A Securities Transaction Credit
      Rule 7620A FINRA/Nasdaq Trade Reporting Facility Reporting Fees
      Rule 7630A Aggregation of Activity of Affiliated Members
      Rule 7640A Late Fees
      Rule 7600B Series Charges for FINRA/NSX Trade Reporting Facility Services
      Rule 7610B Securities Transaction Credits3
      Rule 7620B FINRA/NSX Trade Reporting Facility Reporting Fees
      Rule 7630B Fee for Submission of Non-Media Reports
      Rule 7600C Series Charges for FINRA/NYSE Trade Reporting Facility Services
      Rule 7610C Securities Transaction Credit
      Rule 7620C FINRA/NYSE Trade Reporting Facility Reporting Fees
      G. Rule 7700 Series—Charges for OTC Reporting Facility, OTC Bulletin Board and Trade Reporting and Compliance Engine Services

      Rule No. Rule Title
      Rule 7710 OTC Reporting Facility
      Rule 7720 OTC Bulletin Board Service
      Rule 7730 Trade Reporting and Compliance Engine (TRACE)
      Rule 7740 Historical Research and Administrative Reports
      III. Rule 8000 Series—Investigations and Sanctions
      A. Rule 8100 Series—General Provisions

      Rule No. Rule Title
      Rule 8110 Availability of Manual to Customers
      Rule 8120 Definitions
      B. Rule 8200 Series—Investigations

      Rule No. Rule Title
      Rule 8210 Provision of Information and Testimony and Inspection and Copying of Books
      Rule 8211 Automated Submission of Trading Data Requested by FINRA
      Rule 8213 Automated Submission of Trading Data for Non-Exchange-Listed Securities Requested by FINRA
      C. Rule 8300 Series—Sanctions

      Rule No. Rule Title
      Rule 8310 Sanctions for Violation of the Rules
      Rule 8311 Effect of a Suspension, Revocation, Cancellation, or Bar
      Rule 8312 FINRA BrokerCheck Disclosure
      Rule 8313 Release of Disciplinary Complaints, Decisions and Other Information
      Rule 8320 Payment of Fines, Other Monetary Sanctions, or Costs; Summary Action for Failure to Pay
      Rule 8330 Costs of Proceedings
      IV. Rule 9000 Series—Code of Procedure
      A. Rule 9100 Series—Application and Purpose

      Rule/Series No. Rule/Series Title
      Rule 9110 Application
      Rule 9120 Definitions
      Rule 9130 Series Service; Filing of Papers
      Rule 9131 Service of Complaint and Document Initiating a Proceeding
      Rule 9132 Service of Orders, Notices, and Decisions by Adjudicator
      Rule 9133 Service of Papers Other Than Complaints, Orders, Notices, or Decisions
      Rule 9134 Methods of, Procedures for Service
      Rule 9135 Filing of Papers with Adjudicator: Procedure
      Rule 9136 Filing of Papers: Form
      Rule 9137 Filing of Papers: Signature Requirement and Effect
      Rule 9138 Computation of Time
      Rule 9140 Series Proceedings
      Rule 9141 Appearance and Practice; Notice of Appearance
      Rule 9142 Withdrawal by Attorney or Representative
      Rule 9143 Ex Parte Communications
      Rule 9144 Separation of Functions
      Rule 9145 Rules of Evidence; Official Notice
      Rule 9146 Motions
      Rule 9147 Rulings on Procedural Matters
      Rule 9148 Interlocutory Review
      Rule 9150 Exclusion From Rule 9000 Series Proceeding
      Rule 9160 Recusal or Disqualification
      B. Rule 9200 Series—Disciplinary Proceedings

      Rule/Series No. Rule/Series Title
      Rule 9210 Series Complaint and Answer
      Rule 9211 Authorization of Complaint
      Rule 9212 Complaint Issuance—Requirements, Service, Amendment, Withdrawal, and Docketing
      Rule 9213 Assignment of Hearing Officer and Appointment of Panelists to Hearing Panel or Extended Hearing Panel
      Rule 9214 Consolidation or Severance of Disciplinary Proceedings
      Rule 9215 Answer to Complaint
      Rule 9216 Acceptance, Waiver, and Consent; Plan Pursuant to SEA Rule 19d-1(c)(2)
      Rule 9217 Violations Appropriate for Disposition Under Plan Pursuant to SEA Rule 19d-1(c)(2)
      Rule 9220 Series Request for Hearing; Extensions of Time, Postponements, Adjournments
      Rule 9221 Request for Hearing
      Rule 9222 Extensions of Time, Postponements, and Adjournments
      Rule 9230 Series Appointment of Hearing Panel, Extended Hearing Panel
      Rule 9231 Appointment by the Chief Hearing Officer of Hearing Panel or Extended Hearing Panel or Replacement Hearing Officer
      Rule 9232 Criteria for Selection of Panelists and Replacement Panelists
      Rule 9233 Hearing Panel or Extended Hearing Panel: Recusal and Disqualification of Hearing Officers
      Rule 9234 Hearing Panel or Extended Hearing Panel: Recusal and Disqualification of Panelists
      Rule 9235 Hearing Officer Authority
      Rule 9240 Series Pre-hearing Conference and Submission
      Rule 9241 Pre-hearing Conference
      Rule 9242 Pre-hearing Submission
      Rule 9250 Series Discovery
      Rule 9251 Inspection and Copying of Documents in Possession of Staff
      Rule 9252 Requests for Information
      Rule 9253 Production of Witness Statements
      Rule 9260 Series Hearing and Decision
      Rule 9261 Evidence and Procedure in Hearing
      Rule 9262 Testimony
      Rule 9263 Evidence: Admissibility
      Rule 9264 Motion for Summary Disposition
      Rule 9265 Record of Hearing
      Rule 9266 Proposed Findings of Fact, Conclusions of Law, and Post-Hearing Briefs
      Rule 9267 Record; Supplemental Documents Attached to Record; Retention
      Rule 9268 Decision of Hearing Panel or Extended Hearing Panel
      Rule 9269 Default Decisions
      Rule 9270 Settlement Procedure
      Rule 9280 Contemptuous Conduct
      Rule 9290 Expedited Disciplinary Proceedings
      C. Rule 9300 Series—Review of Disciplinary Proceeding by National Adjudicatory Council and FINRA Board; Application for SEC Review

      Rule/Series No. Rule/Series Title
      Rule 9310 Series Appeal to or Review by National Adjudicatory Council
      Rule 9311 Appeal by Any Party; Cross-Appeal
      Rule 9312 Review Proceeding Initiated By Adjudicatory Council
      Rule 9313 Counsel to National Adjudicatory Council
      Rule 9320 Series Transmission of Record; Extensions of Time, Postponements, Adjournments
      Rule 9321 Transmission of Record
      Rule 9322 Extensions of Time, Postponements, Adjournments
      Rule 9330 Series Appointment of Subcommittee or Extended Proceeding Committee; Disqualification and Recusal
      Rule 9331 Appointment of Subcommittee or Extended Proceeding Committee
      Rule 9332 Disqualification and Recusal
      Rule 9340 Series Proceedings
      Rule 9341 Oral Argument
      Rule 9342 Failure to Appear at Oral Argument
      Rule 9343 Disposition Without Oral Argument
      Rule 9344 Failure to Participate Below; Abandonment of Appeal
      Rule 9345 Subcommittee or Extended Proceeding Committee Recommended Decision to National Adjudicatory Council
      Rule 9346 Evidence in National Adjudicatory Council Proceedings
      Rule 9347 Filing of Papers in National Adjudicatory Council Proceedings
      Rule 9348 Powers of the National Adjudicatory Council on Review
      Rule 9349 National Adjudicatory Council Formal Consideration; Decision
      Rule 9350 Series Discretionary Review by FINRA Board
      Rule 9351 Discretionary Review by FINRA Board
      Rule 9360 Effectiveness of Sanctions
      Rule 9370 Application to SEC for Review
      D. Rule 9500 Series—Other Proceedings

      Rule/Series No. Rule/Series Title
      Rule 9520 Series Eligibility Proceedings
      Rule 9521 Purpose and Definitions
      Rule 9522 Initiation of Eligibility Proceeding; Member Regulation Consideration
      Rule 9523 Acceptance of Member Regulation Recommendations and Supervisory Plans by Consent Pursuant to SEA Rule 19h-1
      Rule 9524 National Adjudicatory Council Consideration
      Rule 9525 Discretionary Review by the FINRA Board
      Rule 9526 Expedited Review
      Rule 9527 Application to SEC for Review
      Rule 9550 Series Expedited Proceedings
      Rule 9551 Failure to Comply with Public Communication Standards
      Rule 9552 Failure to Provide Information or Keep Information Current
      Rule 9553 Failure to Pay FINRA Dues, Fees and Other Charges
      Rule 9554 Failure to Comply with an Arbitration Award or Related Settlement
      Rule 9555 Failure to Meet the Eligibility or Qualification Standards or Prerequisites for Access to Services
      Rule 9556 Failure to Comply with Temporary and Permanent Cease and Desist Orders
      Rule 9557 Procedures for Regulating Activities Under NASD Rules 3130 and 3131 Regarding a Member Experiencing Financial or Operational Difficulties
      Rule 9558 Summary Proceedings for Actions Authorized by Section 15A(h)(3) of the Exchange Act
      Rule 9559 Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series
      E. Rule 9600 Series—Procedures for Exemptions

      Rule No. Rule Title
      Rule 9610 Application
      Rule 9620 Decision
      Rule 9630 Appeal
      F. Rule 9700 Series—Procedures on Grievances Concerning the Automated Systems

      Rule No. Rule Title
      Rule 9710 Purpose
      Rule 9720 Form of Application
      Rule 9730 Request for Hearing
      Rule 9740 Consideration of Applications
      Rule 9750 Decision
      Rule 9760 Call for Review by the National Adjudicatory Council
      Rule 9770 Application to SEC for Review
      G. Rule 9800 Series—Temporary Cease and Desist Orders

      Rule No. Rule Title
      Rule 9810 Initiation of Proceeding
      Rule 9820 Appointment of Hearing Officer and Hearing Panel
      Rule 9830 Hearing
      Rule 9840 Issuance of Temporary Cease and Desist Order by Hearing Panel
      Rule 9850 Review by Hearing Panel
      Rule 9860 Violation of Temporary Cease and Desist Orders
      Rule 9870 Application to SEC for Review
      V. Rule 10000 Series—Code of Arbitration Procedure
      A. Rule 10100 Series—Administrative Provisions

      Rule No. Rule Title
      IM-10100 Failure to Act Under Provisions of Code of Arbitration Procedure
      Rule 10101 Matters Eligible for Submission
      Rule 10102 National Arbitration and Mediation Committee
      Rule 10103 Director of Arbitration
      Rule 10104 Composition and Appointment of Panels
      IM-10104 Arbitrators' Honorarium
      Rule 10105 Non-Waiver of FINRA Objects and Purposes
      Rule 10106 Legal Proceedings
      B. Rule 10200 Series—Industry and Clearing Controversies

      Rule No. Rule Title
      Rule 10201 Required Submission
      Rule 10202 Composition of Panels
      Rule 10203 Simplified Industry Arbitration
      Rule 10204 Applicability of Uniform Code
      Rule 10205 Schedule of Fees for Industry and Clearing Controversies
      Rule 10210 Statutory Employment Discrimination Claims
      Rule 10211 Special Arbitrator Qualifications for Employment Discrimination Disputes
      Rule 10212 Composition of Panels
      Rule 10213 Discovery
      Rule 10214 Awards
      Rule 10215 Attorneys' Fees
      Rule 10216 Coordination of Claims Filed in Court and in Arbitration
      Rule 10217 Fees
      C. Rule 10300 Series—Uniform Code of Arbitration

      Rule No. Rule Title
      Rule 10301 Required Submission
      Rule 10302 Simplified Arbitration
      IM-10302 Related Counterclaim
      Rule 10303 Hearing Requirements—Waiver of Hearing
      Rule 10304 Time Limitation Upon Submission
      Rule 10305 Dismissal of Proceedings
      Rule 10306 Settlements
      Rule 10307 Tolling of Time Limitation(s) for the Institution of Legal Proceedings and Extension of Time Limitation(s) for Submission to Arbitration
      Rule 10308 Selection of Arbitrators
      IM-10308 Arbitrators Who Also Serve as Mediators
      Rule 10309 Composition of Panels
      Rule 10310 Notice of Selection of Arbitrators
      Rule 10311 Peremptory Challenge
      Rule 10312 Disclosures Required of Arbitrators and Director's Authority to Disqualify
      Rule 10313 Disqualification or Other Disability of Arbitrators
      Rule 10314 Initiation of Proceedings
      Rule 10315 Determination of Hearing Location
      Rule 10316 Representation by Counsel
      Rule 10317 Attendance at Hearings
      IM-10317 Closing Arguments
      Rule 10318 Failure to Appear
      Rule 10319 Adjournments
      Rule 10320 Acknowledgement of Pleadings
      Rule 10321 General Provisions Governing Pre-Hearing Proceedings
      Rule 10322 Subpoenas and Power to Direct Appearances
      Rule 10323 Evidence
      Rule 10324 Interpretation of Provisions of Code and Enforcement of Arbitrator Rulings
      Rule 10325 Determination of Arbitrators
      Rule 10326 Record of Proceedings
      Rule 10327 Oaths of the Arbitrators and Witnesses
      Rule 10328 Amendments
      Rule 10329 Reopening of Hearings
      Rule 10330 Awards
      Rule 10331 Incorporation by Reference
      Rule 10332 Schedule of Fees for Customer Disputes
      Rule 10333 Member Surcharge and Process Fees
      Rule 10334 Direct Communication Between Parties and Arbitrators
      Rule 10335 Temporary Injunctive Orders; Requests for Permanent Injunctive Relief
      VI. Rule 12000 Series—Code of Arbitration Procdure for Customer Disputes
      A. Part I—Interpretive Material, Definitions, Organization and Authority

      Rule No. Rule Title
      IM-12000 Failure to Act Under Provisions of Code of Arbitration Procedure for Customer Disputes
      Rule 12100 Definitions
      Rule 12101 Applicability of Code and Incorporation by Reference
      Rule 12102 National Arbitration and Mediation Committee
      Rule 12103 Director of Dispute Resolution
      Rule 12104 Effect of Arbitration on FINRA Regulatory Activities
      Rule 12105 Agreement of the Parties
      B. Part II—General Arbitration Rules

      Rule No. Rule Title
      Rule 12200 Arbitration Under an Arbitration Agreement or the Rules of FINRA
      Rule 12201 Elective Arbitration
      Rule 12202 Claims Against Inactive Members
      Rule 12203 Denial of FINRA Forum
      Rule 12204 Class Action Claims
      Rule 12205 Shareholder Derivative Actions
      Rule 12206 Time Limits
      Rule 12207 Extension of Deadlines
      Rule 12208 Representation of Parties
      Rule 12209 Legal Proceedings
      Rule 12210 Ex Parte Communications
      Rule 12211 Direct Communications Between Parties and Arbitrators
      Rule 12212 Sanctions
      Rule 12213 Hearing Locations
      Rule 12214 Payment of Arbitrators
      C. Part III—Initiating and Responding to Claims

      Rule No. Rule Title
      Rule 12300 Filing and Serving Documents
      Rule 12301 Service on Associated Persons
      Rule 12302 Filing an Initial Statement of Claim
      Rule 12303 Answering the Statement of Claim
      Rule 12304 Answering Counterclaims
      Rule 12305 Answering Cross Claims
      Rule 12306 Answering Third Party Claims
      Rule 12307 Deficient Claims
      Rule 12308 Loss of Defenses Due to Untimely or Incomplete Answer
      Rule 12309 Amending Pleadings
      Rule 12310 Answering Amended Claims
      Rule 12311 Amendments to Amount in Dispute
      Rule 12312 Multiple Claimants
      Rule 12313 Multiple Respondents
      Rule 12314 Combining Claims
      D. Part IV—Appointment, Disqualification, and Authority of Arbitrators

      Rule No. Rule Title
      Rule 12400 Neutral List Selection System and Arbitrator Rosters
      Rule 12401 Number of Arbitrators
      Rule 12402 Composition of Arbitration Panels
      Rule 12403 Generating and Sending Lists to the Parties
      Rule 12404 Striking and Ranking Arbitrators
      Rule 12405 Combining Lists
      Rule 12406 Appointment of Arbitrators; Discretion to Appoint Arbitrators Not on List
      Rule 12407 Additional Parties
      Rule 12408 Disclosures Required of Arbitrators
      Rule 12409 Arbitrator Recusal
      Rule 12410 Removal of Arbitrator by Director
      Rule 12411 Replacement of Arbitrators
      Rule 12412 Director's Discretionary Authority
      Rule 12413 Jurisdiction of Panel and Authority to Interpret the Code
      Rule 12414 Determinations of Arbitration Panel
      E. Part V—Prehearing Procedures and Discovery

      Rule No. Rule Title
      Rule 12500 Initial Prehearing Conference
      Rule 12501 Other Prehearing Conferences
      Rule 12502 Recording Prehearing Conferences
      Rule 12503 Motions
      Rule 12505 Cooperation of Parties in Discovery
      Rule 12506 Document Production Lists
      Rule 12507 Other Discovery Requests
      Rule 12508 Objecting to Discovery; Waiver of Objection
      Rule 12509 Motions to Compel Discovery
      Rule 12510 Depositions
      Rule 12511 Discovery Sanctions
      Rule 12512 Subpoenas
      Rule 12513 Authority of Panel to Direct Appearances of Associated Person Witnesses and Production of Documents Without Subpoenas
      Rule 12514 Exchange of Documents and Witness Lists Before Hearing
      F. Part VI—Hearings; Evidence; Closing the Record

      Rule No. Rule Title
      Rule 12600 Required Hearings
      Rule 12601 Postponement of Hearings
      Rule 12602 Attendance at Hearings
      Rule 12603 Failure to Appear
      Rule 12604 Evidence
      Rule 12605 Witness Oath
      Rule 12606 Record of Proceedings
      Rule 12607 Order of Presentation of Evidence and Arguments
      Rule 12608 Closing the Record
      Rule 12609 Reopening the Record
      G. Part VII—Termination of an Arbitration Before Award

      Rule No. Rule Title
      Rule 12700 Dismissal of Proceedings Prior to Award
      Rule 12701 Settlement
      Rule 12702 Withdrawal of Claims
      H. Part VIII—Simplified Arbitration and Default Proceedings

      Rule No. Rule Title
      Rule 12800 Simplified Arbitration
      Rule 12801 Default Proceedings
      I. Part IX—Fees and Awards

      Rule No. Rule Title
      Rule 12900 Fees Due When a Claim Is Filed
      Rule 12901 Member Surcharge
      Rule 12902 Hearing Session Fees, and Other Costs and Expenses
      Rule 12903 Process Fees Paid by Members
      Rule 12904 Awards
      VII. Rule 13000 Series—Code of Arbitration Procedure for Industry Disputes
      A. Part I—Interpretive Material, Definitions, Organization and Authority

