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  • 2009

    • 09-74 SEC Approves Changes to Arbitration Rules on Definition of Associated Person, Distribution of the FINRA Discovery Guide and Applicability of Hearing Session Fees; Effective Date: January 18, 2010

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      Arbitration Rules

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      FINRA Rule 12100(r)
      FINRA Rule 12506(a)
      FINRA Rule 12902(a)
      FINRA Rule 13100(r)
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topic(s)

      Arbitration
      Associated Persons
      Discovery Guide
      Fees

      Executive Summary

      Effective January 18, 2010, amendments to the Customer and Industry Codes of Arbitration:

      • clarify the definition of "associated person" and make it conform to the same term in the FINRA By-Laws;
      • streamline a case administration procedure; and
      • clarify that customers could be assessed hearing session fees based on their own claims for relief in connection with an industry claim.1

      The amendments will apply to claims filed on or after the effective date. The text of the amendments is set forth in Attachment A.

      Questions concerning this Notice should be directed to:

      • Kenneth L. Andrichik, Senior Vice President, Chief Counsel and Director of Mediation and Strategy, Dispute Resolution (DR), at (212) 858-3915 or ken.andrichik@finra.org; or
      • Mignon McLemore, Assistant Chief Counsel, DR, at (202) 728-8151 or mignon.mclemore@finra.org.

      Background and Discussion

      The SEC has approved a proposal to amend FINRA Rules 12100(r), 12506(a) and 12902(a) of the Code of Arbitration Procedure for Customer Disputes (Customer Code) and Rule 13100(r) of the Code of Arbitration Procedure for Industry Disputes (Industry Code) regarding the definition of "associated person," the distribution of the FINRA Discovery Guide and the applicability of hearing session fees. Each amendment is discussed below.

      Definition of "Person Associated with a Member"

      FINRA has amended the definition of "person associated with a member" under the Customer and Industry Codes to make it conform to the definition of the same term in FINRA's By-Laws.

      The definition of a "person associated with a member" under Rule 12100(r) of the Customer Code and Rule 13100(r) of the Industry Code is similar to the definition in FINRA's By-Laws,2 with two exceptions.3 First, the current definition of associated person under the Codes could be interpreted to include corporate entities.4 Thus, FINRA has amended the definition to insert the word "other" before the second reference to "natural person" to clarify that the definition does not include corporate entities.

      Second, the current definition of an associated person under the Codes does not pertain to individuals who have applied for registration with FINRA. Thus, FINRA has amended the definition to expand the forum's jurisdiction to natural persons who have applied for registration. FINRA's By-Laws make it clear that individuals who have signed and submitted a Form U4 are subject to FINRA's rules.5 This conforming change to the Codes will ensure that such individuals also will be required to arbitrate a dispute that arises while they are awaiting their licenses.

      Distribution of the FINRA Discovery Guide

      During the arbitration process, parties can request the discovery of documents, names of witnesses and other information from each other to prepare their cases for the hearing. To help parties understand what information they should disclose, FINRA automatically provides a copy of the FINRA Discovery Guide6 to parties when it serves the statement of claim.7

      In light of the availability of Dispute Resolution forms, guides and the claim filing system on FINRA's Web site, FINRA believes that it is no longer necessary to distribute automatically a printed Discovery Guide to parties when they file a claim. Thus, FINRA has amended Rule 12506 to state that, when FINRA serves the statement of claim, it will notify parties of the location of the Discovery Guide (which includes the Document Production Lists) on FINRA's Web site, but will not provide a printed copy except upon request.

      Applicability of Hearing Session Fees

      On January 24, 2007, the SEC approved the "Code Revision,"8 which reorganized the old Code of Arbitration Procedure (old Code) into three separate procedural codes: the Customer Code, the Industry Code and the Mediation Code. The Code Revision simplified the language of the old Code, codified current dispute resolution practices and implemented several substantive changes to dispute resolution rules.

      Under the old Code, arbitrators could allocate hearing session fees against any party.9 Rule 10332(c)10 of the old Code protected customers from potentially higher forum fees (now hearing session fees) triggered by amounts sought in industry claims by prohibiting the arbitrators from assessing forum fees against customers if the industry claim was dismissed. Moreover, the rule protected customers from higher forum fees by requiring that the amount of the forum fees be based on the amount awarded to an industry party and not on the amount of damages requested by the industry claim. However, Rule 10332(c) also provided that customers could be subject to potential forum fees based on their own claims for relief in connection with the industry claim.

      During the drafting of the Code Revision, FINRA inadvertently omitted from the corresponding rule in the Customer Code11 the provision (in old Rule 10332(c)) that permitted the forum to assess fees against the customer based on the customer's claim in an industry dispute. Thus, FINRA has amended Rule 12902(a)(4) to incorporate the omitted language, which makes it clear to customers that if they file a claim in connection with a claim filed by a firm, they may be subject to filing fees and hearing session fees based on their own claim for relief.

      Effective Date Provisions

      The amendments will become effective January 18, 2010, and will apply to claims filed on or after that date.


      1 Exchange Act Release No. 60878 (Oct. 26, 2009), 74 Federal Register 56679 (Nov. 2, 2009) (File No. SR-FINRA-2009-041).

      2 See By-Laws of Corporation, Article I, Definitions (rr).

      3 The reference to Procedural Rule 8210 in the By-Law definition would not apply to FINRA's dispute resolution forum and, therefore, has not been added to the Code definitions.

      4 See Rule 12100(r)(2) of the Customer Code and Rule 13100(r)(2) of the Industry Code.

      5 Note ii. See also Notice to Members (NTM) 99-95 (November 1999).

      6 The Discovery Guide provides parties in customer cases with guidance on which documents they should exchange without arbitrator or staff intervention (called Document Production Lists) and provides guidance to arbitrators in determining which documents parties are presumptively required to produce. The Discovery Guide was approved by the SEC and was made available for use in arbitration proceedings involving customer disputes upon the publication of NTM 99-90 (November 1999).

      7 See Rule 12506 of the Customer Code.

      8 See Securities Exchange Act Release No. 55158 (January 24, 2007); 72 FR 4574 (January 31, 2007) (File Nos. SR-NASD-2003-158 and SR-NASD-2004-011).

      9 If the parties and arbitrators meet in connection with an arbitration proceeding, the meeting is called a "hearing session." FINRA charges the parties a fee for each hearing session; the fee is based on the amount in dispute. See Rule 12902(a)(1).

      10 Rule 10332(c) of the old Code stated, in relevant part, that "no fees shall be assessed against a customer in connection with an industry claim that is dismissed; however, in cases where there is also a customer claim, the customer may be assessed forum fees based on the customer claim."

      11 For example, if a firm filed a claim against a customer, and the arbitrators dismissed the claim, the customer would not be assessed any forum fees. However, if, in connection with the industry claim, the customer filed a counterclaim against the firm, the customer would be subject to potential forum fees based on the customer's own claim for relief.

      12 See Rule 12902(a)(4).


      ATTACHMENT A

      New language is underlined; deletions are in brackets.

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

      * * * * *

      Customer Code

      12100. Definitions

      (r) Person Associated with a Member

      The term "person associated with a member" means:
      (1) A natural person who is registered or has applied for registration under the Rules of FINRA; or
      (2) A sole proprietor, partner, officer, director, or branch manager of a member, or [a] other natural person occupying a similar status or performing similar functions, or a natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a member, whether or not any such person is registered or exempt from registration with FINRA under the By-Laws or the Rules of FINRA.

      * * * *

      12506. Document Production Lists

      (a) Applicability of Document Production Lists

      When the Director serves the statement of claim, the Director will [provide] notify parties of the location of the FINRA Discovery Guide and Document Production Lists on FINRA's Web site, but will provide a copy to the parties upon request. Document Production Lists 1 and 2 describe the documents that are presumed to be discoverable in all arbitrations between a customer and a member or associated person. Other Document Production Lists may also apply, depending on the specific cause(s) of action alleged.
      (b)–(c) No change.

      * * * *

      12902. Hearing Session Fees, and Other Costs and Expenses

      (a) Hearing Session Fees
      (1)–(3) No change.
      (4) If hearing session fees are allocated against a customer in connection with a claim filed by a member or associated person, the amount of hearing session fees the customer must pay must be based on the amount actually awarded to the member or associated person, rather than on the amount claimed by the member or associated person. No hearing session fees may be assessed against a customer in connection with a claim filed by a member that is dismissed; however, in cases where there is also a customer claim, the customer may be assessed a filing fee under Rule 12900(a), and may be subject to hearing session fees.
      (b)–(e) No change.

      * * * * *

      Industry Code

      13100. Definitions

      (r) Person Associated with a Member

      The term "person associated with a member" means:
      (1) A natural person who is registered or has applied for registration under the Rules of FINRA; or
      (2) A sole proprietor, partner, officer, director, or branch manager of a member, or [a] other natural person occupying a similar status or performing similar functions, or a natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a member, whether or not any such person is registered or exempt from registration with FINRA under the By-Laws or the Rules of FINRA.

      * * * * *

    • 09-73 FINRA Reminds Firms of Their Sales Practice Obligations Relating to Principal-Protected Notes

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      Principal-Protected Notes

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      NASD Rule 2210
      NASD Rule 2310
      NTM 05-26
      NTM 05-59
      Suggested Routing

      Advertising
      Compliance
      Legal
      Senior Management
      Key Topics

      Communications With the Public
      Principal-Protected Notes
      Structured Products
      Suitability
      Training

      Executive Summary

      The retail market for principal-protected notes (PPNs) has grown in recent years, in part because they are often marketed as combining the relative safety of bonds with a potential for growth not available with traditional fixed income products.1 However, these products are not risk-free, and their terms and structures can be complex. Firms must ensure that their promotional materials or communications to the public regarding these products are fair and balanced, and do not overstate either the level of protection offered or an investment's potential returns. Firms also have a duty to ensure that their registered representatives understand the risks, terms and costs associated with these products, and that they perform an adequate suitability analysis before recommending them to a customer.

      Questions concerning this Notice should be directed to the Office of Emerging Regulatory Issues at (202) 728-8472.

      Background and Discussion

      PPNs typically combine a zero-coupon bond with an option or other derivative product whose payoff is linked to an underlying asset, such as an equities index or basket of indices. The investor is guaranteed the return of some or all principal at a set maturity date—typically ranging up to ten years from issuance—and also is entitled to participate in a return that is linked to a specified change in the value of the underlying asset.

      PPNs sold to retail investors often have reassuring names that include some variant of "principal protection," "capital guarantee," "absolute return," "minimum return" or similar terms. However, they are not without risk. Most importantly, the principal guarantee is subject to the credit-worthiness of the guarantor. In addition, principal protection levels can vary. While some products guarantee 100 percent return of principal, others guarantee as little as 10 percent. In most cases, the principal guarantee only applies to notes that are held to maturity. Issuers may (but are not obligated to) provide a secondary market for certain notes but, depending on demand, the notes may trade at significant discounts to their purchase price and might not return all of the guaranteed amount.

      Some PPNs have complicated pay-out structures that can make it hard for registered representatives and their customers to accurately assess their risk and potential for growth. For example,2 a PPN that guarantees a 10 percent return of principal might be structured so that, if at any time up to and including the maturity date, the underlying index gains by more than 40 percent, the payout at maturity would be as follows:

      If the underlying index's return is ... then the note's return is ... so the note investor gets Examples
      A gain of more than 40% 10% 110% of principal returned Index rises to 160% of its initial level prior to the maturity date and ultimately finishes at 160% of its initial level; note returns 110% of principal. Index rises to 150% of its initial level prior to the maturity date but ultimately finishes at 80% of its intitial level; note returns 110% of principal.

      However, if the underlying index does not gain by more than 40 percent at any time during the life of the note, then the payout would be as follows:

      If the underlying index's return is ... then the note's return is ... so the note investor gets Examples
      A loss of more than 10% The underlying index return + 10% From 10% up to (but not including) 100% of principal returned Index loses 100% as of the maturity date; note loses 90% (i.e., returns 10% of principal). Index loses 50% as of the maturity date; note loses 40% (i.e., returns 60% of principal).
      A loss of more than 10% 0% 100% of principal returned Index loses 2% as of the maturity date; note returns 100% of principal. Index loses 10% as of the maturity date; note returns 100% of principal.
      A loss of more than 10% 0% 100% of principal returned  
      A gain of up to 40% The underlying index return More than 100% up to (and including) 140% of principal returned Index rises 35% as of the maturity date; note gains 35% (i.e., returns 135% of principal).

      In another example, a PPN that offers 100 percent principal protection and is linked to the spread between the 30-year and two-year constant maturity swap rates (capturing any widening of the yield curve between long-term rates and short-term rates) might be structured so that in the first year, the note pays the investor a fixed coupon of 10 percent, regardless of the spread:

      If the spread between the 30-year and two-year constant maturity swap rates is ... then the note's return is ... so the note investor gets Example
      Any 10% for that year 10% after one year, paid as a coupon Regardless of the spread, the note investor receives a coupon of 10% at the end of the first year.

      However, after the first year:

      If the spread between the 30-year and two-year constant maturity swap rates is ... then the note's return is ... so the note investor gets Examples
      Always less than 70 basis points during the year 0% for that year No coupon payment for that year Spread fluctuates but is always less than 40 basis points during the year; no coupon is paid.
      Greater than 70 basis points on N% of the days in the year (on at least one day but not all days during the year) 10% multiplied by N% for that year More than 0% but less than 10% for that year, paid as a coupon Spread exceeds 70 basis points on half of the days during the year; 5% coupon is paid.
      Always greater than 70 basis points during the year 10% for that year 10% for that year, paid as a coupon Spread fluctuates but always exceeds 80 basis points during the year; 10% coupon is paid.

      PPNs are also linked to a wide variety of assets or benchmarks, including foreign equity indices, currencies, foreign exchange rates, commodities, spreads between interest rates and "hybrid" baskets of various asset types. For example, a note might be based on the performance of an equally weighted basket comprised of the Russell 2000, Dow Jones U.S. Real Estate Index Exchange Traded Fund, the Brazilian Real-U.S. Dollar exchange rate and the price of copper.

      Communications With the Public

      Under NASD Rule 2210, all communications with the public, including advertisements and public appearances regarding PPNs, must present a fair and balanced picture regarding both their risks and potential benefits. Rule 2210 also prohibits exaggerated, unwarranted or misleading statements and the omission of any material fact or qualification that would cause a communication to be misleading.

      Therefore, in marketing or describing a product as offering principal protection, firms must ensure that their communications accurately and fairly explain how the securities operate. For example, firms must not overstate either the level of protection offered or the investment's potential for growth. Promotional materials must be balanced, with appropriate disclosures concerning, among other things:

      • the level of principal protection offered;
      • the credit-worthiness of the guarantor;
      • the potential returns and pay-out structure (including any limits on upside potential);
      • the investor's ability to access funds pending maturity date or the expiration of a lock-up period; and
      • any costs or fees that might affect the return of principal.

      Moreover, sales materials and oral presentations that omit a description of the derivative component of a product and instead present such products as ordinary debt securities could violate Rule 2210. Firms should also be careful to balance any statements concerning the fact that a structured product has a ticker symbol or has been approved for listing on an exchange with the risks that an active and liquid trading market may not develop. Firms are further reminded that providing risk disclosure in a prospectus supplement does not cure otherwise deficient disclosure in sales material, even if such sales material is accompanied or preceded by the prospectus supplement.

      Suitability

      NASD Rule 2310 requires that, before recommending the purchase or sale of a security, firms must have a reasonable basis for determining that the product is suitable for at least some investors. To make this determination, firms must perform adequate due diligence, which includes carefully reviewing and understanding the risks, costs, terms and conditions of the product being offered. Rule 2310 also requires that, before executing a recommended transaction, a firm must make reasonable efforts to obtain information concerning the customer's financial status, tax status, investment objectives and "such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer."

      Therefore, before recommending a PPN, firms must review its suitability, both generally and for specific customers. Among other things, firms should consider the credit-worthiness of the guarantor in assessing the suitability of products offering full or partial principal protection. Firms should also fully understand the nature and terms of the principal guarantee, as well as the investment's pay-out structure, costs and fees.

      If the investment is designed to be held until maturity or involves significant lock-up periods, firms should consider the likelihood that the customer will need to access their money before the maturity date arrives or the lock-up period expires. Firms should also understand and consider the call risk associated with any callable notes. There also may be tax consequences that can affect whether the notes are suitable for a specific customer. For example, unless a fund invested in zero-coupon bonds is held in a tax-deferred retirement account, investors may have to pay U.S. income tax yearly on the imputed interest from the fund's zero-coupon bond holdings as it accrues. This may be true even if no actual cash distributions are paid into the account from the zero-coupon bonds held in the fund's portfolio.

      Depending on their structure and terms, some PPNs can involve high fees and hidden costs. In addition, investors may be sacrificing higher yield to obtain the principal guarantee. It is also important to note that the principal guarantee generally relates to nominal principal and does not offer inflation protection. While investors may be willing to absorb these costs in exchange for the security provided by principal-protected products, firms should nonetheless take them into account when assessing their general and customer-specific suitability.

      Given the similarity between options and the derivative components of some PPNs, firms should also consider whether purchases of certain notes that guarantee only a limited return of principal should be restricted to investors whose accounts have been approved for options trading, and whether it would be appropriate to apply the suitability requirements for options trading to those products.3 Firms that do not limit purchases of structured products in which investors' principal is at risk from market movements in the reference security to accounts approved for options trading should develop other comparable procedures designed to ensure that structured products are only sold to persons for whom the risk of such products is appropriate. These firms should be prepared to demonstrate the basis for allowing investors with accounts not approved for trading options to purchase structured products.

      In addition, NASD IM-2310-2(e) (Fair Dealing with Customers with Regard to Derivative Products or New Financial Products) emphasizes firms' obligations to deal fairly with customers when making recommendations or accepting orders for new financial products. The IM states that "[a]s new products are introduced from time to time, it is important that members make every effort to familiarize themselves with each customer's financial situation, trading experience, and ability to meet the risks involved with such products and to make every effort to make customers aware of the pertinent information regarding the products."

      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 PPNs, that training should emphasize the need to understand and consider:

      • the risks associated with such products, including the credit-worthiness of the guarantor;
      • the terms and conditions, including the pay-out structure;
      • the underlying index, asset or benchmark;
      • the investment's potential for growth;
      • the fee structure; and
      • any other features that might impact the product's suitability, both generally and for a specific customer.

      1 As used in this Notice, the terms "principal-protected note" and "PPN" refer to any structured product that combines a bond with a derivative component and that guarantees a full or partial return of principal at maturity.

      2 The examples in this Notice are hypothetical composites based on terms and structures of real notes, and are included for illustrative purposes only.

      3 See Notice to Members (NTM) 05-59. Also see NTM 05-26 regarding vetting new products.

    • 09-72 SEC Approval and Effective Dates for New Consolidated FINRA Rules; Effective Date (all rules except FINRA Rule 2330): February 15, 2010; Effective Date (FINRA Rule 2330): February 8, 2010

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      SEC Approves New Consolidated FINRA Rules

      Regulatory Notice
      Notice Type

      Consolidated Rulebook
      Rule Approval
      Referenced Rules & Notices

      FINRA Rule 2060
      FINRA Rule 2130
      FINRA Rule 2251
      FINRA Rule 2270
      FINRA Rule 2330
      FINRA Rule 5210
      FINRA Rule 5220
      FINRA Rule 5290
      Information Notice 03/12/08
      Information Notice 10/06/08
      Regulatory Notice 08-57
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Key Topics

      Approval Procedures for Day-Trading Accounts
      Day-Trading Risk Disclosure Statement
      Forwarding of Proxy and Other Issuer-Related Materials
      Members' Responsibilities Regarding Deferred Variable Annuities
      Offers at Stated Prices
      Order Entry and Execution Practices
      Publication of Transactions and Quotations
      Use of Information Obtained in Fiduciary Capacity

      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 FINRA is proposing new consolidated rules in phases for approval by the SEC as part of the Consolidated FINRA Rulebook.2 In October and November, the SEC approved eight new consolidated FINRA rules.3 All of the new rules take effect on February 15, 2010 except for FINRA Rule 2330, which has an implementation date of February 8, 2010.

      Questions regarding this Notice should be directed to:

      • Adam Arkel, Assistant General Counsel, Office of General Counsel (OGC), at (202) 728-6961 (regarding FINRA Rule 2251);
      • Lisa Horrigan, Associate General Counsel, OGC, at (202) 728-8190 (regarding FINRA Rule 5290);
      • Stan Macel, Assistant General Counsel, OGC, at (202) 728-8056 (regarding FINRA Rules 2130 and 2270);
      • Racquel Russell, Assistant General Counsel, OGC, at (202) 728-8363 (regarding FINRA Rules 5210 and 5220);
      • Matthew Vitek, Counsel, OGC, at (202) 728-6961 (regarding FINRA Rule 2060); or
      • Jim Wrona, Associate Vice President & Associate General Counsel, OGC, at (202) 728-8270 (regarding FINRA Rule 2330).

      Background & Discussion

      In October and November 2009, the SEC approved eight FINRA rules as part of the Consolidated FINRA Rulebook:

      • Rule 2060 (Use of Information Obtained in Fiduciary Capacity);4
      • Rule 2130 (Approval Procedures for Day-Trading Accounts);5
      • Rule 2251 (Forwarding of Proxy and Other Issuer-Related Materials);6
      • Rule 2270 (Day-Trading Risk Disclosure Statement);7
      • Rule 2330 (Members' Responsibilities Regarding Deferred Variable Annuities);8
      • Rule 5210 (Publication of Transactions and Quotations);9
      • Rule 5220 (Offers at Stated Prices);10 and
      • Rule 5290 (Order Entry and Execution Practices).11

      The attachment to this Notice sets forth additional information regarding these new consolidated rules and includes a hyperlink to each related rule filing. The filings provide, among other things, FINRA's statement of the purpose of the rule changes and an exhibit showing the changes between the new rule text and the text of the NASD rule as it exists in the Transitional Rulebook. Also, the text of each new FINRA Rule is available in the online FINRA Manual at www.finra.org/finramanual.12

      Rule Conversion Chart

      As discussed in additional detail in Information Notice 10/06/08 and Regulatory Notice 08-57, FINRA has posted three Rule Conversion Charts on its 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 charts are intended as a reference aid only. FINRA reminds firms that the charts do not in any way serve as a substitute for diligent review of the relevant new rule language. The Rule Conversion Charts are 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 consists of (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together the NASD Rules and Incorporated NYSE Rules are referred to as the Transitional Rulebook). While the NASD Rules generally apply to all FINRA 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 FINRA Rule 2330 (Members' Responsibilities Regarding Deferred Variable Annuities) was filed for immediate effectiveness pursuant to Section 19(b)(3)(A) of the Exchange Act. See discussion of FINRA Rule 2330 in Attachment A.

      4 See Exchange Act Release No. 61071 (November 30, 2009); 74 FR 64109 (December 7, 2009) (Order Approving Proposed Rule Change; File No. SR-FINRA-2009-067).

      5 See Exchange Act Release No. 61059 (November 24, 2009); 74 FR 62847 (December 1, 2009) (Order Approving Proposed Rule Change; File No. SR-FINRA-2009-059).

      6 See Exchange Act Release No. 61052 (November 23, 2009); 74 FR 62857 (December 1, 2009) (Order Approving Proposed Rule Change; File No. SR-FINRA-2009-066).

      7 See supra note 4.

      8 See Exchange Act Release No. 61122 (December 7, 2009); 74 FR 65816 (December 11, 2009) (Notice of Filing and Immediate Effective of Proposed Rule Change; File No. SR-FINRA-2009-083).

      9 See Exchange Act Release No. 60835 (October 16, 2009); 74 FR 54616 (October 22, 2009) (Order Approving Proposed Rule Change; File No. SR-FINRA- 2009-055).

      10 See supra note 8.

      11 See supra note 3.

      12 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 Rules (and Related Rule Filings)

      The SEC approved the following new FINRA rules in October and November 2009. The effective date of all of the rules is February 15, 2010, except for Rule 2330 which has an implementation date of February 8, 2010.

      FINRA Rule Filing SR-FINRA-2009-055

      www.finra.org/rulefilings/2009-055

      FINRA Rule 5210

      The rule change adopts, without material change, NASD Rule 3310 (Publication of Transactions and Quotations) and NASD IM-3310 (Manipulative and Deceptive Quotations) as FINRA Rule 5210 (Publication of Transactions and Quotations) in the Consolidated FINRA Rulebook.

      FINRA Rule 5210 prohibits members from publishing or circulating, or causing to be published or circulated, any communication that purports to report any transaction as a purchase or sale of any security, unless such member believes that such transaction was a bona fide purchase or sale of such security. The rule also prohibits members from publishing or circulating, or causing to be published or circulated, any communication that purports to quote the bid price or asked price for any security, unless the member believes that such quotation represents a bona fide bid for, or offer of, such security.

      Supplementary material to FINRA Rule 5210 provides that it would be inconsistent with FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade), 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices) and 5210 (Publication of Transactions and Quotations) for a member to publish or circulate or cause to be published or circulated, by any means whatsoever (1) any report of any securities transaction or of any purchase or sale of any security unless such member knows or has reason to believe that such transaction was a bona fide transaction, purchase or sale, or (2) any quotation for any security without having reasonable cause to believe that such quotation is a bona fide quotation, is not fictitious and is not published or circulated or caused to be published or circulated for any fraudulent, deceptive or manipulative purpose.

      As further addressed in Notice to Members (NTM) 04-66, FINRA reminds members of their obligations under NASD Rule 3010 (Supervision) to have in place a supervisory system and written supervisory procedures reasonably designed to ensure that such orders placed into trading systems are not entered in error or in a manner inconsistent with FINRA rules, including NASD Rule 5210 (Publication of Transactions and Quotations).

      FINRA Rule 5220

      The rule change adopts, without material change, NASD Rule 3320 (Offers at Stated Prices) and NASD IM-3320 (Firmness of Quotations) as FINRA Rule 5220 (Offers at Stated Prices) in the Consolidated FINRA Rulebook.

      FINRA Rule 5220 provides that no member shall make an offer to buy from or sell to any person any security at a stated price unless such member is prepared to purchase or sell, as the case may be, at such price and under such conditions as are stated at the time of such offer to buy or sell.

      Supplementary material to FINRA Rule 5220 provides that it shall be deemed conduct inconsistent with high standards of commercial honor and just and equitable principles of trade if a member "backs away" from its quotation. Rule 5220 recognizes that members change inter-dealer quotations constantly in the course of trading, but under normal circumstances where the member is making a firm trading market in any security, it is expected at least to buy or sell a normal unit of trading in the quoted stock at its then-prevailing quotations, unless clearly designated as "not firm" or "firm for less than a normal unit of trading" when supplied by the member. The supplementary material further provides that, if at the time an order for the purchase or sale of the quoted security is presented, the member is in the process of effecting a transaction in such quoted security, and immediately after the completion of such transaction, communicates a revised quotation size, such member shall not be obligated to purchase or sell the quoted security in an amount greater than such revised quotation size.

      Rule/Series Number Rule Title
      Rule 5000 Series SECURITIES OFFERING AND TRADING STANDARDS AND PRACTICES
      Rule 5200 Series QUOTATION AND TRADING OBLIGATIONS AND PRACTICES
      Rule 5210 Publication of Transactions and Quotations
      Rule 5220 Offers at Stated Prices

      FINRA Rule Filing SR-FINRA-2009-059

      www.finra.org/rulefilings/2009-059

      FINRA Rules 2130 and 2270

      The rule change adopts, with certain modifications, NASD Rule 2360 (Approval Procedures for Day-Trading Accounts) as FINRA Rule 2130 (Approval Procedures for Day-Trading Accounts); and NASD Rule 2361 (Day-Trading Risk Disclosure Statement) as FINRA Rule 2270 (Day-Trading Risk Disclosure Statement).

      FINRA Rules 2130 and 2270 focus on members' obligations to disclose to non-institutional customers the basic risks of engaging in a day-trading strategy and to assess the appropriateness of day-trading strategies for such customers. FINRA Rule 2130 creates an obligation on members that promote a day-trading strategy regarding account-opening approval procedures for non-institutional customers. FINRA Rule 2270 creates an obligation on such members to disclose to non-institutional customers the unique risks of engaging in a day-trading strategy.