      Rule No. Rule Title
      IM-13000 Failure to Act Under Provisions of Code of Arbitration Procedure for Industry Disputes
      Rule 13100 Definitions
      Rule 13101 Applicability of Code and Incorporation by Reference
      Rule 13102 National Arbitration and Mediation Committee
      Rule 13103 Director of Dispute Resolution
      Rule 13104 Effect of Arbitration on FINRA Regulatory Activities
      Rule 13105 Agreement of the Parties
      B. Part II—General Arbitration Rules

      Rule No. Rule Title
      Rule 13200 Required Arbitration
      Rule 13201 Statutory Employment Discrimination Claims
      Rule 13202 Claims Involving Registered Clearing Agencies
      Rule 13203 Denial of FINRA Forum
      Rule 13204 Class Action Claims
      Rule 13205 Shareholder Derivative Actions
      Rule 13206 Time Limits
      Rule 13207 Extension of Deadlines
      Rule 13208 Representation of Parties
      Rule 13209 Legal Proceedings
      Rule 13210 Ex Parte Communications
      Rule 13211 Direct Communication Between Parties and Arbitrators
      Rule 13212 Sanctions
      Rule 13213 Hearing Locations
      Rule 13214 Payment of Arbitrators
      C. Part III—Initiating and Responding to Claims

      Rule No. Rule Title
      Rule 13300 Filing and Serving Documents
      Rule 13301 Service on Associated Persons
      Rule 13302 Filing an Initial Statement of Claim
      Rule 13303 Answering the Statement of Claim
      Rule 13304 Answering Counterclaims
      Rule 13305 Answering Cross Claims
      Rule 13306 Answering Third Party Claims
      Rule 13307 Deficient Claims
      Rule 13308 Loss of Defenses Due to Untimely or Incomplete Answer
      Rule 13309 Amending Pleadings
      Rule 13310 Answering Amended Claims
      Rule 13311 Amendments to Amount in Dispute
      Rule 13312 Multiple Claimants
      Rule 13313 Multiple Respondents
      Rule 13314 Combining Claims
      D. Part IV—Appointment, Disqualification, and Authority of Arbitrators

      Rule No. Rule Title
      Rule 13400 Neutral List Selection System and Arbitrator Rosters
      Rule 13401 Number of Arbitrators
      Rule 13402 Composition of Arbitration Panels Not Involving a Statutory Discrimination Claim
      Rule 13403 Generating and Sending Lists to the Parties
      Rule 13404 Striking and Ranking Arbitrators
      Rule 13405 Combining Lists
      Rule 13406 Appointment of Arbitrators; Discretion to Appoint Arbitrators Not on List
      Rule 13407 Additional Parties
      Rule 13408 Disclosures Required of Arbitrators
      Rule 13409 Arbitrator Recusal
      Rule 13410 Removal of Arbitrator by Director
      Rule 13411 Replacement of Arbitrators
      Rule 13412 Director's Discretionary Authority
      Rule 13413 Jurisdiction of Panel and Authority to Interpret the Code
      Rule 13414 Determinations of Arbitration Panel
      E. Part V—Prehearing Procedures and Discovery

      Rule No. Rule Title
      Rule 13500 Initial Prehearing Conference
      Rule 13501 Other Prehearing Conferences
      Rule 13502 Recording Prehearing Conferences
      Rule 13503 Motions
      Rule 13505 Cooperation of Parties in Discovery
      Rule 13506 Discovery Requests
      Rule 13507 Responding to Discovery Requests
      Rule 13508 Objecting to Discovery Requests; Waiver of Objection
      Rule 13509 Motions to Compel Discovery
      Rule 13510 Depositions
      Rule 13511 Discovery Sanctions
      Rule 13512 Subpoenas
      Rule 13513 Authority of Panel to Direct Appearances of Associated Person Witnesses and Production of Documents Without Subpoenas
      Rule 13514 Exchange of Documents and Witness Lists Before Hearing
      F. Part VI—Hearings; Evidence; Closing the Record

      Rule No. Rule Title
      Rule 13600 Required Hearings
      Rule 13601 Postponement of Hearings
      Rule 13602 Attendance at Hearings
      Rule 13603 Failure to Appear
      Rule 13604 Evidence
      Rule 13605 Witness Oath
      Rule 13606 Record of Proceedings
      Rule 13607 Order of Presentation of Evidence and Arguments
      Rule 13608 Closing the Record
      Rule 13609 Reopening the Record
      G. Part VII—Termination of an Arbitration Before Award

      Rule No. Rule Title
      Rule 13700 Dismissal of Proceedings Prior to Award
      Rule 13701 Settlement
      Rule 13702 Withdrawal of Claims
      H. Part VIII—Simplified Arbitration; Default Proceedings; Statutory Employment Discrimination Claims; and Injunctive Relief

      Rule No. Rule Title
      Rule 13800 Simplified Arbitration
      Rule 13801 Default Proceedings
      Rule 13802 Statutory Employment Discrimination Claims
      Rule 13803 Coordination of Statutory Employment Discrimination Claims Filed in Court and in Arbitration
      Rule 13804 Temporary Injunctive Orders; Requests for Permanent Injunctive Relief
      I. Part IX—Fees and Awards

      Rule No. Rule Title
      Rule 13900 Fees Due When a Claim Is Filed
      Rule 13901 Member Surcharge
      Rule 13902 Hearing Session Fees, and Other Costs and Expenses
      Rule 13903 Process Fees Paid by Members
      Rule 13904 Awards
      VIII. Rule 14000 Series—Code of Mediation Procedure
      Rule No. Rule Title
      Rule 14100 Definitions
      Rule 14101 Applicability of Code
      Rule 14102 National Arbitration and Mediation Committee
      Rule 14103 Director of Mediation
      Rule 14104 Mediation under the Code
      Rule 14105 Effect of Mediation on Arbitration Proceedings
      Rule 14106 Representation of Parties
      Rule 14107 Mediator Selection
      Rule 14108 Limitation on Liability
      Rule 14109 Mediation Ground Rules
      Rule 14110 Mediation Fees

      FINRA Rule Filing SR-FINRA-2008-025

      www.finra.org/Industry/Regulation/RuleFilings/2008/P038707

      The rule change transfers NASD Rule 2790 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) in substantially the same form to the Consolidated FINRA Rulebook as FINRA Rule 5130. The rule change makes minor, technical changes to the rule to reflect, for example, the registration of the NASDAQ Stock Market, LLC as a national securities exchange.

      FINRA Rule 5130 protects the integrity of the initial public offering (IPO) process by ensuring that: (1) firms make bona fide public offerings of securities at the offering price; (2) firms do not withhold securities in a public offering for their own benefit or use such securities to reward persons who are in a position to direct future business to firms; and (3) industry insiders, including firms and their associated persons, do not take advantage of their insider position to purchase new issues for their own benefit at the expense of public customers. FINRA Rule 5130 plays an important part in maintaining investor confidence in the capital raising and IPO process.

      Rule No. Rule Title
      Rule 5130 Restrictions on the Purchase and Sale of Initial Equity Public Offerings

      FINRA Rule Filing SR-FINRA-2008-026

      www.finra.org/Industry/Regulation/RuleFilings/2008/P038730

      The rule change adopts the NASD Rule 0100 Series (General Provisions) as FINRA Rules in the Consolidated FINRA Rulebook, with the exception of NASD Rule 0120, which will be addressed at a later date in a separate filing. The NASD Rule 0100 Series governs the adoption, application and interpretation of NASD rules and sets forth certain definitions not contained in the FINRA By-Laws. Additionally, these rules address FINRA's delegation of certain responsibilities to its subsidiaries, and its authority and access with respect to its subsidiaries. FINRA is transferring this rule series as the FINRA Rule 0100 Series, renamed as "General Standards," to the Consolidated FINRA Rulebook, with only minor changes. FINRA notes that, notwithstanding their transfer to the Consolidated FINRA Rulebook, these rules of general applicability apply equally to both the Transitional Rulebook and the Consolidated FINRA Rulebook.

      Rule/Series No. Rule /Series Title
      Rule 0100 Series General Standards
      Rule 0110 Adoption of Rules
      Rule 0120 Effective Date
      Rule 0130 Interpretation
      Rule 0140 Applicability
      Rule 0150 Application of Rules to Exempted Securities Except Municipal Securities
      Rule 0160 Definitions in FINRA By-Laws
      Rule 0170 Delegation, Authority and Access

      FINRA Rule Filing SR-FINRA-2008-027

      www.finra.org/Industry/Regulation/RuleFilings/2008/P038723

      The rule change adopts without material change NASD Rules 3060 (Influencing or Rewarding Employees of Others) and 3090 (Transactions Involving Association and American Stock Exchange Employees) as FINRA Rules in the Consolidated FINRA Rulebook and deletes the corresponding provisions in Incorporated NYSE Rules 350, 350.10, 407(a), 407.10 and NYSE Rule Interpretations 350/01 through 350/03. The rule change renumbers NASD Rule 3060 as FINRA Rule 3220 and NASD Rule 3090 as FINRA Rule 2070 in the Consolidated FINRA Rulebook.

      FINRA Rule 3220 (Influencing or Rewarding Employees of Others) states that no member or associated person shall give gifts or gratuities to an agent or employee of another person in excess of $100 per year where the gift or gratuity is in relation to the business of the employer of the recipient. The rule protects against improprieties that may arise when members or their associated persons give gifts or gratuities. FINRA Rule 2070 (Transactions Involving FINRA Employees) addresses conflicts of interest involving FINRA employees.

      Rule No. Rule Title
      Rule 2070 Transactions Involving FINRA Employees
      Rule 3220 Influencing or Rewarding Employees of Others

      FINRA Rule Filing SR-FINRA-2008-028

      www.finra.org/Industry/Regulation/RuleFilings/2008/P038732

      The rule change adopts NASD Rules 2110 (Standards of Commercial Honor and Principles of Trade), 2120 (Use of Manipulative, Deceptive or Other Fraudulent Devices), and 2290 (Fairness Opinions) as FINRA Rules in the Consolidated FINRA Rulebook without material change and deletes Incorporated NYSE Rule 401(a) (Business Conduct), Incorporated NYSE Rule 435 (Miscellaneous Prohibitions), with the exception of paragraph (5), and NYSE Rule Interpretations 401/01 and 401/02. The rule change renumbers NASD Rule 2110 as FINRA Rule 2010, NASD Rule 2120 as FINRA Rule 2020, and NASD Rule 2290 as FINRA Rule 5150 in the Consolidated FINRA Rulebook.

      FINRA Rule 2010 requires members, in the conduct of their business, to observe high standards of commercial honor and just and equitable principles of trade. Rule 2010 protects investors and the securities industry from dishonest practices that are unfair to investors or hinder the functioning of a free and open market, even though those practices may not be illegal or violate a specific rule or regulation. FINRA Rule 2020 is FINRA's general antifraud provision. FINRA has used this broad rule to address a wide variety of manipulative, deceptive, and fraudulent misconduct, including market manipulation, excessive trading, insider trading, and fraudulent misrepresentation. FINRA Rule 5150 requires specific disclosures and procedures addressing the conflicts of interest that arise when a broker-dealer provides a fairness opinion in a change of control transaction, such as a merger or sale or purchase of assets.

      Rule No. Rule Title
      Rule 2010 Standards of Commercial Honor and Principles of Trade
      Rule 2020 Use of Manipulative, Deceptive or Other Fraudulent Devices
      Rule 5150 Fairness Opinions

      FINRA Rule Filing SR-FINRA-2008-030

      www.finra.org/Industry/Regulation/RuleFilings/2008/P038786

      The rule change adopts NASD Rule 3013 (Annual Certification of Compliance and Supervisory Processes) and IM-3013 (Annual Compliance and Supervision Certification) as a FINRA Rule in the Consolidated FINRA Rulebook without material change and deletes the corresponding provisions in Incorporated NYSE Rule 342.30 and NYSE Rule Interpretations 311(b)(5)/04 through /05 and 342.30(d)/01 through (e)/01. The rule change renumbers NASD Rule 3013 and IM-3013 as FINRA Rule 3130 in the Consolidated FINRA Rulebook.

      FINRA Rule 3130 requires each member firm to designate one or more principals to serve as a chief compliance officer (CCO). The rule further requires that the chief executive officer(s) (CEO) certify annually that the member has in place processes to establish, maintain, review, modify and test policies and procedures reasonably designed to achieve compliance with applicable FINRA rules, MSRB rules and federal securities laws and regulations.

      Rule No. Rule Title
      Rule 3130 Annual Certification of Compliance and Supervisory Processes

      FINRA Rule Filing SR-FINRA-2008-033

      www.finra.org/Industry/Regulation/RuleFilings/2008/P038813

      The rule change adopts the short interest reporting requirements (NASD Rule 3360 and Incorporated NYSE Rules 421(1) and 421.10) as FINRA Rule 4560 (Short-Interest Reporting) in the Consolidated FINRA Rulebook. FINRA Rule 4560 requires members to report short positions in OTC Equity Securities and exchange-listed securities. Members must report total short positions in all customer and proprietary accounts as of the settlement dates designated, and in the manner prescribed, by FINRA. (Currently, such information must be reported twice a month and is, in turn, made publicly available on an aggregate basis twice a month.)

      Rule No. Rule Title
      Rule 4560 Short-Interest Reporting

      FINRA Rule Filing SR-FINRA-2008-039

      www.finra.org/Industry/Regulation/RuleFilings/2008/P038926

      The rule change (1) adopts NASD Rule 2710 (Corporate Financing Rule—Underwriting Terms and Arrangements), without material change except for paragraphs (b)(10) and (11), as a FINRA Rule in the Consolidated FINRA Rulebook and (2) clarifies and streamlines the notice and other requirements in FINRA Rules relating to Regulation M under the Securities Exchange Act (including paragraphs (b)(10) and (11) of NASD Rule 2710 and paragraph (a) of Incorporated NYSE Rule 392). The rule change renumbers NASD Rule 2710 as FINRA Rule 5110 and adopts new FINRA Rules 5190 and 6470 in the Consolidated FINRA Rulebook. (New FINRA Rule 5190 houses the Regulation M-related notice requirements applicable to members participating in securities offerings, including paragraphs (b)(10) and (11) of NASD Rule 2710 and paragraph (a) of Incorporated NYSE Rule 392. New FINRA Rule 6470 houses certain Regulation M-related requirements that are currently in the OTC Bulletin Board rules and applies to all OTC Equity Securities.)

      Rule No. Rule Title
      Rule 5110 Corporate Financing Rule—Underwriting Terms and Arrangements
      Rule 5190 Notification Requirements for Offering Participants
      Rule 6470 Withdrawal of Quotations in an OTC Equity Security in Compliance with SEC Regulation M

      FINRA Rule Filing SR-FINRA-2008-022

      www.finra.org/Industry/Regulation/RuleFilings/2008/P038543

      The rule change addresses the applicability of the consolidated FINRA Rules to member firms of the NYSE that became members of FINRA pursuant to the membership waive-in process set in forth in NASD IM-1013-1 (Membership Waive-In Process for Certain New York Stock Exchange Member Organizations) (such firms are referred to as Waive-In Firms). Specifically, the rule change amends IM-1013-1 to specify that the Waive-In Firms will be subject to FINRA's By-Laws and Schedules to By-Laws, including Schedule A, the consolidated FINRA Rules and the Incorporated NYSE Rules, provided that their securities business is limited to the permitted floor activities. If a Waive-In Firm seeks to expand its business operations to include any activities other than the permitted floor activities, the firm must continue to apply for and receive approval pursuant to NASD Rule 1017. Upon approval of such expansion, the firm would be subject to all NASD Rules, in addition to the consolidated FINRA Rules and the Incorporated NYSE Rules.

      FINRA Rule Filing SR-FINRA-2008-029

      www.finra.org/Industry/Regulation/RuleFilings/2008/P038766

      The rule change repeals NASD Rule 1130 (Reliance on Current Membership List) and Incorporated NYSE Rules 405A (Non-Managed Fee-Based Account Programs—Disclosure and Monitoring), 440F (Public Short Sale Transactions Effected on the Exchange), 440G (Transactions in Stocks and Warrants for the Accounts of Members, Allied Members and Member Organizations) and 477 (Retention of Jurisdiction—Failure to Cooperate) to eliminate duplicative provisions and remove requirements that are specific to the NYSE marketplace.


      1 FINRA Rule 6121 took effect on October 7, 2008, pursuant to a separate filing. See Exchange Act Release No. 58753 (October 8, 2008), 73 FR 61177 (October 15, 2008) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change; File No. SR-FINRA-2008-048). Rule 6121 permits FINRA to halt over-the-counter trading in NMS stocks, as defined in Rule 600(b)(47) of SEC Regulation NMS, if other major U.S. securities markets initiate market-wide trading halts in response to extraordinary market conditions or if otherwise directed by the SEC.

      2 FINRA Rule 6560 corresponds to NASD Rule 6541 in the Transitional Rulebook. FINRA has deleted NASD Rule 6541, effective November 11, 2008, pursuant to separate filings. Accordingly, FINRA does not intend to implement Rule 6560 when the other FINRA Rules included in this Notice become effective. See Regulatory Notice 08-49 (September 2008) (Trading Ahead of Customer Limit Orders); see also Exchange Act Release No. 58532 (September 12, 2008), 73 FR 54649 (September 22, 2008) (Order Approving Proposed Rule Change; File No. SR-NASD-2007-041); Exchange Act Release No. 55351 (February 26, 2007), 72 FR 9810 (March 5, 2007) (Order Granting Accelerated Approval of Proposed Rule Change; File No. SR-NASD-2005-146).

      3 FINRA has deleted FINRA Rule 7610B pursuant to a separate filing, effective October 20, 2008. (FINRA Rule 7610B corresponds to NASD Rule 7001C in the Transitional Rulebook.) See File No. SR-FINRA-2008-050. Accordingly, FINRA does not intend to implement Rule 7610B when the other FINRA Rules included in this Notice become effective.

    • 08-56 FINRA Announces the Publication of Consolidated Interpretations of SEC Rules Governing Financial Responsibility, Customer Protection and Books and Records

      View PDF

      Interpretations of SEC Rules

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      SEA Rule 15c3-1
      SEA Rule 15c3-2
      SEA Rule 15c3-3
      SEA Rule 15c3-4
      SEA Rule 17a-3
      SEA Rule 17a-4
      SEA Rule 17a-5
      SEA Rule 17a-11
      SEA Rule 17a-13
      Suggested Routing

      Compliance
      Finance
      Legal
      Operations
      Regulatory Reporting
      Senior Management
      Key Topics

      Books and Records
      Customer Protection
      Financial Reporting
      Net Capital

      Executive Summary

      The purpose of this Notice is to advise FINRA member firms that FINRA has published a consolidated set of interpretations issued by SEC staff with respect to the following rules: SEA Rules 15c3-1, 15c3-2, 15c3-3, 15c3-4, 17a-3, 17a-4, 17a-5, 17a-11 and 17a-13. Historically, written and verbal SEC staff interpretations of these rules were published by the NYSE and/or NASD. Firms subject to these SEC rules were required to refer to both sets of interpretations and determine their applicability. Upon the consolidation of NASD and NYSE Regulation, FINRA staff reconciled the interpretations to create a single resource, now available on FINRA's Web site at www.finra.org/finops. Information about the interpretations is contained within this Notice.