      The rule change made minor changes to the previous NASD rules. These changes included adding supplementary materials to clarify the concept of promoting a day-trading strategy based on previous guidance; to codify the process by which a member may submit advertising materials to FINRA's Advertising Department for review and guidance; and to alert members of additional FINRA rules specifically addressing day-trading.

      Rule/Series Number Rule Title
      Rule 2000 Series DUTIES AND CONFLICTS
      Rule 2100 Series TRANSACTIONS WITH CUSTOMERS
      Rule 2130 Approval Procedures for Day-Trading Accounts
      Rule 2200 Series COMMUNICATIONS AND DISCLOSURES
      Rule 2260 Series DISCLOSURES
      Rule 2270 Day-Trading Risk Disclosure Statement

      FINRA Rule Filing SR-FINRA-2009-066

      www.finra.org/rulefilings/2009-066

      FINRA Rule 2251

      The rule change adopts, without material change, NASD Rule 2260 (Forwarding of Proxy and Other Materials) and NASD IM-2260 (Approved Rates of Reimbursement) as FINRA Rule 2251 (Forwarding of Proxy and Other Issuer-Related Materials) in the Consolidated FINRA Rulebook. The rule change makes minor clarifying changes and other changes primarily to reflect the new formatting and terminology conventions of the Consolidated FINRA Rulebook.

      FINRA Rule 2251 sets forth certain requirements with respect to the transmission of proxy materials and other communications to beneficial owners of securities and the limited circumstances in which members are permitted to vote proxies without instructions from those beneficial owners. The rule generally requires that a member must, in connection with an equity security, forward promptly or, in connection with a debt security, make reasonable efforts to forward promptly certain information to the beneficial owner, or the beneficial owner's designated investor adviser, if the member carries the account in which the security is held for the beneficial owner and the security is registered in a name other than the name of the beneficial owner. The rule prohibits a member from giving a proxy to vote stock that is registered in its name, unless the member is the beneficial owner of the stock. (The rule sets forth certain exceptions. For example, FINRA Rule 2251(c)(2) provides that a member may give a proxy to vote any stock pursuant to the rules of any national securities exchange of which it is a member provided that the records of the member clearly indicate the procedure it is following.)

      The supplementary material to FINRA Rule 2251 regulates the reimbursement that members are entitled to receive in connection with forwarding proxy materials and other communications.

      Rule/Series Number Rule Title
      Rule 2200 Series COMMUNICATIONS AND DISCLOSURES
      Rule 2250 Series PROXY MATERIALS
      Rule 2251 Forwarding of Proxy and Other Issuer-Related Materials

      FINRA Rule Filing SR-FINRA-2009-067

      www.finra.org/rulefilings/2009-067

      FINRA Rule 2060

      The rule change adopts, without material change, NASD Rule 3120 (Use of Information Obtained in Fiduciary Capacity) as FINRA Rule 2060 (Use of Information Obtained in Fiduciary Capacity); and NASD Rule 3380 (Order Entry and Execution Practices) as FINRA Rule 5290 (Order Entry and Execution Practices).

      FINRA Rule 2060 provides that a member that receives information as to the ownership of securities while acting in the capacity of paying agent, transfer agent, trustee or otherwise shall under no circumstances make use of the information for soliciting purchases, sales or exchanges except at the request and on behalf of the issuer.

      FINRA Rule 5290

      FINRA Rule 5290 prohibits members and associated persons from splitting any order into multiple smaller orders for execution or any execution into multiple smaller executions for transaction reporting for the primary purpose of maximizing a monetary or in-kind payment to the member or associated persons as a result of the execution of such orders or the transaction reporting of such executions. This is commonly also referred to as "trade shredding," which is the unlawful practice of splitting customer orders for securities into multiple smaller orders for the primary purpose of maximizing payments or rebates to the member.

      Rule/Series Number Rule Title
      Rule 2000 Series DUTIES AND CONFLICTS
      Rule 2060 Use of Information Obtained in Fiduciary Capacity
      Rule 5000 Series SECURITIES OFFERING AND TRADING STANDARDS AND PRACTICES
      Rule 5200 Series QUOTATION AND TRADING OBLIGATIONS AND PRACTICES
      Rule 5290 Order Entry and Execution Practices

      FINRA Rule Filing SR-FINRA-2009-083

      www.finra.org/rulefilings/2009-083

      The rule change—which FINRA filed with the SEC for immediate effectiveness on November 20, 2009, with an implementation date of February 8, 2010—adopts (without material change) NASD Rule 2821 (Members' Responsibilities Regarding Deferred Variable Annuities) as FINRA Rule 2330 (Members' Responsibilities Regarding Deferred Variable Annuities) in the Consolidated FINRA Rulebook. FINRA Rule 2330 establishes sales practice standards for recommended purchases and exchanges of deferred variable annuities. The rule has six main sections. First, it addresses general considerations, such as the rule's applicability. Second, the rule has requirements governing broker recommendations, including suitability and disclosure obligations. Third, the rule includes various principal review and approval obligations. Fourth, the rule requires members to establish and maintain supervisory procedures reasonably designed to achieve compliance with the standards set forth in the rule. Fifth, the rule has a training component. And sixth, the rule has a supplementary material section that addresses a variety of issues, ranging from the handling of customer funds and checks to information gathering and sharing.

      Rule/Series Number Rule Title
      Rule 2000 Series DUTIES AND CONFLICTS
      Rule 2300 Series SPECIAL PRODUCTS
      Rule 2330 Members' Responsibilities Regarding Deferred Variable Annuities

    • 09-71 SEC Approves Consolidated FINRA Rules Governing Financial Responsibility; Effective Date: February 8, 2010

      View PDF

      Financial Responsibility

      Regulatory Notice
      Notice Type

      Consolidated FINRA Rulebook
      New Rules
      Referenced Rules & Notices

      FINRA Rule 4110
      FINRA Rule 4120
      FINRA Rule 4130
      FINRA Rule 4140
      FINRA Rule 4521
      FINRA Rule 9557
      FINRA Rule 9559
      SEA Rule 15c3-1
      SEA Rule 15c3-3
      Section 4(g) of Schedule A to FINRA By-Laws
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topics

      Capital Compliance
      Financial Responsibility

      Executive Summary

      The SEC approved FINRA's proposed rule change1 to adopt a new set of financial responsibility rules for the consolidated rulebook (the Consolidated FINRA Rulebook).2 FINRA Rules 4110, 4120, 4130, 4140 and 4521 are new consolidated rules governing financial responsibility that are based in part on, and replace, provisions in the NASD and Incorporated NYSE Rules.3 The rule change also amends FINRA Rules 9557 and 9559 to, among other things, provide members served with a notice under the financial responsibility rules an expedited appeal process, and makes certain conforming revisions to Section 4(g) of Schedule A to the FINRA By-Laws.4

      The text of the new rules is set forth in Attachment A on our Web site at www.finra.org/notices/09-71. The chart in Attachment B summarizes the applicability of the new rules to members.

      Questions concerning this Notice should be directed to:

      •   Kris Dailey, Vice President, Risk Oversight & Operational Regulation (ROOR), at (646) 315-8434;
      •   Susan DeMando Scott, Associate Vice President, Financial Operations Department, at (202) 728-8411; or
      •   Adam H. Arkel, Assistant General Counsel, Office of General Counsel, at (202) 728-6961.

      Background

      FINRA's financial responsibility rules play an important role in supporting the SEC's minimum net capital and other financial responsibility requirements. Generally, the rules establish criteria promoting the permanency of members' capital, require the review and approval of certain material financial transactions, and establish criteria intended to identify members approaching financial difficulty and to monitor their financial and operational condition.

      The new rules incorporate many provisions in the existing NASD and NYSE Rules5 that govern financial responsibility, but streamline and reorganize those provisions. In addition, FINRA has tiered many provisions so that they apply only to those members that clear or carry customer accounts.6

      Discussion

      A. FINRA Rule 4110 (Capital Compliance)
      1. Authority to Increase Capital Requirements

      FINRA Rule 4110(a), based primarily on NYSE Rule 325(d), enables FINRA to prescribe greater net capital requirements for carrying and clearing members, or require any such member to restore or increase its net capital or net worth, when deemed necessary for the protection of investors or in the public interest. The authority to act under the rule resides with FINRA's Executive Vice President charged with oversight for financial responsibility (or his or her written officer delegate) (referred to as FINRA's EVP). To execute such authority, FINRA is required under the rule to issue a notice pursuant to FINRA Rule 9557 (a Rule 9557 notice). (As amended by the rule change, FINRA Rule 9557 provides, among other things, opportunity for an expedited hearing pursuant to FINRA Rule 9559; see Section F of this Notice for more detail.)

      Rule 4110(a) is a new provision for FINRA members that are not Dual Members (non-NYSE members) that are carrying or clearing members. However, it does not apply to introducing firms or to certain firms with limited business models (together, referred to as non-clearing firms). (For example, introducing firms and firms that engage exclusively in subscription-basis mutual fund transactions, direct participation programs, or mergers and acquisition activities are not subject to the provision.) In this regard, certain Dual Members that are subject to current NYSE Rule 325(d)—namely those NYSE member firms that are not carrying or clearing members (NYSE non-clearing firms)—will not be subject to the similar requirement in the FINRA Rule. Pursuant to the rule change, all members that are subject to the requirement will have an opportunity to request an expedited hearing if they receive a Rule 9557 notice, which is a new procedural right not available under current NYSE Rule 325(d).

      As FINRA has explained,7 NYSE staff historically employed NYSE Rule 325(d) in limited circumstances, and FINRA anticipates that it will apply FINRA Rule 4110(a) in similar fashion. The new rule enables FINRA to respond promptly to extraordinary, unanticipated or emergency circumstances. Under FINRA Rule 4110(a), FINRA's EVP may require a carrying or clearing member to comply with increased capital requirements in circumstances such as where unanticipated systemic market events threaten the member's capital, or where the member maintains an undue concentration in illiquid products. In such instances, FINRA's EVP may, for example, find it appropriate, in the public interest, to raise the applicable "haircut" (that is, to increase the percentage of the market value of certain securities or commodities positions by which the member must reduce its net worth) or treat certain assets as non allowable in computing net capital.
      2. Suspension of Business Operations

      FINRA Rule 4110(b)(1) is based in part on current NASD Rule 3130(e) and provides that, unless otherwise permitted by FINRA, a member must suspend all business operations during any period of time in which it is not in compliance with SEA Rule 15c3-1. This requirement is consistent with current law.8

      As with NASD Rule 3130(e), FINRA Rule 4110(b)(1) is self-operative (that is, a member is automatically required to comply with the provision without any direction from FINRA). Notwithstanding that the proposed provision is self-operative, FINRA may issue a Rule 9557 notice directing a member that is not in compliance with SEA Rule 15c3-1 to suspend all or a portion of its business. Upon receipt of a Rule 9557 notice, the member would have the right to request an expedited hearing. Neither the fact that FINRA may issue a Rule 9557 notice nor the right to an expedited hearing would be a defense in any subsequent disciplinary proceeding with respect to a member's non-compliance with FINRA Rule 4110(b)(1).
      3. Withdrawal of Equity Capital

      To further the goal of financial stability, FINRA Rule 4110(c)(1) prohibits a member from withdrawing equity capital for a period of one year, unless otherwise permitted by FINRA in writing. The rule expressly provides that, subject to the requirements of FINRA Rule 4110(c)(2), members are not precluded from withdrawing profits earned.

      FINRA anticipates that approvals for the early withdrawal of equity capital pursuant to Rule 4110(c)(1) would be granted on a limited basis.

      FINRA Rule 4110(c)(2) applies only to carrying or clearing members and prohibits any such member, without the prior written approval of FINRA, from withdrawing capital, paying a dividend or effecting a similar distribution that would reduce the member's equity, or making any unsecured advance or loan to a stockholder, partner, sole proprietor, employee or affiliate, where such withdrawals, payments, reductions, advances or loans in the aggregate, in any rolling 35-calendar-day period, on a net basis, would exceed 10 percent of the member's excess net capital.9 This provision is based in part on current NYSE Rule 312(h) and SEA Rule 15c3-1(e). While this is a new requirement for non-NYSE members that are carrying or clearing members, it does not apply to non-clearing firms. In this regard, NYSE non-clearing firms that currently are subject to NYSE Rule 312(h) will not be subject to the new rule. FINRA further notes that the 10 percent limit set forth in Rule 4110(c)(2) provides a de minimis exception; current NYSE Rule 312(h) does not include such an exception.
      4. Sale-and-Leasebacks, Factoring, Financing, Loans and Similar Arrangements

      To ensure the permanency of net capital in contemplated sale-and-leaseback, factoring, financing and similar arrangements, FINRA Rule 4110(d)(1)(A) provides that no carrying or clearing member may consummate a sale-and-leaseback arrangement with respect to any of its assets, or a sale, factoring or financing arrangement with respect to any unsecured accounts receivable, where any such arrangement would increase the member's tentative net capital by 10 percent or more,10 without the prior written authorization of FINRA.

      FINRA Rule 4110(d)(1)(A) is based on NYSE Rule 328(a), but applies only to carrying and clearing members. While the provision is new for non-NYSE members that are carrying or clearing members, it does not apply to non-clearing firms. In this regard, NYSE non-clearing firms that currently are subject to NYSE Rule 328(a) will not be subject to the new rule. Moreover, unlike NYSE Rule 328(a), FINRA Rule 4110(d)(1)(A) includes a de minimis exception by permitting a member to consummate, without FINRA's prior authorization, a sale-and-leaseback arrangement with respect to any of its assets, or a sale, factoring or financing arrangement with respect to any unsecured accounts receivable where the arrangement would not increase the member's tentative net capital by 10 percent or more.11

      Proposed FINRA Rule 4110(d)(1)(B), which is also based on NYSE Rule 328(a), provides that no carrying member may consummate any arrangement concerning the sale or factoring of customer debit balances, irrespective of amount, without the prior written authorization of FINRA. The provision is new for non-NYSE members that are carrying members.

      Proposed FINRA Rule 4110(d)(2) is based on NYSE Rule 328(b), but applies only to carrying and clearing members. The provision requires FINRA's prior approval for any loan agreement entered into by such a member, the proceeds of which exceed 10 percent of the member's tentative net capital12 and that is intended to reduce the deduction in computing net capital for fixed assets and other assets that cannot be readily converted into cash under SEA Rule 15c3-1(c)(2)(iv). Because the provision applies only to carrying and clearing members, NYSE non-clearing firms will be relieved from current requirements under NYSE Rule 328(b). In addition, unlike current NYSE Rule 328(b), FINRA Rule 4110(d)(2) includes a de minimis exception.

      FINRA Rule 4110(d)(3) provides that any member that is subject to paragraphs (d)(1)(A), (d)(1)(B) or (d)(2) of Rule 4110 is prohibited from consummating, without FINRA's prior written authorization, any arrangement pursuant to those paragraphs if the aggregate of all such arrangements would exceed 20 percent of the member's tentative net capital.13

      FINRA Rule 4110(d)(4) implements a requirement of the SEC's net capital rule and therefore applies to all members. It provides that any agreement relating to a determination of a "ready market" for securities based upon the securities being accepted as collateral for a loan by a bank under SEA Rule 15c3-1(c)(11)(ii) must be submitted to and be acceptable to FINRA before the securities may be deemed to have a "ready market." When determining the acceptability of a loan agreement, pursuant to FINRA Rule 4110(d)(4), FINRA would, as a general matter, consider such factors as whether the bank would have sole recourse under the agreement and whether the term of the loan is at least one year. FINRA expects that a determination of acceptability can generally be made within approximately one week.
      5. Subordinated Loans, Notes Collateralized by Securities and Capital Borrowings

      FINRA Rule 4110(e) is based in part on current NYSE Rule 420 and addresses the requirements for subordinated loans and loans made to general partners of members that are partnerships.

      FINRA Rule 4110(e)(1) implements Appendix D of SEA Rule 15c3-1 and requires that all subordinated loans or notes collateralized by securities must meet such standards as FINRA may require to ensure the continued financial stability and operational capability of a member, in addition to meeting those standards specified in Appendix D of SEA Rule 15c3-1.14 Appendix D of SEA Rule 15c3-1 requires that all subordination agreements must be found acceptable by the Examining Authority before they can become effective.15

      FINRA Rule 4110(e)(2) requires that, unless otherwise permitted by FINRA, each member whose general partner enters into any secured or unsecured borrowing, the proceeds of which will be contributed to the capital of the member, must, in order for the proceeds to qualify as capital acceptable for inclusion in computation of the member's net capital, submit to FINRA for approval a signed copy of the loan agreement. The loan agreement must have at least a 12-month duration and provide non-recourse to the assets of the member. Moreover, because a general partner's interest may allow the lender to reach into the assets of the broker-dealer, FINRA is requiring a provision in the loan agreement that estops the lender from having that right.
      B. FINRA Rule 4120 (Regulatory Notification and Business Curtailment)
      1. Regulatory Notification

      FINRA Rule 4120(a) is based on current NYSE Rule 325(b), but applies only to carrying and clearing members. The rule requires any such member promptly, but in any event within 24 hours, to notify FINRA when certain specified financial triggers are reached.16 This is a new notification requirement for non-NYSE members that are carrying or clearing members; it does not, however, apply to non-clearing firms. Accordingly, NYSE non-clearing firms will no longer be subject to these requirements.
      2. Restrictions on Business Expansion

      FINRA Rule 4120(b) is based on NASD Rule 3130(c) and NYSE Rule 326(a) and addresses circumstances under which a member is prohibited from expanding its business.

      FINRA Rule 4120(b)(1), which is self-operative, applies only to carrying and clearing members, and requires any such member, unless otherwise permitted by FINRA, to refrain from expanding its business during any period in which any of the conditions described in FINRA Rule 4120(a)(1) continue to exist for the specified time period. While NASD Rule 3130(c) includes comparable provisions, the requirement under the new rule is self-operative for non-NYSE members that are carrying or clearing members. FINRA Rule 4120(b) also provides that FINRA may issue a Rule 9557 notice directing any such member not to expand its business, in which case the member would have the right to request an expedited hearing. Neither the fact that FINRA may issue a Rule 9557 notice nor the right to an expedited hearing would be a defense in any subsequent disciplinary proceeding with respect to a member's non-compliance with FINRA Rule 4120(b)(1).

      Unlike the self-operative nature of paragraph (b)(1), FINRA Rule 4120(b)(2) authorizes FINRA, for any financial or operational reason, to restrict any member's ability to expand its business by the issuance of a Rule 9557 notice. In all such cases, the member would have the right to request an expedited hearing. This same right currently applies to NASD Rule 3130(c)(2).
      3. Reduction of Business

      FINRA Rule 4120(c) is based on NASD Rule 3130(d) and NYSE Rule 326(b) and addresses circumstances under which a member would be required to reduce its business.

      FINRA Rule 4120(c)(1), which is self-operative, applies only to carrying and clearing members, requiring any such member, unless otherwise permitted by FINRA in writing, to reduce its business to a point enabling its available capital to exceed the standards set forth in FINRA Rule 4120(a)(1) when any of the enumerated conditions continue to exist for the specified time period. While current NASD Rule 3130(d) includes comparable provisions, the requirement under the new rule is self-operative for non-NYSE members that are carrying or clearing members. FINRA Rule 4120(c)(1) also provides that FINRA may issue a Rule 9557 notice directing any such member to reduce its business, in which case the member would have the right to an expedited hearing. Neither the fact that FINRA may issue a Rule 9557 notice nor the right to an expedited hearing would be a defense in any subsequent disciplinary proceeding with respect to a member's non-compliance with FINRA Rule 4120(c)(1).

      Unlike the self-operative nature of paragraph (c)(1), FINRA Rule 4120(c)(2) authorizes FINRA, for any financial or operational reason, to require any member to reduce its business by the issuance of a notice in accordance with Rule 9557. In all such cases, the member would have the right to request an expedited hearing. This same right currently applies to NASD Rule 3130(d)(2).
      C. FINRA Rule 4130 (Regulation of Activities of Section 15C Members Experiencing Financial and/or Operational Difficulties)

      FINRA Rule 4130 is substantially identical to NASD Rule 3131 except that the new rule reflects FINRA as the designated examining authority and makes other conforming revisions. FINRA Rule 4130 applies only to certain firms that are subject to the Treasury Department's liquid capital requirements.
      D. FINRA Rule 4140 (Audit)

      FINRA Rule 4140 incorporates FINRA's existing authority under NASD Rule 3130 and NASD IM-3130 and NYSE Rule 418 to request an audit or an agreed-upon procedures review under certain circumstances. The new rule imposes a late fee of $100 for each day that a requested report is not timely filed, up to a maximum of 10 business days.
      E. FINRA Rule 4521 (Notifications, Questionnaires and Reports)

      Drawing in part on NASD IM-3130 and Rule 3150 and NYSE Rules 325(b)(2), 41617 and 421(2),18 FINRA Rule 4521 addresses FINRA's authority to request certain information from members to carry out its surveillance and examination responsibilities. As further described below, many of the provisions apply only to carrying and clearing members.

      FINRA Rule 4521(a) provides that each carrying or clearing member must submit to FINRA such financial and operational information regarding the member or any of its correspondents as FINRA deems essential for the protection of investors and the public interest. The provisions are new for certain non-NYSE members that are carrying or clearing members.19

      FINRA Rule 4521(b) requires every member approved by the SEC pursuant to SEA Rule 15c3-1 to use the alternative method of computing net capital contained in Appendix E to that rule to file such supplemental and alternative reports as may be prescribed by FINRA.

      FINRA Rule 4521(c) requires each carrying or clearing member to notify FINRA in writing no more than 48 hours after its tentative net capital, as computed pursuant to SEA Rule 15c3-1, has declined 20 percent or more from the amount reported in its most recent FOCUS Report or, if later, the most recent such notification filed with FINRA. This is a new requirement for non-NYSE members that are carrying or clearing members.

      FINRA Rule 4521(d) requires that, unless otherwise permitted by FINRA in writing, members carrying margin accounts for customers must submit, on a settlement date basis: (1) the total of all debit balances in securities margin accounts; and (2) the total of all free credit balances contained in cash or margin accounts. This is a new requirement for non-NYSE members that carry margin accounts.20

      FINRA Rule 4521(e) provides that a late fee of $100 may be imposed for each day that any report, notification or information a member is required to file pursuant to Rule 4521 is not timely filed, up to a maximum of 10 business days.
      F. FINRA Rules 9557 (Procedures for Regulating Activities Under Rules 4110, 4120 and 4130 Regarding a Member Experiencing Financial or Operational Difficulties) and 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 9550 Series)

      FINRA Rules 9557 and 9559 address service of notice to members that are experiencing financial or operational difficulties and the related hearing procedures. The rule change makes a number of conforming revisions to FINRA Rules 9557 and 9559 in light of several of the new financial responsibility rules (FINRA Rules 4110, 4120 and 4130). The rule change also amends Rules 9557 and 9559 to afford members with an expedited appeals process. For example, under the new rule amendments:
      •   FINRA Rule 9557(d) provides that the requirements referenced in a Rule 9557 notice served upon a member are immediately effective. A timely request for a hearing would stay the effective date for 10 business days after the service of the notice or until a written order is issued pursuant to FINRA Rule 9559(o)(4)(A) (whichever period is less), unless it is determined that such a stay cannot be permitted with safety to investors, creditors or other member firms;
      •   To ensure an expedited process, FINRA Rule 9557(e) requires a member to file with the Office of Hearing Officers any written request for a hearing within two business days after service of the Rule 9557 notice;
      •   FINRA Rule 9559(f)(1) provides that, after a respondent subject to a Rule 9557 notice files a written request for a hearing with the Office of Hearing Officers, the hearing must be held within five business days of such filing;
      •   FINRA Rule 9559(o)(4)(A) provides that, within two business days of the date of the close of the hearing, the Office of Hearing Officers must issue the Hearing Panel's written order. The Hearing Panel order would be effective when issued. (The rule change provides that, pursuant to FINRA Rules 9559(o)(4)(B) and 9559(p), the written decision explaining the reasons for the Hearing Panel's determinations must be issued within seven days of the issuance of the written order.)
      As amended by the rule change, FINRA Rules 9557 and 9559 set forth a number of other enhancements and clarifications of procedure. For example, FINRA Rule 9557(e)(1) provides that a member served with a Rule 9557 notice may request from FINRA staff a letter of withdrawal of the notice. The member may make this request either in lieu of or in addition to filing with the Office of Hearing Officers the written request for a hearing. The rule change enables FINRA staff, in response to the member's request and upon the member's demonstration to the satisfaction of FINRA staff that any requirements and/or restrictions imposed by a notice should be removed or reduced, either to withdraw the Rule 9557 notice or to reduce its requirements and/or restrictions.21 The member may submit a request for a letter of withdrawal to FINRA staff at any time after the notice is served. If such request is denied by FINRA staff, the proposed rule change provides that the member shall not be precluded from making a subsequent request or requests.22

      If a member requests a hearing within two business days after service of a 9557 notice, the member may seek to contest (1) the validity of the requirements and/or restrictions imposed by the notice (as the same may have been reduced by a letter of withdrawal issued by FINRA staff pursuant to Rule 9557(g)(2), where applicable) and/or (2) FINRA staff's determination not to issue a letter of withdrawal of all requirements and/or restrictions imposed by the notice, if such was requested by the member. The Hearing Panel may then either approve or withdraw the requirements and/or restrictions imposed by the notice. If the Hearing Panel approves the requirements and/or restrictions and finds the member has not complied with all of them, the Hearing Panel would be required to impose an immediate suspension on the respondent that would remain in effect unless FINRA staff issues a letter of withdrawal of all requirements and/or restrictions.

      1 See Exchange Act Release No. 60933 (November 4, 2009), 74 FR 58334 (November 12, 2009) (Order Granting Approval to Proposed Rule Change; File No. SR-FINRA-2008-067) (Approval Order).

      2 The current FINRA rulebook consists of: (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the Transitional Rulebook). While the NASD Rules generally apply to all FINRA member firms, the Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (Dual Members). The FINRA Rules apply to all FINRA member firms, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process, see Information Notice 3/12/08 (Rulebook Consolidation Process).

      3 Effective February 8, 2010, NASD Rules 3130 and 3131, NASD IM-3130, Incorporated NYSE Rules 312(h), 313(d), 325, 326, 328, 416.20, 418, 420, 421 and NYSE Rule Interpretations 313(d)/01, 313(d)/02, 325(c)(1), 325(c)(1)/01 and 416/01 will be deleted from the Transitional Rulebook.

      4 FINRA notes that, in devoting this Notice to announcing the effective date of a single set of rules and rule amendments, it is deviating from the protocol by which FINRA generally announces the effective dates of the new FINRA rules that are being adopted as part of the consolidated rulebook. See Information Notice 10/06/08 (Rulebook Consolidation Process: Effective Dates of New Consolidated Rules; Introduction of Rule Conversion Chart). FINRA believes that a single Notice devoted to the new financial responsibility rules is warranted in view of the regulatory subject matter and the nature of the changes.

      5 For convenience, the Incorporated NYSE Rules are referred to as the "NYSE Rules."

      6 All requirements set forth in the new rules that apply to members that clear or carry customer accounts also apply to members that, operating pursuant to the exemptive provisions of SEA Rule 15c3-3(k)(2)(i), either clear customer transactions pursuant to such exemptive provisions or hold customer funds in a bank account established thereunder. See FINRA Rules 4110.02, 4120.03 and 4521.01. For further discussion, see Approval Order, note 8, at 74 FR 58334.

      7 See, e.g., Regulatory Notice 08-23 (Proposed Consolidated FINRA Rules Governing Financial Responsibility) (May 2008).

      8 See Approval Order, note 13, at 74 FR 58335.

      9 The calculation of 10 percent of excess net capital must be based on the member's excess net capital position as reported in its most recently filed Form X-17A-5. The member must assure itself that the excess net capital so reported has not materially changed since the time the form was filed.

      10 The calculation of 10 percent of tentative net capital must be based on the member's tentative net capital position as reported in its most recently filed Form X-17A-5. The member must assure itself that the tentative net capital so reported has not materially changed since the time the form was filed.

      11 See note 9 supra.

      12 See note 9 supra.

      13 See note 9 supra.

      14 See SEA Rule 15c3-1d. Note that the Supplementary Material requires that, for purposes of FINRA Rule 4110(e)(1), the member must assure itself that any applicable provisions of the Securities Act of 1933 and/or state Blue Sky laws have been satisfied, and may be required to submit evidence thereof to FINRA prior to approval of the subordinated loan agreement. See FINRA Rule 4110.01 (Compliance with Applicable Law).

      15 FINRA will issue a separate Regulatory Notice addressing standards for obtaining approval of subordinated loans.

      16 The determination of whether the financial triggers were reached must be based on the member's financial position as reported in its most recently filed Form X-17A-5. The member must assure itself that its financial position so reported has not materially changed since the time the form was filed.

      17 Note that NYSE Rules 416(a), 416(c) and 416.10 will remain in the Transitional Rulebook to be addressed later in the rulebook consolidation process. On July 11, 2008, the SEC approved FINRA's proposal to delete NYSE Rule 416(b). See Exchange Act Release No. 58149 (July 11, 2008), 73 FR 42385 (July 21, 2008) (Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change; File No. SR-FINRA-2008-034).

      18 Because the rule change deletes NYSE Rule 421(2) and its related provision Rule 421.40, the rule change, in combination with rule change SR-FINRA-2008-033 (which was approved by the SEC on September 4, 2008, and took effect on December 15, 2008), deletes NYSE Rule 421 in its entirety. See 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); see also Regulatory Notice 08-57 (SEC Approves New Consolidated FINRA Rules) (October 2008).

      19 Note that NASD Rule 3150 (Reporting Requirements for Clearing Firms) currently requires most carrying and clearing members to submit certain data to FINRA. Rule 3150 will be addressed later in the rulebook consolidation process.

      20 FINRA will issue a separate Regulatory Notice containing guidance with respect to filing requirements under FINRA Rule 4521(d).

      21 See FINRA Rule 9557(g)(2).

      22 See FINRA Rule 9557(e)(1).


      ATTACHMENT A

      View PDF


      ATTACHMENT B—Financial Responsibility Rules Summary Chart

      Proposed FINRA Rule # Proposed FINRA Rule Requirement/Topic Applies to...
      4110 Capital Compliance  
      4110(a) Authority to increase capital requirements Carrying/clearing members1
      4110(b) Suspension of business operations All members
      4110(c)(1) Withdrawal of equity capital All members
      4110(c)(2) Withdrawal of equity capital Carrying/clearing members
      4110(d)(1)(A) Sale-and-leasebacks, factoring, financing, loans and similar arrangements Carrying/clearing members
      4110(d)(1)(B) Sale-and-leasebacks, factoring, financing, loans and similar arrangements Carrying members
      4110(d)(2) Sale-and-leasebacks, factoring, financing, loans and similar arrangements Carrying/clearing members
      4110(d)(3) Sale-and-leasebacks, factoring, financing, loans and similar arrangements Members subject to 4110(d)(1)(A), 4110(d)(1)(B) or 4110(d)(2)
      4110(d)(4) Sale-and-leasebacks, factoring, financing, loans and similar arrangements All members
      4110(e)(1) Subordinated loans, notes collateralized by securities and capital borrowing All members
      4110(e)(2) Subordinated loans, notes collateralized by securities and capital borrowing All members that are partnerships
      4120 Regulatory Notification and Business Curtailment  
      4120(a) Regulatory notification Carrying/clearing members
      4120(b)(1) Restrictions on business expansion Carrying/clearing members
      4120(b)(2) Restrictions on business expansion All members
      4120(c)(1) Reduction of business Carrying/clearing members
      4120(c)(2) Reduction of business All members
      4130 Regulation of Activities of Section 15C Members Experiencing Financial and/or Operational Difficulties Certain members subject to the Treasury Department's liquid capital requirements
      4140 Audit All members
      4521 Notifications, Questionnaires and Reports  
      4521(a), (c) Notifications, questionnaires and reports Carrying/clearing members
      4521(b) Notifications, questionnaires and reports Members subject to the SEC's requirements for broker-dealers that are part of consolidated supervised entities (approved to use Appendix E of SEA Rule 15c3-1 for computing net capital)
      4521(d) Notifications, questionnaires and reports Members carrying margin accounts for customers
      4521(e), (f) Notifications, questionnaires and reports Any member subject to 4521(a) through (d)

      1 As explained in the Notice, all requirements set forth in the rule change that apply to a member that clears or carries customer accounts also apply to any member that, operating pursuant to the exemptive provisions of SEA Rule 15c3-3(k)(2)(i), either clears customer transactions pursuant to such exemptive provisions or holds customer funds in a bank account established thereunder.

    • 09-70 FINRA Requests Comment on Proposed Consolidated FINRA Rules Governing Registration and Qualification Requirements; Comment Period Expires: February 1, 2010

      View PDF

      Registration and Qualification Requirements

      Regulatory Notice
      Notice Type

      Request for Comment
      Consolidated FINRA Rulebook
      Referenced Rules & Notices

      Information Notice 3/12/08
      NASD IM-1000-2 and IM-1000-3
      NASD Rules 1021 and 1022
      NASD IM-1022-1 and IM-1022-2
      NASD Rules 1031 and 1032
      NASD Rules 1041, 1042 and 1043
      NASD Rules 1050, 1060(a), 1070 and 1080
      NASD Rule 1100
      NASD Rule 3010(e)
      NTMs 87-47, 89-78, 95-37, 99-49, 00-50, 01-51, 03-37, 04-81 and 07-04
      NYSE Rule 10 and Its Interpretation
      NYSE Rule Interpretations 311(b)(5)/01, /02, /03 and (g)/01
      NYSE Rule 321.15
      NYSE Rule 344 and Its Interpretation
      NYSE Rule 345 and Its Interpretation
      Regulatory Notices 07-55, 08-24, 09-41 and 09-55
      Suggested Routing

      Compliance
      Legal
      Operations
      Registration
      Senior Management
      Key Topic(s)

      Examination
      Principal
      Qualification
      Registration
      Representative

      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 to streamline and amend the FINRA registration and qualification rules.

      The text of the proposed rules is available as Attachment B on our Web site at www.finra.org/notices/09-70.

      Questions regarding this Notice should be directed to:

      •   Afshin Atabaki, Assistant General Counsel, Office of General Counsel, at (202) 728-8902; or
      •   Joe McDonald, Director, Testing and Continuing Education Department, at (240) 386-5065.

      Action Requested

      FINRA encourages all interested parties to comment on the proposed rules. Comments must be received by February 1, 2010.

      Members 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 only use 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 Securities and Exchange Commission (SEC) by the FINRA Board of Governors, and then must be approved by the SEC, following publication for comment in the Federal Register.3

      Background

      The Exchange Act requires FINRA to prescribe standards of training, experience and competence for persons associated with FINRA members. Accordingly, FINRA has adopted registration and qualification requirements (registration rules) to ensure that persons associated with FINRA members attain and maintain specified levels of competence and knowledge. The current FINRA registration rules include both NASD Rules and certain NYSE Rules,4 some of which pertain specifically to persons engaged in NYSE floor activities. (The similarities and differences between the current NASD Rules and NYSE Rules are described in greater detail in Attachment A.)

      In general, the registration rules: (1) require that associated persons engaged in a member's investment banking or securities business be registered in an appropriate registration category and pass prescribed qualification examinations or obtain a waiver; (2) exempt certain associated persons from the registration requirement; and (3) provide for permissive registration of certain persons.

      Proposal

      FINRA proposes to transfer the NASD Rules into the Consolidated FINRA Rulebook with certain changes that take into account requirements under the NYSE Rules. The most significant proposed changes are described generally below. However, FINRA urges member firms to carefully review the entire proposed rule text (in Attachment B at www.finra.org/notices/09-70) to understand the full extent of the proposed changes. (All provisions discussed below will be transferred to the registration and qualification section in the Consolidated FINRA Rulebook unless stated otherwise.)

      A. Registration Requirements (Proposed FINRA Rule 1210)

      Among other things, proposed FINRA Rule 1210 will expressly differentiate between an "active" and "inactive" registration status and will integrate the provisions regarding required and permissive registrations into a single rule.
      1. Required Active Registration of Persons Engaged in the Investment Banking or Securities Business of a Member (Proposed FINRA Rule 1210(a))

      FINRA proposes to consolidate and streamline the provisions in current NASD Rules 1021(a) and 1031(a) that require associated persons engaged in the investment banking or securities business of a member to register in a principal or representative category appropriate to their assigned functions. FINRA will presume that such registrations are "active" unless it is otherwise notified that they are "inactive" as described below.5

      FINRA also proposes to consolidate in this rule the provisions in the various registration categories that prohibit persons from functioning in any registered capacity other than that for which they are registered. FINRA further proposes to delete NASD IM-1000-3 (potential disciplinary implications of failing to register a representative) as superfluous, since the failure to register a representative as required under current NASD Rule 1031(a) is in fact a violation.
      2. Permissive Inactive Registration of Persons Engaged in a Bona Fide Business Purpose of a Member (Proposed FINRA Rule 1210(b))

      Currently, NASD Rules 1021(a) and 1031(a) provide for permissive registration as a principal or representative of a person who performs legal, compliance, internal audit, back-office operations or similar responsibilities for a member (and permit a member to maintain the registration of such person).

      FINRA proposes to expand this provision by permitting a member to register as a principal or representative any associated person (or maintain the registration of such person), provided that such person is engaged in a bona fide business purpose of the member.

      Under the proposal, a person registered solely pursuant to this permissive registration category (i.e., not otherwise required to be registered based on his or her functions) is deemed to have an "inactive" registration upon notification to FINRA of such registration status. Also, the member must notify FINRA when the inactive registration status has been terminated. Such person will be an associated person for all purposes, but will be considered a registered person only for purposes of the following provisions:6
      •   FINRA By-Laws and Schedule A to the By-Laws (fees and charges);
      •   Forms U4 and U5;
      •   The FINRA consolidated registration rules;
      •   Current NASD Rule 1120 (applicable continuing education requirements);
      •   Current NASD Rule 3010(a)(5) (which requires the assignment of each registered person to an appropriately registered supervisor);7
      •   Current NASD Rule 3010(a)(7) (which requires participation in an annual compliance meeting); and
      •   Current NASD Rule 3010(e) (which addresses personnel background investigations).
      Among other purposes, these provisions ensure that such person maintains an appropriate level of competence and knowledge and is subject to a level of supervision commensurate with his or her status.

      The proposed rule will supersede the existing permissive registration provisions. Therefore, those persons currently registered based solely on performing legal, compliance, internal audit, back-office operations or similar responsibilities who seek to maintain such permissive registrations will have to become appropriately registered in accordance with the proposed rule.

      Additionally, the proposed rule permits a person who is required to be registered as a principal or representative based on his or her assigned functions to register, or maintain registrations, in non-required principal or representative categories by virtue of being engaged in a bona fide business purpose of the member. For instance, a person who is registered as a General Securities Representative and General Securities Principal, but whose functions only require him to be registered as a General Securities Representative, could maintain his registration as a General Securities Principal. However, all of such person's registrations will be deemed "active" registrations, subjecting such person to all FINRA Rules applicable to a registered person. Notwithstanding the status of such person's registrations as active, the proposed rule also requires that such person be appropriately supervised to ensure that he or she is not acting outside the scope of his or her assigned functions. For instance, if the person in the example above is assigned to function only as a General Securities Representative, he may not perform any of the functions of a General Securities Principal.

      The proposed rule further provides that a person whose sole registration is a permissive registration as a Compliance Officer (this category is described in greater detail below) by virtue of being engaged in a bona fide business purpose of the member (i.e., not required to register as a Compliance Officer or in any other category of registration) may have an active or inactive registration with respect to such registration; however, the person must be engaged in compliance activities at the member to have an active registration. If a member elects to designate such person as having an active registration, such person will be subject to the same requirements as any other person with an active registration.

      In 2007, FINRA filed with the SEC a similar proposal that was never published for comment in the Federal Register.8 FINRA intends to withdraw that proposal in conjunction with filing these consolidated rules. The reasons to allow permissive registration for those engaged in a bona fide business purpose of the member remain largely the same.

      First, a member may have a foreseeable need to move an associated person whose principal or representative registration has lapsed for more than two years back into a position that will require or permit such person to be registered. Currently, such persons are required to re-register and re-test (or obtain a waiver of the applicable qualification examinations). Second, the proposed rule allows members to develop a depth of associated persons with registrations in the event of unanticipated personnel changes and also encourages greater regulatory literacy. Finally, the proposed rule eliminates an inconsistency in the rules, which permit certain persons to obtain permissive registrations, but not others who equally are engaged in other bona fide business purposes of the member.

      Members will need to distinguish between functions that require an active registration and functions that permit a bona fide business purpose inactive registration and require notification to FINRA. Members should register an associated person as "inactive" only if they reasonably believe that such person will not be performing functions that require registration.
      3. Permissive Inactive Registration of Persons Engaged in the Business of a Financial Services Industry Affiliate of a Member (Proposed FINRA Rule 1210(c))

      NASD Rules 1021(a) and 1031(a) also permit a member to register as a principal or representative a person who is engaged in the investment banking or securities business of a foreign securities affiliate or subsidiary of the member (or maintain the registration of such person).

      The proposed rule expands these provisions by permitting a member to register as a principal or representative any individual (or maintain the registration of such person) who is engaged in the business of a financial services industry affiliate of the member that controls, is controlled by or is under common control with the member.9 Such person will be designated as a Retained Associate and his or her registration deemed an "inactive" registration upon notification to FINRA of such registration status. Also, the member will be required to notify FINRA when such inactive registration status has been terminated.

      The "financial services industry," for purposes of the proposed rule, is defined as any industry regulated by the SEC, Commodity Futures Trading Commission, state securities authorities, federal or state banking authorities, state insurance authorities, or substantially equivalent foreign regulatory authorities.

      The proposed rule permits a person to be designated as a Retained Associate with one or more members for ten consecutive years (commencing on the date the person is initially designated as a Retained Associate), subject to the following:
      •   First, to mitigate the risk of customer confusion that might be caused by frequent switching between a person's Retained Associate status and active or other inactive statuses, a Retained Associate who subsequently enters an active registration or a bona fide business purpose inactive registration must remain in such registration(s) for at least a consecutive 12-month period to be eligible for any years that may be remaining on his or her Retained Associate period. This 12-month period may be split between different members. However, a person's active registration or bona fide business purpose inactive registration cannot run concurrently with the person's Retained Associate inactive registration.
      •   Second, FINRA will toll a Retained Associate's inactive registration period day-for-day for each day that such person is in active registration, provided that the person is in active registration for at least a consecutive 12-month period and FINRA is properly notified of such person's period of active registration.
      •   Third, a person will forfeit any remaining Retained Associate period if such person subsequently engages in other business activities instead of those that require an active registration or permit a bona fide business purpose or Retained Associate inactive registration.
      •   Fourth, to facilitate such person's transition from one member to another, the proposed rule provides such person up to 30 days following the submission of a Form U5 to enter active registration or a bona fide business purpose or Retained Associate inactive registration with another member. Such person will forfeit any remaining Retained Associate period if he or she does not enter active registration or a bona fide business purpose or Retained Associate inactive registration with another member within 30 days following the submission of a Form U5.
      The following scenarios illustrate the application of the proposed rule:

      Scenario (After an Initial Period as a Retained Associate With the Financial Services Industry Affiliate of Member A) Remaining Retained Associate Period
      Person A enters a Retained Associate inactive registration with the financial services industry affiliate of Member B within 30 days following the submission of his Form U5. Not forfeited; not tolled
      Person A enters an active registration or a bona fide business purpose inactive registration with Member A for a consecutive 7-month period and then returns to work at the financial services industry affiliate of Member A. Forfeited
      Person A enters an active registration with Member A for a consecutive 12-month period. Tolled (for each day of active registration)
      Person A enters an active registration with Member A for a consecutive 7-month period and within 30 days following the submission of his Form U5 he enters an active registration with Member B for a consecutive 5-month period. Tolled (for each day of active registration)
      Person A enters a bona fide business purpose inactive registration with Member A for a consecutive 12-month period. Not forfeited; not tolled
      Person A enters a bona fide business purpose inactive registration with Member A for a consecutive 7-month period and within 30 days following the submission of his Form U5 he enters a bona fide business purpose inactive registration with Member B for a consecutive 5-month period. Not forfeited; not tolled
      Person A enters an active registration or a bona fide business purpose inactive registration with Member B 60 days following the submission of his Form U5 by Member A. Forfeited
      Person A engages in other business activities instead of entering an active registration or a bona fide business purpose or Retained Associate inactive registration. Forfeited


      While a Retained Associate generally will not be considered a registered person (or an associated person), such person will be subject to the following provisions:10
      •   FINRA By-Laws and Schedule A to the By-Laws;
      •   Forms U4 and U5;
      •   The FINRA consolidated registration rules;
      •   Current NASD Rule 1120;
      •   Current NASD Rule 3010(a)(5);11
      •   Current NASD Rule 3010(a)(7);
      •   Current NASD Rule 3010(e);
      •   Current NASD Rule 3050 (which addresses personal securities transactions through other members or financial institutions);
      •   Current NASD Rule 3070 (relating to reporting requirements);
      •   FINRA Rule 5130 (the New Issue Rule); and
      •   FINRA Rule 8000 and 9000 Series (relating to investigations, sanctions and disciplinary procedures).
      Similar to the provisions in the bona fide business purpose category, these provisions (among other purposes) are designed to ensure that Retained Associates maintain an appropriate level of competence and knowledge and are subject to a level of supervision commensurate with their status.

      A person subject to a statutory disqualification will not be eligible to be placed on, or remain in, a Retained Associate status. Among other reasons, this is because a member cannot ensure adequate supervision of all activities engaged in by such person, as ordinarily is required of a member who seeks to associate with a disqualified person.

      FINRA believes that an expansion of the permissive registration categories to include Retained Associates is appropriate for reasons similar to those underlying the permissive registration of persons engaged in a bona fide business purpose of a member (e.g., foreseeable need to move such persons back into a position that will require registration, developing a depth of persons with registrations in the event of unanticipated personnel changes, encouraging greater regulatory literacy through registration).12 FINRA further believes the time and manner limitations are appropriate to guard against abuse of the privilege.
      4. Notification Requirements for Persons Serving in the Armed Forces of the United States (Proposed FINRA Rule 1210(d))

      To enhance the efficiency of the notification process for registered persons serving in the Armed Forces (current NASD IM-1000-2), FINRA proposes to amend the provision to require that the member with which such person is registered promptly notify FINRA of such person's return to active employment with the member and that, in the case of a sole proprietor, the sole proprietor promptly notify FINRA of his or her return to active participation in the investment banking or securities business.
      5. Two-Principal Requirement (Proposed FINRA Rule 1210(e))

      FINRA proposes to amend the two-principal requirement (current NASD Rule 1021(e)(1)) to clarify that a member is required to have a minimum of two General Securities Principals who have satisfied the General Securities Representative, United Kingdom Securities Representative or Canada Securities Representative prerequisite. Alternatively, if the member's business is limited to investment company and variable contracts products or direct participation programs, the member may opt to have two Investment Company and Variable Contracts Products Principals or Direct Participation Programs Principals, respectively.

      Currently, a sole proprietor member (without any other associated persons) is not subject to the two-principal requirement since such member is operating as a one-person firm. Given that one-person firms may be organized in legal forms other than a sole proprietorship (such as a single-person limited liability company), FINRA proposes to modify the exception to clarify that any member with only one associated person is excluded from the two-principal requirement.

      In addition, the proposed rule clarifies that existing members as well as new applicants may request a waiver of the two-principal requirement (current NASD Rule 1021(e)(2)). The proposed rule similarly clarifies that the provision requiring additional principals for members with certain types of operations (current NASD Rule 1021(e)(3)) applies to existing members as well as new applicants.

      The proposed rule further clarifies that all members are required to have an appropriately registered Chief Compliance Officer (current NASD Rule 1022(a)(1)) and Financial and Operations Principal (or Introducing Broker-Dealer Financial and Operations Principal, as applicable) (current NASD Rules 1022(b) and (c)) and provides that all members are required to have an appropriately registered Principal Financial Officer and Principal Operations Officer (as discussed further below). Additionally, the proposed rule clarifies that a member engaged in certain investment banking activities must have a General Securities Principal who has also satisfied the Investment Banking Representative prerequisite requirement (current NASD Rules 1022(a)(1) and 1032(i)) and that a member engaged in certain research activities must have a Research Principal (current NASD Rule 1022(a)(5)).
      6. Personnel Background Investigations (Proposed FINRA Rule 1210(f))

      FINRA proposes to transfer into the proposed rule with non-substantive changes the provision regarding background investigations (current NASD Rule 3010(e)).
      7. Impermissible Registrations (Proposed FINRA Rule 1210(g))

      Consistent with the proposed changes to the registration requirements discussed above, FINRA proposes to replace the provisions prohibiting the "parking" of registrations (current NASD Rules 1021(a) and 1031(a)) with provisions prohibiting a member from registering or maintaining the registration of a person unless it is an active registration or a bona fide business purpose or Retained Associate inactive registration. The proposed rule also permits a member to maintain the inactive registration of a registered person serving in the Armed Forces of the United States, which is consistent with the current registration requirements.
      B. Qualification Examination Requirements and Waiver of Requirements (Proposed FINRA Rule 1220)

      Among other things, proposed FINRA Rule 1220 integrates the qualification examination requirements and waiver of requirements into a single rule.
      1. Qualification Examinations (Paragraphs (a), (b) and (d) through (g) of Proposed FINRA Rule 1220)

      The proposed rule consolidates for simplification the general provisions requiring a person to pass an appropriate qualification examination (including any applicable prerequisite) before such person's registration can become effective (current NASD Rules 1021(a) and 1031(a)). The proposed rule clarifies that a person is not subject to this requirement if such person obtains a waiver of the applicable examination(s) or is registering solely as a Securities Lending Representative, Securities Lending Supervisor or Proctor (which, as noted below, do not require an examination).

      The proposed rule streamlines the general provisions regarding the examination process (current NASD Rules 1070(a), (b) and (c)). FINRA proposes to transfer into the proposed rule with non-substantive changes the provision regarding waiting periods for retaking failed examinations (current NASD Rule 1070(e)).

      The proposed rule also consolidates for simplification the provisions requiring that a person re-test if his or her registration has lapsed for more than two years (current NASD Rules 1021(c), 1031(c) and 1041(c)). The proposed rule clarifies that a person is not subject to this requirement if he or she obtains a waiver of the applicable examination(s) or is registering solely as a Securities Lending Representative, Securities Lending Supervisor or Proctor.

      Further, FINRA proposes to amend the provision permitting a member to designate any representative to function as a principal for a limited period (current NASD Rule 1021(d)) to require the designation of a representative who has been registered as a representative in active registration for at least 18 months within the five-year period immediately preceding such designation. This change is intended to ensure that such persons have an appropriate level of registered representative experience. The proposed rule clarifies that such person must fulfill all applicable prerequisite registration, fee and examination requirements prior to his or her designation as a principal. The proposed rule also extends the time period that such person may function as a principal prior to passing the applicable principal examination from 90 calendar days to 120 calendar days (since the current window in CRD for passing an examination is 120 calendar days). A person registered as an Order Processing Assistant Representative or registered solely as a Securities Lending Representative, Securities Lending Supervisor or Proctor will be prohibited from functioning as a principal under this provision because of the very limited scope of his or her registered representative activities. Finally, the proposed rule clarifies that members that lose their sole Registered Options Principal are subject to separate requirements (current NASD IM-1022-1).
      2. Waivers (Proposed FINRA Rule 1220(c))

      FINRA proposes to transfer into the proposed rule with non-substantive changes the provision regarding waiver of examination requirements (current NASD Rule 1070(d)).
      C. Registration Categories (Proposed FINRA Rule 1230)

      Among other things, proposed FINRA Rule 1230 integrates the following registration categories into a single rule: principal, representative, Order Processing Assistant Representative, Proctor and Research Analyst.
      1. Definition of Principal (Proposed FINRA Rule 1230(a)(1))

      The proposed rule streamlines the definition of the term "principal" (current NASD Rule 1021(b)) and clarifies that a member's chief executive officer and chief financial officer (or equivalent officers) are considered principals based solely on their status. The proposed rule also clarifies that the term "principal" includes any other associated person who is performing functions or carrying out responsibilities that are required to be performed or carried out by a principal under FINRA Rules. Further, the proposed rule codifies existing guidance regarding the term "actively engaged in the management of the member's investment banking or securities business."13
      2. General Securities Principal (Proposed FINRA Rule 1230(a)(2))

      FINRA proposes to eliminate the grandfathering provision for persons who were registered as principals prior to the adoption of the General Securities Principal registration category (current NASD Rule 1022(a)(1)) since it is outdated. As discussed below, FINRA also proposes to move the provision regarding the registration of Chief Compliance Officers to a new stand-alone registration category for Compliance Officers and create a stand-alone registration category for Research Principals. Additionally, the proposed rule clarifies that:
      •   A person registered solely as a General Securities Principal is not qualified to function as a Research Principal, Principal Financial Officer or Principal Operations Officer;
      •   Registration as a United Kingdom Securities Representative or Canada Securities Representative is an acceptable alternative prerequisite to the General Securities Representative prerequisite;14 and
      •   Registration as a Corporate Securities Representative or Private Securities Offerings Representative will satisfy the prerequisite registration requirement, provided that such persons have limited supervisory responsibilities (consistent with their representative category).
      3. Research Principal (Proposed FINRA Rule 1230(a)(3))

      The proposed rule creates a stand-alone registration category for Research Principals (current NASD Rule 1022(a)(5)) and modifies the examination requirements for those persons. By way of background, the Analysis (Series 86) portion of the Research Analyst examination tests knowledge of fundamental analysis and valuation of equity securities and the Regulatory Administration and Best Practices (Series 87) portion of the Research Analyst examination tests knowledge of applicable rules and regulations pertaining to research. The Supervisory Analyst (Series 16) examination tests both knowledge of applicable rules and regulations and fundamental analysis and valuation. Currently, a Research Principal is required to be registered as a General Securities Principal and pass either the Series 87 or the Series 16 examination. FINRA believes that a Research Principal will be able to carry out his or her supervisory responsibilities more effectively by having an appropriate level of knowledge of fundamental analysis and valuation. Therefore, the proposed rule requires that a Research Principal pass the General Securities Principal examination15 and (1) the Series 86 and Series 87 examinations or (2) the Series 16 examination.

      A person registered as a Research Principal immediately prior to the effective date of the proposed rule will be grandfathered. The proposed rule also codifies existing guidance regarding exceptions from the Research Principal requirement for principals responsible for reviewing and approving third-party research reports, principals assigned to supervise for compliance with only the disclosure provisions of NASD Rule 2711 and Supervisory Analysts who are permitted pursuant to FINRA Rules to approve research reports.16
      4. Compliance Officer (Proposed FINRA Rule 1230(a)(4))

      FINRA proposes to establish a new stand-alone registration category for Compliance Officers, which will also contain the Chief Compliance Officer registration requirement (current NASD Rule 1022(a)(1)). The proposed rule revises and redesignates as the Compliance Officer examination the current Compliance Official examination—an NYSE requirement17 applicable to persons responsible for day-to-day compliance activities and other persons directly supervising ten or more compliance personnel. FINRA believes that the role of the Chief Compliance Officer has critical importance and that a Compliance Officer examination tailored to the functions performed by a Chief Compliance Officer is the most appropriate examination for those individuals. The General Securities Representative, United Kingdom Securities Representative or Canada Securities Representative examination will be the prerequisite to the Compliance Officer examination.