      Questions concerning this Notice should be directed to:

      •  Yui Chan, Managing Director, Risk Oversight and Operational Regulation, at (646) 315-8426; or
      •  Susan DeMando, Associate Vice President, Shared Services, at (202) 728-8411.

      Background & Discussion

      SEC staff has issued—and continues to issue—written and verbal interpretations of various SEC rules. Both written and verbal SEC staff interpretations of these rules were historically published by the NYSE and/or NASD. Firms referred to their respective SRO's published interpretations and determined their applicability. Upon the consolidation of NASD and NYSE Regulation, FINRA staff reconciled the interpretations to create a single resource for firms.

      The consolidated set of interpretations—published in the format historically used by the NYSE—is now available on the FINRA Web site at www.finra.org/finops. Interpretations are imbedded in the text of relevant rules and immediately follow the section of the rule that they interpret. The interpretations use a numbering convention of /## (e.g., /01 of SEA Rule 15c3-1(c)(2)(vii)) or in some cases /### (e.g., /021 of SEA Rule 15c3-1(c)(2)(iv)). The interpretations also retain the original date of publication or issuance and, if applicable, any subsequent publication or issuance date(s).

      Firms may purchase a hard-copy, three-ring binder publication of the interpretations for a one-time fee of $150. See www.finra.org/finops for ordering information. Please note that the $150 per binder cost does not include a subscription to future updates via mail. Future interpretation updates will only be available online. Firms that wish to maintain a hard copy of the interpretations must manually download and print updates from www.finra.org/finops.

      FINRA will notify firms of interpretation updates via Regulatory Notices and the Weekly Update email, distributed every Wednesday to Executive Representatives and individuals who have subscribed to FINRA's Regulatory Information and Updates opt-in email list.

    • 08-55 FINRA Requests Comment on Proposed Research Registration and Conflict of Interest Rules Comment Period Expired: November 14, 2008

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      Research Analysts and Research Reports

      Regulatory Notice
      Notice Type

      Request for Comment
      Consolidated FINRA Rulebook
      Referenced Rules & Notices

      NASD Rule 1050
      NASD Rule 2210
      NASD Rule 2711
      NYSE Rule 344
      NYSE Rule 342
      NYSE Rule 472
      Suggested Routing

      Compliance
      Legal
      Registration
      Research
      Senior Management
      Key Topic(s)

      Registration
      Research Analysts
      Research Reports
      Supervision

      Executive Summary

      As part of the process of developing a new, consolidated rulebook (the Consolidated FINRA Rulebook),1 FINRA is requesting comment on proposed research analyst conflict of interest rules.

      The text of proposed FINRA Rules 1223 and 2240 is set forth in Attachment A.

      Questions regarding this Notice should be directed to Philip Shaikun, Associate Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-8451.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by November 14, 2008.

      Member firms and other interested parties can submit their comments using the following methods:

      •  Emailing comments to pubcom@finra.org; or
      •  Mailing comments in hard copy to:

      Marcia E. Asquith
      Office of the Corporate Secretary
      FINRA
      1735 K Street, NW
      Washington, DC 20006-1506

      To help FINRA process and review comments more efficiently, persons should use only one method to comment on the proposal.

      Important Notes: The only comments that FINRA will consider are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the FINRA Web site. Generally, FINRA will post comments on its site one week after the end of the comment period.2

      Before becoming effective, a proposed rule change must be authorized for filing with the SEC by the FINRA Board of Governors, and then must be approved by the SEC, following publication for public comment in the Federal Register.3

      Background

      NASD Rule 2711 (Research Analysts and Research Reports) and Incorporated NYSE Rule 472 (Communications with the Public) (the Rules) set forth requirements to foster objectivity and transparency in equity research and provide investors with more reliable and useful information to make investment decisions. The Rules were intended to restore public confidence in the validity of research and the veracity of research analysts, who are expected to function as unbiased intermediaries between issuers and the investors who buy and sell their securities. The trustworthiness of research had eroded due to the pervasive influences of investment banking and other conflicts that became apparent during the market boom of the late 1990s.

      The current NASD and Incorporated NYSE Rules have no significant differences. Generally, the Rules require clear, comprehensive and prominent disclosure of conflicts of interest in research reports and public appearances by research analysts. The Rules further prohibit certain conduct—investment banking personnel involvement in the content of research and determination of analyst compensation, for example—when the conflicts are considered too pronounced to be cured by disclosure. Several of the Rules' provisions implement the mandates of the Sarbanes-Oxley Act of 2002 (SOx), which proscribes certain conduct and requires some specific disclosures in research reports and public appearances.

      NASD Rule 1050 (Registration of Research Analysts) and Incorporated NYSE Rule 344 (Research Analysts and Supervisory Analysts) require any person associated with a member firm and who functions as a research analyst to be registered as such and pass the Series 86 and 87 exams, unless an exemption applies. A research analyst is defined for the purposes of those rules as "an associated person who is primarily responsible for the preparation of the substance of a research report or whose name appears on a research report."

      In December 2005, in response to a Securities and Exchange Commission (SEC or Commission) Order, FINRA and the NYSE submitted to the SEC a joint report on the operation and effectiveness of the research analyst conflict of interest rules. The report concluded that the Rules have been effective in helping to restore integrity to research by minimizing the influences of investment banking and promoting transparency of other potential conflicts of interest. Evidence suggested that investors are benefiting from more balanced and accurate research to aid their investment decisions. The report also recommended certain changes to the Rules to strike an even better balance between ensuring objective and reliable research on the one hand, and permitting the flow of information to investors and minimizing costs and burdens to member firms on the other. Many of those recommendations are the subject of a FINRA rule filing pending before the SEC (Joint Report Filing) that would be superseded by the proposal in this Notice.

      Proposal

      FINRA proposes replacing the existing Rules with a single rule in the Consolidated FINRA Rulebook and rewriting the research rules in a more streamlined and flexible fashion within the confines set forth in SOx. Within this structure, the new rule would broaden the obligations on member firms to identify and manage research conflicts. It also would incorporate several aspects of the Joint Report Filing and resolve the few differences between that filing and a substantially similar one filed with the SEC by NYSE to amend its Rule 472. Among other things, the proposal additionally codifies an existing interpretation regarding selective dissemination of research and provides further guidance on the subject. The proposal also extends the exemption for firms with limited investment banking activity to include certain aspects related to research analyst compensation determination.

      The most significant proposed changes are described generally below. However, FINRA urges member firms to carefully review the entire attached proposed rule text to understand the full extent of the proposed changes. FINRA notes that the proposal renumbers the new rules as FINRA Rules 1223 and 2240. It also reorganizes new Rule 2240 and includes a "Supplementary Material" section that contains some existing rule language and guidance.

      Definitions

      FINRA proposes to maintain the definitions in the existing Rules, with a few modifications. The proposal:

      •  makes minor changes to the definition of "investment banking services" to clarify that such services include all acts in furtherance of a public or private offering on behalf of an issuer.
      •  incorporates a proposed change from the Joint Report Filing to the definition of "research analyst account" to clarify that the definition does not apply to a registered investment company over which a research analyst has discretion or control, provided that the research analyst or a member of that research analyst's household has no financial interest in the investment company, other than a performance or management fee.
      •  incorporates the Joint Report Filing proposed change to the definition of "research report" to exclude sales material regarding open-end registered investment companies that are not listed or traded on an exchange and public direct participation programs.
      •  moves into this section the definitions of "third-party research report" and "independent third-party research report" that are now in a separate provision of the Rules.

      Identifying and Managing Conflicts of Interest

      The proposal creates a new section entitled "Identifying and Managing Conflicts of Interest." The section includes an overarching provision that requires member firms to establish, maintain and enforce policies and procedures reasonably designed to identify and effectively manage conflicts of interest related to the preparation, content and distribution of research reports and public appearances by research analysts. A second provision sets forth more specifically what those policies and procedures must address. They must promote objective and reliable research that reflects the truly held opinions of research analysts and prevent the use of research or research analysts to manipulate or condition the market or favor the interests of the member firm or certain current or prospective clients.

      SOx requires rules to prohibit or restrict certain conduct related to the preparation, approval and distribution of research reports and the determination of research analysts' compensation. The proposal therefore requires at a minimum that the above-referenced policies and procedures be reasonably designed to achieve compliance with the SOx conduct and structural mandates. However, in contrast to the more prescriptive manner in which the current Rules implement the SOx requirements, the proposal provides firms with more flexibility to adopt policies and procedures to effectuate those mandates in a manner consistent with the member firm's size and organizational structure.

      Thus, the proposal requires firms to establish, maintain and enforce policies and procedures that at a minimum:

      •  prohibit prepublication review, clearance and approval of research reports by persons engaged in investment banking activities and prohibit or restrict such review, clearance and approval by other persons not directly responsible for the preparation, content and distribution of research reports, other than legal and compliance personnel;
      •  limit the supervision and compensatory evaluation of research analysts to persons who are not engaged in investment banking services transactions;
      •  establish information barriers and other safeguards to insulate research analysts from pressure by investment banking personnel and other persons who might be biased in their judgment or supervision;
      •  prevent direct or indirect retaliation against research analysts as a result of content of a research report that may adversely affect a current or prospective client relationship; and
      •  define quiet periods of at least 10 days after an initial pubic offering (IPO) during which a member firm must not publish or otherwise distribute research reports, and research analysts must not make public appearances relating to the issuer if the firm has participated as an underwriter or dealer in the offering.4

      The proposal retains the current requirement that a committee that reports to the member firm's board of directors—or if none exists, a senior executive officer—review and approve the compensation of any research analyst who is primarily responsible for preparation of the substance of a research report. This committee may not have representation from a member firm's investment banking department and may not consider contributions to a member firm's investment banking business in assessing a research analyst's compensation. The committee must consider, among other things, the productivity of the research analyst and the quality and accuracy of his or her research and must document the basis for each research analyst's compensation.

      With respect to the quiet-period provision, FINRA notes that the proposal differs from the Joint Report Filing, which proposed a 25-day IPO quiet period for all underwriters and dealers. However, like the Joint Report Filing, the proposal eliminates the 10-day quiet period after secondary offerings. The proposal also eliminates the current quiet periods 15 days before and after the expiration, waiver or termination of a lock-up agreement. FINRA believes that research issued during such periods potentially offers valuable market information, and the other provisions of the research rules and SEC Regulation AC provide sufficient protection that such research will honestly reflect the analyst's beliefs and be free from other conflicts that would undermine the value or integrity of research issued during these periods.5

      Additionally, the proposal requires firms to adopt policies and procedures to restrict or limit activities by research analysts that can reasonably be expected to compromise their objectivity, including prohibiting participation in the solicitation of investment banking business, road shows and other marketing on behalf of an issuer. This standard largely maintains the existing proscriptions regarding research analyst conduct. The proposal also maintains the current prohibition against promises of particular research or a recommendation or rating as inducement for receipt of business or compensation and prohibits prepublication review by a subject company for purposes other than verification of facts.

      Personal Trading Restrictions

      The proposal creates a more flexible supervisory approach with respect to research analyst account trading in securities of companies a research analyst covers. The current Rules prohibit ownership of pre-IPO shares in a research analyst's coverage area; impose specific blackout periods during which a research analyst account may not trade covered securities; prohibit trading against recommendation; and require pre-approval by legal and compliance of transactions in covered securities by persons who oversee research analysts. The current Rules carve out specific investments from the trading restrictions and also set forth particular exceptions to the provisions with approval of legal and compliance.

      The proposal instead requires firms to establish policies and procedures that restrict or limit research analyst account trading in securities a research analyst covers, any derivatives of such securities and funds whose performance is materially dependent upon the performance of such securities. Such policies and procedures must ensure that research analysts and others with the ability to influence the content of research reports don't benefit in their trading from the knowledge of the content or timing of a research report before the intended recipients of such research have had a reasonable opportunity to act on the information in the research report. Firms further are required to define financial hardship circumstances, if any, in which a firm would permit a research analyst to trade against his or her recommendation.

      Content and Disclosure in Research Reports

      With a couple of modifications and exceptions, the proposal mostly maintains the content and disclosure requirements of the current Rules. This is due in large part to SOx, which mandates disclosure in research reports and public appearances of a research analyst's financial interest in a subject company; whether the research analyst or the member firm or its affiliates has received any compensation from the subject company; whether the issuer has been a client of the member firm within a year of the date of publication of the research report or public appearance and the types of services provided to the issuer; whether the research analyst received compensation with respect to a research report based upon the investment banking revenues of the firm; and other material conflicts.

      Certain provisions—the distribution of ratings and price chart requirements, for example—have been maintained because FINRA believes they provide valuable information to investors to assess the objectivity of a research report and the accuracy of a research analyst's past recommendations, ratings or price targets.

      The proposal requires a member firm to ensure that purported facts in its research reports are based on reliable information. Otherwise, the proposal adopts, with some language modifications, the existing content requirements:

      •  Any recommendation, rating or price target must have a reasonable basis in fact and be accompanied by a clear explanation of the valuation method utilized and a fair presentation of risks that may impede its achievement.
      •  Ratings must be clearly defined in each research report and include any time horizon or benchmark on which the rating is based.
      •  Irrespective of the rating system employed, a member firm must include in each research report that includes a recommendation or rating the percentage of all securities rated by the member firm to which the member firm assigns a "buy", "hold" or "sell" rating.
      •  A member firm must disclose in each research report the percentage of subject companies within each of the "buy," "hold" and "sell" categories for which the firm provided investment banking services within the previous twelve months.
      •  If a research report contains a rating or price target, the member firm must include a price chart that shows the stock price movement of the subject company's security in relation to the dates on which the firm assigned or changed a rating or price target.

      With respect to disclosure of potential conflicts, the proposal requires a member firm to disclose in any research report all conflicts that reasonably could be expected to influence the objectivity of the research report and that are known or should have been known by the member firm or research analyst on the date of distribution. The proposal includes among such conflicts most of those that must be disclosed under the current Rules, including those related to receipt of investment banking and non-investment banking compensation and market making.

      The proposal modifies the requirement to disclose when a member firm or its affiliates owns securities of the subject company. The proposal requires disclosure if a member firm or its affiliates maintain a "significant financial interest in the debt or equity of the subject company," including, at a minimum, if the member firm or its affiliates beneficially own 1 percent or more of any class of common equity securities of the subject company. The determination of beneficial ownership continues to be based upon the standards used to compute ownership for the purposes of the reporting requirements under Section 13(d) of the Exchange Act.

      The proposal retains the general exception to the disclosure requirements in circumstances where disclosure would reveal material non-public information regarding specific potential future investment banking transactions of the subject company. The proposal also continues to permit a member firm that distributes a research report covering six or more companies (compendium report) to direct the reader in a clear manner as to where the applicable disclosures can be found. While an electronic compendium research report may hyperlink to the disclosures—as is the case for any electronic research report—a paper-based compendium report must include a toll-free number or a postal address where the reader may obtain the disclosures. Paper research reports may additionally include a Web address where the disclosures can be found.

      FINRA notes that except for electronic research reports, the proposal does not permit Web-based disclosure. The Joint Report Filing proposed such disclosure, but the SEC staff informed FINRA that it interprets SOx to require disclosures in the research report itself, except as noted above. The SEC staff further indicated that it did not intend to use its exemptive authority under the Exchange Act to allow such Web-based disclosure. FINRA continues to advocate Web-based disclosure as more efficient and effective and will consider amending the proposal should the SEC staff change its position.

      Public Appearances

      The proposal groups in a separate provision the disclosures required when a research analyst makes a public appearance. The required disclosures effectively remain the same as under the current Rules, with one exception: consistent with the above-referenced provision with respect to disclosure in research reports, a research analyst would be required to disclose if a member firm or its affiliates maintain a "significant financial interest in the debt or equity of the subject company," including, at a minimum, if the member firm or its affiliates beneficially own 1 percent or more of any class of common equity securities of the subject company, as computed in accordance with Section 13(d) of the Exchange Act. The proposal also adopts the requirement under NASD Rule 2711 to maintain records of public appearances sufficient to demonstrate compliance by research analysts with the applicable disclosure requirements. The more prescriptive recordkeeping requirements of Incorporated NYSE Rule 472 would be deleted under the proposal.

      Disclosure Required by Other Provisions

      With respect to both research reports and public appearances, member firms and research analysts would continue to be required to comply with applicable disclosure provisions of NASD Rule 2210, Incorporated NYSE Rule 472 and the federal securities laws.

      Termination of Coverage

      The proposal retains in its entirety the provision in the current Rules that requires a member firm to promptly notify its customers if it intends to terminate coverage of a subject company. Such notification must be made using the means of dissemination equivalent to those a member firm ordinarily uses to distribute research reports to its various customers. If practicable, the notice must be accompanied by a final research report, comparable in scope and detail to prior research reports, and include a final recommendation or rating. If impracticable to provide a final research report, recommendation or rating, a firm must disclose to its customers the reason for terminating coverage.

      Distribution of Member Firms' Research Reports

      The proposal codifies an existing interpretation of NASD Rule 2110 and provides additional guidance regarding selective—or tiered—dissemination of a firm's research reports. In that regard, the proposal requires firms to establish policies and procedures to ensure that a research report is not distributed to internal trading personnel or a particular customer or class of customers in advance of other customers that are entitled to receive the research report. The proposal includes further guidance to explain that firms may provide different research products and services to certain classes of customers, provided the firm discloses its research dissemination practices to all customers. A member firm may, by way of example, differentiate its research product offerings based on the recommendations provided to its trading versus its investing clients, the depth of research content (but not the ultimate recommendation) provided to certain classes of customer as determined by the member or whether such different classes of customers will receive certain research services at all. A firm may not, however, differentiate the timing of the availability of research to any customer within the class of customers eligible to receive a particular research report or product. FINRA understands, however, that customers may actually receive at different times research reports originally made available at the same time because of the mode of delivery elected by the customer eligible to receive such research services (e.g. in paper form versus electronic). However, member firms may not "game" the mode of delivery in order to preference certain customers over others in the timing of receipt of reports.

      Distribution of Third-Party Research Reports

      The proposal incorporates in their entirety the current provisions regarding distribution and supervision of third-party research. A detailed discussion of those provisions can be found in Regulatory Notice 08-16.

      Exemption for Firms with Limited Investment Banking Activity

      The proposal extends the exemption for firms with limited investment banking activity to include the provision that prohibits investment banking personnel involvement in determining a research analyst's compensation and the requirement that a committee review and approve such compensation.

      The current rule exempts such firms—those that over the previous three years, on average per year, have managed or co-managed 10 or fewer investment banking transactions and generated $5 million or less in gross revenues from those transactions—from the provisions that prohibit a research analyst from being subject to the supervision or control of an investment banking department employee because the potential conflicts with investment banking are minimal. FINRA believes it follows logically to allow those who supervise research analysts under such circumstances also to be involved in the determination of those analysts' compensation. The proposal still prohibits these firms from compensating a research analyst based upon specific investment banking services transactions or contributions to a member firm's investment banking services activities.

      Exemption from Registration Requirements for Certain "Research Analysts"

      As in the Joint Report Filing, the proposal exempts from the registration and qualification requirements personnel who produce "research reports" but whose primary job is something other than a research analyst (e.g. a registered representative or trader). The existing research rules, in accordance with the SOx mandates, are constructed such that the author of a communication that meets the definition of a "research report" is a "research analyst," irrespective of his or her title or primary job. FINRA believes that the registration and qualification requirements were intended for those individuals whose principal job function is to produce research, while the balance of the research rules are intended to foster objective analysis, transparency of certain conflicts and to provide beneficial information to investors. As such, the proposed exemption extends only to the registration requirements.

      Attestation Requirement

      The proposal deletes the requirement to attest annually that the firm has in place supervisory policies and procedures reasonably designed to achieve compliance with the applicable provisions of the rules, including the compensation committee review provision. FINRA notes that firms would remain obligated pursuant to have a supervisory system reasonably designed to achieve compliance with all applicable securities laws and regulations.


      1 The current FINRA rulebook includes (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 Information Notice 03/12/08 (Rulebook Consolidation Process).

      2 FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Persons should submit only information that they wish to make publicly available. See NASD Notice to Members 03-73 (November 2003) (NASD Announces Online Availability of Comments) for more information.

      3 Section 19 of the Securities Exchange Act of 1934 (SEA or Exchange Act) permits certain limited types of proposed rule changes to take effect upon filing with the SEC. The SEC has the authority to summarily abrogate these types of rule changes within 60 days of filing. See Exchange Act Section 19 and rules thereunder.

      4 Firms still would be required to comply with any additional quiet periods that the federal securities laws impose.

      5 The proposal does not incorporate an element of the Joint Report Filing that would have required an additional attestation that a member has a bona fide reason for issuing research during those 15-day periods before and after the expiration, waiver or termination of a lock-up agreement.


      Attachment A

      Below is the text of Proposed FINRA Rules 1223 and 2240. With respect to Proposed FINRA Rule 1223, new language is underlined; proposed deletions are in brackets.

      * * * * *

      [1050.] FINRA Rule 1223. Registration of Research Analysts1

      (a) All persons associated with a member who are to function as research analysts shall be registered with [NASD]FINRA. Before registration as a Research Analyst can become effective, an applicant shall:
      (1) be registered pursuant to NASD Rule 1032 as a General Securities Representative; and
      (2) pass a Qualification Examination for Research Analysts as specified by the Board of Governors.
      (b) For the purposes of this Rule 1223[1050], "research analyst" shall mean an associated person whose primary job function is to provide investment research and who is primarily responsible for the preparation of the substance of a research report or whose name appears on a research report.
      (c) Upon written request pursuant to the Rule 9600 Series, [NASD]FINRA will grant a waiver from the analytical portion of the Research Analyst Qualification Examination (Series 86) upon verification that the applicant has [passed]:
      (1) passed Levels I and II of the Chartered Financial Analyst ("CFA") Examination; or
      (2) [if the applicant functions as a research analyst who prepares only technical research reports as defined in paragraph (e),] passed Levels I and II of the Chartered Market Technician ("CMT") Examination, if the applicant functions as a research analyst who prepares only technical research reports as defined in paragraph (e); and
      (3) [has] either functioned as a research analyst continuously since having passed the Level II CFA or CMT examination or applied for registration as a research analyst within two years of having passed the Level II CFA or CMT examination.
      (d) An applicant who has been granted an exemption pursuant to paragraph (c) still must become registered as a General Securities Representative and then complete the regulatory portion of the Research Analyst Qualification Examination (Series 87) before that applicant can be registered as a Research Analyst.
      (e) For the purposes of paragraph (c)(2), a "technical research report" shall mean a research report, as that term is defined in Rule [2711]2240(a)([8]10), that is based solely on stock price movement and trading volume and not on [the]a subject company's financial information, business prospects, contact with a subject company's management, or the valuation of a subject company's securities.
      (f) The requirements of paragraph (a) shall not apply to an associated person who:
      (1) is an employee of a non-member foreign affiliate of a member ("foreign research analyst"),
      (2) resides outside the United States, and
      (3) contributes, partially or entirely, to the preparation of globally_[-] branded or foreign affiliate research reports but does not contribute to the preparation of a member's research, including a mixed-team report, that is not globally_[-]branded.
      Provided that the following conditions are satisfied:
      (A) A member that publishes or otherwise distributes globally_[-] branded research reports partially or entirely prepared by a foreign research analyst must subject such research to pre-use review and approval by a registered principal in accordance with NASD Rule 1022(a)(5) or a supervisory analyst pursuant to NYSE Rule 344.11. In addition, the member must ensure that such research reports comply with [NASD]Rule [2711]2240, as applicable.
      (B) In publishing or otherwise distributing globally_[-]branded research reports partially or entirely prepared by a foreign research analyst, a member must prominently disclose:
      (i) each affiliate contributing to the research report;
      (ii) the names of the foreign research analysts employed by each contributing affiliate;
      (iii) that such research analysts are not registered/qualified as research analysts with FINRA[with the NYSE and/or NASD]; and
      (iv) that such research analysts may not be associated persons of the member and therefore may not be subject to Rule [2711]2240 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
      (C) The disclosures required by paragraph (f)(3)(B) of this Rule must be presented on the front page of the research report or the front page must refer to the page on which the disclosures can be found. In electronic research reports, a member may hyperlink to the disclosures. References and disclosures must be clear, comprehensive and prominent.
      (D) Members must establish and maintain records that identify those individuals who have availed themselves of this exemption, the basis for such exemption, and evidence of compliance with the conditions of the exemption. Failure to establish and maintain such records shall create an inference of a violation of Rule 1223[1050]. Members must also establish and maintain records that evidence compliance with the applicable content, disclosure and supervision provisions of Rule 2240[2711]. Members must maintain these records in accordance with the supervisory requirements of Rule 3010, and in addition to such requirement, the failure to establish and maintain such records shall create an inference of a violation of the applicable content, disclosure and supervision provisions of Rule 2240[2711].
      (E) Nothing in paragraph (f) of this Rule shall affect the obligation of any person or broker-dealer, including a foreign broker-dealer, to comply with the applicable provisions of the federal securities laws, rules and regulations and any self-regulatory organization rules.
      (F) The fact that a foreign research analyst avails himself of the exemption in paragraph (f) shall not be probative of whether that individual is an associated person of the member for other purposes, including whether the foreign research analyst is subject to the Rule 2240[2711] restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
      (G) A member that distributes non-member foreign affiliate research reports that are clearly and prominently labeled as such must comply with the third-party research report requirements in Rule [2711]2240(h)[(13)].
      (H) For the purposes of the exemption in paragraph (f), the terms "affiliate," "globally_[-]branded research report" and "mixed-team research report" shall have the following meanings:
      (i) "Affiliate" shall mean a person that directly or indirectly controls, is controlled by, or is under common control with, a member.
      (ii) "Globally_[-]branded research report" refers to the use of a single marketing identity that encompasses the member and one or more of its affiliates.
      (iii) "Mixed-team research report" refers to any member research report that is not globally_[-]branded and includes a contribution by a research analyst who is not an associated person of the member.

      FINRA Rule 2240. Research Analysts and Research Reports2

      (a) Definitions

      For purposes of this Rule, the following terms shall be defined as provided.
      (1) "Equity security" has the same meaning as defined in Section 3(a)(11) of the Exchange Act.
      (2) "Independent third-party research report" means a third-party research report, in respect of which the person producing the report:
      (A) has no affiliation or business or contractual relationship with the distributing member or that member's affiliates that is reasonably likely to inform the content of its research reports; and
      (B) makes content determinations without any input from the distributing member or that member's affiliates.
      (3) "Investment banking department" means any department or division, whether or not identified as such, that performs any investment banking service on behalf of a member.
      (4) "Investment banking services" include, without limitation, acting as an underwriter, participating in a selling group in an offering for the issuer or otherwise acting in furtherance of a public offering of the issuer; acting as a financial adviser in a merger or acquisition; providing venture capital or equity lines of credit or serving as placement agent for the issuer or otherwise acting in furtherance of a private offering of the issuer.
      (5) "Member of a research analyst's household" means any individual whose principal residence is the same as the research analyst's principal residence. This term does not include an unrelated person who shares the same residence as a research analyst, provided that the research analyst and unrelated person are financially independent of one another.
      (6) "Public appearance" means any participation in a conference call, seminar, forum (including an interactive electronic forum) or other public speaking activity before 15 or more persons or before one or more representatives of the media, a radio, television or print media interview, or the writing of a print media article, in which a research analyst makes a recommendation or offers an opinion concerning an equity security. This term does not include a password protected Webcast, conference call or similar event with 15 or more existing customers, provided that all of the event participants previously received the most current research report or other documentation that contains the required applicable disclosures, and that the research analyst appearing at the event corrects and updates during the public appearance any disclosures in the research report that are inaccurate, misleading or no longer applicable.
      (7) "Research analyst" means an associated person who is primarily responsible for, and any associated person who reports directly or indirectly to a research analyst in connection with, preparation of the substance of a research report, whether or not any such person has the job title of "research analyst."
      (8) "Research analyst account" means any account in which a research analyst or member of the research analyst's household has a financial interest, or over which such analyst has discretion or control. This term shall not include an investment company registered under the Investment Company Act of 1940 over which the research analyst or a member of the research analyst's household has discretion or control, provided that the research analyst or member of a research analyst's household has no financial interest in such investment company, other than a performance or management fee. The term also shall not include a "blind trust" account that is controlled by a person other than the research analyst or member of the research analyst's household where neither the research analyst nor a member of the research analyst's household knows of the account's investments or investment transactions.
      (9) "Research department" means any department or division, whether or not identified as such, that is principally responsible for preparing the substance of a research report on behalf of a member.
      (10) "Research report" means any written (including electronic) communication that includes an analysis of equity securities of individual companies or industries (other than an open-end registered investment company that is not listed or traded on an exchange or a public direct participation program) and that provides information reasonably sufficient upon which to base an investment decision. This term does not include:
      (A) communications that are limited to the following:
      (i) discussions of broad-based indices;
      (ii) commentaries on economic, political or market conditions;
      (iii) technical analyses concerning the demand and supply for a sector, index or industry based on trading volume and price;
      (iv) statistical summaries of multiple companies' financial data, including listings of current ratings;
      (v) recommendations regarding increasing or decreasing holdings in particular industries or sectors; or
      (vi) notices of ratings or price target changes, provided that the member simultaneously directs the readers of the notice to the most recent research report on the subject company that includes all current applicable disclosures required by this Rule and that such research report does not contain materially misleading disclosures, including disclosures that are outdated or no longer applicable;
      (B) the following communications, even if they include an analysis of an individual equity security and information reasonably sufficient upon which to base an investment decision:
      (i) any communication distributed to fewer than 15 persons;
      (ii) periodic reports or other communications prepared for investment company shareholders or discretionary investment account clients that discuss individual securities in the context of a fund's or account's past performance or the basis for previously made discretionary investment decisions; or
      (iii) internal communications that are not given to current or prospective customers; and
      (C) communications that constitute statutory prospectuses that are filed as part of a registration statement.
      (11) "Subject company" means the company whose equity securities are the subject of a research report or a public appearance.
      (12) "Third-party research report" means a research report that is produced by a person or entity other than the member.
      (b) Identifying and Managing Conflicts of Interest
      (1) A member must establish, maintain and enforce policies and procedures reasonably designed to identify and effectively manage conflicts of interest related to:
      (A) the preparation, content and distribution of research reports; and
      (B) public appearances by research analysts.
      (2) A member's policies and procedures must be reasonably designed to promote objective and reliable research that reflects the truly held opinions of research analysts and to prevent the use of research reports or research analysts to manipulate or condition the market or favor the interests of the member or certain current or prospective clients. Such policies and procedures must at a minimum:
      (A) prohibit prepublication review, clearance or approval of research reports by persons engaged in investment banking services activities and restrict or prohibit such review, clearance or approval by other persons not directly responsible for the preparation, content and distribution of research reports, other than legal and compliance personnel;
      (B) limit supervision and determination of compensation of research analysts to persons not engaged in investment banking services activities;
      (C) prohibit compensation based upon specific investment banking services transactions or contributions to a member's investment banking services activities;
      (D) require that the compensation of a research analyst who is primarily responsible for the substance of a research report be reviewed and approved at least annually by a committee that reports to a member's board of directors, or if the member has no board of directors, a senior executive officer of the member. This committee may not have representation from the member's investment banking department and must consider the following factors when reviewing a research analyst's compensation:
      (i) the research analyst's individual performance, including the analyst's productivity and the quality of the analyst's research;
      (ii) the correlation between the research analyst's recommendations and the stock price performance; and
      (iii) the overall ratings received from clients, sales force and peers independent of the member's investment banking department, and other independent ratings services.
      The committee must document the basis upon which each such research analyst's compensation was established.
      (E) establish information barriers and other institutional safeguards to ensure that research analysts are insulated from the review, pressure or oversight by persons engaged in investment banking services activities or other persons who might be biased in their judgment or supervision;
      (F) prevent direct or indirect retaliation or threat of retaliation against research analysts by persons engaged in investment banking services activities or other employees as the result of content of a research report;
      (G) define periods of a minimum of 10 days after the completion of an initial public offering during which the member must not publish or otherwise distribute research reports, and research analysts must not make public appearances, relating to the issuer if the member has participated as an underwriter or dealer in the offering;
      (H) restrict or limit research analyst account trading in securities, any derivatives of such securities and funds whose performance is materially dependent upon the performance of securities covered by the research analyst, including:
      (i) ensuring that research analyst accounts, supervisors of research analysts and associated persons with the ability to influence the content of research reports do not benefit in their trading from knowledge of the content or timing of a research report before the intended recipients of such research have had a reasonable opportunity to act on the information in the research report; and
      (ii) defining financial hardship circumstances, if any, in which the member will permit research analyst accounts to trade against their recommendations;
      (I) prohibit explicit or implicit promises of favorable research, a particular research rating or recommendation or specific research content as inducement for the receipt of business or compensation;
      (J) restrict or limit activities by research analysts that can reasonably be expected to compromise their objectivity, including prohibiting:
      (i) participation in the solicitation of investment banking services; and
      (ii) participation in road shows and other marketing on behalf of issuers; and
      (K) prohibit prepublication review of a research report by a subject company for purposes other than verification of facts.
      (c) Content and Disclosure in Research Reports
      (1) A member must ensure that purported facts in its research reports are based on reliable information.
      (2) A member must ensure that any recommendation, rating or price target has a reasonable basis in fact and is accompanied by a clear explanation of the valuation method utilized and a fair presentation of the risks that may impede achievement of the recommendation, rating or price target.
      (3) A member that employs a rating system must clearly define in each research report the meaning of each rating in the system, including the time horizon and any benchmarks on which a rating is based.
      (A) Irrespective of the rating system a member employs, a member must include in each research report that includes a rating the percentage of all securities rated by the member to which the member would assign a "buy", "hold" or "sell" rating.
      (B) A member must disclose in each research report the percentage of subject companies within each of the "buy", "hold" and "sell" categories for which the member has provided investment banking services within the previous 12 months.
      (C) The information required in paragraphs (c)(3)(A) and (B) must be current as of the end of the most recent calendar quarter or the second most recent calendar quarter if the publication date of the research report is less than 15 calendar days after the most recent calendar quarter.
      (4) If a research report contains either a rating or price target for a subject company's security, and the member has assigned a rating or price target to the security for at least one year, the research report must include a line graph of the security's daily closing prices for the period that the member has assigned any rating or price target or for a three-year period, whichever is shorter. The graph must:
      (A) indicate the dates on which the member assigned or changed each rating or price target;
      (B) depict each rating or price target assigned or changed on those dates; and
      (C) be current as of the end of the most recent calendar quarter (or the second most recent calendar quarter if the publication date of the research report is less than 15 calendar days after the most recent calendar quarter).
      (5) A member must disclose in any research report all conflicts that reasonably could be expected to influence the objectivity of the research report and that are known or should have been known by the member or research analyst on the date of publication or distribution of the report, including:
      (A) if the research analyst or a member of the research analyst's household has a financial interest in the debt or equity securities of the subject company, and the nature of such interest;
      (B) if the research analyst has received compensation based upon (among other factors) the member's investment banking revenues;
      (C) if the member or any of its affiliates:
      (i) managed or co-managed a public offering of securities for the subject company in the past 12 months;
      (ii) received compensation for investment banking services from the subject company in the past 12 months; or
      (iii) expects to receive or intends to seek compensation for investment banking services from the subject company in the next three months;
      (D) if, as of the end of the month immediately preceding the date of publication or distribution of a research report (or the end of the second most recent month if the publication date is less than 30 calendar days after the end of the most recent month) the member or its affiliates has received from the subject company any compensation for products or services other than investment banking services in the previous 12 months;
      (E) if the subject company is, or over the 12 month period preceding the date of publication or distribution of the research report has been, a client of the member, and if so, the types of services provided to the issuer. Such services, if applicable, shall be identified as either investment banking services, non-investment banking securities-related services or non-securities services.
      (F) if the member or its affiliates maintain a significant financial interest in the debt or equity of the subject company, including, at a minimum, if the member or its affiliates beneficially own 1% or more of any class of common equity securities of the subject company;
      (G) if the member was making a market in the securities of the subject company at the time of publication or distribution of the research report; and
      (H) any other material conflict of interest of the research analyst or member that the research analyst or an associated person of the member with the ability to influence the content of a research report knows or has reason to know at the time of the publication or distribution of a research report.
      (6) A member or research analyst will not be required to make a disclosure required by paragraph (c)(5) to the extent such disclosure would reveal material non-public information regarding specific potential future investment banking transactions of the subject company.
      (7) Except as provided in subparagraph (8), the disclosures required by this paragraph (c) must be presented on the front page of research reports or the front page must refer to the page on which the disclosures are found. Electronic research reports may provide a hyperlink directly to the required disclosures. All disclosures and references to disclosures required by this Rule must be clear, comprehensive and prominent.
      (8) A member that distributes a research report covering six or more subject companies (a "compendium report") may direct the reader in a clear manner as to where the reader may obtain applicable current disclosures required by this paragraph (c). Electronic compendium reports may include a hyperlink to the required disclosures. Paper-based compendium reports must provide either a toll-free number to call or a postal address to write for the required disclosures and may also include a web address of the member where the disclosures can be found.
      (d) Disclosure in Public Appearances