      The proposed rule will require all persons designated as Chief Compliance Officers on Schedule A of Form BD to register as Compliance Officers and pass the Compliance Officer examination before their registrations can become effective, subject to the following provisions intended to facilitate the transition to the new examination.
      •   A person designated as a Chief Compliance Officer on Schedule A of Form BD, or registered as a Compliance Official, immediately prior to the effective date of the proposed rule will be qualified to register as a Compliance Officer without having to pass the Compliance Officer examination.
      •   A person designated as a Chief Compliance Officer on Schedule A of Form BD after the effective date of the proposed rule, but before the introduction of the Compliance Officer examination, will be required to pass the General Securities Principal examination (and the General Securities Representative, United Kingdom Securities Representative or Canada Securities Representative prerequisite) to qualify to register as a Compliance Officer. This requirement will apply to all members. Such persons will not be required to pass the Compliance Officer examination after its introduction.
      •   A person designated as a Chief Compliance Officer on Schedule A of Form BD after the effective date of the proposed rule and the introduction of the Compliance Officer examination will be required to pass the Compliance Officer examination to qualify to register as a Compliance Officer, unless such person has earned the FINRA Institute at Wharton Certified Regulatory and Compliance Professional (CRCP) designation.
      FINRA believes that the General Securities Principal qualification examination in combination with the CRCP designation, which provides an in-depth understanding of the foundation, theory and practical application of securities laws and regulation, is appropriately tailored to the functions performed by a Chief Compliance Officer. Therefore, the proposed rule provides that a person who has passed the General Securities Principal qualification examination (and the General Securities Representative, United Kingdom Securities Representative or Canada Securities Representative prerequisite) and has earned the CRCP designation will be qualified to register as a Compliance Officer without having to pass the Compliance Officer examination.
      5. Financial and Operations Principal, Introducing Broker-Dealer Financial and Operations Principal, Principal Financial Officer and Principal Operations Officer (Proposed FINRA Rule 1230(a)(5))

      The proposed rule maintains the requirement that a member have a Financial and Operations Principal or Introducing Broker-Dealer Financial and Operations Principal, as applicable, but merges these registration categories (current NASD Rules 1022(b) and (c)) for simplification.

      Additionally, the proposed rule modifies the NASD and NYSE requirements that members designate and register Chief Financial Officers (current NASD Rules 1022(b) and (c)) and Chief Financial Officers and Chief Operations Officers (current NYSE Rule Interpretations 311(b)(5)/02 and /03), respectively. FINRA does not believe it necessary for an officer to have the title of Chief Financial Officer or Chief Operations Officer for purposes of these provisions so long as the designated person performs the same functions.

      More specifically, the proposed rule requires members to designate: (1) a Principal Financial Officer with primary responsibility for financial filings and the related books and records; and (2) a Principal Operations Officer with primary responsibility for the day-to-day operations of the business, including overseeing the receipt and delivery of securities and funds, safeguarding customer and firm assets, calculation and collection of margin from customers and processing dividend receivables and payables and reorganization redemptions and those books and records related to such activities.

      Consistent with the current examination requirements, the proposed rule requires that a member's Principal Financial Officer and Principal Operations Officer register as Financial and Operations Principals (or Introducing Broker-Dealer Financial and Operations Principals, as applicable).

      Since the financial and operational activities of members that neither self clear nor provide clearing services are limited, such members may designate the same person as the Principal Financial Officer, Principal Operations Officer and Financial and Operations Principal (or Introducing Broker-Dealer Financial and Operations Principal) (i.e., such members are not required to designate different persons to function in these capacities).

      Given the level of financial and operational responsibility at clearing and self-clearing members, FINRA believes that it is necessary for such members to designate separate persons to function as Principal Financial Officer and Principal Operations Officer. Such persons may also carry out the other responsibilities of a Financial and Operations Principal (e.g., supervision of individuals engaged in financial and operational activities). The proposed rule also provides that a clearing or self-clearing member that is limited in size and resources may, pursuant to the FINRA Rule 9600 Series, request a waiver of the requirement to designate separate persons to function as Principal Financial Officer and Principal Operations Officer.
      6. Registered Options Principal (Paragraph (a)(6) and Supplementary Material .02 and .03 of Proposed FINRA Rule 1230)

      FINRA proposes to convert into supplementary material the provision in the Registered Options Principal category (current NASD Rule 1022(f)) regarding security futures activities, together with similar provisions in the General Securities Sales Supervisor (current NASD Rule 1022(g)) and General Securities Representative (current NASD Rule 1032(a)) categories. Consistent with FINRA Rule 2360 (Options), which allows a General Securities Sales Supervisor (in addition to a Registered Options Principal) to also approve the opening of an options account, the proposed rule provides that a General Securities Sales Supervisor may supervise options activities pursuant to FINRA Rule 2360.

      As discussed below, FINRA is proposing to eliminate the Options Representative category (current NASD Rule 1032(d)). Therefore, the proposed rule eliminates from the Registered Options Principal category the Options Representative prerequisite. The proposed rule also removes the Corporate Securities Representative co-prerequisite since it is tied to the Options Representative prerequisite. Consequently, a person registering as a Registered Options Principal after the effective date of the proposed rule must satisfy one of the remaining prerequisites—the General Securities Representative, United Kingdom Securities Representative or Canada Securities Representative prerequisite. A person registered as a Registered Options Principal immediately prior to the effective date of the proposed rule will be grandfathered from the new prerequisite requirement.

      In addition, the provision regarding members that lose their sole Registered Options Principal (current NASD IM-1022-1) will be transferred with non-substantive changes into supplementary material.
      7. Government Securities Principal (Proposed FINRA Rule 1230(a)(7))

      The proposed rule eliminates the grandfathering provision for persons who were registered as principals prior to the 1988 adoption of the Government Securities Principal category since the provision is outdated.

      Further, the proposed rule clarifies that: (1) a person registering as a Government Securities Principal is required to satisfy the General Securities Representative, United Kingdom Securities Representative, Canada Securities Representative or Government Securities Representative (current NASD Rule 1032(g)) prerequisite; and (2) a General Securities Principal who has satisfied the General Securities Representative, United Kingdom Securities Representative or Canada Securities Representative prerequisite (or who is also registered as a Government Securities Representative) is qualified to function as a Government Securities Principal without having to register separately as such.
      8. Investment Company and Variable Contracts Products Principal and Direct Participation Programs Principal (Paragraphs (a)(8) and (a)(9) of Proposed FINRA Rule 1230)

      The proposed rule clarifies that a General Securities Principal who has satisfied the General Securities Representative, United Kingdom Securities Representative or Canada Securities Representative prerequisite is qualified to function as an Investment Company and Variable Contracts Products Principal (current NASD Rule 1022(d)) or as a Direct Participation Programs Principal (current NASD Rule 1022(e)) without having to register separately in such categories.
      9. General Securities Sales Supervisor (Paragraph (a)(10) and Supplementary Material .04 of Proposed FINRA Rule 1230)

      Consistent with FINRA Rule 2360 (Options), FINRA proposes to add "approval of customer accounts" to the list of permissible supervisory activities of a General Securities Sales Supervisor.

      Currently, for purposes of compliance with NASD Rule 2210 (Communications with the Public), a General Securities Sales Supervisor is permitted to approve most sales literature, but is not permitted to provide final approval of advertisements. However, as detailed in Regulatory Notice 09-55, FINRA is proposing to amend the communications rules, including NASD Rule 2210, to combine the definitions of advertisement, sales literature and independently prepared reprint into a single category—retail communications. Since FINRA is proposing to remove the distinction between advertisements and sales literature as part of the communications rules, FINRA also proposes to amend the General Securities Sales Supervisor registration category to remove the restriction from providing final approval of advertisements. Thus, the proposed rule permits a General Securities Sales Supervisor to approve retail communications to the same extent a General Securities Sales Supervisor may currently approve sales literature.

      Further, the provision explaining the General Securities Sales Supervisor category (current NASD IM-1022-2) will be transferred into supplementary material with changes consistent with the proposed changes to the General Securities Sales Supervisor registration category.
      10. Supervisory Analyst (Proposed FINRA Rule 1230(a)(11))

      NYSE Rules require that an individual who is responsible for approving research reports be registered and qualified as a Supervisory Analyst. Pursuant to NASD Rules (current NASD Rules 1050(f)(3)(A), 2210(b)(1)(B) and 2711(h)(13)(C) and existing guidance18), a Supervisory Analyst may approve research reports in lieu of a Research Principal. If a member elects to have a Supervisory Analyst approve research, then a Research Principal must supervise the overall conduct of the Supervisory Analyst and Research Analyst.

      Consistent with NASD Rules and existing guidance, FINRA proposes to adopt a standalone permissive registration category for Supervisory Analysts. A person may register as a Supervisory Analyst, provided his or her activities are limited to approving research reports pursuant to the applicable rules and the person passes the Supervisory Analyst examination. Unlike the current NYSE requirement, the proposed rule does not require evidence of appropriate experience. Rather than passing the entire Supervisory Analyst examination, a person may obtain a waiver from the securities analysis portion (Part II) of the Supervisory Analyst qualification examination upon verification that the person has passed Level I of the Chartered Financial Analyst examination, which is consistent with the current NYSE provision. The proposed rule further clarifies that a Supervisory Analyst must be supervised by a Research Principal.
      11. General Securities Representative (Proposed FINRA Rule 1230(b)(2))

      The proposed rule deletes references to the Japan Module of the General Securities Representative examination. Current NASD Rule 1032(a)(2)(D) permits a person registered and in good standing as a representative with the Japanese securities regulators to become qualified as a General Securities Representative by passing the Japan Module of the General Securities Representative examination. The Japan Module, however, was never implemented.
      12. Securities Lending Representative and Securities Lending Supervisor (Proposed FINRA Rule 1230(b)(6))

      NASD Rules currently do not have a specific registration category for associated persons engaged in securities lending activities and in the direct supervision of such activities. Whether such persons are required to be registered depends on whether they are functioning as "representatives" or "principals" under current NASD Rules. Given the scope of such activities and for tracking and FINRA examination purposes, FINRA believes that it is appropriate to have a specific registration category for such persons similar to the NYSE registration requirements.

      The proposed rule generally adopts the NYSE registration requirements for Securities Lending Representatives and Securities Lending Supervisors. The proposed rule requires an associated person who has discretion to commit a member to any contract or agreement (written or oral) involving securities lending or borrowing activities with any other person, and the direct supervisor of the associated person to register as a Securities Lending Representative and Securities Lending Supervisor, respectively. While they will not be subject to a qualification examination at this time, they will be required to register as such for tracking and FINRA examination purposes, regardless of their registrations in other categories.

      Unlike the NYSE requirement, the proposed rule does not require such persons to sign an agreement (representing a form of code of ethics), pursuant to which they agree to abide by all policies and procedures established by their employers as well as all applicable federal and state securities laws and NYSE rules. FINRA has determined not to adopt this agreement in its current form at this time in light of the status of such persons as registered persons.
      13. Order Processing Assistant Representative (Proposed FINRA Rule 1230(b)(7))

      The proposed rule streamlines and consolidates the Order Processing Assistant Representative category (current NASD Rules 1041 and 1042) and clarifies that a person whose sole function is to accept unsolicited customer orders is not required to register as an Order Processing Assistant Representative if he or she chooses to register in another appropriate representative category. However, if the person registers in another appropriate representative category, the person will be precluded from registering as an Order Processing Assistant Representative.

      The proposed rule further codifies an existing restriction that prohibits an Order Processing Assistant Representative from accepting customer orders for municipal securities and direct participation programs.19 The proposed rule also clarifies that Order Processing Assistant Representatives will not be precluded from registering in another registration category, but upon such registration they will lose their Order Processing Assistant Representative registration.
      14. Proctor (Proposed FINRA Rule 1230(b)(8))

      The proposed rule amends the Proctor category to clarify that persons registered solely as Proctors (current NASD Rule 1043) based on the scope of their activities are subject to the same compensation restrictions as persons registered solely as Order Processing Assistant Representatives; i.e., they may only be compensated through an hourly wage, a salary, or bonuses or other compensation based on a member's profit sharing plan or similar arrangement.
      15. Investment Company and Variable Contracts Products Representative (Proposed FINRA Rule 1230(b)(9))

      Consistent with the registration provisions of MSRB Rule G-3(a)(ii)(C), the proposed rule amends the Investment Company and Variable Contracts Products Representative category (current NASD Rule 1032(b)) to clarify that such persons are also permitted to engage in the solicitation, purchase or sale of municipal fund securities as defined under MSRB Rule D-12.
      16. Representatives Engaged in Options Activities (Proposed FINRA Rule 1230.01)

      FINRA believes that there is diminishing utility in the Options Representative category. Therefore, FINRA proposes to eliminate this category and instead require that a representative engaged in options activities register as a General Securities Representative, United Kingdom Securities Representative or Canada Securities Representative, which is consistent with the current NYSE requirements. A person registered as an Options Representative immediately prior to the effective date of the proposed rule will be grandfathered from this requirement.
      17. Qualification Examination Requirements for Foreign Associates (Proposed FINRA Rule 1230.05)20

      Pursuant to current NASD Rule 1100, a Foreign Associate may function as a registered representative, including acting as a trader or the registered person responsible for servicing the accounts of a foreign national. However, Foreign Associates are exempt from the requirement to pass a qualification examination and are not subject to continuing education requirements.

      Considering the type of interaction that Foreign Associates may have with customers, FINRA believes there is no reason such persons should not demonstrate the same level of competence and knowledge required of their counterparts in the United States. The proposed rule therefore eliminates the Foreign Associate category and requires that a person registered as a Foreign Associate immediately prior to the effective date of the proposed rule register in an appropriate registration category (and pass any applicable examination) within one year of the effective date of the proposed rule.
      18. Other Provisions Transferring With Non-Substantive Changes (Paragraphs (a)(2)(B), (b)(1), (b)(3) through (b)(5) and (b)(10) through (b)(13) of Proposed FINRA Rule 1230))

      FINRA proposes to transfer into the proposed rule with non-substantive changes the following registration categories and provisions:
      •   General Securities Principal responsible for supervising investment banking activities (current NASD Rule 1022(a)(1));21
      •   Definition of the term "Representative" (current NASD Rule 1031(b));
      •   Direct Participation Programs Representative (current NASD Rule 1032(c));
      •   Corporate Securities Representative (current NASD Rule 1032(e));
      •   Equity Trader (current NASD Rule 1032(f));
      •   Government Securities Representative (current NASD Rule 1032(g));
      •   Private Securities Offerings Representative (current NASD Rule 1032(h));
      •   Investment Banking Representative (current NASD Rule 1032(i));22 and
      •   Research Analyst (current NASD Rule 1050).
      D. Associated Persons Exempt from Registration (Proposed FINRA Rule 1240)23
      1. Active Versus Inactive

      Current NASD Rule 1060(a)(2) exempts from registration those associated persons who are not actively engaged in the investment banking or securities business. This exemption relates to the current provisions prohibiting the "parking" of registrations, which, among other things, prohibit a member from maintaining a registration for any person who is no longer active in the member's investment banking or securities business. The proposed changes to the registration requirements render the exemption obsolete; therefore, FINRA proposes to delete the exemption.
      2. Codification of Guidance Regarding Contact with Prospective Customers (Proposed FINRA Rule 1240.01)

      FINRA proposes to codify existing guidance permitting unregistered persons to have limited contact with prospective customers (subject to certain restrictions).24
      3. Rescission of Guidance Regarding Unregistered Persons Who Occasionally Receive Unsolicited Customer Orders (Paragraph (a) and Supplementary Material .02 of Proposed FINRA Rule 1240)

      FINRA proposes to rescind existing guidance permitting unregistered administrative personnel to occasionally receive an unsolicited customer order at a time when appropriately qualified representatives or principals are unavailable.25 FINRA believes that to accept customer orders a person must be appropriately registered. The proposed rule clarifies that the function of accepting customer orders is not considered a clerical or ministerial function (current NASD Rule 1060(a)(1)) and that associated persons who accept customer orders under any circumstances are required to be appropriately registered and qualified.
      4. Other Exemptions from Registration (Paragraphs (b) and (c) of Proposed FINRA Rule 1240)

      Current NASD Rule 1060(a)(4)(A) exempts from registration associated persons whose functions are related solely and exclusively to effecting transactions on the floor of a national securities exchange, provided they are registered as floor members with such exchange. Since exchanges have registration categories other than the floor member category, FINRA proposes to amend this provision to clarify that the exemption applies to associated persons solely and exclusively effecting transactions on the floor of a national securities exchange, provided they are appropriately registered with such exchange.

      FINRA proposes to transfer into the proposed rule with non-substantive changes the remaining exemptions from registration (current NASD Rules 1060(a)(3) and (a)(4)(B) through (D)).
      E. NYSE Provisions Proposed for Deletion26

      FINRA proposes to delete the following NYSE provisions as they are substantially similar to the proposed consolidated registration rules, otherwise incorporated as described above, rendered obsolete by the proposed approach reflected in the registration rules, or addressed by other rules:
      •   NYSE Rule 10 (definition of "registered representative");27
      •   NYSE Rule Interpretations 10/01 and 345(a)/01 (clerical and ministerial exemption from registration);
      •   NYSE Rule Interpretation 311(b)(5)/01 (qualification requirements for principal executives);
      •   NYSE Rule Interpretations 311(b)(5)/02 and /03 (relating to the designation and registration of a Chief Financial Officer and a Chief Operations Officer);
      •   NYSE Rule Interpretation 311(g)/01 (requirement that certain members have at least two general partners);
      •   NYSE Rule 321.15 (registration of certain employees of a foreign subsidiary);
      •   NYSE Rule 344 and its Interpretation (Research Analyst and Supervisory Analyst categories);
      •   NYSE Rules 345(a), 345.10, 345.15(2) through 345.15(4) and NYSE Rule Interpretation 345.15/02 (representative categories);28
      •   NYSE Rules 345.11(a) and (b) and NYSE Rule Interpretation 345.11/01 (personnel background investigations);
      •   NYSE Rule 345.11(c) and NYSE Rule Interpretation 345.11/02 (Form U4 recordkeeping obligations);
      •   NYSE Rules 345.12, 345.13, 345.17 and 345.18 and NYSE Rule Interpretations 345.12/01 and 345.18/01 (Forms U4 and U5 filing requirements);
      •   NYSE Rule 345.15(1)(a) (examination requirement);
      •   NYSE Rule 345.15(1)(b) and NYSE Rule Interpretation 345.15/01 (examination waivers);
      •   NYSE Rule Interpretation 345(a)/02 (independent contractor status);
      •   NYSE Rule Interpretation 345(a)/03) (status of persons serving in the Armed Forces);
      •   NYSE Rule Interpretation 345(b) (provisions regarding officers);29 and
      •   NYSE Rule 345.16 (requirement to provide information regarding employees).

      1 The current FINRA rulebook consists of: (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the Transitional Rulebook). While the NASD Rules generally apply to all FINRA member firms, the Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (Dual Members). The FINRA Rules apply to all FINRA member firms, unless such rules have a more limited application by their terms. 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 Notice to Members (NTM) 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 or 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 Exchange Act Section 19 and rules thereunder.

      4 For convenience, the Incorporated NYSE Rules are referred to as the NYSE Rules.

      5 The proposal contains several provisions that require notification to FINRA. FINRA will advise members through a Regulatory Notice of the manner of the required notifications.

      6 Some of these provisions are subject to pending proposals related to the rulebook consolidation process.

      7 For purposes of the proposed rule, the assigned registered supervisor will only be responsible for supervising such person's activities to ensure that such person is not engaged in any activities that will require registration and is complying with the provisions applicable to such person based on his or her status as a (permissively) registered person.

      8 See SR-FINRA-2007-004.

      9 Persons who are currently registered pursuant to this permissive category, to the extent that they seek to maintain such registrations, will have to be appropriately registered in accordance with the proposed rule. Additionally, FINRA is proposing to delete NYSE Rule 321.15 (which requires the registration of certain employees of a foreign subsidiary). Thus, persons who are currently registered pursuant to NYSE Rule 321.15, to the extent that they seek to maintain such registrations, will also have to be appropriately registered in accordance with the proposed rule.

      10 See supra note 6.

      11 For purposes of the proposed rule, the assigned registered supervisor will only be responsible for supervising such person's activities to ensure that such person is: (1) in fact engaged in the business of the member's financial services industry affiliate; (2) not engaged in any activities that will require registration or make such person eligible for inactive registration by engaging in a bona fide business purpose of the member; and (3) complying with the provisions applicable to such person based on his or her status as a Retained Associate.

      12 In 2005, the NYSE filed a proposal, SR-NYSE-2005-59, with the SEC to permit a member to maintain the registration (as a retained associate) of a person employed by a financial services industry affiliate of the member. The NYSE proposal has not been published for comment in the Federal Register.

      13 See NTM 99-49 (June 1999).

      14 The proposed consolidated registration rules provide similar clarifications regarding these prerequisite categories in the context of other registration categories (with the exception of the General Securities Sales Supervisor category, which requires the General Securities Representative prerequisite).

      15 A person may qualify to function as principal or representative based on a combination of registrations and examinations. For instance, a person who is registered as a General Securities Sales Supervisor and passes the General Securities Principal Sales Supervisor Module (Series 23) examination also satisfies the General Securities Principal examination requirement. See NTM 03-37 (July 2003).

      16 See NTMs 04-81 (November 2004) and 07-04 (January 2007).

      17 The NYSE Compliance Official requirement (NYSE Rule 342.13(b) and NYSE Rule Interpretation 342(a)(b)/02) is proposed to be deleted as part of the proposed changes to the supervision rules. See Regulatory Notice 08-24 (May 2008).

      18 See NTM 04-81.

      19 See NTM 89-78 (December 1989).

      20 FINRA will address NASD Rule 1090 (Foreign Members), which relates to members that do not maintain an office in the United States responsible for preparing and keeping financial and other required reports, as part of a separate phase of the rulebook consolidation.

      21 See Regulatory Notice 09-41 (July 2009).

      22 See id.

      23 FINRA will address the foreign finder provision (current NASD Rule 1060(b)), the corresponding NYSE provision (NYSE Rule Interpretation 345(a)(i)/03) and NYSE Rule Interpretations 345(a)(i)/01 and /02 (relating to compensation paid to non-registered persons and compensation paid for advisory solicitations) as part of a separate phase of the rulebook consolidation. See Regulatory Notice 09-69 (December 2009).

      24 See NTM 00-50 (August 2000).

      25 See NTM 87-47 (July 1987).

      26 The NYSE registration requirements for certain supervisors (NYSE Rules 342(d) and .13(a) and NYSE Rule Interpretation 342.13/01) are proposed to be deleted as part of the proposed changes to the supervision rules. See Regulatory Notice 08-24. Supervisors registered as General Securities Principals or General Securities Sales Supervisors will not lose these registrations since these categories will be maintained as part of the FINRA registration rules. Supervisors registered solely by having passed the General Module (Series 10) of the General Securities Sales Supervisor examination (or the historical equivalent to the Series 10) will lose these stand-alone registrations. However, FINRA will consider upon request the Series 10 registration, among other considerations, in determining whether to grant such persons a waiver of a principal examination.

      27 FINRA believes that the definition of the term "representative" in current NASD Rule 1031(b) is more consistent with the functions customarily performed by a registered representative.

      28 FINRA also is proposing to delete the NYSE registration requirements relating to commodities solicitors (NYSE Rule 345.15(5)) and floor members and floor clerks (NYSE Rule Interpretation 345.15/02) as these activities are not within the scope of the proposed registration rules.

      29 This is a conforming change. The corresponding NYSE Rule, NYSE Rule 345(b), was deleted as part of a prior rule change. See Exchange Act Release No. 58533 (September 12, 2008), 73 FR 54652 (September 22, 2008) (Order Approving SR-FINRA-2008-036).


      Attachment A

      Comparison of Current Rules Regarding Registration and Qualification Requirements

      The table below explains the similarities and differences between current NASD and NYSE rules regarding registration and qualification requirements. FINRA proposes to transfer the NASD rules into the Consolidated FINRA Rulebook with certain changes that take into account requirements under the NYSE rules. FINRA urges member firms to carefully review the entire proposed rule text in Attachment B at www.finra.org/notices/09-70 to understand the full extent of the proposed changes.

      Similar Requirements
      Description Applicable FINRA/NASD/NYSE Provisions
      General Registration/Qualification Requirements  
      FINRA By-Laws and NASD and NYSE Rules require that members file Forms U4 and U5, including any amendments, and that such filings be made through the Central Registration Depository. Article V, Sections 2 and 3, of the FINRA By-Laws
      FINRA Rule 1010
      NYSE Rule 345.12, .13, .17 and .18
      NYSE Rule Interpretation 345.12/01 and .18/01
      NASD and NYSE Rules remind members of their Form U4 recordkeeping obligations under the Exchange Act. FINRA Rule 1010
      NYSE Rule 345.11(c)
      NYSE Rule Interpretation 345.11/02
      NASD and NYSE Rules require members to investigate the background of prospective personnel. NASD Rule 3010(e)
      Regulatory Notice 07-55
      NYSE Rule 345.11(a)
      NYSE Rule Interpretation 345.11/01
      NASD and NYSE Rules require an applicant for registration to provide, upon a member's request, a copy of his or her Form U5. NASD Rule 3010(f)1
      NYSE Rule 345.11(b)
      NASD and NYSE Rules set forth provisions regarding the status of registered persons serving in the Armed Forces of the United States. NASD IM-1000-2(a) and (b)
      NYSE Rule Interpretation 345(a)/03
      NASD and NYSE Rules set forth a general requirement that persons pass an appropriate qualification examination (including any applicable prerequisites) before their registration can become effective. NASD Rules 1021(a) and 1031(a)
      NYSE Rule 345.15(1)(a)
      NASD and NYSE Rules provide that if a person does not register with a member within two years of his or her last registration, his or her qualification will lapse and the person must then re-test as applicable to function in a registered category. NASD Rules 1021(c), 1031(c)and 1041(c)
      NYSE Rule Interpretation 345A(a)/04
      NASD and NYSE Rules provide an exemption from registration for associated persons whose functions are solely and exclusively clerical or ministerial. NASD Rule 1060(A)(1)
      NTM 87-47
      NYSE Rule Interpretations 10/01 and 345(a)/01
      NASD and NYSE Rules set forth provisions regarding waiver of the applicable qualification examinations. NASD Rule 1070(d)
      NYSE Rules 342.13 and 345.15(1)(b)
      NYSE Rule Interpretations 344/01 and 345.15/01
      NASD and NYSE Rules set forth waiting periods for retaking failed examinations. NASD Rule 1070(e)
      Information Memorandum 04-16
      NASD and NYSE Rules require that examinations be kept confidential. NASD Rule 1080
      Information Memorandum 88-37
      FINRA and NYSE Rules require members to provide information regarding their employees. FINRA Rule 8210
      NYSE Rule 345.16
      Requirements Applicable to Principals/Supervisors/Representatives  
      NASD and NYSE Rules require that certain supervisory personnel have at least one year of direct experience or two years of related experience in the subject area that they supervise. NASD Rule 1014(a)(10)(D)
      NYSE Rule 342.13(a)
      NASD and NYSE Rules require that members engaged in options transactions with the public have an associated person registered and qualified as a Registered Options Principal. NASD Rules 1021(e)(3) and 1022(f)
      NYSE Rule 7202
      NASD and NYSE Rules set forth specific registration and qualification requirements for associated persons engaged in security futures activities. NASD Rules 1022(f)(5), 1022(g)(3), 1032(a)(2)(A) and 1032(d)(4)
      NYSE Rule Interpretation 345A(b)(2)(i)/02
      Information Memorandum 03-43
      NASD and NYSE Rules require that a representative register and qualify as a General Securities Representative.