      A research analyst must disclose in public appearances:
      (1) if the research analyst or a member of the research analyst's household has a financial interest in the debt or equity securities of the subject company, and the nature of such interest;
      (2) if the member or its affiliates maintain a significant financial interest in the debt or equity of the subject company, including, at a minimum, if the member or its affiliates beneficially own 1% or more of any class of common equity securities of the subject company;
      (3) if, to the extent the research analyst knows or has reason to know, the member or any affiliate received any compensation from the subject company in the previous 12 months;
      (4) if the research analyst received any compensation from the subject company in the previous 12 months;
      (5) if, to the extent the research analyst knows or has reason to know, the subject company currently is, or during the 12-month period preceding the date of publication or distribution of the research report, was, a client of the member. In such cases, the research analyst also must disclose the types of services provided to the subject company, if known by the research analyst; or
      (6) any other material conflict of interest of the research analyst or member that the research analyst knows or has reason to know at the time of the public appearance.
      (7) A member or research analyst will not be required to make a disclosure required by this paragraph (d) to the extent such disclosure would reveal material non-public information regarding specific potential future investment banking transactions of the subject company.
      (8) Members must maintain records of public appearances by research analysts sufficient to demonstrate compliance by those research analysts with the applicable disclosure requirements in this paragraph (d). Such records must be maintained for at least three years from the date of the public appearance.
      (e) Disclosure Required by Other Provisions

      In addition to the disclosures required by paragraphs (c) and (d), members and research analysts must comply with all applicable disclosure provisions of NASD Rule 2210 and the federal securities laws.
      (f) Termination of Coverage

      A member must promptly notify its customers if it intends to terminate coverage of a subject company. Such notice must be made using the member's ordinary means of dissemination to its various customers. The notice must be accompanied by a final research report, comparable in scope and detail to prior research reports, and include a final recommendation or rating. If impracticable to provide a final research report, recommendation or rating, a member must disclose to its customers its reason for terminating coverage.
      (g) Distribution of Member Research Reports

      A member must establish, maintain and enforce policies and procedures reasonably designed to ensure that a research report is not distributed selectively to internal trading personnel or a particular customer or class of customers in advance of other customers that are entitled to receive the research report.
      (h) Distribution of Third-Party Research Reports
      (1) A member must establish, maintain and enforce policies and procedures reasonably designed to ensure that any third-party research it distributes:
      (A) is reliable and objective;
      (B) contains complete and accurate disclosures, as applicable to the distributing member pursuant to paragraph (h)(2); and
      (C) contains no untrue statement of material fact and is otherwise not false or misleading. For the purposes of this paragraph (h)(1)(C) only, a member's obligation to review a third-party research report extends to any untrue statement of material fact or any false or misleading information that:
      (i) should be known from reading the report; or
      (ii) is known based on information otherwise possessed by the member.
      (2) A member must accompany any third-party research report it distributes with, or provide a web address that directs a recipient to, disclosure of any material conflict of interest that can reasonably be expected to have influenced the choice of a third party research provider or the subject company of a third-party research report.
      (3) A member shall not be required to review a third-party research report to determine compliance with paragraph (h)(1)(C) if such research report is an independent third-party research report.
      (4) For the purposes of paragraph (h)(2), a member shall not be considered to have distributed independent third-party research where such research is made available by a member
      (a) upon request;
      (b) through a member-maintained web site; or
      (c) to a customer in connection with a solicited order in which the registered representative has informed the customer, during the solicitation, of the availability of independent research on the solicited equity security and the customer requests such independent research.
      (5) A member must ensure that a third-party research report is clearly labeled as such and that there is no confusion on the part of the recipient as to the person or entity that prepared the research report.
      (i) Exemption for Members with Limited Investment Banking Activity

      The provisions of paragraphs (b)(2)(A), (B), (D) and (E) shall not apply to members that over the previous three years, on average per year, have participated in 10 or fewer investment banking services transactions as manager or co-manager and generated $5 million or less in gross investment banking revenues from those transactions; provided, however, that with respect to paragraph (b)(2)(E), such members must establish information barriers and other institutional safeguards to ensure research analysts are insulated from pressure by persons engaged in investment banking services activities or other persons who might be biased in their judgment or supervision. For the purposes of this paragraph (i), the term "investment banking services transactions" includes the underwriting of both corporate debt and equity securities but not municipal securities. Members that qualify for this exemption must maintain records sufficient to establish eligibility for the exemption and also maintain for at least three years any communication that, but for this exemption, would be subject to paragraphs (b)(2)(A), (B), (D) and (E).

      • • • • • • Supplementary Material: --------

      .01 Pitch Book Materials. FINRA interprets paragraph (b)(2)(J)(i) to prohibit in pitch materials any information about a member's research capacity in a manner that suggests, directly or indirectly, that the member might provide favorable research coverage. For example, FINRA would consider the publication in a pitch book or related materials of an analyst's industry ranking to imply the potential outcome of future research because of the manner in which such rankings are compiled. On the other hand, a member would be permitted to include in the pitch materials the fact of coverage and the name of the research analyst because such information alone does not imply favorable coverage.

      Members must consider whether the facts and circumstances of any solicitation or engagement would warrant disclosure under Section 17(b) of the Securities Act of 1933.
      .02 Disclosure of Non-Investment Banking Services Compensation. A member may satisfy the disclosure requirement in paragraph (c)(5)(D) with respect to receipt of non-investment banking services compensation by an affiliate by implementing policies and procedures reasonably designed to prevent the research analyst and associated persons of the member with the ability to influence the content of research reports from directly or indirectly receiving information from the affiliate as to whether the affiliate received such compensation. However, a member must disclose receipt of non-investment banking services compensation received by its affiliates from the subject company in the past 12 months when the research analyst or an associated person with the ability to influence the content of a research report has actual knowledge that an affiliate received such compensation during that time period.
      .03 Beneficial Ownership of Equity Securities. With respect to paragraphs (c)(5)(F) and (d)(2), beneficial ownership of any class of common equity securities shall be computed in accordance with the same standards used to compute ownership for purposes of the reporting requirements under Section 13(d) of the Exchange Act.
      .04 Distribution of Member Research Products. With respect to paragraph (g), a member may provide different research products and services to certain classes of customers. For example, a member may offer one research product for those with a long-term investment horizon ("investor research") and a different research product for those customers with a short-term investment horizon ("trading research"). These products may lead to different recommendations or ratings, provided that each is consistent with the meaning of the member's ratings system for each respective product. However, a member may not differentiate a research product based on the timing of receipt of a recommendation, rating or other potentially market moving information, nor may a member denote a research product as one product as a means to allow certain customers to trade in advance of other customers that are entitled to the same research product. In addition, a member that provides different research products and services for certain customers must inform its other customers that its alternative research products and services may reach different conclusions or recommendations that could impact the price of the equity security. Thus, for example, a member that offers trading research must inform its investment research customers that its trading research product may contain different recommendations or ratings that could result in short-term price movements contrary to the recommendation in its investment research.
      .05 Ability to Influence the Content of a Research Report. For the purposes of this Rule, an associated person with the ability to influence the content of a research report is an associated person who, in the ordinary course of that person's duties, has the authority to review the research report and change that research report prior to publication or distribution.

      1 The draft text is marked to show changes between NASD Rule 1050 and proposed FINRA Rule 1223. The proposal would delete the corresponding provisions in Incorporated NYSE Rule 344 and Rule Interpretation 344.

      2 The proposal would delete NASD Rule 2711 and the corresponding provisions of Incorporated NYSE Rules 351, 472 and Rule Interpretation 472.

    • 08-54 Guidance on Special Purpose Acquisition Companies

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      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      SEA Rule 419
      SEA Rule 3a51-1
      SEA Section 11
      NASD Rule 2720
      Suggested Routing

      Advertising
      Compliance
      Corporate Finance
      Registered Representatives
      Senior Management
      Trading
      Training
      Key Topics

      IPO
      Secondary Market Trading
      Special Purpose Acquisition Companies

      Executive Summary

      Special purpose acquisition companies (SPACs) are shell companies that raise capital in initial public offerings (IPOs) for the purpose of merging with or acquiring an operating company. The SPACs market has undergone rapid growth in recent years. In 2007, 22 percent of all initial public offerings in the United States were issued by SPACs totaling over $12 billion in raised capital. While SPACs' percentage of the capital raised in the IPO market so far in 2008 declined to 12 percent, they continue to be significant vehicles for raising capital in the public market. SPAC IPOs differ significantly from traditional equity IPOs, with unique conflicts of interest and incentives for SPAC managers, underwriters and financial advisors. Firms and their customers who invest in SPACs should be aware of these differences before participating in a SPAC IPO.

      This Notice provides guidance on the structure, trends and conflicts of interest associated with SPACs and reminds firms1 of their suitability and disclosure obligations when participating in this market.

      Questions regarding this Notice should be directed to: Joseph E. Price, Vice President, Corporate Financing, at (240) 386-4623 or Lisa Jones Toms, Counsel, Corporate Financing, at (240) 386-4661.

      Background & Discussion

      SPACs are companies without any revenue or operating history that use investors' funds to acquire or merge with an operating company. SPACs can operate as blank check companies, which the SEC defines as companies that either have no specific business plan or purpose, or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies, and are issuing "penny stock" as defined in Exchange Act Rule 3a51-1. If a SPAC meets the definition of a blank check company, it would be required to comply with Rule 419 under the Securities Act of 1933, which requires investors' funds to be held in escrow, filing of a post-effective amendment upon execution of an acquisition agreement, and the return of the escrowed funds if an acquisition has not occurred within 18 months of the effective date of the initial registration statement. Most SPACs, however, are not required to comply with Rule 419 because they are structured so that they can rely on an exception from the definition of "penny stock" or they meet other exceptions for listed companies.

      In a traditional IPO, the prospectus focuses on historical facts about the issuer and its past performance. Underwriters market the offering after announcing an initial price range. The price at which shares are offered to the public should reflect both demand for the shares and estimates of future performance of the issuer. Underwriters conduct significant and thorough due diligence on the issuer and assume liability under section 11 of the Securities Act for the information disclosed in the prospectus.

      By contrast, SPAC securities are offered at a unit price, typically $6, $8 or $10 per unit. SPACs do not "pre-identify" possible acquisition targets and the underwriters do not undertake any due diligence on acquisition targets. While some SPACs are specific about the industries or regions in which they will seek an operating company, others are open-ended.

      A SPAC typically must complete an acquisition within 18 to 24 months, and must use at least 80 percent of its net assets for any such acquisition. If it fails to do so, then it must dissolve. When a SPAC dissolves, it returns to investors their pro rata share of the assets in escrow. In most cases, investors will receive nearly all of their principal invested, but will not share in any of the returns generated from the funds held in escrow as such proceeds are used to cover the operating expenses of the SPAC.

      This 18- to 24-month deadline is designed to help investors by forcing a timely return of most of their capital if a suitable acquisition is not completed. However, it also puts SPAC management under severe time pressure to identify a target and complete a transaction.2

      If a SPAC's managers can identify an appropriate acquisition target, they must then obtain approval through a shareholder vote. Investors are sent proxy materials disclosing the details of the proposed acquisition. A SPAC's public shareholders may vote in favor of the acquisition, or vote against the acquisition. If the shareholders vote against the acquisition, they may elect to have their shares converted into a pro rata portion of the IPO proceeds, which are held in an escrow account.

      While the proxy statement sent to SPAC shareholders contains current audited financial information and other material information about the acquisition target, there are significant differences in the liability and disclosure obligations regarding a company that becomes public by acquisition by a SPAC and one that becomes public through a traditional IPO. In a traditional IPO, underwriters conduct significant and thorough due diligence on a company and assume liability for the information disclosed in the registration statement. There may be no similar "gatekeeper" function by underwriters in connection with the acquisition target of a SPAC.

      SPACs present different risks depending on what point in the SPAC "life cycle" the investor purchases shares. We discuss below some of the risks that a firm must consider at the various stages of a SPAC's life cycle if it recommends SPAC securities to its customers.

      Initial Public Offering

      During the IPO stage, investors purchase units representing one or more shares of common stock and one or more warrants exercisable for one share of common stock at a discount to the offering price. Typically, a SPAC will trade as a single unit following the IPO. After a certain period, often 90 days following the IPO, the common stock and warrants trade separately.

      SPAC IPOs have certain risks, which must be disclosed to investors and which must be the subject of the broker-dealer's suitability analysis. For example, SPAC IPOs present the following two risks:

      •  The risk that SPAC managers are unqualified or incompetent, a risk made more pronounced by lack of any operating history or past performance of the SPAC.
      •  The risk that no acquisition will occur and the SPAC will be liquidated. The SPAC structure, which requires most of investor's funds to be held in escrow and returned if an acquisition is not completed, does provide some downside protection. Moreover, investors may be able to sell their SPAC units in the secondary market. However, investors must either bear the opportunity cost of waiting for a determination about whether an acquisition will occur or sell in the secondary market before the outcome is determined.

      Of the approximately 149 SPACs that have been issued as of May 31, 2008, only 48 have completed an acquisition. Moreover, many SPACs, including most of the SPACs that have gone effective since 2003, have not completed an acquisition.3

      Whenever a firm recommends SPAC securities to investors it must ensure that all registered persons understand the features of the securities in order to perform a suitability analysis before executing a transaction. Investors, particularly retail investors if they are offered SPAC securities, should fully understand the risks associated with SPACs.

      FINRA rules require firms to have reasonable grounds for believing that a recommendation for a securities transaction is suitable for its customers. In meeting their suitability obligations, firms should consider whether they should adopt any special suitability guidelines for SPACs.

      Firms also must ensure that marketing materials used by the firm provide an accurate and balanced description of SPACs. Some of the marketing materials reviewed by FINRA staff have referred to the potential for price appreciation in SPAC shares based on a change in valuation from a private to public company. Firms that distribute these marketing materials must ensure that they provide a fair description of all risks associated with the investment, including the risk that the acquisition may not occur or that the customer's investment may decline in value even if the acquisition is completed.

      Escrow Account

      Following the IPO, nearly all of the SPAC proceeds are held in an escrow account to be used to complete an acquisition. The escrow account typically invests in money market funds or short-term U.S. government securities. The SPAC assets are released from escrow when the shareholders approve an acquisition or the SPAC is dissolved.4

      If a SPAC fails to complete an acquisition within the specified time period, it must dissolve. When a SPAC dissolves, it returns to investors their pro rata share of the assets in escrow. In most cases, investors will receive nearly all of their principal invested, but will not share in any of the returns generated from the funds held in escrow as such proceeds are used to cover the operating expenses of the SPAC.

      Secondary Market Trading

      A SPAC unit typically has two components: shares of common stock and a warrant, which trade separately within weeks of the IPO. The common shares often trade at a discount to the cash held in escrow. Warrants are exercisable only upon successful completion of an acquisition and typically will expire worthless if the SPAC is liquidated.

      Purchasing the common stock and warrants in the secondary market raises different issues. The characteristics of the common stock likely depend on whether the stock is purchased before or after an acquisition target has been announced. Naturally, an investment before the announcement of an acquisition is a bet on whether an acquisition target will be announced and whether it is an attractive investment.

      However, there can be much uncertainty concerning any future acquisition. Even after an acquisition target is announced, there typically is a delay, which can be weeks before audited financial statements regarding the acquisition target are available through the preliminary proxy filing. In addition, the acquisition terms and arrangements may change during the proxy filing and review period.

      Purchasing warrants in the aftermarket is a highly speculative investment that is generally suitable only for sophisticated investors who can assume and understand the risk that an acquisition will not be completed and the warrants will expire worthless. Purchasing warrants after the announcement of an acquisition may present special risks. FINRA research indicates that SPAC share prices slightly outpace the market on the day an acquisition target is announced.

      The release of more complete information occasionally leads to a decline in the price of the SPAC's common stock. Investors who purchase in the secondary market after an acquisition announcement may suffer a loss if the value of the shares subsequently declines. FINRA research indicates that most SPAC share prices significantly lag the market after the acquisition is completed.

      Proxy Solicitation

      The announcement of a potential acquisition is a critical stage in a SPAC's life cycle. SPAC management stands to gain a significant equity interest in the target company but must first market the deal and gain approval from a majority or supermajority of its shareholders before it can close on the acquisition. For underwriters, one-half of the underwriter's fee can be contingent upon completion of the acquisition and often the underwriter will receive a separate fee for services as an adviser to the acquisition.

      If a SPAC's management identifies an appropriate acquisition target, it must then seek a shareholder vote. An acquisition by a SPAC typically requires the approval of at least 60 percent of the shareholders and some deals require 80 percent. Investors are sent proxy materials disclosing the details of the proposed acquisition.

      An investor who votes against an acquisition is entitled to a pro rata return of the funds held in escrow. If the investor decides that he will vote against the acquisition and the SPAC's securities are trading at a premium in the secondary market, however, it may be in the investor's best interest to sell his securities in the secondary market.5

      SPAC underwriters generally should not engage in proxy solicitation if payment of part of the underwriting fee or an advisory fee is contingent upon the successful completion of the acquisition. In such a case, a SPAC underwriter would have a conflict of interest if it recommended that a customer vote "yes" on the proposed acquisition.

      Completion of an Acquisition

      SPAC sponsors, unless they have purchased shares of the SPAC's common stock, do not receive a pro rata distribution from the escrow account if an acquisition is not completed. In addition, they are typically prohibited from selling their shares in the secondary market prior to completion of the acquisition. These mechanisms, along with their 20 percent equity stake in the SPAC, may help to align management and investors' interest in completing an acquisition. However, SPAC managers have a strong incentive to buy a company, even at inflated values, since they will get 20 percent of the company at a nominal price.

      At the acquisition stage of a SPAC's life, firms are required to disclose these incentives and all of the conflicts that the firm may face as a sponsor or adviser of a SPAC prior to recommending the sale or purchase of SPAC shares to its customers. The firm must also consider the implications under FINRA's conflicts of interest rule, NASD Rule 2720, if the acquisition is successful.6


      1 This Notice refers to broker-dealers and their associated persons collectively as "firms" unless otherwise specified.

      2 Some recent SPACs have adopted automatic extensions of six months or longer if an acquisition is announced before the deadline, and have decreased the percentage of "yes" votes required to approve an acquisition from 80 percent to 60 percent.

      3 For more information about the SPAC market, see "State of the SPAC: A Flight to Quality, A Primer for a Growing Industry," SPAC Research Partners (April 9, 2008).

      4 A portion of the interest earned in the account may be withdrawn to pay some of the SPAC's working capital expenses prior to an acquisition.

      5 Even if the shares are not trading at a premium, by selling in the market the customer would earn a quicker return of capital than if he votes "no" and exercises his redemption rights.

      6 NASD Rule 2720 requires a qualified independent underwriter to conduct due diligence in an offering in which a participat-ing member has a conflict of interest or offerings in which the issuer proposes to acquire a broker-dealer that would become publicly owned as a result of the acquisition.

    • 08-53 FINRA Revises the Effective Date to Collect and Process Certain CRD Numbers in Connection with Regulation T and SEC Rule 15c3-3 Extensions of Time Requests Effective Date: April 1, 2009

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      Reg T Extension of Time Requests

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      NASD Rule 3160
      Regulation T §§ 220.4 and 220.8
      SEC Rule 15c3-3
      NTM 06-62
      Regulatory Notice 08-32
      Suggested Routing

      Compliance
      Institutional
      Legal
      Operations
      Registered Representatives
      Senior Management
      Systems
      Key Topics

      Extension Processing

      Executive Summary

      This Notice announces a revised effective date for submission of certain Central Registration Depository (CRD) numbers, specifically, registered representative and correspondent firm branch CRD numbers, in connection with Regulation T extension of time requests filed on behalf of correspondent firms. In addition, FINRA is also revising the effective date for member firms to collect and process contra broker-dealer CRD numbers in connection with extensions of time requests filed pursuant to SEC Rule 15c3-3(d)(2).1 As a result, FINRA will allow firms to provide alternate information with respect to these fields beginning November 17, 2008, when the new Reg T System becomes effective (see Regulatory Notice 08-32). Effective April 1, 2009, firms must provide all applicable CRD numbers in extension of time requests.

      Questions concerning this Notice should be directed to:

      •  Rudolph Verra, Managing Director, Risk Oversight and Operational Regulation, at (646) 315-8811;
      •  Glen Garofalo, Director, Credit Regulation, at (646) 315-8464;
      •  Steve Yannolo, Principal Credit Specialist, Credit Regulation, at (646) 315-8621; or
      •  Vincent Rotolo, Senior Credit Specialist, Credit Regulation, at (646) 315-8576.

      Background & Discussion

      On June 23, 2008, FINRA issued Regulatory Notice 08-32, which described the integration of the legacy NYSE Regulation and NASD extension of time processing systems into a single system. Effective November 17, 2008, member firms must file all requests for extension of time through the new system—known as the Reg T System—which is accessible through FINRA's Firm Gateway.

      The Notice also described the data fields that member firms must populate when submitting extensions of time requests with FINRA. Effective November 17, 2008, member firms must populate all data fields discussed in Notice 08-32 in extension of time requests. FINRA is, however, extending the deadline to April 1, 2009, for member firms to provide certain CRD numbers and is allowing firms to provide alternate information with respect to selected fields as discussed below. Effective April 1, 2009, member firms must provide all CRD numbers noted below in extension requests.

      Expanded Data Elements

      The following data elements described in Notice 08-32 are affected by this change:

      •  Registered Representative's CRD Number: This field is required for all Regulation T and SEC Rule 15c3-3(m) customer extension requests. Effective November 17, 2008, for self-directed accounts with no registered representative assigned to the account, a firm must enter "999999999999" (12 characters) into this field. Effective November 17, 2008, a clearing firm filing an extension of time on behalf of its own customer must populate this field with the registered representative's CRD number associated with the account. However, if an extension of time is filed by a clearing firm on behalf of a correspondent firm, then the clearing firm may populate this field with either: (1) the correspondent firm's registered representative's CRD number associated with the account; or (2) the registered representative number that it currently uses.2 Effective April 1, 2009, the clearing firm must provide the correspondent firm's registered representative's CRD number associated with the account.
      •  Correspondent Branch CRD Number: Firms must provide the CRD number of the correspondent firm's branch office where the registered representative assigned to the account is located. This field is required for all Regulation T and SEC Rule 15c3-3(m) customer extension requests if the Correspondent Firm Flag is "Y" for yes when the request is being made on behalf of a correspondent firm. Effective November 17, 2008, a clearing firm filing an extension of time request on behalf of a correspondent firm may populate this field with either: (1) the correspondent firm's branch CRD number; or (2) the correspondent firm's branch code.3 Effective April 1, 2009, the clearing firm must provide the correspondent firm's branch CRD number.
      •  Contra Broker-Dealer CRD Number: Firms must indicate the CRD number of the broker-dealer failing to deliver the securities if the extension of time is being requested pursuant to SEC Rule 15c3-3(d)(2). Effective November 17, 2008, a clearing firm filing an extension of time can populate this field with either: (1) the contra broker-dealer's CRD number; or (2) the contra-broker-dealer's clearing number (DTCC number). Effective April 1, 2009, the clearing firm must provide the contra broker-dealer's CRD number.

      FINRA reminds member firms that they must populate all data fields described in Notice 08-32 in extension of time requests effective November 17, 2008, including the correspondent firm CRD number.4 FINRA also reminds member firms that it will deny extensions if the firms fail to provide the required data. It is important that firms ensure they obtain the appropriate information that will be required when submitting extension of time requests.

      Firms that use a service bureau to submit extension requests on their behalf must ensure that this Regulatory Notice is promptly communicated to their service bureaus so that the programming changes affecting registered representative, correspondent firm branch and contra broker-dealer CRD numbers are effective by the new deadline, April 1, 2009.

      Testing

      FINRA will make the Reg T Customer Test Environment (CTE) available for firms to test their programming changes beginning October 20, 2008, at https://regfilingtest.finra.org. For firms that will transmit files via FTP, FINRA will accept test data files transmitted through its testing environment during the same time period. Additional testing for the programming for the fields that will become mandatory on April 1, 2009, will be available beginning late February or early March 2009. Please refer to the Message Center, https://regfiling.finra.org, for further information about testing. For firms that are not familiar with the Reg T system and FTP submission process, a fact sheet outlining the process is available at http://www.finra.org/web/groups/reg_systems/documents/regulatory_systems/p038475.pdf. Users will need a FINRA user ID and password to access CTE. Firms that encounter technical problems, or need to request a FINRA user ID and password, should contact the FINRA Help Desk at (800) 321-6273.

      Training

      As noted in Notice 08-32, training for the online application will be available via an online tutorial beginning on November 1, 2008. Firms can access the tutorial at www.finra.org/compliancetools.

      Frequently Asked Questions

      If you have additional questions, please see the Frequently Asked Questions (FAQ) at www.finra.org/regt.


      1 See SEC Rule 15c3-3(d)(2) which requires a broker-dealer to take prompt steps to obtain physical possession or control of securities failed to be received for more than 30 calendar days through a buy-in procedure or otherwise.

      2 Firms generally assign an internal number to each of their registered representatives. These numbers are unique to each firm, and are often used in various reporting and statements that may be disseminated by the firm. Firms supply these numbers when requesting customer extensions in FINRA's current extension processing systems.

      3 Firms generally assign an internal number to each of their branch offices. These numbers are unique to each firm, and are often used in various reporting and statements that may be disseminated by the firm. Some firms supply these numbers when requesting customer extensions in FINRA's current extension processing systems.

      4 As described in Regulatory Notice 08-32, this field is required for all Regulation T and SEC Rule 15c3-3(m) customer extension requests if the Correspondent Firm Flag is "Y."

    • 08-52 SEC Approves Amendments to Eliminate Yield Reporting to TRACE and FINRA Will Disseminate Standard Yield in Real-Time TRACE Data

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      Trade Reporting and Compliance Engine (TRACE)

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      NASD Rule 6230
      SEC Rule 10b-10
      Suggested Routing

      Compliance
      Executive Representatives
      Fixed Income
      Legal
      Operations
      Senior Management
      Systems
      Trading
      Training
      Key Topic(s)

      TRACE Data
      TRACE-Eligible Security
      Transaction Reporting
      Yield

      Executive Summary

      On September 12, 2008, the Securities and Exchange Commission approved an amendment to NASD Rule 6230 (Transaction Reporting).1 Effective November 3, 2008, member firms will no longer report yield to TRACE and FINRA will calculate and disseminate a Standard Yield in TRACE data.

      The text of the rule amendment is set forth in Attachment A.

      Questions regarding this Notice should be directed to:

      •  Patrick S. Geraghty, Director, Fixed Income, Market Regulation, at (240) 386-4973;
      •  Elliot R. Levine, Associate Vice President and Counsel, Transparency Services, at (202) 728-8405; or
      •  Sharon Zackula, Associate Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-8985.

      Background & Discussion

      Currently, a member firm that executes a transaction in a TRACE-eligible security is required to report yield under NASD Rule 6230(c)(13). Also, currently disseminated TRACE data includes the yields reported by firms. FINRA has amended NASD Rule 6230(c) to eliminate the requirement to report yield when a transaction in a TRACE- eligible security is reported to TRACE. In addition, FINRA amends its dissemination practices for TRACE data. Instead of disseminating a member-reported yield, FINRA will disseminate a Standard Yield that is calculated in the TRACE System (Standard Yield) for each transaction in a TRACE-eligible security, with limited exceptions.

      Background on Standard Yield. Standard Yield for each transaction is calculated based on uniform assumptions, using a method adopted by many professional market participants.2 Generally, for principal transactions, Standard Yield is calculated based upon the reported price inclusive of markup, and, for agency trades, is calculated based upon the reported price plus any reported commission. As a general rule, FINRA will not disseminate a Standard Yield when transactions occur in the types of debt securities that were set forth in NASD Rule 6230(c)(13) prior to this amendment.3

      FINRA believes that disseminating Standard Yields will enhance the usefulness of disseminated TRACE data to market participants. Because the yields are calculated according to a single formula and a uniform set of assumptions, market participants, especially those who are not market professionals, may find the data more informative. For customers that have purchased TRACE-eligible securities, deleting member-reported yields from disseminated TRACE data and replacing them with Standard Yields will not limit their access to relevant yield information. Under SEC Rule 10b-10, a customer currently receives yield information in the customer's confirmation.4 That yield is specifically calculated, reflecting the price and various fees the customer was charged by the member firm, as required in SEC Rule 10b-10.5

      Vendors. FINRA requires TRACE data vendors and redistributors to display yield in real- time TRACE data. Currently, certain vendors disseminate a yield that they calculate and they want to continue to do so after November 3, 2008, instead of disseminating the Standard Yield calculated by FINRA's TRACE System. FINRA will permit this flexibility, provided that a vendor that displays a yield other than the Standard Yield discloses that the vendor is disseminating a yield other than the Standard Yield.

      The amendment to NASD Rule 6230(c) and the change to FINRA's dissemination practices to disseminate Standard Yield in TRACE data will become effective on November 3, 20086.


      1 See Securities Exchange Act Release No. 58520 (September 11, 2008), 73 FR 54193 (September 18, 2008)(order approving File No. SR-FINRA-2008-040).

      2 FINRA's TRACE System calculates Standard Yield using a calculation library that is widely used by professionals in the securities industry. All yields are calculated and disseminated, applying uniform rules, standards and practices that are generally accepted in the industry (e.g., the Standard Yield is calculated as the internal rate of return according to a discounted cash flow model, the calculation uses a day count of 30/360, and Standard Yield is the lower of yield to call (if the bond is callable) or yield to maturity, or so-called "yield-to-worst").

      3 For example, Standard Yield will not be disseminated if the TRACE-eligible security (1) is in default; (2) has a floating interest rate; (3) has an interest rate that will or may be "stepped-up" or "stepped-down" and the amount of increase or decrease is an unknown variable; (4) is a pay-in-kind (PIK) security; (5) is a security where the principal or interest to be paid is an unknown variable or is an amount that is not currently ascertainable; or (6) is a security for which FINRA determines that disseminating a yield would provide inaccurate or misleading information concerning the price of, or trading in, the security. See also paragraph (13) of Rule NASD 6230(c) (to be deleted effective November 3, 2008).

      4 17 CFR 240.10b-10.

      5 Id.

      6 If a member firm executes a transaction before November 3, 2008, but reports it to TRACE on or after November 3, 2008, yield must be reported to TRACE. However, when information regarding the transaction reported "as/of" is disseminated by TRACE, the disseminated yield will be the Standard Yield.


      Attachment A

      New language is underlined; proposed deletions are in brackets.

      6200. TRADE REPORTING AND COMPLIANCE ENGINE (TRACE)

      * * * * *

      6230. Transaction Reporting

      (a) through (b) No Change.
      (c) Transaction Information To Be Reported

      Each TRACE trade report shall contain the following information:
      (1) through (10) No Change.
      (11) Stated commission; and
      (12) Such trade modifiers as required by either the TRACE rules or the TRACE users guide.[; and]
      [(13) The lower of yield to call or yield to maturity. A member is not required to report yield when the TRACE-eligible security is a security that is in default; a security for which the interest rate is floating; a security for which the interest rate will be or may be increased (e.g., certain "step-up bonds") or decreased (e.g., certain "step-down bonds") and the amount of increase or decrease is an unknown variable; a pay-in-kind security ("PIK"); any other security where the principal or interest to be paid is an unknown variable or is an amount that is not currently ascertainable, or any other security that the Association designates if the Association determines that reporting yield would provide inaccurate or misleading information concerning the price of, or trading in, the security.]
      (d) through (f) No Change.

      * * * * *

    • 08-51 SEC Approves Amendments to FINRA's Transaction Reporting Rules to Require Prompt Last Sale Reporting of Transactions in Foreign Securities Effective Date: October 27, 2008

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      Reporting of Transactions in Foreign Securities

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      NASD Rule 6610
      NASD Rule 6620
      Section 3 of Schedule A to the By-Laws
      Section 31 of the Securities Exchange Act of 1934
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Trading
      Key Topic(s)

      Foreign Securities
      Transaction Reporting

      Executive Summary

      Effective October 27, 2008, the reporting and dissemination of over-the-counter (OTC) transactions in all OTC Equity Securities (including domestic securities, foreign securities and ADRs) will be treated consistently. Consequently, beginning on that date, member firms will be required to report transactions in foreign securities within 90 seconds of execution (unless a specific exception applies), and FINRA will disseminate last sale information regarding those transactions on a real-time basis. The text of NASD Rule 6620, as amended, is set forth in Attachment A to this Notice.

      Questions concerning this Notice should be directed to the Legal Section, Market Regulation, at (240) 386-5126 or the Office of General Counsel, at (202) 728-8071.

      Background & Discussion

      On August 8, 2008, the SEC approved amendments to FINRA's transaction reporting rules to eliminate the different reporting and dissemination treatment of transactions in OTC Equity Securities.1 As a result of these amendments, beginning October 27, 2008, transactions in all OTC Equity Securities (including domestic securities, foreign securities and ADRs) will be treated in the same manner, from both a reporting and a dissemination standpoint.2 Consequently, beginning on that date, transactions in foreign securities generally must be reported within 90 seconds of execution, and FINRA will disseminate last sale information regarding those transactions on a real-time basis.3

      Prior to the amendments approved by the SEC, NASD Rule 6620(a) generally required that transactions in some OTC Equity Securities—domestic equity securities, ADRs, and Canadian issues, including those that are not registered with the SEC and otherwise subject to financial reporting—that were executed between 8:00 a.m. and 8:00 p.m. Eastern Time be reported to the OTC Reporting Facility within 90 seconds of execution.4 Foreign securities other than ADRs and Canadian issues were excluded from the 90-second reporting requirement and were required to be reported by 1:30 p.m. Eastern Time the day after the transaction was executed.5 Although not required, member firms were permitted to report transactions in foreign securities within 90 seconds of execution.6 Beginning October 27, 2008, this distinction in reporting obligations will be eliminated, and OTC transactions in foreign securities will be subject to the same reporting requirements that have been in place for domestic securities, Canadian issues, and ADRs pursuant to NASD Rule 6620.

      In addition, there is a disparity in the way FINRA disseminates last sale information of OTC equity transactions to the marketplace. Although last sale information for transactions in domestic OTC Equity Securities reported pursuant to Rule 6620 is disseminated on a real-time basis, irrespective of whether the security was registered with the SEC, there is no uniformity in the dissemination of last sale information for transactions in ADRs and foreign securities. By requiring 90-second reporting for foreign securities transactions (unless a specific exception applies), FINRA also will begin uniformly disseminating trading information for all OTC Equity Securities on a real-time basis, providing improved transparency to the OTC market. Consequently, beginning October 27, 2008, FINRA will begin disseminating information for all reported transactions in OTC Equity Securities on a real-time basis if the transaction is required to be reported within 90 seconds of execution.


      1 See Securities Exchange Act Release No. 58331 (August 8, 2008), 73 FR 47990 (August 15, 2008) (Order Approving SR-FINRA-2008-016). NASD Rule 6610(d) defines "OTC Equity Security" as "any non-exchange-listed security and certain exchange-listed securities that do not otherwise qualify for real-time trade reporting." The term specifically excludes "restricted securities," as defined in SEC Rule 144(a)(3) under the Securities Act of 1933, and any securities designated in the PORTAL Market. See NASD Rule 6610(c). The amendments do not change the reporting requirements for transactions in direct participation program securities, which are not required to be reported within 90 seconds of execution. See NASD Rule 6920(a).

      2 The single exception is for transactions in foreign equity securities that are reported to a foreign regulator. See NASD Rule 6620(g)(2)(B). Transactions in foreign equity securities executed on and reported to a foreign securities exchange are also excepted from the FINRA reporting requirements. See NASD Rule 6620(g)(2)(A).

      3 Section 31 of the Securities Exchange Act of 1934 requires FINRA to pay transaction fees and assessments to the SEC for sales transacted by or through its members otherwise than on a national securities exchange of securities subject to prompt last sale reporting (pursuant to the rules of the SEC or FINRA). This fee is designed to recover the costs related to the government's supervision and regulation of the securities markets and securities professionals. To recover the costs of FINRA's Section 31 obligation, FINRA assesses a regulatory transaction fee on its members under Section 3 of Schedule A to the FINRA By-Laws (Section 3 Fee), the amount of which is set in accordance with Section 31. Prior to the amendments described in this Notice, transactions in foreign securities (other than ADRs and Canadian issues) were not required to be reported "promptly" and were, therefore, excluded from the Section 3 Fee. The requirement to report transactions in foreign securities to FINRA within 90 seconds of execution will result in those transactions being subject to the Section 3 Fee. For the most recent fee rate, see FINRA Information Notice 03/10/08.

      4 See NASD Rule 6620(a).

      5 See NASD Rule 6620(a)(3)(C)(iii).

      6 See NASD Rule 6620 n.1.


      ATTACHMENT A

      Below is the text of the rule changes. New language is underlined; deletions are in brackets.

      FINRA has proposed renumbering NASD Rule 6620 as Rule 6622 in the Consolidated FINRA Rulebook. See SR-FINRA-2008-021.

      * * * * *

      6000. NASD SYSTEMS AND PROGRAMS

      * * * * *

      6600. OVER-THE-COUNTER EQUITY SECURITIES

      * * * * *

      6620. Transaction Reporting

      (a) When and How Transactions are Reported
      (1) through (2) No change.
      (3) Transaction Reporting Outside Normal Market Hours
      (A) through (B) No change.
      (C) Last sale reports of transactions in OTC Equity Securities executed outside the hours of 8:00 a.m. and 8:00 p.m. Eastern Time shall be reported as follows:
      (i) Last sale reports of transactions in [American Depositary Receipts (ADRs), Canadian issues, or domestic] OTC Equity Securities that are executed between midnight and 8:00 a.m. Eastern Time shall be transmitted to the OTC Reporting Facility between 8:00 a.m. and 9:30 a.m. Eastern Time on trade date and be designated as ".T" trades to denote their execution outside normal market hours. Transactions not reported before 9:30 a.m. shall be reported after 4:00 p.m. and before 8:00 p.m. as .T trades. The party responsible for reporting on trade date, the trade details to be reported, and the applicable procedures shall be governed, respectively, by paragraphs (b), (c), and (d) below; and
      (ii) Last sale reports of transactions in [ADRs, Canadian issues, or domestic] OTC Equity Securities that are executed between 8:00 p.m. and midnight Eastern Time shall be transmitted to the OTC Reporting Facility on the next business day (T+1) between 8:00 a.m. and 8:00 p.m. Eastern Time, and be designated as "as of" trades to denote their execution on a prior day. The party responsible for reporting on T+1, the trade details to be reported, and the applicable procedures shall be goverened, respectively, by paragraphs (b), (c), and (d) below.[; and]
      [(iii) Last sale reports of transactions in foreign securities (excluding ADRs and Canadian issues) shall be transmitted to the OTC Reporting Facility on T+1 regardless of time of execution.1 Such reports shall be made between 8:00 a.m. and 1:30 p.m. Eastern Time in the same manner as described in subparagraph (3)(B)(ii) above.]
      (4) through (9) No change.
      (b) through (g) No change.