      Alternatively, if the representative does not engage in municipal securities activities, NASD and NYSE Rules permit the representative to register and qualify as a United Kingdom Limited Securities Representative or Canada Limited Securities Representative.
      NASD Rules 1031(a) and 1032(a)
      NYSE Rule 345.10 and .15(2)
      NYSE Rule Interpretation 345.15/02
      Information Memoranda 91-09 and 96-06
      NASD and NYSE Rules provide that a representative is not required to register as a General Securities Representative if the person's activities are so limited as to qualify such person for one or more of the limited categories of representative registration, including an Investment Company and Variable Contracts Products Representative or a Direct Participation Programs Representative. NASD Rule 1032(a)(1), (b) and (c)
      NYSE Rule 345.15(3)
      NYSE Rule Interpretation 345.15/02
      NASD and NYSE Rules require that 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 be registered and qualified as a Research Analyst. NASD Rule 1050
      NYSE Rule 344, .10 and .12
      NYSE Rule Interpretation 344/01 and /02
      NASD and NYSE Rules require that an associated person designated as a Proctor for the purposes of in-firm delivery of the Regulatory Element be registered as a Proctor. Proctors are not subject to a qualification examination. Associated persons who are registered in other registration categories may be designated as Proctors without having to register as such. NASD Rules 1120(a)(6)(E)and 1043
      NYSE Rule Interpretation 345A(a)/03E
      Information Memorandum 02-49


      Differing Requirements
      Description Applicable FINRA/NASD/NYSE Provisions
      General Registration/Qualification Requirements  
      NASD Rules set forth provisions regarding the deferment of the lapse of registration requirements in NASD Rules 1021(c), 1031(c), and 1041(c) for formerly registered persons serving in the Armed Forces of the United States. NASD IM-1000-2(c)
      NASD Rules include a provision regarding the disciplinary implications of failing to register a representative. NASD IM-1000-3
      NASD Rules prohibit a member from maintaining a principal or representative registration with FINRA for any person who is no longer active in the member's investment banking or securities business, who is no longer functioning as a principal or representative as defined under the rules, or where the sole purpose is to avoid the re-testing requirement applicable to persons whose registration in such categories has lapsed for more than two years. These rules also prohibit a member from making application for the registration of a person as principal or representative where the member does not intend to employ the person in its investment banking or securities business.

      However, the rules permit a member to maintain, or make application for, the registration as a principal or representative of a person who performs legal, compliance, internal audit, back-office operations (e.g., cashiering, accounting, settling, and the record keeping of customers' cash or margin accounts) or similar responsibilities for the member. In addition, the rules permit a member to maintain, or make application for, the registration as a principal or representative of a person who is engaged in the investment banking or securities business of a foreign securities affiliate or subsidiary of the member.
      NASD Rules 1021(a) and 1031(a)
      NYSE Rules require that certain persons apply to the NYSE for Approved Person status.3 Natural persons applying for Approved Person status are required to submit a Form U4 and register as an Approved Person. Approved Persons are not subject to a qualification examination. NYSE Rules 2(c)and 304(e)4
      Information Memorandum 00-21
      NYSE Rules provide that an independent contractor is deemed an employee of a member for purposes of the NYSE Rules and require that the member comply with certain requirements when entering into an arrangement with any person asserting independent contractor status, including a requirement that the independent contractor execute a "consent to jurisdiction" form.5 NYSE Rule Interpretation 345(a)/02
      NASD Rules provide that the following associated persons are not required to be registered: (1) associated persons who are not actively engaged in the investment banking or securities business; (2) associated persons whose functions are related solely and exclusively to the member's need for nominal corporate officers or for capital participation; and (3) associated persons whose functions are related solely and exclusively to: effecting transactions on the floor of a national securities exchange and who are registered as floor members with such exchange, transactions in municipal securities, transactions in commodities or transactions in security futures (provided that any such person is registered with a registered futures association). NASD Rule 1060(a)
      NASD Rules provide general information relating to the examination process. NASD Rule 1070(a), (b) and (c)
      Requirements Applicable to Principals/Supervisors/Representatives  
      NYSE Rules require that an employee of a non-U.S. registered foreign subsidiary whose duties (involving the purchase or sale of U.S. securities) correspond to those of a registered representative file a Form U4 and be approved by the NYSE as a registered representative of the parent member. NYSE Rule 321.15
      Information Memorandum 93-54
      NASD Rules require that a principal register and qualify as a General Securities Principal.6 The term "principal" includes sole proprietors, officers, partners, managers of offices of supervisory jurisdiction and directors who are actively engaged in the management of the member's investment banking or securities business, such as supervision, solicitation, conduct of business or the training of persons associated with a member for any of these functions.

      An associated person registered solely as a General Securities Principal is not qualified to function as a Financial and Operations Principal; Introducing Broker-Dealer Financial and Operations Principal; Registered Options Principal; General Securities Sales Supervisor; Municipal Securities Principal; or Municipal Fund Securities Limited Principal, unless the General Securities Principal is also registered and qualified in these other categories.
      NASD Rules 1021(a), 1021(b) and 1022(a)
      NTM 99-49
      NASD Rules provide that a principal is not required to register as a General Securities Principal if the person's activities are so limited as to qualify such person for one or more of the limited categories of principal registration, including a Financial and Operations Principal, an Introducing Broker-Dealer Financial and Operations Principal, a Registered Options Principal, an Investment Company and Variable Contracts Products Principal, a Direct Participation Programs Principal, General Securities Sales Supervisor or Government Securities Principal. NASD Rule 1022(a) through (h)
      NASD IM-1022-2
      NYSE Rules require that persons designated by a member to be in charge of any office of the member, any regional or other group of offices, or any sales department or activity pass the General Securities Sales Supervisor examination. The General Securities Principal examination and the General Module (Series 10) of the General Securities Sales Supervisor examination are acceptable alternative examinations to the General Securities Sales Supervisor examination. However, persons that pass these alternative examinations cannot supervise options or municipal securities activities. NYSE Rule 342(d) and .13(a)
      NYSE Rule Interpretation 342.13/01
      NYSE Rules require that "principal executives" be appropriately qualified to perform their assigned functions. NYSE Rule 311.17
      NYSE Rule Interpretation 311(b)(5)/01
      NASD Rules require that a member's Chief Compliance Officer (CCO) designated on Schedule A of the member's Form BD be registered as a General Securities Principal. If the member's activities are limited to investment company and variable contracts products, direct participation programs or government securities, the member's CCO may instead be registered as an Investment Company and Variable Contracts Principal, Direct Participation Programs Principal or Government Securities Principal, respectively. In addition, for purposes of the CCO requirement for Dual Members, FINRA recognizes the Compliance Official examination as an acceptable alternative to the principal examination requirements for General Securities Principal, Investment Company and Variable Contracts Principal and Direct Participation Programs Principal, as applicable. The NASD Rules also include a grandfathering provision for certain CCOs. NASD Rule 1022(a)(1)
      FINRA Rule 3130(a)
      NTM 01-51
      NYSE Rules require that Compliance Officials, the person (or persons) designated by a member to direct day-to-day compliance activity (such as the CCO) and each other person designated by the member to directly supervise ten or more persons engaged in compliance activity, pass the Compliance Official qualification examination.

      If a member's commissions and other fees from its public business (retail and institutional) are under $500,000 in the preceding calendar year and it introduces to another broker-dealer, the member's Compliance Officials are exempt from the Compliance Official qualification examination requirement. Compliance Officials that supervise ten or more persons whose compliance responsibilities are limited to the registration of individuals with regulatory bodies are also exempt from the Compliance Official qualification examination requirement.

      If a member is conducting a specialist business in addition to a public business, the member's Compliance Officials are also required to pass the Compliance Official for Specialist Firm qualification examination. However, if a member's activities are limited to the execution of orders on the NYSE floor and it does not conduct any public business, the member's Compliance Officials are subject only to the Compliance Official for Specialist Firm qualification examination requirement.
      NYSE Rule 342.13(b)
      NYSE Rule Interpretation 342(a)(b)/02
      NASD Rules require that a General Securities Principal who is responsible for supervising investment banking activities as described in NASD Rule 1032(i) also be registered as an Investment Banking Representative. NASD Rule 1022(a)(1)
      NASD Rules require that a member's Research Principal, a principal who is responsible for supervising the overall conduct of a Research Analyst or Supervisory Analyst or who is responsible for approving research reports (other than a principal responsible for reviewing and approving third-party research reports, a principal assigned to supervise for compliance with only the disclosure provisions of NASD Rule 2711 or a Supervisory Analyst who is permitted to approve research reports), be registered as either a General Securities Principal and pass the Regulatory Administration and Best Practices (Series 87) portion of the Research Analyst examination or a General Securities Principal and pass the Supervisory Analyst examination. NASD Rule 1022(a)(5)
      NTMs 04-81 and 07-04
      NASD Rules permit a Supervisory Analyst to approve research reports. If a member elects to have a Supervisory Analyst approve research, then a Research Principal must supervise the overall conduct of the Supervisory Analyst and Research Analyst. NASD Rules 1050(f)(3)(A), 2210(b)(1)(B) and 2711(h)(13)(C)
      NTM 04-81
      NYSE Rules require that an individual who is responsible for approving research reports be registered and qualified as a Supervisory Analyst. Such person is required to present evidence of appropriate experience (which means having at least three years prior experience within the immediately preceding six years involving securities or financial analysis) and pass the Supervisory Analyst qualification examination. Rather than passing the entire Supervisory Analyst qualification examination, such person may obtain a waiver from the securities analysis portion (Part II) of the Supervisory Analyst qualification examination upon verification that the person has passed Level I of the Chartered Financial Analyst examination. NYSE Rules 344, 344.11 and 472(a)(2)
      NYSE Rule Interpretation 344/03 and /04
      NASD Rules require that a principal who is responsible for the financial and operational management of a member that has a minimum net capital requirement of $250,000 under SEA Rules 15c3-1(a)(1)(ii) and 15c3-1(a)(2)(i), or a member that has a minimum net capital requirement of $150,000 under SEA Rule 15c3-1(a)(8), be designated, registered and qualified as a Financial and Operations Principal. Such members also are required to designate a Chief Financial Officer (CFO) who is required to be registered and qualified as a Financial and Operations Principal.

      In addition, NASD Rules require that a principal who is responsible for the financial and operational management of a member that is subject to the net capital requirements of SEA Rule 15c3-1, other than a member that is subject to the net capital requirements of SEA Rules 15c3-1(a)(1)(ii), (a)(2)(i) or (a)(8), be designated, registered and qualified as a Financial and Operations Principal or an Introducing Broker-Dealer Financial and Operations Principal. Such members also are required to designate a CFO who is required to be registered and qualified as a Financial and Operations Principal or an Introducing Broker-Dealer Financial and Operations Principal.
      NASD Rules 1021(e)(3), 1022(b) and (c)
      NYSE Rules require that members designate a CFO and a Chief Operations Officers (COO) and that the CFO and the COO be registered and qualified as a Financial and Operations Principal if the member is a clearing firm or as either a Financial and Operations Principal or an Introducing Broker-Dealer Financial and Operations Principal if the member is an introducing firm.

      If the member is an introducing firm, the same person may be designated as both the CFO and COO.
      NYSE Rule Interpretation 311(b)(5)/02 and /03
      NASD Rules require that a principal engaged in government securities activities be registered as a Government Securities Principal. Such persons are not subject to a principal qualification examination. The rules include a grandfathering provision for certain principals. NASD Rule 1022(h)
      NASD Rules provide that a person who is currently registered with a member as a representative and whose duties are changed by the member so as to require registration as a principal may function as a principal for up to 90 calendar days before he or she is required to pass the appropriate qualification examination for principal.

      In addition, NASD Rules provide that a person who is not registered with a member as a representative and who is required to register as a principal may function as a principal for up to 90 calendar days after first satisfying all applicable prerequisite requirements before he or she is required to pass the appropriate qualification examination for principal.
      NASD Rule 1021(d)
      NASD Rules require that a member, except a sole proprietorship, have a minimum of two registered principals with respect to each aspect of the member's investment banking and securities business. In situations that indicate conclusively that only one registered principal should be required, FINRA may waive the two-principal requirement pursuant to the Rule 9600 Series and permit such member to have only one registered principal. NASD Rule 1021(e)(1) and (2)
      NYSE Rules require that a member carrying customer accounts have at least two general partners who are natural persons actively engaged in the member's business.7 NYSE Rule Interpretation 311(g)/01
      NASD Rules require that members that have one Registered Options Principal promptly notify FINRA and agree to certain conditions if such person is terminated, resigns, becomes incapacitated or is otherwise unable to perform his or her duties. NASD IM-1022-1
      NASD Rules define the term "representative" as an associated person, including assistant officer other than a principal, who is engaged in the investment banking or securities business for the member, such as supervision, solicitation, conduct of business in securities or the training of persons associated with a member for any of these functions. NASD Rule 1031(b)
      NYSE Rules define the term "registered representative" as an employee engaged in the solicitation or handling of accounts or orders for the purchase or sale of securities, or other similar instruments for the accounts of customers of his or her employer or in the solicitation or handling of business in connection with investment advisory or investment management services furnished on a fee basis by his or her employer. NYSE Rule 10
      NASD Rules provide that a representative is not required to register as a General Securities Representative if the person's activities are so limited as to qualify such person for one or more of the limited categories of representative registration, including an Options Representative, a Corporate Securities Representative, Government Securities Representative or Private Securities Offerings Representative. NASD Rule 1032(a)(1), (d), (e), (g) and (h)
      Subject to certain exceptions, NASD Rules require that each representative who, with respect to transactions in equity, preferred or convertible debt securities effected otherwise than on a securities exchange, is engaged in proprietary trading, the execution of transactions on an agency basis or the direct supervision of such activities be registered as an Equity Trader. NASD Rule 1032(f)
      NASD Rules provide that associated persons engaged in investment banking activities are required to be registered as Investment Banking Representatives. NASD Rule 1032(i)
      NASD Rules provide that a person associated with a member is not required to register as a General Securities Representative or in one or more of the limited categories of representative registration if the person's activities are so limited as to qualify such person for registration as an Order Processing Assistant Representative. An Order Processing Assistant Representative is an associated person whose only function is to accept unsolicited customer orders (other than orders for municipal securities and direct participation programs) for submission for execution by the member. Order Processing Assistant Representatives are subject to certain restrictions regarding their activities and compensation and are subject to certain supervisory requirements. In addition, they may not be registered concurrently in any other capacity. NASD Rules 1041 and 1042
      NTM 89-78
      NASD Rules provide that associated persons (who are to function as representatives for the member) that meet the "Foreign Associate" criteria are exempt from the requirement to pass a qualification examination. To qualify for the Foreign Associate registration category, an associated person must meet the following criteria: (1) cannot be a citizen, national, or resident of the U.S. or any of its territories or possessions; (2) must conduct all of his or her securities activities in areas outside the jurisdiction of the U.S.; and (3) cannot engage in any securities activities with or for any citizen, national or resident of the U.S.

      A Foreign Associate may act in any registered representative capacity on behalf of the member, including acting as a trader or the registered person responsible for servicing the accounts of a foreign national.

      To designate an associated person as a Foreign Associate, a member must: (1) file a Form U4 with FINRA and certify that the person meets the criteria for a Foreign Associate; (2) attest that the person is not disqualified from registration; and (3) certify that service of process for any proceeding by FINRA for such person may be sent to an address designated by the member. If the Foreign Associate is terminated, the member must notify FINRA immediately (by filing a Form U5). Foreign Associates are not subject to continuing education requirements.
      NASD Rule 1100
      NTM 95-37
      NYSE rules require that a securities lending representative (any person who has discretion to commit his or her employer member to any contract or agreement (written or oral) involving securities lending or borrowing activities with any other person) and the direct supervisor of a securities lending representative be registered by filing a Form U4 and sign an agreement (representing a form of code of ethics) as an addendum to the Form U4. The rules also require that such persons complete the regulatory element of the continuing education requirements. However, such persons are not required to pass a qualification examination. NYSE Rule 345(a) and .10
      NYSE Rule Interpretations 345.15/02 and 345A(a)/02
      NYSE Rules require that a "Registered Options Representative," a representative who transacts business with the public in option contracts, pass the General Securities Representative qualification examination. NYSE Rules 345.10, 345.15(4) and 700(b)(49)8
      NYSE Rule Interpretation 345.15/02
      NYSE Rules require that commodities solicitors, individuals who are engaged in the solicitation or handling of business in, or the sale of, commodities futures contracts, satisfy a solicitor's examination requirement (acceptable to the NYSE) of a national commodities exchange. NYSE Rule 345.15(5)
      NYSE Rules permit floor members and floor clerks who conduct a public business limited to accepting orders directly from "professional customers" for execution on the NYSE floor to pass the Series 7A qualification examination instead of the General Securities Representative qualification examination. The Floor Member qualification examination and the Trading Assistant qualification examination are prerequisites for the Series 7A qualification examination for such floor members and floor clerks, respectively. NYSE Rule Interpretation 345.15/02
      NYSE Rules require that: (1) individuals who work as Front Line Specialist Clerks on the NYSE floor pass the Front Line Specialist Clerk qualification examination; (2) individuals who effect transactions on the NYSE floor pass the Floor Member qualification examination; (3) individuals who work as Trading Assistants on the NYSE floor pass the Trading Assistant qualification examination; and (4) other individuals who work as Floor Employees register as such (however, they are not subject to a qualification examination). Such persons also are subject to certain training requirements.

      NYSE Rules require that associated persons who conduct a public business (with other than "professional customers" on the NYSE floor) also pass the General Securities Representative qualification examination.
      NYSE Rules 35 and 304A(a)
      NYSE Rule Interpretation 359
      Information Memorandum 06-36

      1. NASD Rule 3010(f) is proposed to be deleted as part of the proposed changes to the supervision rules. See Regulatory Notice 08-24 (May 2008).

      2. NYSE Rule 720 was deleted as part of the changes to the FINRA options rules, which took effect on February 17, 2009. See Exchange Act Release No. 58932 (November 12, 2008), 73 FR 69696 (November 19, 2008) (Order Approving SR-FINRA-2008-032).

      3. 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.

      4. NYSE Rule 304(e) was not incorporated into the FINRA rulebook.

      5. The status of independent contractors as associated persons of a member under FINRA and NASD Rules is well settled. See, e.g., Letter from Douglas Scarff, Director, Division of Market Regulation, SEC, to Gordon S. Macklin, President, NASD (June 18, 1992).

      6. A person may qualify to function as principal or representative based on a combination of registrations and examinations. For instance, a person who is registered as a General Securities Sales Supervisor and passes the General Securities Principal Sales Supervisor Module (Series 23) examination also satisfies the General Securities Principal examination requirement. See NTM 03-37 (July 2003).

      7. NYSE Rule 311(h), which included a similar provision, was deleted as part of a prior rule change. See Exchange Act Release No. 58533 (September 12, 2008), 73 FR 54652 (September 22, 2008) (Order Approving SR-FINRA-2008-036).

      8. NYSE Rule 700(b)(49) was deleted as part of the changes to the FINRA options rules, which took effect on February 17, 2009. See Exchange Act Release No. 58932 (November 12, 2008), 73 FR 69696 (November 19, 2008) (Order Approving SR-FINRA-2008-032).

      9. NYSE Rules 35 and 304A(a) and NYSE Rule Interpretation 35 were not incorporated into the FINRA rulebook.


      Attachment B

      View PDF

    • 09-69 FINRA Requests Comment on Proposed Consolidated FINRA Rule Governing Payments to Unregistered Persons; Comment Period Expires: February 1, 2010

      View PDF

      Payments to Unregistered Persons

      Regulatory Notice
      Notice Type

      Request for Comment
      Consolidated FINRA Rulebook
      Referenced Rules & Notices

      FINRA Rule 8311
      Information Notice 03/12/08
      NASD Rule 1060(b)
      NASD Rule 2410
      NASD Rule 2420
      NASD IM-2420-1
      NASD IM-2420-2
      NYSE Rule 353
      Regulatory Notice 09-34
      Suggested Routing

      Compliance
      Executive Representatives
      Legal
      Registered Representatives
      Registration
      Senior Management
      Key Topics

      Broker-Dealer Registration
      Compensation
      Disqualification
      Retiring Registered Representative
      Sanctions

      Executive Summary

      As part of the process to develop a new consolidated rulebook (the Consolidated FINRA Rulebook),1 FINRA is requesting comment on a proposed FINRA rule regarding payments to unregistered persons. Proposed FINRA Rule 2040 (Payments to Unregistered Persons) would be a new consolidated rule that streamlines the provisions of current:

      •   NASD Rule 1060(b) (Persons Exempt from Registration); Rule 2410 (Net Prices to Persons Not in Investment Banking or Securities Business); Rule 2420 (Dealing with Non-Members); IM-2420-1 (Transactions Between Members and Non-Members); and IM-2420-2 (Continuing Commissions Policy);
      •   NYSE Rule 353 (Rebates and Compensation); NYSE Rule Interpretations 345(a)(i)/01 (Compensation to Non-Registered Persons); /02 (Compensation Paid for Advisory Solicitations); and /03 (Compensation to Non-Registered Foreign Persons Acting as Finders); and
      •   FINRA Rule 8311 (Effect of a Suspension, Revocation, Cancellation, or Bar).

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

      Questions concerning this Notice should be directed to Kosha K. Dalal, Associate Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-6903.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by February 1, 2010.

      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 Securities and Exchange Commission (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 Rules 1060(b) (Persons Exempt from Registration); 2410 (Net Prices to Persons Not in Investment Banking or Securities Business); 2420 (Dealing with Non-Members); IM-2420-1 (Transactions Between Members and Non-Members); and IM-2420-2 (Continuing Commissions Policy (collectively, the NASD Non-Member Rules)) govern payments by members to unregistered persons. These NASD Non-Member Rules were developed in an era when a registered broker-dealer could engage in an over-the-counter securities business and elect whether to be a member of a registered securities association.4 An original purpose of the NASD Non-Member Rules was to encourage non-members to become members by generally prohibiting members from providing commissions or discounts/concessions to non-members.5 Since the adoption of these NASD Non-Member Rules, the laws governing broker-dealers have changed, and today virtually all broker-dealers doing business with the public are FINRA members.6

      As a result, FINRA has generally interpreted the provisions of the NASD Non-Member Rules, through interpretive letters and other guidance, to prohibit the payment of commissions or fees derived from a securities transaction to any non-member that may be acting as an unregistered broker-dealer.7 FINRA has refrained from opining whether a person is acting as an unregistered broker-dealer, as the authority to interpret Section 15(a) of the Exchange Act rests with the SEC. Section 15(a)(1) of the Exchange Act generally requires any broker-dealer effecting transactions in securities to be registered with the SEC. Registration as a broker-dealer provides a framework of rules to regulate the conduct of persons who receive transaction-based compensation, the receipt of which can create potential incentives for abusive sales practices. SEC guidance states that receipt of securities transaction-based compensation is an indication that a person is engaged in the securities business and that such person generally should be registered as a broker-dealer.8

      Proposal

      Proposed FINRA Rule 2040

      FINRA is proposing to establish new FINRA Rule 2040 (Payments to Unregistered Persons), which eliminates the current NASD Non-Member Rules and related NYSE Non-Member Rules (discussed further below) and replaces them with a more straightforward rule. The proposed rule expressly aligns with Section 15(a) of the Exchange Act and its related guidance to determine whether registration as a broker-dealer is required for certain persons to receive transaction-related compensation. The proposed rule sets forth the following requirements:

      •   Payments to Unregistered Persons

      FINRA is proposing to establish new FINRA Rule 2040(a), which prohibits members or associated persons from, directly or indirectly, paying or offering to pay any compensation, fees, concessions, discounts, commissions or other allowances to:
      (1) any person that is not registered as a broker-dealer under Section 15(a) of the Exchange Act but, by reason of receipt of any such payments, is required to be so registered under applicable federal securities laws and SEC rules, regulations and published guidance by the SEC or its staff in the form of releases, no-action letters or interpretations; or
      (2) any appropriately registered associated person, unless such payment complies with all applicable federal securities laws, FINRA rules and SEC rules, regulations and published guidance by the SEC or its staff in the form of releases, no-action letters or interpretations.
      The proposed change makes the rule consistent with FINRA staff interpretations under NASD Rule 2420 and SEC rules and regulations under Section 15(a) of the Exchange Act. The proposal also aligns the rule with SEC staff guidance that states that receipt of certain securities transaction-based compensation requires registration as a broker-dealer. Therefore, under the proposal, persons would look to SEC rules and regulations to determine whether the activities in question require registration as a broker-dealer under Section 15(a) of the Exchange Act. In cases where a member represents that the proposed activities would not require the recipient of the payments to register as a broker-dealer, and can support such position through SEC rules, regulations or other guidance, such as a no-action letter, the proposed rule does not prohibit the member from making the payments to such person.

      The proposed change also clarifies that payments to associated persons are not prohibited by this rule where such payments are otherwise permissible.
      •   Retiring Representatives

      FINRA is also proposing to establish new FINRA Rule 2040(b), which codifies existing FINRA staff guidance on the payment by members of continuing commissions to retiring registered representatives. The proposal permits members to pay continuing commissions to retiring registered representatives of the member, after they cease to be employed by the member, that are derived from accounts held for continuing customers of the retiring registered representative regardless of whether customer funds or securities are added to the accounts during the period of retirement, provided (1) a bona fide contract between the member and the retiring registered representative calling for the payments was entered into in good faith while the person was a registered representative of the employing member and such contract, among other things, prohibits the retiring registered representative from soliciting new business, opening new accounts or servicing the accounts generating the continuing commission payments; and (2) the arrangement complies with applicable SEC rules, regulations and published guidance by the SEC or its staff.

      The proposal defines the term "retiring registered representative" to mean an individual who retires from a member (including as a result of a total disability) and leaves the securities industry. In the case of the death of the retiring registered representative, the retiring representative's beneficiary designated in the written contract or the retiring registered representative's estate if no beneficiary is so designated may be the beneficiary of the respective member's agreements with the deceased representative.

      FINRA believes this proposal is consistent with SEC guidance on the payment of compensation to retiring representatives.9

      Amendments to FINRA Rule 8311

      FINRA is proposing amendments to FINRA Rule 8311 to eliminate duplicative provisions in NASD IM-2420-2 and to clarify the scope of the rule on payments by members to persons subject to suspension, revocation, cancellation, bar (each a "sanction") or other disqualification. The proposed rule provides that if a person is subject to a sanction or other disqualification, a member may not allow such person to be associated with it in any capacity that is inconsistent with the sanction imposed or disqualified status, including a clerical or ministerial capacity. The proposed rule further provides that a member may not pay or credit to a person subject to a sanction or disqualification, during the period of the sanction or disqualification or any period thereafter, any remuneration that the person might have accrued during the period of the sanction or disqualification. However, a member may make payments or credits to a person subject to a sanction that are consistent with the scope of activities permitted under the sanction where the sanction solely limits an associated person from conducting specified activities (such as a suspension from acting in a principal capacity) or to a disqualified person that has been approved (or is otherwise permitted pursuant to FINRA rules and the federal securities laws) to associate with a member.

      Specifically, the proposal clarifies that:

      (1) other disqualifications, not just suspensions, revocations, cancellation or bars are subject to the rule (and the rule is not limited to orders issued by FINRA or the SEC);
      (2) a member may not allow a person subject to a sanction or disqualification to "be" associated with such member in any capacity that is inconsistent with the sanction imposed or disqualified status, including a clerical or ministerial capacity, not simply "remain" associated;
      (3) a member may not pay any remuneration to a person subject to a sanction or disqualification, not just payments that result directly or indirectly from any securities transaction; and
      (4) the rule applies to any salary, commission, profit or remuneration that the associated person might have "accrued," not just "earned" during the period of a sanction or disqualification, not just suspension.

      FINRA is also proposing to add a new paragraph to the rule that would expressly permit a member to pay to any person subject to a sanction or disqualification any remuneration pursuant to an insurance or medical plan, indemnity agreement relating to legal fees, or as required by an arbitration award or court judgment. FINRA believes that these exceptions strike the correct balance by permitting certain key payments.

      In addition, FINRA is proposing to add new Supplementary Material .01 (Remuneration Accrued Prior to Effective Date of Sanction or Disqualification) that relates to commissions accrued by a person prior to the effective date of a sanction or disqualification. The proposed supplementary material would permit a member to pay a person that is subject to a sanction or disqualification remuneration that the member can evidence accrued to the person prior to the effective date of the sanction or disqualification. However, a member may not pay any remuneration that accrued to the person that relates to or results from the activity giving rise to the sanction or disqualification. FINRA believes that adopting this new provision is necessary to address questions by the industry on a member's ability to pay commissions and other remuneration that was accrued by the person prior to sanction or disqualification going into effect. FINRA also believes the supplementary material, together with the proposed amendments discussed above, clarify that a member may not pay trail commissions to a person that may have accrued during the period of the sanction or disqualification; rather, the member can only make such payments where the member can evidence that they accrued to the person prior to the effective date of the sanction or disqualification.

      Adoption of New General Standard

      In addition, FINRA is proposing to adopt a new general standard that is based largely on provisions of NASD IM-2420-1 and would provide that a member will be treated as a non-member of FINRA from the effective date of any order or notice from FINRA or the SEC issuing a revocation, cancellation, expulsion or suspension of its membership. In the case of suspension, a member will be automatically reinstated to membership in FINRA at the termination of the suspension period. FINRA believes this is consistent with the current provisions of IM-2420-1 and should be retained in the FINRA rulebook.

      NASD and NYSE Rules To Be Deleted

      FINRA proposes to eliminate the following NASD and Incorporated NYSE Rules and related interpretations:

      •   NASD Rule 1060(b) and NYSE Rule Interpretation 345(a)(i)/03

      NASD Rule 1060(b) (Persons Exempt from Registration) and NYSE Rule Interpretation 345(a)(i)/03 (Compensation to Non-Registered Foreign Persons Acting as Finders) are identical provisions and provide that member firms and persons associated with a member may pay transaction-related compensation to non-registered foreign finders, based upon the business of customers such persons direct to member firms, subject to certain conditions (foreign finder exemption).
      •   NASD Rule 2410

      NASD Rule 2410 (Net Prices to Persons Not in Investment Banking and Securities Business) prohibits payments or concessions by members to "any person not actually engaged in the investment banking or securities business."
      •   NASD Rule 2420

      NASD Rule 2420 (Dealing with Non-Members) generally prohibits members from dealing with, or making payments to, non-member broker-dealers, except at the same prices, fees or concessions offered to the general public. NASD Rule 2420(b) specifically prohibits members from joining any non-member broker-dealer syndicate or group in connection with the sale of securities. NASD Rule 2420(c) provides that members may pay concessions and fees to a non-member broker or dealer in a foreign country who is not eligible for membership, provided the member obtains an agreement from such foreign broker or dealer in making sales of securities within the United States that such foreign broker or dealer will act in accordance with the general requirements of the rule to prohibit the payment of concessions or discounts to non-members that are not allowed to the general public. NASD Rule 2420(d) provides restrictions on payments by or to persons that have been suspended or expelled.
      •   NASD Rule IM-2420-1

      NASD IM-2420-1 (Transactions between Members and Non-Members) provides certain exemptions from the general prohibition on arrangements with non-members set forth in NASD Rule 2420. For example, the rule provides exemptions for arrangements with certain non-members relating to transactions in "exempted securities," or transactions on a national securities exchange. The rule further clarifies that a firm that is suspended or expelled from FINRA membership, or whose registration is revoked by the SEC, is to be considered a non-member for purposes of the rule.
      •   NASD Rule IM-2420-2

      NASD IM-2420-2 (Continuing Commissions Policy) allows members to pay continuing commissions to former registered representatives after they cease to be employed by a member, if, among other things, a bona fide contract between the member and the registered representative calling for the payments was entered into in good faith while the person was a registered representative of the employing member. The rule states that such contracts cannot permit the solicitation of new business or the opening of new accounts by persons who are not registered, and must conform with all applicable laws and regulations. The rule also provides that NASD Rule 2830(c) (Investment Company Securities, Conditions for Discounts to Dealers), should not be interpreted to require a sales agreement for a dealer to receive commissions on direct payments by clients or automatic dividend reinvestments.10 The rule further contains a prohibition on the payment of any kind by a member to any person who is not eligible for FINRA membership or eligible to be associated with a member because of any disqualification, such as revocation, expulsion or suspension that is still in effect. The rule recognizes the validity of contracts entered into in good faith to allow retired representatives to receive continuing compensation on their accounts or to designate a widow or other beneficiary; however, the rule states that members are not required to enter such contracts and FINRA will not specify the terms of such contracts.
      •   NYSE Rule 353

      NYSE Rule 353 (Rebates and Compensation) prohibits a member, principal executive, registered representative or officer from, directly or indirectly, rebating to any person any part of the compensation he receives from the solicitation of orders for the purchase or sale of securities or other similar instruments for the accounts of customers of the member, 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 other member. NYSE Rule 353(b) further provides that a member, principal executive, registered representative or officer cannot be compensated for business done by or through his employer after the termination of his employment except as may be permitted by the NYSE.
      •   NYSE Rule Interpretation 345(a)(i)/01 and /02

      NYSE Rule Interpretation 345(a)(i)/01 (Compensation to Non-Registered Persons) prohibits a member from paying to non-registered persons compensation based upon the business of customers they direct to the member if such compensation is, among other things, formulated as a direct percentage of commissions generated and is other than on an isolated basis.

      NYSE Rule Interpretation 345(a)(i)/02 (Compensation Paid for Advisory Solicitations) provides that a member that is also registered with the SEC as an investment adviser may enter into arrangements that comply with Rule 206(4)-3 (Cash Payments for Client Solicitations) of the Investment Advisers Act of 1940.

      1 The current FINRA rulebook consists of: (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the Transitional Rulebook). While the NASD Rules generally apply to all FINRA member firms, the Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (Dual Members). The FINRA Rules apply to all FINRA member firms, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process, see Information Notice 3/12/08 (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 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 See Maloney Act of 1938. Pub. L. No. 75-719, 52 Stat. 1070, which added Section 15A to the Exchange Act to provide for the establishment of national securities associations with authority, subject to SEC review, to supervise the over-the-counter securities market and promulgate rules governing voluntary membership of broker-dealers.

      5 Section 15A(e)(1) of the Exchange Act states that "[t]he rules of a registered securities association may provide that no member thereof shall deal with any nonmember professional (as defined in paragraph (2) of this subsection) except at the same prices, for the same commissions or fees, and on the same terms and conditions as are by such member accorded to the general public." Section 15A(e)(2) of the Exchange Act defines "nonmember professional" as "(A) with respect to transactions in securities other than municipal securities, any registered broker or dealer who is not a member of a registered securities association, except such a broker or dealer who deals exclusively in commercial paper, bankers' acceptances, and commercial bills, and (B) with respect to transactions in municipal securities, any municipal securities dealer (other than a bank or division or department of a bank) who is not a member of any registered securities association and any municipal securities broker who is not a member of any such association." The legislative reports from Congress on this provision state that exclusion from membership would in effect be a form of economic sanction on such non-members. See S. Rep. No. 1455 and H. R. Rep. No 2307, 75th Cong., 3rd Sess. (1938).

      6 Section 15(b)(8) of the Exchange Act provides that "[i]t shall be unlawful for any registered broker or dealer to effect any transaction in, or induce or attempt to induce the purchase or sale of, any security (other than commercial paper, bankers' acceptances, or commercial bills), unless such broker or dealer is a member of a securities association registered pursuant to Section 15A of this title or effects transactions in securities solely on a national securities exchange of which it is a member."

      7 See FINRA Interpretative Letters under NASD Rule 2420 and IM-2420-2 at www.finra.org/interpretiveletters/conduct to: Richard Schultz, Triad Securities Corp. (12/28/07); Jonathan K. Lagemann, Esq., Law Offices of Jonathan Kord Lagemann (6/27/01); Jay Adams Knight, Esq., Musick, Peeler & Garrett LLP (3/8/01); Kathleen A. Wieland, William Blair & Company (9/27/00); Michael R. Miller, Esq., Kunkel Miller & Hament (5/31/00); Gordon C. Ogden, III, Profinancial, Inc. (1/18/00); Trish Stone-Damen, Investors Retirement & Management Company, Inc. (1/29/99); Leslie D. Smith, Berthel Fisher & Company (12/9/98); Victoria Bach-Fink, Wall Street Financial Group (12/7/98); Brian C. Underwood, A.G. Edwards & Sons, Inc. (9/16/98); Daniel Schloendorn, Willkie Farr & Gallagher (6/18/98); David M. Katz, Sidley & Austin (9/25/97); Peter D. Koffler, Twenty-First Securities Corporation (8/20/97); Interpretive Letter to Name Not Public (4/11/97); Ted. A. Troutman, Esquire, Muir & Troutman (2/4/02); Joe Tully, Commonwealth Financial Network (8/9/01); Name Not Public (5/25/01); Peter D. Koffler, Esq., Twenty-First Securities Corporation (1/21/00); Leslie D. Smith, Berthel Fisher & Company (12/9/98); Name Not Public (12/23/96); Name Not Public (11/20/96).

      8 See, e.g., Birchtree Financial Services, Inc. SEC No-Action Letter (pub. avail. Sept 22, 1988); 1st Global, Inc., SEC No-Action Letter (pub. avail. May 7, 2001).

      9 See Securities Industry and Financial Markets Association, SEC No-Action Letter (pub. avail. Nov. 20, 2008).

      10 NASD Rule 2830(c) prohibits investment company underwriters from selling the fund's securities to a retail broker-dealer at a price other than the public offering price unless, among other things, the sale is in conformance with NASD Rule 2420. FINRA has proposed to adopt new FINRA Rule 2341, based largely on NASD Rule 2830, which would eliminate the reference to NASD Rule 2420. See Regulatory Notice 09-34.


      Attachment A

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

      * * * * *

      Text of Proposed New FINRA Rule

      * * * * *

      0100. General Standards

      * * * * *

      0180. Effective Date of Revocation, Cancellation, Expulsion, Suspension or Resignation
      (a) A member shall be treated as a non-member of FINRA from the effective date of any order or notice from FINRA or the SEC issuing a revocation, cancellation, expulsion or suspension of its membership. In the case of suspension, a member shall be automatically reinstated to membership in FINRA at the termination of the suspension period.
      (b) A member shall be treated as a non-member of FINRA from the date of acceptance by FINRA of any resignation of such member.

      * * * * *

      2000. Duties and Conflicts

      * * * * *

      2040. Payments to Unregistered Persons
      (a) General

      No member or associated person shall, directly or indirectly, pay or offer to pay any compensation, fees, concessions, discounts, commissions or other allowances to:
      (1) any person that is not registered as a broker-dealer under Section 15(a) of the Exchange Act but, by reason of receipt of any such payments, is required to be so registered under applicable federal securities laws and SEA rules, regulations and published guidance issued by the SEC or its staff in the form of releases, no-action letters or interpretations; or
      (2) any appropriately registered associated person unless such payment complies with all applicable federal securities laws, FINRA rules and SEA rules, regulations and published guidance issued by the SEC or its staff in the form of releases, no-action letters or interpretations.
      (b) Retiring Representatives
      (1) A member may pay continuing commissions to a retiring registered representative of the member, after he or she ceases to be associated with such member, that are derived from accounts held for continuing customers of the retiring registered representative regardless of whether customer funds or securities are added to the accounts during the period of retirement; provided:
      (i) a bona fide contract between the member and the retiring registered representative calling for the payments was entered into in good faith while the person was a registered representative of the member and such contract, among other things, prohibits the retiring registered representative from soliciting new business, opening new accounts, or servicing the accounts generating the continuing commission payments; and
      (ii) the arrangement complies with applicable SEA rules, regulations and published guidance issued by the SEC or its staff in the form of releases, no-action letters or interpretations.
      (2) The term "retiring registered representative," as used in this Rule shall mean an individual who retires from a member (including as a result of a total disability) and leaves the securities industry. In the case of death of the retiring registered representative, the retiring registered representative's beneficiary designated in the written contract or the retiring registered representative's estate if no beneficiary is so designated may be the beneficiary of the respective member's agreement with the deceased representative.

      * * * * *

      Text of Proposed Amendments to FINRA Rule 8311

      * * * * *

      8000. Investigations and Sanctions

      * * * * *

      8300. Sanctions

      * * * * *

      8311. Effect of a Suspension, Revocation, Cancellation, [or] Bar or Other Disqualification

      (a) [If FINRA or the SEC issues an order that imposes]If a person is subject to a suspension, revocation, [or] cancellation of [the] registration, bar from association with a member (each a "sanction") or other disqualification [of a person associated with a member or bars a person from further association with any member], a member shall not allow such person to [remain] be associated with it in any capacity that is inconsistent with the sanction imposed or disqualified status, including a clerical or ministerial capacity. [If FINRA or the SEC suspends a person associated with a member, the]A member also shall not pay or credit to any person subject to a sanction or disqualification, during the period of the sanction or disqualification or any period thereafter, any salary, [or any] commission, profit, or any other remuneration [that results directly or indirectly from any securities transaction,] that the person [associated with a member] might have [earned] accrued during the period of [suspension] the sanction or disqualification. However, a member may make payments or credits to a person subject to a sanction that are consistent with the scope of activities permitted under the sanction where the sanction solely limits an associated person from conducting specified activities (such as a suspension from acting in a principal capacity) or to a disqualified person that has been approved (or is otherwise permitted pursuant to FINRA rules and the federal securities laws) to associate with a member.
      (b) Notwithstanding paragraph (a) of this Rule, a member may pay to a person that is subject to a sanction or disqualification described in paragraph (a) of this Rule, any remuneration pursuant to an insurance or medical plan, indemnity agreement relating to legal fees, or as required by an arbitration award or court judgment.

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

      .01 Remuneration Accrued Prior to Effective Date of Sanction or Disqualification. Notwithstanding this Rule, a member may pay or credit to a person that is subject of a sanction or disqualification salary, commission, profit or any other remuneration that the member can evidence accrued to the person prior to the effective date of such sanction or disqualification; provided, however, the member may not pay any salary, commission, profit or any other remuneration that accrued to the person that relates to or results from the activity giving rise to the sanction or disqualification.

      * * * * *

    • 09-68 SEC Approves Changes to the Personnel Assessment and Gross Income Assessment Fees; Effective Date: January 1, 2010

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      Regulatory Pricing Changes

      Regulatory Notice
      Notice Type

      Rule Amendments
      Referenced Rules & Notices

      Regulatory Notice 08-19
      Regulatory Notice 09-56
      Sections 1 and 2 of Schedule A of FINRA By-Laws
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Key Topics

      Gross Income Assessment
      Personnel Assessment
      Regulatory Fees

      Executive Summary

      The SEC has approved changes to FINRA's regulatory pricing structure as originally outlined in Regulatory Notice 09-56 (September 2009). Effective January 1, 2010, FINRA will implement a new Personnel Assessment rate structure and a revised calculation for the Gross Income Assessment.1 The text of the amendments to Schedule A of the FINRA By-Laws is set forth in Attachment A.

      Questions concerning this Notice should be directed to:

      •    Finance at (240) 386-5397; or
      •    the Office of General Counsel at (202) 728-8071.

      Background and Discussion

      FINRA's primary pricing structure consists of the following fees: the Personnel Assessment (PA), the Gross Income Assessment (GIA), the Trading Activity Fee and the Branch Office Assessment. These fees are used to fund FINRA's regulatory activities, including its examination and enforcement programs. The SEC has approved a rule change that restructures the PA and the GIA to allow FINRA to continue to effectively discharge its regulatory obligations in a fiscally prudent way, while reducing its vulnerability to another market downturn.

      The GIA currently is assessed through a seven-tiered rate structure with a minimum GIA of $1,200. Under the current pricing structure, firms are required to pay an annual GIA as follows:

      (1) $1,200 on annual gross revenue up to $1million;
      (2) 0.1215% of annual gross revenue greater than $1million up to $25million;
      (3) 0.2599% of annual gross revenue greater than $25million up to $50million;
      (4) 0.0518% of annual gross revenue greater than $50million up to $100million;
      (5) 0.0365% of annual gross revenue greater than $100million up to $5 billion;
      (6) 0.0397% of annual gross revenue greater than $5 billion up to $25 billion; and,
      (7) 0.0855% of annual gross revenue greater than $25 billion.

      The rule change amends Schedule A of the FINRA By-Laws to assess a GIA of the greater of (1) the amount that would be the GIA based on the existing rate structure (current year GIA) or (2) a three-year average of the GIA to be calculated by adding the current year GIA plus the GIA assessed on the firm over the previous two calendar years, divided by three. For a newer firm that has only been assessed in the prior year, FINRA will compare the current year GIA to the firm's two-year average and assess the greater amount.

      Otherwise, the existing GIA rate structure and phase-in implementation through 2010 remain the same. Thus, for 2010, the current year GIA would remain subject to the cap set forth in Regulatory Notice 08-19 (April 2008), which describes the new funding structure that resulted from the consolidation of NASD and the member regulation, enforcement and arbitration functions of NYSE Regulation into FINRA. FINRA states in the Notice that it will apply a 10 percent cap on any increase or decrease of a firm's 2010 current year GIA resulting from the new pricing structure implemented in January 2008.2

      Firms should note that FINRA is committed to its practice of providing rebates to firms when revenues exceed the expenditures necessary to discharge its regulatory obligations.

      The rule change also increases the PA to better align FINRA's revenues with its costs. The PA is currently assessed on a three-tiered rate structure: firms with one to five registered representatives and principals are assessed $75 for each registered person; 6 to 25 registered persons, $70 each; and 26 or more registered persons, $65 each. The rule change increases those rates to $150, $140 and $130, respectively, based on the same tiered structure.

      Implementation

      The rule changes are effective January 1, 2010.


      1 See Exchange Act Release No. 61042 (November 20, 2009), 74 FR 62616 (November 30, 2009) (Order Approving SR-FINRA-2009-057).

      2 The actual amount of GIA assessed in any given year—e.g., the capped amount or the three-year average—will be used to calculate subsequent three-year average determinations. The caps, if applicable, would be applied to the current-year assessment and the resulting number would be used to calculate the three-year average.


      Attachment A

      Below is the text of the amendments. New language is underlined; deletions are in brackets.

      * * * * *

      SCHEDULE A TO THE BY-LAWS OF THE CORPORATION

      Assessments and fees pursuant to the provisions of Article VI of the By-Laws of the Corporation shall be determined on the following basis.

      * * * * *

      Section 1—Member Regulatory Fees

      (a) through (b) No Change.
      (c) Each member shall pay an annual Gross Income Assessment equal to the greater [total] of:
      (1) the total of:
      [(1)](A) $1,200.00 on annual gross revenue up to $1million;
      [(2)](B) 0.1215% of annual gross revenue greater than $1million up to $25 million;
      [(3)](C) 0.2599% of annual gross revenue greater than $25million up to $50million;
      [(4)](D) 0.0518% of annual gross revenue greater than $50million up to $100million;
      [(5)](E) 0.0365% of annual gross revenue greater than $100million up to $5 billion;
      [(6)](F) 0.0397% of annual gross revenue greater than $5 billion up to $25 billion; and
      [(7)](G) 0.0855% of annual gross revenue greater than $25 billion[.]; or
      (2) The average Gross Income Assessment from the preceding three calendar years, to be determined by adding the Gross Income Assessment calculation pursuant to paragraph (c)(1) to the actual Gross Income Assessment in the preceding two calendar years, then dividing by three.
      The rate structure set forth in paragraph (c)(1) [above] will be implemented over a three year period beginning in 2008 in such manner as specified by FINRA.

      For the purpose of paragraph (c)(1), [E]each member is to report annual gross revenue as defined in Section 2 of this Schedule[,] for the preceding calendar year.
      (d) Each member shall pay an annual Personnel Assessment equal to:
      (1) [$75]$150.00 per principal and each representative up to five principals and representatives as defined below;
      (2) [$70]$140.00 per principal and each representative for six principals and representatives up to twenty-five principals and representatives as defined below; or
      (3) [$65]$130.00 per principal and each representative for twenty-six or more principals and representatives as defined below.
      A principal or representative is defined as a principal or representative in the member's organization who is registered with FINRA as of December 31st of the prior fiscal year.

      * * * * *

    • 09-67 Regulatory Element Continuing Education Fees to Increase; Effective Date: January 4, 2010

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      Continuing Education

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      NASD Rule 1120
      NYSE Rule 345A
      Section 4 of Schedule A of the By-Laws
      Suggested Routing

      Compliance
      Continuing Education
      Legal
      Registration
      Senior Management
      Key Topics

      Continuing Education
      Regulatory Element Fees

      Executive Summary

      Beginning January 4, 2010, the fee for the Regulatory Element of the continuing education requirements of FINRA rules will increase from $75 to $100.1 The fee increase applies to all three Regulatory Element programs: the General Program (S101), the Series 6 Program (S106) and the Supervisors Program (S201). Firms that participate in in-firm delivery of the Regulatory Element will continue to receive a $3 credit to their Central Registration Depository (CRD®) account for the in-firm deliveries they make.

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

      Questions concerning this Notice should be directed to Roni Meikle, Director, Continuing Education, at (646) 315-8688.

      Background & Discussion

      NASD Rule 1120 (Continuing Education Requirements) and Incorporated NYSE Rule 345A (Continuing Education for Registered Persons) prescribe requirements regarding the continuing education of certain registered persons (referred to as the “Securities Industry Continuing Education Program” or “CE Program”). The CE Program consists of a Regulatory Element and a Firm Element. The Regulatory Element is a computer-based education program developed and administered by FINRA to help ensure that registered persons are kept current on regulatory, compliance and sales practic ematters in the industry.2

      The Regulatory Element session fee will increase from $75 to $100 on January 4, 2010. The fee increase is necessary to cover the costs associated with administering the CE Program, including the redesign of the Regulatory Element,3 and to maintain an adequate reserve.


      1 See Exchange Act Release No. 60963 (November 6, 2009), 74 FR 59334 (November 17, 2009) (Notice of Filing and Immediate Effectiveness of SR-FINRA-2009-071). Under Section 19(b) of the Securities Exchange Act of 1934, the Securities and Exchange Commission has the authority to summarily abrogate this type of rule change within 60 days of filing.

      2 The Firm Element consists of annual, firm developed and administered training programs designed to keep covered registered persons current regarding securities products, services and strategies offered by the firm.

      3 The redesign updates the presentation and content of the Regulatory Element to reflect changes in technology and adult learning theories. FINRA will implement the redesign of the General and Series 6 Programs first; the redesign of the Supervisors Program will be implemented at a later stage.


      Attachment A

      Below is the text of the amendments. New language is underlined; deletions are in brackets.

      * * * * *

      SCHEDULE A TO THE BY-LAWS OF THE CORPORATION

      * * * * *

      Section 4—Fees

      * * * * *

      (a) through (e) No change.
      (f) There shall be a session fee of [$75.00] $100 assessed as to each individual who is required to complete the Regulatory Element of the Continuing Education Requirements pursuant to [Rule 1120] FINRA Rules.
      (g) through (h) No change.

      * * * * *

    • 09-66 SEC Approves Changes to FINRA's BrokerCheck Disclosure Rule to Retain and Make Publicly Available Information About Final Regulatory Actions Against Former Brokers; Effective Date: November 30, 2009

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      FINRA BrokerCheck

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      FINRA Rule 8312
      Suggested Routing

      Compliance
      Legal
      Operations
      Registered Representatives
      Senior Management
      Key Topics

      Broker Check
      Central Registration Depository
      Form U4
      Form U5
      Form U6
      Regulatory Action Disclosure Questions

      Executive Summary

      Beginning November 30, 2009, information concerning final regulatory actions against brokers—as well as certain administrative information (e.g., employment and registration history) and information about qualification examinations, if available, and the broker's most recently submitted comment, if any—will be permanently available in BrokerCheck,® regardless of when they were employed in the securities industry.

      The text of the amendments to FINRA Rule 8312 (FINRA BrokerCheck Disclosure)1 is set forth in Attachment A.

      Questions concerning this Notice should be directed to:

      •   Richard E. Pullano, Associate Vice President and Chief Counsel, Registration and Disclosure, at (240) 386-4821; or
      •   Stan Macel, Assistant General Counsel, Office of General Counsel, at (202) 728-8056.

      Background & Discussion

      FINRA Rule 8312 governs the information FINRA releases to the public via BrokerCheck. FINRA established BrokerCheck (then known as the Public Disclosure Program) in 1988 to provide the public with information on the professional background, business practices, and conduct of FINRA member firms and their associated persons. Via BrokerCheck, FINRA releases to the public certain information reported on uniform registration forms to the Central Registration Depository (CRD® or CRD System).2 The primary purpose of BrokerCheck is to help investors make informed choices about the individuals and firms with which they may wish to do business.

      Currently, as described in FINRA Rule 8312, BrokerCheck provides information regarding current and former member firms, as well as current associated persons and persons who were associated with a firm within the preceding two years. Starting on November 30, 2009, FINRA will expand BrokerCheck to provide public access to certain information about former associated persons, regardless of when they were associated with a firm, if they were the subject of any final regulatory action as defined in Form U4 that has been reported to CRD via a uniform registration form.3 For these purposes, a final regulatory action as defined in Form U4 may consist of any final action—including any action that is on appeal—by the SEC, Commodity Futures Trading Commission, a federal banking agency, the National Credit Union Administration, another federal regulatory agency, a state regulatory agency, a foreign financial regulatory authority or a self-regulatory organization (as those terms are used in Form U4).4 To illustrate, actions that are delineated in current Form U4 Questions 14C, 14D or 14E will be considered "final regulatory actions." Similarly, actions that are detailed in current Form U5 Question 7D, and have a status of "final" or "on appeal," will be considered "final regulatory actions" as such actions are also addressed in Form U4.5

      The amendments will allow the public access to information about formerly registered persons who, although no longer in the securities industry in a registered capacity, may work in other investment-related industries or attain other positions of trust and about whom investors may wish to learn relevant disciplinary information. Specifically, FINRA will disclose through BrokerCheck information concerning any final regulatory action(s), as well as certain administrative information (e.g., employment and registration history) and information about qualification examinations, if available, regarding these formerly registered individuals. FINRA also will provide the most recently submitted comment, if any, provided by the subject person, presuming the comment is in the form and in accordance with the procedures established by FINRA and relates to the information provided through BrokerCheck. The amendments will not expand access to other information that may be part of the CRD System regarding the former registered person, such as customer complaints, bankruptcies, liens, criminal events or arbitration claims.

      FINRA notes that the amount and format of information made available for this expanded category of individuals will depend in part on when the individuals left the securities industry, and whether their CRD data is available in a Web-based format. FINRA expects that the public will have access to information regarding final regulatory actions, employment and registration history, qualification examinations and most recent comment for a large majority of the individuals whose information will be available on BrokerCheck as a result of the amendments.

      However, two conditions apply to a small percentage of individuals whose registration with FINRA ceased prior to 1999. First, since some of these individuals' records are not currently available in a Web-based format, BrokerCheck reports about these persons cannot be generated automatically. Instead, FINRA will, as promptly as practicable, prepare such reports manually before making them available on BrokerCheck.6 Second, for a very limited number of individuals whose records are not available in a Web-based format, not all of the administrative data and qualification information is available. In such situations, only the individual's name, information about any final regulatory action(s) and the most recent comment, if any, will be disclosed through BrokerCheck.


      1 See Exchange Act Release No. 61002 (November 13, 2009), 74 FR 61193 (November 23, 2009) (Order Approving SR-FINRA-2009-050).

      2 The uniform registration forms are Form BD (Uniform Application for Broker-Dealer Registration), Form BDW (Uniform Request for Broker-Dealer Withdrawal), Form U4 (Uniform Application for Securities Industry Registration or Transfer), Form U5 (Uniform Termination Notice for Securities Industry Registration) and Form U6 (Uniform Disciplinary Action Reporting Form).

      3 Because the information disclosed through BrokerCheck is derived from the CRD System, BrokerCheck will only disclose information regarding regulatory actions that have been reported to CRD via a uniform registration form.

      4 A final regulatory action does not include any action limited to the revocation or suspension of an individual's authorization to act as an attorney, accountant or federal contractor (current Form U4 Question 14F).

      5 FINRA staff also will review responses to all Regulatory Action Disclosure questions and Disclosure Review Pages on the Forms U4 and U5 (including the predecessor questions in this area), as well as information filed on Form U6, to determine whether a former associated person is subject to a final regulatory action and should therefore be included in BrokerCheck. FINRA may disclose a final action that is reported by a regulator on a Form U6 even if that action has not been reported by an individual on a Form U4 because, for example, the individual was not registered at the time the final regulatory action was reported.

      6 Once a report has been manually prepared, it will be available immediately to subsequent requesters.


      Attachment A

      Below is the text of the amendments. New language is underlined; deletions are in brackets.