      [1 Member firms that have the operational capability to report transactions in foreign securities (excluding ADRs and Canadian issues) within 90 seconds of execution, between the hours of 8:00 a.m. and 5:15 p.m. Eastern Time, may do so at their option. If a firm chooses this option, it need not report the same transaction(s) on T+1 as prescribed by subsection (ii)(c).]

    • 08-50 Procedures for Submitting Written Attestation of Bona Fide Market Making Relating to Fail-to-Deliver Positions

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      Short Selling

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      SEC Rule 204T of Regulation SHO
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Systems
      Trading and Market Making
      Key Topic(s)

      Bona Fide Market Making
      Fails to Deliver
      Short Selling
      Settlement

      Executive Summary

      FINRA is advising firms of the process by which market makers, under SEC Rule 204T, can submit their written attestation to extend the close-out requirements for fail-to-deliver positions established solely for the purpose of meeting its bona fide market making obligations. Market makers must complete the form in Attachment A to qualify for the extension.

      Questions regarding this Notice may be directed to:

      •  Short Sale Section, Market Regulation, at (240) 386-5126;
      •  FINRA Operations, at (866) 776-0800; or
      •  Office of General Counsel, at (202) 728-8071.

      Background & Discussion

      On September 17, 2008, the SEC issued an Emergency Order adopting a temporary rule to Regulation SHO, Rule 204T, which generally provides that if a participant of a registered clearing agency has a fail-to-deliver position at a registered clearing agency in any equity security for a long or short sale transaction in that equity security, the participant shall, by no later than the beginning of regular trading hours on the settlement day following the settlement date of the transaction that resulted in the fail-to-deliver position, immediately close out the fail-to-deliver position by borrowing or purchasing securities of like kind and quantity.1 On September 24, 2008, the SEC's Division of Trading and Markets issued guidance regarding these temporary requirements. As part of this guidance, the SEC extended Rule 204T(a)'s close-out requirement for fail-to-deliver positions attributable to bona fide market making activities by registered market makers, options market makers, or other market makers obligated to quote in the over-the-counter market (collectively, market makers).2 Market makers that qualify for this extension are permitted to close out the fail-to-deliver position attributable to the market maker by no later than the beginning of regular trading hours on the morning of the third settlement day after the settlement date for the transaction that resulted in the fail-to-deliver position. To qualify for the extension, the market maker must attest in writing to the market on which it is registered that the fail-to-deliver position was established solely for the purpose of meeting its bona fide market making obligations and describe the steps it has taken to deliver the securities.

      Alternative Display Facility (ADF) market makers or market makers in OTC equity securities (e.g., OTC Bulletin Board and Pink Sheet securities) that intend to avail themselves of this extension must submit to FINRA their written attestation in the form provided in Attachment A.

      Completed attestations must be faxed to FINRA Operations at (301) 978-8511 by the close of business on the settlement day following the original settlement date of the transaction(s).


      1 See Exchange Act Release No. 58572 (September 17, 2008).

      2 See Question #4, Division of Trading and Markets: Guidance Regarding the Commission's Emergency Order Concerning Rules to Protect Investors against "Naked" Short Selling Abuses (September 24, 2008).


      FINRA MARKET MAKER WRITTEN ATTESTATION AND NOTICE RELATING TO THE CLOSE-OUT REQUIREMENTS OF RULE 204T OF REGULATION SHO

      ___________________________________________________________________________________
      Member Name Date

      The above-referenced firm, a FINRA registered Market Maker, attests that it is subject to the closeout requirements of Rule 204T of Regulation SHO with respect to the position referenced below, which was acquired solely for the purpose of meeting its bona fide market making obligations. The firm understands that the extension of its close-out requirements under SEC Rule 204T applies only to those transactions in which it is acting as a bona fide Market Maker and that the applicant must close out the fail-to-deliver position no later than the beginning of regular trading hours on the morning of the third settlement day after the settlement date for the transaction that resulted in the fail-to-deliver position (T+6).

      ___________________________________________________________________________________
      Security Name Symbol

      ___________________________________________________________________________________
      Trade Date of Relevant Activity

      ___________________________________________________________________________________
      Settlement Date of Relevant Activity

      ___________________________________________________________________________________
      Total Fail-to-Deliver Position as of Settlement Date

      ___________________________________________________________________________________
      Amount of Fail-to-Deliver Position to be Closed Out by the Morning of Settlement Date +3

      Reason and circumstances for the fail-to-deliver position (e.g., Market Maker obligation to maintain the market):
      ___________________________________________________________________________________
      ___________________________________________________________________________________

      Specific actions taken by the Market Maker, including dates, in an effort to deliver the securities to its registered clearing agency (including the identity of all parties contacted for attempts to cover the position; attach additional sheets if necessary):

      _______________________________________________________________________________________
      _______________________________________________________________________________________

      Extenuating circumstances (if any): ____________________________________________________________
      _______________________________________________________________________________________

      MEMBER FIRM ACKNOWLEDGES THAT THE SECURITIES AND EXCHANGE COMMISSION CAN WITHDRAW THIS GUIDANCE AT ANY TIME.

      ___________________________________________________________________________________
      Officer's Signature

      ___________________________________________________________________________________
      Print Name Title Phone Number

      Fax Completed Form To: (301) 978-8511

    • 08-49 FINRA Announces Effective Date for Expansion of NASD IM-2110-2 to OTC Equity Securities and Revised Minimum Price-Improvement Standards in IM-2110-2 Effective Date: November 11, 2008

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      Trading Ahead of Customer Limit Orders

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      NASD IM-2110-2
      NASD Rule 6541
      NASD Rule 6610
      NTM 07-19
      Suggested Routing

      Compliance
      Executive Representatives
      Legal
      Operations
      Senior Management
      Systems
      Trading
      Training
      Key Topics

      Limit Orders
      Limit Order Protection
      Manning Rule
      Minimum Price-Improvement
      Standards
      OTC Equity Securities

      Executive Summary

      Effective November 11, 2008, the requirements in NASD Interpretive Material (IM) 2110-2 (Trading Ahead of Customer Limit Order) apply to over-the-counter (OTC) equity securities, as defined in NASD Rule 6610(d).1 Also effective November 11, 2008, the minimum level of price improvement that firms must provide to trade ahead of an unexecuted customer limit order under IM-2110-2 is based on tiered standards that vary according to the price of the customer limit order.2 The revised price-improvement standards apply to both OTC equity securities and NMS stocks. The text of IM-2110-2, as amended, is set forth in Attachment A of this Notice.

      Questions regarding this Notice may be directed to the Legal Section, Market Regulation, at (240) 386-5126; or the Office of General Counsel at (202) 728-8071.

      Background and Discussion

      Current IM-2110-2 generally prohibits a firm from trading for its own account in an exchange-listed security at a price that is equal to or better than an unexecuted customer limit order in that security, unless the firm immediately thereafter executes the customer limit order at the price at which it traded for its own account or a better price. The legal underpinnings for IM-2110-2 are a firm's basic fiduciary obligations under agency law and the requirement that it must, in the conduct of its business, "observe high standards of commercial honor and just and equitable principles of trade."3

      Expansion of IM-2110-2 to OTC Equity Securities

      As announced in Notice to Members 07-19 (April 2007), the SEC approved the expansion of IM-2110-2 to OTC equity securities and the deletion of NASD Rule 6541 (Limit Order Protection).4 Following publication of NTM 07-19, FINRA filed with the SEC a proposed rule change to delay the effective date of the expansion of IM-2110-2 to OTC equity securities to coincide with the effective date of the amendments to the minimum price-improvement standards discussed below.5

      As described more fully in NTM 07-19, the limit order protection requirements under IM-2110-2 differ from those under Rule 6541. Effective November 11, 2008, firms must comply with the requirements of IM-2110-2 for limit orders in all OTC equity securities, including those previously covered by Rule 6541.

      Revised Minimum Price-Improvement Standards

      IM-2110-2 prescribes a minimum level of price improvement that a firm must provide to trade ahead of an unexecuted customer limit order. In other words, the price-improvement standards in IM-2110-2 impose a minimum amount by which a firm must trade, in addition to the price of the customer buy limit order (or less than the price of a customer sell order), to not trigger the protections under IM-2110-2. For example, if a firm is holding a customer limit order to buy priced at $10.01 and the applicable minimum price-improvement standard is $.01, the firm would be permitted to buy at $10.02 or higher without triggering the requirements of IM-2110-2.

      As part of the above-referenced proposed rule change expanding the scope of IM-2110-2 to apply to OTC equity securities, the SEC also approved amendments to the minimum price-improvement standards in IM-2110-2. In response to firms' concerns regarding the application of these standards, FINRA delayed the effective date of the approved amendments and subsequently filed with the SEC a proposed rule change to further amend the minimum price-improvement standards based on tiered standards that vary according to the price of the customer limit order. On September 12, 2008, the SEC approved the proposed amendments to the minimum price-improvement standards.

      As amended, IM-2110-2 sets forth the following minimum level of price improvement that a firm must provide to trade ahead of an unexecuted customer limit order:

      Security Type Price of Customer Limit Order Minimum Price Improvement Required
      NMS stocks ≥ $1.00 $0.01
      OTC equity securities ≥ $1.00 The lesser of $0.01 or ½ of the current inside spread
      NMS stocks and OTC equity securities < $1.00 but ≥ $.01 The lesser of $0.01 or ½ of the current inside spread
      NMS stocks and OTCequity securities < $.01 but ≥ $0.001 The lesser of $0.001 or ½ of the current inside spread
      NMS stocks and OTCequity securities < $.001 but ≥ $0.0001 The lesser of $0.0001 or ½ of the current inside spread
      OTC equity securities < $.0001 but ≥ $0.00001 The lesser of $0.00001 or ½ of the current inside spread
      OTC equity securities < $.00001 The lesser of $0.000001 or ½ of the current inside spread

      Additionally, as amended, IM-2110-2 provides that for customer limit orders priced outside the best inside market for the security, the minimum amount of price improvement required must either meet the same tiered minimum price-improvement standards set forth above or the firm must trade at a price at or inside the best inside market for the security. For customer limit orders in securities for which there is no published inside market, the minimum amount of price improvement required defaults to the same tiered minimum price improvement standards described above.7

      Amended IM-2110-2 also requires that any better-priced customer limit orders must receive protection up to the size of the triggering trade. Thus, once the minimum price-improvement standards trigger the protection of a pending customer limit order, a firm would be required to also protect any more aggressively priced customer limit order(s), even if those limit orders would not be directly triggered by the minimum price-improvement standards of IM-2110-2.

      For example, assume the best inside market for an NMS stock is $.996 to $1.00 and a firm is holding customer limit orders to sell at prices of $.998 and $1.00. If the firm sells for its own account at $.996, under the minimum price-improvement standards set forth above, customer limit orders to sell priced below $.998 and customer limit orders priced from $1.00 up to, but not including, $1.006 would be protected as a result of the firm's $.996 triggering proprietary trade. Once the limit order priced at $1.00 is activated upon the execution of the firm's trade at $.996 (it is activated because it is within $.01 of the price of the firm's trade), IM-2110-2, as amended, requires that the firm protect any more aggressively priced customer limit orders.

      This requirement only applies in the limited circumstance where a firm has a limit order that is protected by IM-2110-2, but more aggressively priced customer limit orders are not protected. Therefore, in this example, if the firm were holding only a customer limit order to sell at $.998 (and not a customer limit order to sell at $1.00), the $.998 order would not be triggered by this requirement.

      FINRA is not mandating any particular order handling procedures or execution priorities among protected orders. Firms may choose any reasonable methodology for executing multiple orders triggered by IM-2110-2, but a firm must ensure that such methodology is applied consistently and complies with applicable rules and regulations. In the example above, the firm may implement a methodology that executes all more aggressively priced customer limit orders first (i.e., the limit order priced at $.998) before executing the limit order priced at $1.00.

      Firms accepting customer limit orders are reminded that they owe their customers duties of "best execution" regardless of whether the orders are executed through the firm or sent to another firm for execution. Order entry firms should continue to monitor routinely the handling of their customers' limit orders regarding the quality of the execution received.8

      The expansion of IM-2110-2 to OTC equity securities and the amendments to the minimum price-improvement standards become effective on November 11, 2008.


      1 See Securities Exchange Act Release No. 55351 (February 26, 2007), 72 FR 9810 (March 5, 2007) (order approving SR-NASD-2005-146). See also Notice to Members 07-19 (April 2007).

      2 See Securities Exchange Act Release No. 58532 (September 12, 2008) (order approving SR-NASD-2007-041), available at http://www.sec.gov/rules/sro/nasd/2008/34-58532.pdf.

      3 See NASD Rule 2110. See also In re E.F. Hutton & Co. (known as the "Manning decision"), Securities Exchange Act Release No. 25887, 49 S.E.C. 829 (July 6, 1988), appeal filed, Hutton & Co. Inc. v. SEC, Dec. No. 88-1649 (D.C. Cir. September 2, 1988) (Stipulation of Dismissal Filed, January 11, 1989).

      4 See supra, note 1.

      5 See Securities Exchange Act Release No. 57133 (January 11, 2008), 73 FR 3500 (January 18, 2008) (notice of filing and immediate effectiveness of SR-FINRA-2007-038). See also Securities Exchange Act Release No. 56103 (July 19, 2007), 72 FR 40918 (July 25, 2007) (notice of filing and immediate effectiveness of SR-NASD-2007-39); and Securities Exchange Act Release No. 56822 (November 20, 2007), 72 FR 67326 (November 28, 2007) (notice of filing and immediate effectiveness of SR-FINRA-2007-023).

      6 See supra, note 2.

      7 With respect to OTC equity securities that are foreign securities traded in a foreign currency, firms must convert the foreign currency to US dollars for purposes of determining the applicable minimum price-improvement standards. A firm may use any reasonable business practice for the currency conversion, and must document its practice and apply the methodology consistently.

      8 See{ IM-2110-2.


      Attachment A

      Below is the text of the rule change. New language is underlined; deletions are in brackets.*

      IM-2110-2. Trading Ahead of Customer Limit Order

      (a) General Application

      To continue to ensure investor protection and enhance market quality, NASD's Board of Governors is issuing an interpretation to NASD Rules dealing with member firms' treatment of their customer limit orders in NMS stocks and OTC equity securities. This interpretation, which is applicable from 9:30 a.m. to 6:30 p.m. Eastern Time, will require members to handle their customer limit orders with all due care so that members do not "trade ahead" of those limit orders. Thus, members that handle customer limit orders, whether received from their own customers or from another member, are prohibited from trading at prices equal or superior to that of the limit order without executing the limit order. In the interests of investor protection, NASD is eliminating the so-called disclosure "safe harbor" previously established for members that fully disclosed to their customers the practice of trading ahead of a customer limit order by a market-making firm.1 For purposes of this interpretation, (1) "NMS stock" shall have the meaning set forth in SEC Rule 600(b)(47) of Regulation NMS and (2) "OTC equity security" shall have the meaning set forth in Rule 6610(d).

      Rule 2110 states that:

      A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.

      Rule 2320, the Best Execution Rule, states that:

      In any transaction for or with a customer, a member and persons associated with a member shall use reasonable diligence to ascertain the best inter-dealer market for the subject security and buy or sell in such a market so that the resultant price to the customer is as favorable as possible to the customer under prevailing market conditions.

      Interpretation

      The following interpretation of Rule 2110 has been approved by the Board:

      A member firm that accepts and holds an unexecuted limit order from its customer (whether its own customer or a customer of another member) in an NMS stock or OTC equity security and that continues to trade the subject security for its own account at prices that would satisfy the customer's limit order, without executing that limit order, shall be deemed to have acted in a manner inconsistent with just and equitable principles of trade, in violation of Rule 2110, provided that a member firm may negotiate specific terms and conditions applicable to the acceptance of limit orders only with respect to limit orders that are: (a) for customer accounts that meet the definition of an "institutional account" as that term is defined in Rule 3110(c)(4); or (b) 10,000 shares or more, unless such orders are less than $100,000 in value. In the event that a member trades ahead of an unexecuted customer limit order at a price that is better than the unexecuted limit order, such member is required to execute the limit order at the price received by the member or better. Nothing in this interpretation, however, requires members to accept limit orders from any customer.

      By rescinding the safe harbor position and adopting this interpretation, NASD wishes to emphasize that members may not trade ahead of their customer limit orders even if the member had in the past fully disclosed the practice to its customers prior to accepting limit orders. NASD believes that, pursuant to Rule 2110, members accepting and holding unexecuted customer limit orders owe certain duties to their customers and the customers of other member firms that may not be overcome or cured with disclosure of trading practices that include trading ahead of the customer's order. The terms and conditions under which institutional account or appropriately sized customer limit orders are accepted must be made clear to customers at the time the order is accepted by the firm so that trading ahead in the firm's market-making capacity does not occur.

      The minimum amount of price improvement necessary [in order] for a member to execute an incoming order on a proprietary basis when holding an unexecuted limit order in that same security, and not be required to execute the held limit order is as follows:
      1) For customer limit orders priced greater than or equal to $1.00 [that are at or inside the best inside market], the minimum amount of price improvement required is $0.01 for NMS stocks and the lesser of $0.01 or one-half (1/2) of the current inside spread for OTC equity securities;
      2) For customer limit orders priced greater than or equal to $.01 and less than $1.00 [that are at or inside the best inside market], the minimum amount of price improvement required is the lesser of $0.01 or one-half (1/2) of the current inside spread;
      3) [For customer limit orders priced outside the best inside market, the member must price improve the incoming order by executing the incoming order at a price at or inside the best inside market for the security; and]
      [4) For customer limit orders in securities for which there is no published inside market, the minimum amount of price improvement required is $0.01.]

      For customer limit orders priced less than $.01 but greater than or equal to $0.001, the minimum amount of price improvement required is the lesser of $0.001 or one-half (1/2) of the current inside spread;
      4) For customer limit orders priced less than $.001 but greater than or equal to $0.0001, the minimum amount of price improvement required is the lesser of $0.0001 or one-half (1/2) of the current inside spread;
      5) For customer limit orders priced less than $.0001 but greater than or equal to $0.00001, the minimum amount of price improvement required is the lesser of $0.00001 or one-half (1/2) of the current inside spread;
      6) For customer limit orders priced less than $.00001, the minimum amount of price improvement required is the lesser of $0.000001 or one-half (1/2) of the current inside spread; and
      7) For customer limit orders priced outside the best inside market, the minimum amount of price improvement required must either meet the requirements set forth above or the member must trade at a price at or inside the best inside market for the security.