      * * * * *

      8000. Investigations and Sanctions

      * * * * *

      8300. Sanctions

      * * * * *

      8312. FINRA BrokerCheck Disclosure

      (a) In response to a written inquiry, electronic inquiry, or telephonic inquiry via a toll-free telephone listing, FINRA shall release information regarding a current or former member[, an] or current or former associated person[, or a person who was associated with a member within the preceding two years,] through FINRA BrokerCheck.
      (b) For inquiries regarding a current or former member, a current associated person, or a person who was associated with a member within the preceding two years, [E]except as otherwise provided in paragraph ([c]d) below, FINRA shall release:
      (1) any information reported on the most recently filed Form U4, Form U5, Form U6, Form BD, and Form BDW (collectively "Registration Forms");
      (2) currently approved registrations;
      (3) summary information about certain arbitration awards against a member involving a securities or commodities dispute with a public customer;
      (4) the most recently submitted comment, if any, provided to FINRA by the person who is covered by BrokerCheck, in the form and in accordance with the procedures established by FINRA, for inclusion with the information provided through BrokerCheck. Only comments that relate to the information provided through BrokerCheck will be included;
      (5) information as to qualifications examinations passed by the person and date passed. FINRA will not release information regarding examination scores or failed examinations;
      (6) in response to telephonic inquiries via the BrokerCheck toll-free telephone listing, whether a particular member is subject to the provisions of NASD Rule 3010(b)(2) ("Taping Rule");
      (7) Historic Complaints (i.e., the information last reported on Registration Forms relating to customer complaints that are more than two (2) years old and that have not been settled or adjudicated, and customer complaints, arbitrations or litigations that have been settled for an amount less than $10,000 prior to May 18, 2009 or an amount less than $15,000 on or after May 18, 2009 and are no longer reported on a Registration Form), provided that:
      (A) any such matter became a Historic Complaint on or after March 19, 2007;
      (B) the most recent Historic Complaint or currently reported customer complaint, arbitration or litigation is less than ten (10) years old; and
      (C) the person has a total of three (3) or more currently disclosable regulatory actions, currently reported customer complaints, arbitrations or litigations, or Historic Complaints (subject to the limitation that they became a Historic Complaint on or after March 19, 2007), or any combination thereof; and
      (8) the name and succession history for current or former members.
      (c) For inquiries regarding a person who (1) was formerly associated with a member, but who has not been associated with a member within the preceding two years, and (2) was the subject of a final regulatory action as defined in Form U4 that has been reported to CRD on a Registration Form, except as provided in paragraph (d) below, FINRA shall release, to the extent available:
      (1) information regarding the final regulatory action as reported on a Registration Form;
      (2) administrative information, including employment history and registration history derived from information reported on a Registration Form;
      (3) the most recently submitted comment, if any, provided to FINRA by the person who is covered by BrokerCheck, in the form and in accordance with the procedures established by FINRA, for inclusion with the information provided through BrokerCheck. Only comments that relate to the information provided through BrokerCheck will be included; and
      (4) information as to qualifications examinations passed by the person and date passed. FINRA will not release information regarding examination scores or failed examinations.
      For purposes of this paragraph (c), a final regulatory action as defined in Form U4 may include any final action, including any action that is on appeal, by the SEC, the Commodity Futures Trading Commission, a federal banking agency, the National Credit Union Administration, another federal regulatory agency, a state regulatory agency, a foreign financial regulatory authority, or a self-regulatory organization (as those terms are used in Form U4).
      (d) FINRA shall not release:
      (1) information reported as a Social Security number, residential history, or physical description, information that FINRA is otherwise prohibited from releasing under Federal law, or information that is provided solely for use by regulators. FINRA reserves the right to exclude, on a case-by-case basis, information that contains confidential customer information, offensive or potentially defamatory language or information that raises significant identity theft, personal safety or privacy concerns that are not outweighed by investor protection concerns;
      (2) information reported on Registration Forms relating to regulatory investigations or proceedings if the reported regulatory investigation or proceeding was vacated or withdrawn by the instituting authority;
      (3) "Internal Review Disclosure" information reported on Section 7 of the Form U5;
      (4) "Reason for Termination" information reported on Section 3 of the Form U5;
      (5) Form U5 information for fifteen (15) days following the filing of such information;
      (6) the most recent information reported on a Registration Form, if:
      (A) FINRA has determined that the information was reported in error by a member, regulator or other appropriate authority;
      (B) the information has been determined by regulators, through amendments to the uniform Registration Forms, to be no longer relevant to securities registration or licensure, regardless of the disposition of the event or the date the event occurred;
      (7) information provided on Schedule E of Form BD.
      ([d]e) Upon written request, FINRA may provide a compilation of information about FINRA members, subject to terms and conditions established by FINRA and after execution of a licensing agreement prepared by FINRA. FINRA may charge commercial users of such information reasonable fees as determined by FINRA. Such compilations shall consist solely of information selected by FINRA from Forms BD and BDW and shall be limited to information that is otherwise publicly available from the SEC.

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

      .01 Availability and Format of Information Regarding Persons Associated with a Member Prior to 1999. Certain types of information about some persons formerly associated with a member, but who have not been associated with a member since January 1, 1999, may not be available through BrokerCheck. Types of information that may be unavailable for these persons may include the following: administrative information (e.g., employment and registration history) and information as to qualifications examinations. In addition, FINRA may release a composite report that includes information from multiple Registration Forms for such persons.

      * * * * *

    • 09-65 FINRA Delays the Effective Date for Increased Margin Requirements for Options on Leveraged ETFs and Day-Trading Requirements for Leveraged ETFs; New Effective Date: April 30, 2010

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      Non-Traditional Exchange Traded Funds (ETFs)

      Regulatory Notice
      Notice Type

      Special Alert
      Referenced Rules & Notices

      NASD Rule 2520
      NYSE Rule 431
      Regulatory Notice 09-53
      Suggested Routing

      Compliance
      Legal
      Margin Department
      Operations
      Regulatory Reporting
      Risk Management
      Senior Management
      Key Topics

      Leveraged ETFs
      Margin Requirements
      Uncovered Options on Leveraged ETFs

      Executive Summary

      In August 2009, FINRA issued Regulatory Notice 09-53 (Non-Traditional ETFs), announcing increased customer margin requirements for leveraged ETFs and uncovered options overlying leveraged ETFs effective December 1, 2009. To accommodate ongoing changes in options symbology and other systems-related concerns, FINRA is deferring the effective date for increased customer margin for uncovered options overlying leveraged ETFs, as well as the application of day-trading margin requirements for leveraged ETFs to April 30, 2010. Firms should be aware, however, that the increased maintenance margin for leveraged ETFs will take effect as originally scheduled on December 1, 2009.

      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; or
      •   Steve Yannolo, Principal Credit Specialist, Credit Regulation, at (646) 315-8621.

      Background & Discussion

      As noted in Regulatory Notice 09-53, NASD Rule 2520(f)(8)(A) and Incorporated NYSE Rule 431(f)(8)(A) permit FINRA—in response to market conditions—to prescribe higher initial and maintenance margin requirements. In view of the increased volatility of leveraged ETFs compared to their non-leveraged counterparts, FINRA announced higher maintenance margin levels for leveraged ETFs and uncovered options overlying leveraged ETFs.

      In general, the margin requirements have increased by a factor commensurate with the leverage of the ETF or underlying ETF in the case of an option.

      FINRA is deferring the increased maintenance margin requirements for options overlying leveraged ETFs and the day-trading margin requirements with respect to leveraged ETFs until April 30, 2010. While FINRA is committed to increasing these margin requirements, it also is mindful of the fact that listed options markets are in the final stages of a wholesale overhaul of the method of identifying exchange-traded options contracts.1 The Options Symbology Initiative requires broker-dealers to redesign their systems to accommodate this new symbology and is expected to be completed on February 12, 2010.

      To allow firms to devote the necessary resources to meet this deadline, FINRA is deferring the implementation of the increased maintenance margin requirements for options overlying leveraged ETFs until April 30, 2010. FINRA also is deferring the implementation of the day-trading margin requirements until April 30, 2010, as such calculations also may incorporate options overlying leveraged ETFs. Firms should be aware, however, that the increased maintenance margin for leveraged ETFs will take effect as originally scheduled on December 1, 2009.

      Member firms are reminded to review Regulatory Notice 09-53, which discusses the increased maintenance margin requirements in detail.

      Other Leveraged Products

      In Regulatory Notice 09-53, FINRA advised firms to assess the adequacy of maintenance requirements for all securities that contain inherent leverage, such as leveraged mutual funds, and to increase requirements where appropriate. FINRA notes that this statement applies to security futures that have leveraged ETFs as the underlying security as well as any other securities that contain leverage or are linked to a leveraged product.


      1 See Regulatory Notices 09-18 (EBS Submissions Following Implementation of the Option Symbology Initiative) and 09-47 (New Large Options Positions Report (LOPR) Requirements Due to Implementation of Options Symbology Initiative).

    • 09-64 Verification of Instructions to Transmit or Withdraw Assets from Customer Accounts

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      Customer Assets

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      Information Notice 3/12/08
      NASD Rule 3012
      NYSE Rule 342.23
      NYSE Rule 401
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Key Topic(s)

      Internal Controls
      Letters of Authorization
      Supervisory Procedures
      Transmittal/Withdrawal of Customer Assets

      Executive Summary

      As part of their duty to safeguard customer assets and to meet their supervisory obligations, FINRA firms must have and enforce policies and procedures governing the withdrawal or transmittal of funds or other assets from customer accounts.1 Among other things, the policies and procedures should be reasonably designed to review and monitor all instructions to transmit or withdraw assets from customer accounts, including instructions from an investment adviser or other third party purporting to act on behalf of the customer. FINRA firms are required to test and verify their procedures for adequacy and to update them when necessary.

      Questions concerning this Notice should be addressed to:

      •   Mike Rufino, Senior Vice President and Deputy, Member Regulation, at (212) 858-4487; or
      •   Patricia Albrecht, Assistant General Counsel, Office of General Counsel, at (202) 728-8026.

      Background and Discussion

      Recently, several cases involving the misappropriation of customer assets have highlighted the importance of having adequate procedures for verifying the validity of instructions to transmit or withdraw securities or other assets from customer accounts. In some cases, an employee of the firm committed a fraud; in others, outside investment advisers or other third parties purported to be acting on behalf of the customer. A number of the cases involved forged letters of authorization. In some, employees concealed their misconduct by diverting customers' genuine account statements to a post office box or address under the employee's control, and replacing them with fabricated statements.

      Policies and Procedures

      NASD Rule 3012 (Supervisory Control System)2 and Incorporated NYSE Rule 401 (Business Conduct) require all firms to establish, maintain and enforce written supervisory control policies and procedures that, among other things, include procedures that are reasonably designed to review and monitor the transmittal of funds (e.g., wires or checks) or securities:

      •   from customer accounts to third-party accounts (i.e., a transmittal that would result in a change of beneficial ownership);
      •   from customer accounts to outside entities (e.g., banks, investment companies);
      •   from customer accounts to locations other than a customer's primary residence (e.g., post office box, "in care of "accounts, alternate address); and
      •   between customers and registered representatives (including the hand-delivery of checks).

      The policies and procedures a firm establishes under these rules must include "a means or method of customer confirmation, notification or follow up that can be documented."3 NASD Rule 3012 further provides that a firm must identify in its written supervisory control procedures any of these activities it does not engage in and document that additional supervisory policies and procedures for such activities must be in place before the firm can engage in them.4

      These rules apply to both clearing and introducing firms. While firms may allocate responsibility for complying with particular requirements between the clearing and introducing firms, both firms must have policies and procedures in place to ensure that their respective responsibilities are met. For example, the firms may agree that the introducing firm is responsible for verifying a customer's identity. However, the clearing firm must still have adequate policies and procedures to review and monitor disbursements it makes to third-party accounts, outside entities or an address other than the customer's primary address. A firm's procedures should also specify how instructions to withdraw or transmit assets may be conveyed, including which employees of the introducing firm are authorized to transmit instructions to the clearing firm on the customer's behalf, and both firms are responsible for ensuring that their employees follow their respective procedures.

      Additionally, a firm's policies and procedures should include procedures that are reasonably designed to, among other things:

      •   Verify that any third party who purports to be acting on behalf of a customer, including any family member, third-party investment advisor or money manager, has been authorized by the customer to take the action in question. Typically, this requires firms to verify that a valid power of attorney has been executed by the customer and that actions taken by the third party are within the scope of the authority conveyed.
      •   Verify the identity of a person who appears in person to receive assets and who claims to be the customer.
      •   Adequately document the steps taken to verify the information listed above and maintain that documentation in accordance with applicable books and records requirements.
      •   Identify and respond to red flags or suspicious activity.

      If a firm's procedures require heightened review of certain transmittal instructions based on dollar amount thresholds, firms should also be aware that firm employees or third-party investment advisers can learn of the threshold amounts and try to "fly under the radar" by submitting multiple instructions for lesser amounts. Therefore, firms should take steps to address this risk, including, to the extent possible, limiting dissemination of information about the threshold triggers.

      While firms' procedures must be designed to detect and respond to unusual or suspicious activity, firms must also take into account that fraudulent activity can often flourish when employees fall into a sense of familiarity or routine that can be exploited either by other employees or third parties. Therefore, firms must train their employees to follow all applicable policies and procedures rigorously, even in what appear to be routine situations. Moreover, a firm's policies and procedures should include random sampling and testing of even routine transfers and withdrawals. This helps to verify that employees follow agreed upon procedures and helps deter improper conduct. In addition, firms should closely monitor the use of standing instructions, including standing letters of authorization. Parameters for the instructions should be clear and the authorization kept current.

      Firms that use automated systems to help monitor transmittals and withdrawals must have adequate means to test and review the effectiveness of such systems just as they must monitor manual systems. Firms should also periodically review and assess the adequacy of their automated supervisory systems and procedures, which can become outdated or ineffective for a variety of reasons, including business growth, consolidation, new technologies, as well as changes in the size, volume and/or frequency of transmittals. Firms are also reminded to make certain that each employee's access to relevant systems is limited strictly to what is appropriate for the employee's function within the firm.

      Questions to Consider

      Given the recent number of cases involving fraudulent letters of authorization and other forms of transmittal requests, FINRA urges firms to review the adequacy of their current policies and procedures to verify the validity of such requests. As they do so, firms may find the following questions helpful:

      •   What types of transmittals does the firm accept?
      •   Do the firm's policies and procedures adequately address all types of permitted transmittals, as well as FINRA's requirements that firm's have procedures specifically designed to review and monitor these transmittals?
      •   How are transmittals identified on the firm's books and records, and what exception reports are used to monitor them? Is there any type of transmittal that is not included in exception reports?
      •   Does the person(s) responsible for reviewing transmittals have a means to review all transmittals regardless of the form in which they are submitted?
      •   If standing letters of authorization are permitted, are there limits on their use? Do they expire after a specified period of time? Are transfers made pursuant to standing letters of authorization subject to heightened scrutiny?
      •   Is there a tracking and/or reconciliation process for transmittals?
      •   Do the firm's procedures adequately address risks associated with the various ways it allows transmittal requests to be communicated (telephone, fax, email, notarized letter)?
      •   Are there clear guidelines for employees regarding letters of authorization and have they been communicated effectively? Do these guidelines allow exceptions, and if so, how are they documented?
      •   Is there a separate system to follow up and review the letter of authorization process, and is the level of testing adequate? Are all types of transmittals, based on dollar amount or format, potentially subject to independent verification and testing?
      •   Do testing procedures include representative samples of transaction types, volumes and dollar amounts?
      •   If procedures include thresholds or parameters to identify transmittals subject to heightened supervision or additional testing, are the parameters adequate given the current transaction volume and average dollar size? Can parties circumvent the parameters by using multiple, smaller transfers that are designed to "fly under the radar"?
      •   Do any non-employees have access and/or authority over part of the transmittal process (such as signature verification at an introducing broker)? What types of tests are used to ensure that access and authority is properly limited?
      •   Are there adequate and clearly communicated escalation procedures for bringing red flags or suspicious activity to senior management's attention?

      For more information, please listen to FINRA's compliance podcast, which highlights strong practices based on a survey of a sample of FINRA firms. The podcast, "Letters of Authorization," was published on January 21, 2009, and is available at www.finra.org/podcasts.


      1 This Notice does not apply to account transfers made pursuant to ACATS or FINRA Rule 11870.

      2 The current FINRA rulebook consists of (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the Transitional Rulebook). While the NASD Rules generally apply to all FINRA member firms, the Incorporated NYSE Rules apply only to those member firms of FINRA that are also members of the NYSE (Dual Members). The FINRA Rules apply to all FINRA member firms, unless such rules have amore limited application by their terms. For more information about the rulebook consolidation process, see Information Notice 3/12/08 (Rulebook Consolidation Process).

      3 See NASD Rule 3012(a)(2)(B) and Incorporated NYSE Rule 401(b) (requiring procedures as part of a firm's internal control requirements prescribed under Incorporated NYSE Rule 342.23).

      4 See NASD Rule 3012(a)(2)(B). Incorporated NYSE Rule 401 does not have a comparable provision.

    • 09-63 FINRA Requests Comment on Proposed Consolidated FINRA Rule Governing Discretionary Accounts and Transactions; Comment Period Expires: December 28, 2009

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      Discretionary Accounts and Transactions

      Regulatory Notice
      Notice Type

      Request for Comment
      Consolidated FINRA Rulebook
      Referenced Rules & Notices

      Advisers Act Rule 202(a)(11)-1
      Information Notice 3/12/08
      NASD Rule 2510
      NASD Rule 3110
      NTM 03-73
      NTM 83-70
      NYSE Rule 408
      NYSE Rule Interpretation 408
      Regulatory Notice 08-25
      SEA Rule 17a-3
      SEA Rule 17a-4
      Suggested Routing

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

      Authorization
      Discretionary Power
      Documentation
      Record Retention
      Supervision
      Time or Price Discretion

      Executive Summary

      As part of the process of developing a new consolidated rulebook (the Consolidated FINRA Rulebook),1 FINRA is requesting comment on a proposed consolidated FINRA rule governing discretionary accounts and transactions.

      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 proposed rule. Comments must be received by December 28, 2009.

      Members 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 only use 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

      The FINRA rulebook contains several provisions regarding discretionary accounts and transactions,4 including NASD Rule 2510 and Incorporated NYSE Rule 408 (and its Interpretation).5

      NASD Rule 2510

      NASD Rule 2510 addresses the obligations of members that have discretionary power over a customer's account.

      Rule 2510(a) (Excessive Transactions) prohibits members and their agents or employees that have discretionary power over a customer's account from effecting any excessive transactions in view of the financial resources and character of such discretionary account. Rule 2510(b) (Authorization and Acceptance of Account) provides that a member or registered representative may not exercise any discretionary power in such account unless the customer has given prior written authorization to a stated individual, and the account has been accepted in writing by the member or a designated partner, officer or manager of the member. Rule 2510(c) (Approval and Review of Transactions) requires that a member or a designated partner, officer or manager of the member approve promptly in writing each discretionary order entered and review all discretionary accounts at frequent intervals to detect and prevent excessive transactions.

      NASD Rule 2510(d) (Exceptions) provides certain exceptions from the requirements of paragraphs (a) through (c) of the rule. NASD Rule 2510(d)(1) provides an exception for investment discretion granted by a customer as to the price at which or the time to execute an order given by a customer for the purchase or sale of a definite amount of a specified security. However, the authority to exercise such discretion will be in effect only until the end of the business day on which the customer granted such discretion, unless the customer provides a specific written contrary indication signed and dated, or it is a valid good-'til-canceled instruction issued on a "not-held" basis for an institutional account as defined in NASD Rule 3110(c)(4).6 Rule 2510(d)(1) also requires that any exercise of time or price discretion be reflected on the order ticket.

      NASD Rule 2510(d)(2) provides an exception for bulk exchanges at net asset value of money market mutual funds using negative response letters sent to customers, subject to specified conditions. FINRA staff has issued guidance regarding the use of the negative response process under Rule 2510(d)(2) in certain circumstances.7

      NYSE Rule 408 and Rule Interpretation 408

      NYSE Rule 408(a) prohibits members and their employees from exercising discretionary power in a customer's account without first obtaining: (1) the customer's written authorization (substantially similar to NASD Rule 2510(b)); (2) the signature of the person(s) authorized to exercise discretion in the account (similar to NASD Rule 3110(c)(3)(A)); and (3) the date such discretionary authority was granted (similar to NASD Rule 3110(c)(3)(B)). The requirements of NYSE Rule 408(a) also apply to those circumstances where a member or an employee accepts orders for a customer account from a third person (i.e., an agent of the customer).

      NYSE Rule 408(b) requires that: (1) employees notify a supervisor and obtain his or her prior approval before exercising discretionary power in a customer's account (substantially similar to NASD Rule 2510(b)); (2) the supervisor frequently review the account (substantially similar to NASD Rule 2510(c)); and (3) members maintain a written statement of the supervisory procedures governing such accounts (substantially similar to the general requirements of NASD Rule 3010(b)(1)). The rule further requires that an order entered on a discretionary basis by an employee be identified as discretionary on the order ticket (similar to SEA Rule 17a-3(a)(6)(i)).8

      NYSE Rule 408(c) prohibits employees that have discretionary power over a customer's account from effecting any excessive transactions in view of the financial resources of such customer (substantially similar to NASD Rule 2510(a)).

      Similar to NASD Rule 2510(d)(1), NYSE Rule 408(d) excludes from the requirements of NYSE Rules 408(a) through (c) the exercise of certain time or price discretion, including a valid good-'til-canceled instruction issued on a "not-held" basis for an institutional account. However, the definition of "institutional account" for purposes of the exclusion under NYSE Rule 408(d) differs from the definition of "institutional account" for purposes of the exclusion under NASD Rule 2510(d)(1).9

      NYSE Rule 408.10 requires that all discretionary orders in listed index warrants be approved and initialed on the day entered by a Senior Registered Options Principal or Registered Options Principal.10

      NYSE Rule Interpretation 408/01 (Automatic Money Market Fund Redemptions) addresses the obligation of members that offer their customers automatic money market fund redemption programs whereby debit balances created by the purchase of securities in a customer's account are automatically satisfied by the redemption of shares of a money market fund in the account.11 Such programs are subject to specific conditions, including the requirement to notify customers in writing regarding the programs.

      Proposal

      FINRA proposes to transfer NASD Rule 2510 into the Consolidated FINRA Rulebook as FINRA Rule 3260 with certain changes that take into account requirements under NYSE Rule 408. 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. Unless otherwise noted below, the provisions in NASD Rule 2510 will transfer, subject only to non-substantive changes, as part of proposed FINRA Rule 3260.

      A. Transactions by Members and Their Associated Persons (Proposed FINRA Rule 3260(a))

      To provide additional clarity, proposed FINRA Rule 3260(a) groups together the requirements (such as trade-by-trade approval and frequent review of accounts) applicable to members and their associated persons that have discretionary power over a customer's account. The proposed rule clarifies that the requirements apply to all associated persons of a member, not just agents, employees and registered representatives. Consistent with the proposed changes to the consolidated FINRA rules governing books and records,12 the proposed rule requires that a customer's written authorization be provided to a named, natural person or persons and that the discretionary account be accepted in writing by a designated partner, officer or manager of a member denoting that the account has been accepted in accordance with the member's policies and procedures for acceptance of discretionary accounts. Further, consistent with NYSE Rule 408(b), the proposed rule clarifies that the designated partner, officer or manager responsible for denoting acceptance of discretionary accounts, approving discretionary orders and reviewing such accounts has to be someone other than the person vested with discretionary power.

      In addition, consistent with NASD Rule 3110(c)(3)(B) and NYSE Rule 408(a),13 the proposed rule requires that members and associated persons obtain the customer's "dated" prior written authorization to identify the date that the discretionary authority was granted.14
      B. Transactions by Agents of Customers (Proposed FINRA Rule 3260(b))

      Proposed FINRA Rule 3260(b) requires that, before accepting orders for a customer's account from any person other than the customer, members and associated persons obtain the customer's dated prior written authorization granting discretionary power to such person. This provision establishes a baseline requirement, regardless of the type of account.

      This change is based in part on the existing requirements of NYSE Rule 408(a) regarding accepting orders for a customer account from a third person and SEA Rule 17a-3(a)(17)(ii) (which requires that, for each discretionary account with a natural person, members maintain a record containing the dated signature of the customer granting authorization).

      FINRA is soliciting comments specifically on the ability of members to obtain the required written authorizations from customers in an institutional account (e.g., sub-account customers in a master account—sub-account arrangement).
      C. Specific Discretionary Activities by Members and Their Associated Persons in a Customer's Account; Extent Permissible (Proposed FINRA Rule 3260(c))

      Proposed FINRA Rule 3260(c) provides that notwithstanding the requirements of proposed FINRA Rule 3260(a) members may, subject to certain conditions, exercise time or price discretion, effect bulk exchanges at net asset value of money market mutual funds using negative response letters (consistent with the conditions set forth in current NASD Rule 2510(d)(2)), effect redemptions of money market mutual funds for payment of securities purchases and effect transactions to satisfy an indebtedness to the member.
      •   Duration of Limited Time or Price Discretion

      In light of inquiries from members regarding the duration of an oral authorization for time or price discretion, FINRA proposes to clarify that notwithstanding the requirements of proposed FINRA Rule 3260(a) members may exercise: (1) time or price discretion given by a customer during a normal trading session, provided that such discretion is only valid during that session; or (2) time or price discretion given by a customer after the close of a normal trading session, provided that such discretion is only valid during the next normal trading session. Such limited time or price discretion may be given orally by a customer. The proposed change has no impact on the duration of good-'til-canceled orders for institutional accounts (as set forth in current NASD Rule 2510(d)(1)).
      •   Redemptions of Money Market Funds for Payment of Securities Purchases and Transactions to Satisfy Indebtedness to the Member

      As discussed above, transactions involving automatic money market fund redemption programs are subject to specific conditions, including the requirement that customers be given written notice specifically informing them of such programs. Additionally, FINRA believes that members and their customers should be provided the flexibility to enter into written agreements that allow certain transactions by members to satisfy an indebtedness to them (such as to satisfy margin requirements).

      Therefore, the proposed rule clarifies that notwithstanding the requirements of proposed FINRA Rule 3260(a) a member may effect redemptions of money market funds for payment of securities purchases or effect transactions to satisfy an indebtedness to the member (e.g., margin requirements), provided that such redemptions or transactions are permitted by a prior signed, written agreement between the member and customer that prominently discloses the terms of such arrangements. However, the proposed rule provides that any provisions in such agreement allowing the use of negative response letters remain subject to applicable FINRA rules and federal securities laws governing the use of such letters.
      D. Addition of Supplementary Material (Proposed FINRA Rules 3260.01 and .02)

      FINRA proposes adding supplementary material to:
      •   Clarify that the requirements of paragraphs (a) and (c) of proposed FINRA Rule 3260 relating to transactions by member firms and their associated persons apply only to the extent member firms may maintain broker-dealer discretionary accounts or otherwise exercise broker-dealer discretion in an account as permitted under the federal securities laws. This proposed change is designed to make these requirements self-limiting, as there are currently SEC rulemaking proposals pending that address the ability of broker-dealers to maintain discretionary accounts or otherwise exercise broker-dealer discretion in an account;15 and
      •   Require that customers' prior written authorizations, records denoting acceptance of accounts and written agreements between member firms and customers be preserved for at least six years after the date that such records are updated and that the last update to such records, or the original records if there are no updates, be preserved for at least six years after the date the account is closed. The proposed six-year retention period is consistent with the record retention period for similar customer account records under the proposed consolidated FINRA rules governing books and records and under the Exchange Act.16 Further, the proposed rule requires that member firms preserve records relating to the approval of discretionary orders for the period of time and accessibility specified in SEA Rule 17a-4(b), which is for at least three years. The proposed three-year retention period is consistent with the record retention period for order tickets under the Exchange Act.
      FINRA proposes to delete NYSE Rule 408 and Rule Interpretation 408 as these provisions are substantially similar to proposed FINRA Rule 3260, otherwise incorporated as described above, rendered obsolete by the approach reflected in proposed FINRA Rule 3260, or addressed by other rules as described above.

      1 The current FINRA rulebook consists of: (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the Transitional Rulebook). While the NASD Rules generally apply to all FINRA member firms, the Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (Dual Members). The FINRA Rules apply to all FINRA member firms, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process, see Information Notice 3/12/08 (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 Notice to Members (NTM) 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 or 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 Exchange Act Section 19 and rules thereunder.