      If the minimum price improvement standards above would trigger the protection of a pending customer limit order, any better-priced customer limit order(s) must also be protected under this IM, even if those better-priced limit orders would not be directly triggered under the minimum price-improvement standards above.
      NASD also wishes to emphasize that all members accepting customer limit orders owe those customers duties of "best execution" regardless of whether the orders are executed through the member or sent to another member for execution. As set out above, the Best Execution Rule requires members to use reasonable diligence to ascertain the best inter-dealer market for the security and buy or sell in such a market so that the price to the customer is as favorable as possible under prevailing market conditions. NASD emphasizes that order entry firms should continue to monitor routinely the handling of their customers' limit orders regarding the quality of the execution received.
      (b) and (c) No Change.

      * This Attachment A is marked to show the amendments adopted pursuant to SR-NASD-2007-041 relating to the minimum price-improvements standards. The amendments adopted pursuant to SR-NASD-2005-146 relating to the expansion of IM-2110-2 to OTC equity securities appear as existing text.

      1 No change to the footnote.

    • 08-48 Special Allowance to Permit Bulk Exchanges of Shares of Certain Reserve Funds

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      Bulk Exchanges of Shares of Certain Reserve Funds

      Regulatory Notice
      Notice Type

      Special Alert
      Referenced Rules & Notices

      NASD Rule 2310
      NASD Rule 2510
      Suggested Routing

      Compliance
      Legal
      Mutual Funds
      Registered Representatives
      Senior Management
      Key Topic(s)

      Money Market Mutual Funds
      Bulk Exchanges

      Executive Summary

      FINRA is issuing this Notice to allow member firms to exchange customer assets that are invested in the Reserve Primary Fund, the Reserve Yield Plus Fund, and the Reserve International Liquidity Fund (the Funds) in bulk for shares of another money market mutual fund or for deposits in an FDIC-insured bank without complying with all of the requirements of NASD Rule 2510(d), subject to certain conditions. In particular, firms may:

      •  Exchange shares of the Funds either for shares of another money market mutual fund or an FDIC-insured deposit account; and
      •  Conduct the bulk exchange1 prior to notifying customers, provided written notification is sent out promptly thereafter.

      Questions concerning this Notice should be directed to Thomas M. Selman, Executive Vice President, at (202) 728-6977 or Joseph P. Savage, Vice President and Counsel, at (240) 386-4534.

      Background & Discussion

      NASD Rule 2510 imposes certain requirements on member firms and their associated persons that have discretionary power over a customer's account, including prohibitions on excessive transactions, requirements for prior written customer consent as to the individuals possessing discretionary authority, and requirements related to the firm's review and approval of discretionary orders.2

      Rule 2510(d)(2) states that these provisions shall not apply to bulk exchanges at net asset value of money market mutual funds utilizing negative response letters sent to customers, provided certain conditions are met. In order to qualify for this exception:

      •  The bulk exchange must be limited to situations involving mergers and acquisitions of funds, changes of clearing members and exchanges of funds used in sweep accounts;
      •  The negative response letter must contain a tabular comparison of the nature and amount of the fees charged by each fund;
      •  The negative response letter must contain a comparative description of the investment objectives of each fund and a prospectus of the fund to be purchased; and
      •  The negative response feature must not be activated until at least 30 days after the date on which the letter was mailed.3

      On September 16 and 17, 2008, The Reserve announced that the net asset values of the Funds had fallen below $1.00 per share.4 Member firms have inquired whether they may make bulk exchanges of customer assets that are invested in the Funds, to either another money market mutual fund or deposits held at a bank insured by the Federal Deposit Insurance Corporation (FDIC) without complying with all of the requirements of Rule 2510(d)(2). Given the need to protect investors, and after consultation with the Securities and Exchange Commission (SEC) staff, FINRA has agreed to permit bulk exchanges of customer assets invested in the Funds to another money market mutual fund or an FDIC-insured bank account without compliance with all of the provisions of Rule 2510(d)(2), subject to certain conditions.

      First, member firms may exchange customers' assets from the Funds for either shares of another money market mutual fund whose net asset value is $1.00 per share and that is required to comply with Rule 2a-7 under the Investment Company Act of 1940, or for deposits in an FDIC-insured bank.5 Members must ensure that the money market mutual fund or bank deposit account into which it is moving customer assets is suitable for each customer based on the requirements of NASD Rule 2310.

      Second, while member firms may exchange customers' assets prior to sending out a notice of the bulk exchange, they must notify customers in writing promptly after the exchange.6 The notice must include the tabular comparison of the nature and amount of fees charged by each fund as required by Rule 2510(d)(2)(B) and the comparative description of the investment objectives of each fund and a prospectus of the new money market mutual fund as required by Rule 2510(d)(2)(C). If customers' assets are being moved into an FDIC-insured bank account, the notice must include a description of the account, any fees associated with the account, and a listing of the account's terms and conditions that the bank normally provides to customers opening such an account.7


      1 For purposes of this Notice, the term "bulk exchange" refers to both the movement of existing customer assets from the Funds to another money market mutual fund or bank account, and the redirection of future customer cash flows into the new fund or account.

      2 See NASD Rule 2510(a), (b) and (c).

      3 NASD Rule 2510(d)(2).

      4 Press Release, The Reserve (Sept. 16, 2008); Press Release, The Reserve (Sept. 17, 2008).

      5 In the past, FINRA has issued guidance under Rule 2510 with regard to proposed bulk exchanges of customers' money market mutual funds. See, e.g., Staff Interpretive Memo, "Use of a negative response process under NASD Rule 2510(d)(2)(D) to designate an alternative money market sweep fund when existing sweep fund closes with inadequate notice," (May 15, 2008); Letter from Patricia Albrecht to George T. Simon (Jan. 26, 2005); Letter from Sarah J. Williams to Marc A. Cohn (Feb. 3, 2003). This Notice does not alter this guidance in any respect other than as expressly provided herein with regard to the Funds.

      6 Customers who have consented to receiving communications from the member firm electronically may receive the notice in electronic form.

      7 The SEC staff has asked FINRA to inform broker-dealers that, in structuring any bank sweep programs, broker-dealers should use the banking "brokered deposit" structure as a template for establishing the legal relationships between the broker-dealer, the bank and the customers.

    • 08-47 Changes to Customer Complaint Reporting Procedures Under NASD Rule 3070(c) and NYSE Rule 351(d); Effective Date: October 1, 2008

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      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      NASD Rule 3070(c)
      NYSE Rule 351(d)
      Suggested Routing

      Chief Compliance Officer
      Legal and Compliance
      Operations
      Senior Management
      Key Topic(s)

      Customer Complaint Reporting Code Changes

      Executive Summary

      NASD Rule 3070(c) and Incorporated NYSE Rule 351(d) require all member firms to report on a quarterly basis statistical information regarding customer complaints.1 Firms must file this information by the 15th calendar day of the month following the end of each quarter (e.g., by April 15 for the first quarter). The information reported by member firms provides FINRA with an important regulatory tool that assists us with the timely identification of potential sales practice and operational issues.

      The following changes to the customer complaint reporting procedures under NASD Rule 3070(c) and NYSE Rule 351(d) will become effective on October 1, 2008, and therefore must be reflected in the fourth quarter 2008 customer complaint filing (due January 15, 2009).

      Questions concerning this Notice should be directed to Dave Troutner, Deputy Director, Central Review Group, Member Regulation, at (240) 386-6404.

      Background and Discussion

      FINRA is revising the problem and product codes used to report statistical information regarding customer complaints to better categorize complaints reported to FINRA. A significant number of complaints relating to the new and revised descriptions below had previously been reported under the miscellaneous codes for operational and sales practice complaints. These revisions and additions will better enable FINRA to identify potential sales practice and operational issues.

      New Problem and Product Codes and Descriptions

      Operational Problem Codes and Descriptions

      Due to the increased number of complaints reported in the "Account Administration and Processing" problem category (Code #61), FINRA conducted a detailed review of the issues underlying these complaints. Based on this review, we divided the "Account Administration and Processing" category into three sub-categories, each with its own code number. The two new code categories are:

      •  Account Administration and Processing—Account Opening—Code #65

      Allegations concerning problems establishing a new account (e.g., delays in opening account, and issues with account type and documentation).
      •  Account Administration and Processing—Account Maintenance—Code #66

      Allegations concerning non-transaction-related problems with existing accounts (e.g. address changes, investment objective changes, title changes and account closing issues).

      We changed the title of Code #61 to more clearly distinguish it from Code #65 and Code #66. Its substance remains the same but for the substitution of the word "inaccurate" for the word "erroneous":

      •  Account Administration and Processing—Daily Activities—Code #61

      Allegations concerning daily activity in client accounts (e.g., trade correction, journal entries, un-invested credit balances, and inaccurate or missing positions in an account).

      The word "erroneous" has been changed to "inaccurate" to clarify the types of complaints that should be categorized as Account Administration and Processing—Daily Activities versus complaints involving errors which may need to be coded as sales practice.

      In addition, we established a new "online" code to capture complaints relating to access and functionality of a firm's online system. Since the current "Online Trading" problem category (Code #62) is primarily intended to capture execution-related complaints associated with online accounts (including non-execution, price discrepancy, delays in execution and delays in trade confirmation), firms have reported general complaints about online access and functionality in the "Miscellaneous" Non-Sales Practice problem category (Code #99). To capture these complaints more accurately, we added a new Non-Sales Practice problem category, "Online Issues":

      •  Online Issues—Code #67

      Allegations concerning access and functionality of a firm's online system (connectivity and navigation).

      We are retaining the "Online Trading" category (Code #62), which member firms should continue to use to report complaints primarily involving execution-related issues associated with online accounts.

      Sales Practice Problem Code and Description

      To reduce the number of complaints reported in the "Miscellaneous" Sales Practice category (#00), we added a new category titled "Poor Recommendation/Poor Advice" (Code #12):

      •  Poor Recommendation/Poor Advice—Code #12

      Allegations that a recommendation to purchase, sell or exchange a security constituted poor advice.

      Firms should continue to use the "Poor Performance" category (Code #23) for customer complaints about poor account performance that do not allege any sales practice violations against the registered person or attribute damages to a research analyst recommendation (not otherwise reportable under Problem Codes #20 (Research), #21 (Product Origination/Investment Banking), or #22 (Trading)).

      Operational and Sales Practice Product Code and Description

      We added a new product code to classify complaints relating to Structured Products:

      •  Structured Products—Code #42

      Structured Products, which are defined as investment instruments designed to facilitate a particular risk-return objective, the performance of which is based on one or more referenced asset, index, interest rate, or other market measure. Some structured products offer full protection of the principal invested, whereas others offer limited or no protection of the principal. Structured Products may be listed on a securities exchange or traded in the over-the-counter market.

      1 FINRA has incorporated into its rulebook certain rules of the NYSE, including NYSE Rule 351. The Incorporated NYSE rules apply solely to those members of FINRA that are also members of NYSE ("Dual Members"). In applying the Incorporated NYSE rules to Dual Members, FINRA also has incorporated the related interpretive positions set forth in the NYSE Rule Interpretations Handbook and NYSE Information Memos.

    • 08-46 Interpretive Guidance on Capital Treatment of Introducing Broker-Dealers' Clearing Deposits

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      Clearing Deposits

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      SEA Rule 15c3-1
      Suggested Routing

      Compliance
      Legal
      Operations
      Regulatory Reporting
      Senior Management
      Key Topic(s)

      Clearing Agreements
      Clearing Deposits
      Net Capital Requirements

      Executive Summary

      This Notice provides FINRA member firms with interpretive guidance from the staff of the Securities and Exchange Commission's Division of Trading and Markets regarding clearing deposits:

      •  Interpretation I, applicable to all clearing agreements and effective immediately, clarifies the net capital treatment of introducing firms' clearing deposits with their clearing firm in the event the clearing agreement is terminated.
      •  Interpretation II, effective January 5, 2009, addresses termination penalty clauses in clearing agreements and affects only those member firms whose clearing agreements contain such a clause.

      We strongly encourage all firms that are a party to a clearing agreement to review this Notice carefully for its impact and any action that may be necessary.

      Questions regarding this Notice may be directed to:

      •  Anthony Lucarelli, Director, Risk Oversight & Operational Regulation, at (646) 315-8520;
      •  Bernadette Chichetti, Director, Risk Oversight & Operational Regulation, at (646) 315-8428; or
      •  Susan DeMando, Associate Vice President, Financial Operations, at (202) 728-8411.

      Background and Discussion

      Many clearing and carrying agreements (clearing agreements) require the introducing firm to deposit money with the clearing firm (clearing deposit) to cover any obligations that may arise from the clearance of the introducing firm's accounts (e.g., unsecured customer debit balances). Such clearing deposits are typically retained by the clearing firm for the duration of the clearing arrangement and are generally returned to the introducing firm, as long as the introducing firm does not have obligations to the clearing firm that it cannot otherwise satisfy, within a short period after the termination of the clearing arrangement. The interpretive guidance in this Notice deals with the time period in which an introducing firm may consider its clearing deposit as an allowable asset for net capital purposes once the clearing agreement has been terminated.

      Some FINRA introducing firms have entered into clearing agreements that, in addition to requiring a clearing deposit, contain a provision or clause that would impose a monetary penalty upon the introducing firm (payable to the clearing firm) if the introducing firm voluntarily terminates the clearing arrangement prior to a period specified in the agreement (termination penalty clause). Typically, such clauses are effective at the time the agreement is entered into but cease after a specified period, after which a monetary penalty would not be imposed on the introducing firm if it were to voluntarily terminate its clearing arrangement with the clearing firm. A common reason that clearing firms impose such termination penalty clauses is to ensure that they retain the introducing firm clearing relationship for a period sufficient to recoup investments in technology, systems, and personnel, among other things, which accommodate the clearance of an introducing firm's accounts.

      These termination penalty clauses have given rise to questions about the clearing firm's rights to the clearing deposit of an introducing firm that is subject to an early termination penalty if the introducing firm becomes the subject of a protective decree pursuant to the Securities Investor Protection Act of 1970. Questions have also arisen as to how the introducing firm should contemplate such clauses vis a vis its net capital computation.

      These issues, and the guidance provided by the staff of the Securities and Exchange Commission (SEC), are discussed on the next page.

      Interpretation I—Net Capital Treatment of a Clearing Deposit Upon Termination of the Agreement

      The SEC interpretation of Securities Exchange Act (SEA) Rule 15c3-1 provides that a clearing deposit may be treated as an allowable asset, provided that the clearing agreement explicitly states that the deposit will be returned to the introducing firm within 30 calendar days after cancellation of the agreement. The SEC's interpretation further requires that a written Proprietary Accounts of Introducing Brokers (PAIB) agreement has been executed between the clearing and introducing firms. Moreover, the clearing agreement must state that the introducing firm's clearing deposit does not represent an ownership interest in the clearing broker-dealer in order for the clearing deposit to be deemed allowable for capital purposes.1

      FINRA staff has received questions about the definition of "cancellation of the agreement." As an example, an introducing firm may give notice to the clearing firm that it will cancel its clearing agreement on X date (cancellation date), in which case it must receive its clearing deposit within 30 days after such date. Firms have stated that in some cases the process of transferring all of the introducing firm's customers to the new clearing firm may not be completed, or even begun, within the 30 days of the cancellation date. In such case, the clearing firm may retain the clearing deposit until the transfer of accounts to the new clearing firm has been completed. While the retention of the deposit by the clearing firm in such case may be deemed operationally reasonable, the current interpretation to SEA Rule 15c3-1 does not provide flexibility to accommodate the operational reality and requires the introducing firm to apply a net capital charge for the unreturned deposit on the 31st day after the cancellation date.

      To assist member firms in fulfilling their obligations to each other upon the termination of a clearing arrangement under such circumstances, FINRA sought guidance from the SEC. As a result, effective immediately, the interpretation of SEA Rule 15c3-1, as described above, is amended to reflect that the 30-calendar day period shall commence five business days after the date of the initial transfer of customer accounts. The amount of any clearing deposit held under the terms of the clearing agreement that is not returned to the introducing firm within 30 calendar days after the five-business-day grace period shall be treated as a non-allowable asset in the computation of the introducing firm's net capital commencing on the 31st day.

      Interpretation II—Clearing Agreements Containing an Early Termination Penalty Clause

      Due to the potential lien on the introducing firm's clearing deposit if such firm becomes the subject of the issuance of a protective decree pursuant to the Securities Investor Protection Act of 1970 while the termination clause is still in effect, the introducing firm must treat any clearing deposits of cash and/or securities held by its clearing broker-dealer, up to the amount of the termination penalty, as non-allowable assets pursuant to SEA Rule 15c3-1, unless the clearing agreement contains the following language:

      In the event that [the Introducing Broker-Dealer] is the subject of the issuance of a protective decree pursuant to the Securities Investor Protection Act of 1970 (15 USC 78aaa-lll), [the Clearing Firm's] claim for payment of a termination fee under this Agreement shall be subordinate to claims of [the Introducing Broker's] customers that have been approved by the Trustee appointed by the Securities Investor Protection Corporation pursuant to the issuance of such protective decree.

      The above quoted language is voluntary on behalf of the clearing firm. In this regard, in order for an introducing firm that is party to a clearing agreement containing a termination penalty clause to treat its clearing deposit as an allowable asset for net capital purposes, its clearing agreement must be amended to include the aforementioned language by January 2, 2009. The clearing firm may provide the additional language either in an amended clearing agreement, or an addendum to an existing clearing agreement.

      Further, each clearing firm must provide by January 2, 2009 written documentation to its FINRA Coordinator 1) stating that its clearing agreements have been revised accordingly for all of its introducing firms, or 2) listing the names of the introducing broker-dealers whose clearing agreements were not revised. Absent the additional language specified above in its clearing agreement, an introducing firm whose clearing agreement contains a termination penalty clause must treat its clearing deposit, up to the amount of the early termination penalty, as a non-allowable asset starting January 5, 2009, until the early termination penalty is no longer applicable.

      Notwithstanding the above, on the date that an introducing firm provides notice to the clearing firm of its voluntary termination of a clearing agreement that results in a termination penalty (i.e., the termination clause has not expired), the introducing firm must apply a net capital charge for the lesser of the amount of the termination penalty or the amount of the clearing deposit. The introducing firm must also make a determination, under generally accepted accounting principles, whether it must accrue a liability to reflect the effect of the termination penalty clause. An introducing firm that accrues a liability for the full amount of the termination penalty may reduce the aforementioned net capital charge by the amount of such accrual. The amount of any such accrued liability must be included in aggregate indebtedness by introducing firms that use the Basic Method of computing their net capital requirement pursuant to SEA Rule 15c3-1.


      1 This interpretation was published by the New York Stock Exchange as interpretation /021 of SEA Rule 15c3-1(c)(2)(iv)(E).

    • 08-45 FINRA to Deduct All Delinquent Arbitration and Mediation Fees from CRD Accounts; Effective Date: September 22, 2008

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      Arbitration and Mediation Fees

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      NASD Rule 10000 Series
      NASD Rule 12000 Series
      NASD