      4 This proposal excludes product-specific discretionary account requirements such as set forth in FINRA Rules 2354 (Discretionary Accounts), 2360(b)(18) (Discretionary Accounts) and 2370(b)(18) (Discretionary Accounts), which have been adopted as part of FINRA's set of consolidated rules addressing index warrants, options and security futures, respectively. See Exchange Act Release No. 58932 (November 12, 2008), 73 FR 69696 (November 19, 2008) (Order Granting Accelerated Approval; File No. SR-FINRA-2008-032). This proposal also excludes certain recordkeeping requirements relating to discretionary accounts (current NASD Rule 3110(c)(3) (Customer Account Information)) that are being addressed as part of the proposed changes to the consolidated FINRA rules governing books and records. See Regulatory Notice 08-25 (May 2008) (Proposed Consolidated FINRA Rules Governing Books and Records Requirements).

      Additionally, this proposal excludes NASD IM-2310-2(b)(4)(A)(ii) (Discretionary Accounts) (relating to fair dealing with customers), NASD Rules 2720(l) (Discretionary Accounts) (relating to transactions in securities issued by a member or an affiliate of a member or by a company with which a member has a conflict of interest) and 2810(b)(2)(C) (Suitability) (relating to direct participation programs) and FINRA Rule 5110(f)(2)(K)(ii) (Prohibited Arrangements) (relating to underwriting terms and arrangements). Some of these other provisions relating to discretionary accounts and transactions are more restrictive, but generally consistent with NASD Rule 2510.

      5 For convenience, the Incorporated NYSE Rules are referred to as the NYSE Rules.

      6 See infra note 9.

      7 See Staff Interpretive Memo, dated May 15, 2008 (allowing use of the negative response process to designate an alternative money market sweep fund when the existing sweep fund closes with inadequate notice to permit a member to provide the 30-day prior notice required under Rule 2510(d)(2)(D)); Letter from Patricia Albrecht, Assistant General Counsel, NASD, to George T. Simon, Foley & Lardner, LLP, dated January 26, 2005 (allowing use of the negative response process to complete the transfer of customer funds from one money market mutual fund to another notwithstanding that proceeds were held as free credit balances for an intervening period between redemption and reinvestment). This proposal does not alter the existing guidance.

      8 See also NYSE Rule Interpretation 408/02 (Identification of Discretionary Orders) (which addresses the marking of order tickets with a specific series of numbers or symbols for purposes of identifying orders entered on a discretionary basis).

      9 NYSE Rule 408.11 defines the term "institutional account" to mean the account of: (1) a bank; (2) a savings association; (3) an insurance company; (4) a registered investment company; (5) a state or a political subdivision; (6) a pension or profit sharing plan, subject to ERISA, with more than $25 million in total assets under management, or of a federal agency or political subdivision; (7) any person that has a net worth of at least $45 million and financial assets of at least $40 million; or (8) an SEC registered investment adviser.

      NASD Rule 3110(c)(4) defines the term "institutional account" to mean the account of: (1) a bank; (2) a savings and loan association; (3) an insurance company; (4) a registered investment company; (5) an SEC registered investment adviser or a state registered investment adviser; or (6) a person with total assets of at least $50 million.

      10 The Incorporated NYSE Rules relating to Senior Registered Options Principals were deleted as part of a prior rule change. See Exchange Act Release No. 58932 (November 12, 2008), 73 FR 69696 (November 19, 2008) (Order Granting Accelerated Approval; File No. SR-FINRA-2008-032). The FINRA consolidated rules relating to index warrants require that a Registered Options Principal frequently review such discretionary accounts and that any member that does not utilize computerized surveillance tools for the frequent and appropriate review of discretionary activity establish and implement procedures to require specific Registered Options Principals who have been designated to review discretionary accounts to approve and initial each discretionary order on the day entered. See FINRA Rules 2354 and 2360(b)(18)(A).

      11 FINRA issued similar guidance in 1983. See NTM 83-70 (December 1983) (Automatic Money Market Fund Redemptions).

      12 See Regulatory Notice 08-25 (May 2008).

      13 FINRA is proposing to delete the requirement of Rule 3110(c)(3)(B) to record the date that the discretionary authority was granted as part of the proposed changes to the consolidated FINRA rules governing books and records. See Regulatory Notice 08-25 (May 2008). FINRA believes that it is more appropriate to reposition this requirement into proposed FINRA Rule 3260.

      14 See also SEA Rule 17a-3(a)(17)(ii) (which requires that, for each discretionary account with a natural person, members maintain a record containing the dated signature of the customer granting authorization).

      15 In 2005, the SEC adopted Rule 202(a)(11)-1 under the Advisers Act, a principal purpose of which was to deem broker-dealers offering "fee-based brokerage accounts" not subject to the Advisers Act. Rule 202(a)(11)-1 also included several interpretive positions regarding Advisers Act Section 202(a)(11)(C), including a provision that any account over which a broker-dealer exercises investment discretion (other than on a temporary or limited basis) is subject to the Advisers Act. In March 2007, Rule 202(a)(11)-1 was vacated. See Financial Planning Association v. SEC, 482 F.3d 481 (D.C. Cir. 2007). In September 2007, the SEC re-proposed its interpretive positions for comment, including the provision regarding the application of the Advisers Act to discretionary accounts. See Investment Advisers Act Release No. 2652 (September 24, 2007), 72 FR 55126 (September 28, 2007) (Interpretive Rule Under the Advisers Act Affecting Broker-Dealers).

      16 See Regulatory Notice 08-25 (May 2008). However, FINRA notes that currently members are required to preserve account records evidencing the granting of discretionary authority with respect to accounts of non-natural persons for only three years. Compare SEA Rule 17a-4(b)(6), with SEA Rule 17a-3(a)(17)(ii), and SEA Rule 17a-4(e)(5) (which requires a six-year retention period with respect to similar records for a discretionary account with a natural person).


      Attachment A

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

      * * * * *

      Text of Proposed New FINRA Rule

      (Marked to Show Changes from NASD Rule 2510; NASD Rule 2510 and NYSE Rule 408 (and Its Interpretation) to Be Deleted in Their Entirety from the Transitional Rulebook)

      * * * * *

      [2510]3260. Discretionary Accounts and Transactions

      (a) [Excessive] Transactions by Members and Their Associated Persons

      No member or associated person of the member shall exercise any discretionary power in a customer's account unless such customer has given a dated prior written authorization to exercise discretionary power to a named, natural person or persons and the account has been accepted in writing by a partner, an officer or a manager, other than the person vested with discretionary power, designated by the member denoting that the account has been accepted in accordance with the member's policies and procedures for acceptance of discretionary accounts. No such member or associated person shall effect with or for [any] such [customer's] account [in respect to which such member or his agent or employee is vested with any discretionary power] any transactions of purchase or sale [which] that are excessive in size or frequency in view of the financial resources and character of such account. A partner, an officer or a manager, other than the person vested with discretionary power, designated by the member shall approve promptly in writing each discretionary order entered in such discretionary accounts and shall review such discretionary accounts at frequent intervals in order to detect and prevent transactions that are excessive in size or frequency in view of the financial resources and character of the account.
      (b) [Authorization and Acceptance of Account] Transactions by Agents of Customers

      No member or [registered representative] associated person of the member shall [exercise any discretionary power in a customer's account] accept orders for a customer's account from a person other than the customer unless such customer has given a dated prior written authorization to exercise discretionary power to such person [a stated individual or individuals and the account has been accepted by the member, as evidenced in writing by the member or the partner, officer or manager, duly designated by the member, in accordance with Rule 3010].
      [(c) Approval and Review of Transactions]

      [The member or the person duly designated shall approve promptly in writing each discretionary order entered and shall review all discretionary accounts at frequent intervals in order to detect and prevent transactions which are excessive in size or frequency in view of the financial resources and character of the account.]
      ([d]c) [Exceptions] Specific Discretionary Activities; Extent Permissible

      [This Rule](1) Notwithstanding the requirements of paragraph (a) of this Rule, [shall not apply to:] members may:
      [(1)](A)
      (i) Exercise discretion as to [the price at which or] the time or price [when] of execution of an order [given by a customer] for the purchase or sale of a definite dollar amount or quantity of a specified security [shall be executed] given by a customer:
      a. during a normal trading session, provided that such time or price discretion shall be in effect only until the end of that normal trading session [, except that the authority to exercise time and price discretion will be considered to be in effect only until the end of the business day on which the customer granted such discretion, absent a specific, written contrary indication signed and dated by the customer.]; or
      b. after a normal trading session, provided that such time or price discretion shall be in effect only during the next normal trading session; or
      (ii) Exercise discretion as [This limitation shall not apply] to time [and] or price [discretion exercised in] for an institutional account, as defined in NASD Rule 3110(c)(4), pursuant to valid [G]good-[T]'til[1]-[C]cance[l]led instructions issued on a "not-held" basis.

      Any exercise of time [and] or price discretion must be reflected on the order ticket[;].
      [(2)](B) Effect bulk exchanges at net asset value of money market mutual funds ("funds") utilizing negative response letters, provided:
      [(A)](i) The bulk exchange is limited to situations involving mergers and acquisitions of funds, changes of clearing members and exchanges of funds used in sweep accounts;
      [(B)](ii) The negative response letter contains a tabular comparison of the nature and amount of the fees charged by each fund;
      [(C)](iii) The negative response letter contains a comparative description of the investment objectives of each fund and a prospectus of the fund to be purchased; and
      [(D)](iv) The negative response feature will not be activated until at least 30 days after the date on which the letter was mailed.
      (C) Effect redemptions of funds for payment of securities purchases or effect transactions to satisfy an indebtedness to the member (e.g., margin requirements), provided that such redemptions or transactions are permitted by a prior signed, written agreement between the member and customer that prominently discloses the terms of any such arrangement. Any provision in such agreement allowing for the use of negative response letters shall be applicable only to the extent permitted by FINRA rules and the federal securities laws.

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

      .01 Compliance With Federal Securities Laws Governing Discretionary Accounts and Transactions. The requirements of paragraphs (a) and (c) of this Rule shall apply only to the extent members may maintain broker-dealer discretionary accounts or otherwise exercise broker-dealer discretion in an account as permitted under the federal securities laws.
      .02 Record Retention. For purposes of this Rule, members shall preserve customers' prior written authorizations, records denoting acceptance of accounts and written agreements between members and customers that subsequently are updated for at least six years after the date that they are updated. Members shall preserve the last update to such records, or the original records if there are no updates, for at least six years after the date the account is closed. For purposes of paragraph (a) of this Rule, members shall preserve records relating to the approval of discretionary orders for the period of time and accessibility specified in SEA Rule 17a-4(b).

      * * * * *

    • 09-62 Broker-Dealer, Investment Adviser Firm, Agent and Investment Adviser Representative, and Branch Renewals for 2010; Payment Deadline: December 11, 2009

      View PDF

      BD and IA Renewals for 2010

      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®
      IARD
      Registration
      Renewals

      Executive Summary

      The 2010 renewal process begins on November 16, 2009, when online Preliminary Renewal Statements are made available to all firms on Web CRD/IARD.

      Firms should note the following key dates in the 2010 renewal process:

      November 4, 2009 Firms may start submitting post-dated Form U5, BDW, ADV-W and BR Closing/Withdrawal filings via Web CRD/IARD.

      Please Note: Post-dated filings submitted by 11 p.m. Eastern Time (ET) November 13, 2009, 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, 2009.

      November 16, 2009 Preliminary Renewal Statements are available on Web CRD/IARD.

      December 11, 2009 Full payment of Preliminary Renewal Statements is due.

      January 4, 2010 Final Renewal Statements are available on Web CRD/IARD.

      February 5, 2010 Full payment of Final Renewal Statements is due.

      Member firms are advised that failure to remit full payment of their Preliminary Renewal Statements to FINRA by December 11, 2009, could cause the firm to become ineligible to do business in the jurisdictions where it is registered, effective January 1, 2010.

      In addition to this Notice, firms should review the instructions posted at www.finra.org/renewals, especially the 2010 Renewal Program Bulletin, the 2010 IARD Renewal Program 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, 2010.

      Questions concerning this Notice should be directed to the FINRA Gateway Call Center at (301) 869-6699.

      Background & Discussion

      Preliminary Renewal Statements

      Beginning November 16, 2009, 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 (BX), 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 11, 2009.

      If payment is not received by December 11, 2009, FINRA-registered 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.

      New "CRD Renewals" Contact

      New for the 2010 Renewal Program is a "CRD Renewals" contact that has been added to the FINRA Contact System (FCS). FINRA-registered firms now have the option to designate who should receive important hardcopy and electronic notifications regarding the FINRA Renewal Program, such as the person responsible for paying the registration renewal fees assessed by FINRA, states/jurisdictions and other self-regulatory organizations. As this is the first renewal cycle in which a CRD Renewals contact can be designated, FINRA also will continue to send renewal communications to other known firm contacts (e.g., CRD Account Administrators, Executive Representatives or CRD Contacts) for the 2010 Renewal Program.

      Fees

      A fee of $30 will be assessed for each person who renews his/her registration with any regulator through Web CRD. Firms can access a listing of agents for whom the firms will be assessed by requesting the Renewals—Firm Renewal Roster.

      In addition, 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.

      A FINRA branch office assessment fee of $75 per branch will be assessed based on the number of active FINRA branches as of December 31, 2009. One branch office assessment fee will be waived per firm.

      A FINRA branch renewal processing fee of $20 per branch will be assessed based on the number of active FINRA branches as of December 31, 2009. One branch renewal processing fee will be waived per firm.

      Please note that the FINRA personnel assessment fees are not assessed through the annual Renewal Program. FINRA will mail all FINRA-registered firms a separate invoice for these fees. Firms can obtain a listing of agents for whom the firms will be assessed the personnel assessment fee by requesting the Renewals—Firm Renewal Roster.

      Renewal fees for AMEX, ARCA, BATS, BX, 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 registered individuals registered in each SRO and jurisdiction.

      Branch office renewal fees will also be collected for those regulators that 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 2010 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 2010 IARD Renewal Program is posted at www.iard.com/fees.asp.

      Renewal Payment

      Firms have four payment methods available to pay 2010 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 payment of renewal fees, FINRA will automatically transfer funds from a firm's Daily Account to its Renewal Account on December 11, 2009, the Preliminary Renewal Statement payment deadline. FINRA will transfer funds only if a firm has sufficient funds available in its Daily Account on December 11 to cover the amount due. Please Note: If a firm does not want funds automatically transferred, the firm should ensure that its payment is received in its Renewal Account by the December 11 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 electronic payment from a designated bank account to the firm's Renewal Account with FINRA. Please note that in order for funds to be posted to your firm's Renewal Account by December 11, 2009, payment must be submitted electronically, no later than 8 p.m. ET on December 9, 2009.

      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 payments, along with a print-out of the first page of their Preliminary Renewal Statements, directly to:

      U.S. 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 U.S. mail processing time when sending payment via the U.S. Postal Service (USPS).

      Member firms should use the blue, pre-addressed renewal payment envelope that is mailed to firms 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 print-out 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 is mailed to your firm or write the address on an envelope exactly as noted in this Notice.

      Wire Payment

      Firms may wire full payment of their Preliminary Renewal Statements by requesting their banks to initiate wire transfers to: "Mellon Financial, Philadelphia, PA." Firms should provide their bank with 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 16, 2009, member firms can request, print and/or download renewal reports via Web CRD/IARD. Three reports are available for reconciliation with the Preliminary Renewal Statement:

      •   Firm Renewal Report—This report lists individuals included in the 2010 Renewal Program and includes billing codes (if they have been supplied by the firm).
      •   Branches Renewal Report—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—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.

      Post-Dated Form Filings

      This functionality allows firms to file termination forms with a termination date of December 31, 2009. If a Form U5, BDW, BR Closing/Withdrawal or ADV-W filing indicates a termination date of December 31, 2009, 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 2010 renewal fees. December 31, 2009, is the only date that can be used for a post-dated form filing.

      Firms can begin electronically filing post-dated Form U5, BDW, ADV-W and BR Closing/Withdrawal filings via Web CRD/IARD on November 4, 2009. Firms that submit post-dated termination filings by 11 p.m. ET on November 13, 2009, will not be assessed renewal fees for the terminated registrations on their Preliminary Renewal Statements. Firms that submit post-dated termination filings on, or after, November 16, 2009, will not be assessed renewal fees for the terminated jurisdictions on their Final Renewal Statements in January 2010. Those firms should see a credit balance on their Final Renewal Statements 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 processed by the renewal filing deadline date of 1 p.m. ET on December 24, 2009.

      Firms should exercise care when submitting post-dated Form U5, BDW, BR Closing/ Withdrawal and ADV-W filings. Web CRD/IARD will process these forms as they are submitted and FINRA cannot withdraw a post-dated termination filing once submitted. A firm that submits a post-dated termination filing 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 4, 2010. 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 Forms BDW via Web CRD. Firms that file either a full or partial Form BDW by 11 p.m. ET November 13, 2009, will avoid the assessment of the applicable renewal fees on their Preliminary Renewal Statements, 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 those five regulators must submit a paper Form BDW directly to that regulator, as well as submit one electronically via Web CRD.

      The deadline for electronic filing of a Form BDW for any firm that wants to terminate a registration before year-end 2009 is 1 p.m. ET December 24, 2009. 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 p.m. ET November 13, 2009, will avoid the assessment of the applicable renewal fees on their Preliminary Renewal Statements.

      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 is 1 p.m. ET December 24, 2009.

      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 13, 2009, to avoid being charged for those individuals on their Preliminary Renewal Statements. 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 4, 2010, FINRA will make available all Final Renewal Statements on 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, 2009. Any adjustments in fees owed as a result of registration terminations, approvals, notice filings or transitions subsequent to the Preliminary Renewal Statement will be reflected 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 systematically transferred and reflected on firms' Daily Accounts on January 4, 2010. 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 print-out of the firm's credit balance as reflected on Web CRD/IARD.

      On or after January 4, 2010, 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, BX, 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 2010 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 5, 2010, 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 2010 Regulatory Notice.

    • 09-61 Securities Industry/Regulatory Council on Continuing Education Issues Firm Element Advisory Update

      View PDF

      Continuing Education

      Regulatory Notice
      Notice Type

      Guidance
       
      Suggested Routing

      Compliance
      Continuing Education
      Legal
      Registration
      Senior Management
      Key Topics

      Continuing Education
      Firm Element

      Executive Summary

      This Notice advises firms of the Fall 2009 Securities Industry/Regulatory Council on Continuing Education Firm Element Advisory, which identifies regulatory and sales practice topics that firms should consider in their Firm Element training plans. Topics updated or added since the spring Advisory are indicated in the document as such.

      The updated Firm Element Advisory is available at www.cecouncil.com/Documents/FEA_Semi_Annual_Update.pdf.

      This Notice also includes resources the Council is making available to help firms with their Firm Element planning.

      Questions concerning this Notice should be directed to cecounciladmin@finra.org; 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 for possible inclusion in Firm Element training plans. The topics have been identified from a review of industry regulatory and self-regulatory organization publications and announcements of significant events.

      The Firm Element Advisory 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.

      New Firm Element Planning Resources

      Firms have asked the Council for more resources to help with Firm Element planning. In response to that request, the Council has developed tools for use by firms in addition to or in conjunction with the Firm Element Advisory:

      •    Guide to Firm Element Needs Analysis and Training Plan Development: Offers suggestions for effectively performing the Needs Analysis and developing training plans. The document is available at www.cecouncil.com/publications/council_publications/Guide_to_Firm_Element.pdf.
      •    The Firm Element Organizer: A Web-based tool that can be used to search through an extensive database of regulatory resources related to specific investment products or services. The Organizer provides links to the identified resources and is available at www.cecouncil.com/firm_element/organizer.
      •    Training Resources: The Council has also included a section in the FEA that lists training resources provided by industry regulators that can be used for Firm Element training or can assist registered persons when preparing for their Regulatory Element sessions.

      The Council recommends using all the available tools to make the Firm Element planning more efficient and effective.

    • 09-60 SEC Approval and Effective Dates for New Consolidated FINRA Rules; Effective Date (all rules except FINRA Rule 3310): December 14, 2009 Effective Date (FINRA Rule 3310): January 1, 2010

      View PDF

      SEC Approves New Consolidated FINRA Rules

      Regulatory Notice
      Notice Type

      Consolidated Rulebook
      Rule Approval
      Referenced Rules & Notices

      FINRA Rule 2124
      FINRA Rule 2150
      FINRA Rule 2220
      FINRA Rule 2262
      FINRA Rule 2264
      FINRA Rule 2269
      FINRA Rule 3310
      FINRA Rule 4370
      FINRA Rule 5230
      FINRA Rule 5250
      FINRA Rule 5260
      Information Notice 03/12/08
      Information Notice 10/06/08
      Regulatory Notice 08-57
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Key Topics

      Anti-Money Laundering
      Business Continuity Plans
      Control Relationship with Issuer
      Customers' Securities or Funds
      Emergency Contact Information
      Margin Disclosure Statement
      Market Making
      Market Price of a Security
      Net Transactions with Customers
      Options Communications
      Participation or Interest in Primary or Secondary Distribution
      Trading Halts

      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 FINRA is proposing new consolidated rules in phases for approval by the SEC as part of the Consolidated FINRA Rulebook.2 In August and September, the SEC approved eleven new consolidated FINRA Rules. The new rules, except for FINRA Rule 3310 (Anti-Money Laundering Compliance Program), take effect on December 14, 2009. FINRA Rule 3310 takes effect on January 1, 2010.

      Questions regarding this Notice should be directed to:

      •   Patricia Albrecht, Assistant General Counsel, Office of General Counsel (OGC), at (202) 728-8026 (regarding FINRA Rules 2220, 3310 and 4370);
      •   Adam Arkel, Assistant General Counsel, OGC, at (202) 728-6961 (regarding FINRA Rules 2262 and 2269);
      •   Afshin Atabaki, Assistant General Counsel, OGC, at (202) 728-8902 (regarding FINRA Rule 2150);
      •   Brant Brown, Associate General Counsel, OGC, at (202) 728-8264 (regarding FINRA Rule 5230); or
      •   Racquel Russell, Assistant General Counsel, OGC, at (202) 728-8363 (regarding FINRA Rules 2124, 2264, 5250 and 5260).

      Background & Discussion

      In August and September 2009, the SEC approved eleven FINRA Rules as part of the Consolidated FINRA Rulebook:

      •   Rule 2124 (Net Transactions with Customers);3
      •   Rule 2150 (Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts);4
      •   Rule 2220 (Options Communications);5
      •   Rule 2262 (Disclosure of Control Relationship with Issuer);6
      •   Rule 2264 (Margin Disclosure Statement);7
      •   Rule 2269 (Disclosure of Participation or Interest in Primary or Secondary Distribution);8
      •   Rule 3310 (Anti-Money Laundering Compliance Program);9
      •   Rule 4370 (Business Continuity Plans and Emergency Contact Information);10
      •   Rule 5230 (Payments Involving Publications that Influence the Market Price of a Security);11
      •   Rule 5250 (Payments for Market Making);12 and
      •   Rule 5260 (Prohibition on Transactions, Publication of Quotations, or Publication of Indications of Interest During Trading Halts).13

      The attachment to this Notice sets forth additional information regarding these new consolidated rules and includes a hyperlink to each related rule filing. The filings provide, among other things, FINRA's statement of the purpose of the rule changes and an exhibit showing the changes between the new rule text and the text of the NASD rule as it exists in the Transitional Rulebook. Also, the text of each new FINRA Rule is available in the online FINRA Manual at www.finra.org/finramanual.14

      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 its 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 consists of (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together the NASD Rules and Incorporated NYSE Rules are referred to as the Transitional Rulebook). While the NASD Rules generally apply to all FINRA 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. 60534 (August 19, 2009), 74 FR 44410 (August 28, 2009) (Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1; File No. SR-FINRA-2009-036).

      4 See Exchange Act Release No. 60701 (September 21, 2009); 74 FR 49425 (September 28, 2009 (Order Approving Proposed Rule Change; File No. SR-FINRA-2009-014).

      5 See supra note 3.

      6 See Exchange Act Release No. 60659 (September 11, 2009), 74 FR 48117 (September 21, 2009) (Order Approving Proposed Rule Change; File No. SR-FINRA-2009-044).

      7 See Exchange Act Release No. 60697 (September 21, 2009), 74 FR 49051 (September 25, 2009) (Order Approving Proposed Rule Change; File No. SR-FINRA-2009-052).

      8 See supra note 6.

      9 See Exchange Act Release No. 60645 (September 10, 2009), 74 FR 47630 (September 16, 2009) (Order Approving Proposed Rule Change; File No. SR-FINRA-2009-039).

      10 See supra note 3.

      11 See Exchange Act Release No. 60648 (September 10, 2009), 74 FR 47837 (September 17, 2009) (Order Approving Proposed Rule Change; File No. SR-FINRA-2009-048).

      12 See supra note 3.

      13 See supra note 6.

      14 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 Filings)

      The SEC approved the following new FINRA Rules in August and September 2009. The effective date of the all of the rules, except FINRA Rule 3310 (Anti-Money Laundering Compliance Progam), is December 14, 2009. The effective date of FINRA Rule 3310 is January 1, 2010.

      FINRA Rule Filing SR-FINRA-2009-014

      www.finra.org/rulefilings/2009-014

      FINRA Rule 2150

      The rule change adopts certain paragraphs of NASD Rule 2330 (Customers' Securities or Funds) as FINRA Rule 2150 (Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts) in the Consolidated FINRA Rulebook with minor changes. The rule change also deletes Incorporated NYSE Rule 352 (with the exception of paragraphs (e), (f) and (g)) from the Transitional Rulebook.

      FINRA Rule 2150 prohibits member firms and associated persons from making improper use of a customer's securities or funds and from guaranteeing a customer against loss in connection with any securities transaction or in any securities account of the customer. FINRA Rule 2150 also prohibits member firms and associated persons from sharing in the profits or losses in a customer's account except under certain limited conditions. Additionally, the rule permits, under certain conditions, a member firm or associated person acting as an investment adviser to receive compensation based on a share in the profits or gains in a customer's account.

      Supplementary material to FINRA Rule 2150 codifies existing staff guidance that a "guarantee" extended to all holders of a particular security by an issuer as part of that security generally would not be subject to the prohibition against guarantees and that a permissible sharing arrangement remains subject to other applicable FINRA rules. The supplementary material also provides clarification regarding: (1) reimbursement to a customer for transaction losses on an after-the-fact basis; (2) a member firm's ability to correct a bona fide error; and (3) applicable record retention requirements.

      Rule/Series Number Rule Title
      2000 Series DUTIES AND CONFLICTS
      2100 Series TRANSACTIONS WITH CUSTOMERS
      Rule 2150 Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts

      FINRA Rule Filing SR-FINRA-2009-036

      www.finra.org/rulefilings/2009-036

      The rule change adopts, without material change:

      •   NASD Rule 2441 (Net Transactions with Customers) as FINRA Rule 2124;
      •   NASD Rule 2220 (Options Communications) as FINRA Rule 2220;
      •   NASD Rule 3510 (Business Continuity Plans) and NASD 3520 (Emergency Contact Information) as FINRA Rule 4370; and
      •   NASD Rule 2460 (Payment for Market Making) as FINRA Rule 5250.

      FINRA Rule 2124

      FINRA Rule 2124 (Net Transactions with Customers) requires member firms to provide disclosure and obtain consent when trading on a "net" basis with customers. With respect to non-institutional customers, the member firm must obtain the customer's written consent on an order-by-order basis prior to executing the transaction and such consent must evidence the customer's understanding of the terms and conditions of the order. With respect to institutional customers, a member firm must obtain the customer's consent prior to executing the transaction and such consent may be obtained by either: (1) use of a negative consent letter; (2) oral disclosure and consent on an order-by order basis; or (3) written consent on an order-by-order basis.

      FINRA Rule 2220

      FINRA Rule 2220 (Options Communications) sets forth a member firm's obligations with respect to its options communications with the public and carries over the 2008 revisions to NASD Rule 2220 that make the options communications rule more consistent with FINRA's general rules on communications with the public and the options communications rules of other self-regulatory organizations.1 Among other things, those revisions include: (1) using, to the extent appropriate, the same terminology and definitions as in FINRA's general rules on communications with the public; (2) making the requirements for principal review of correspondence concerning options the same as for correspondence generally; and (3) updating the standards on the content of communications that precede the delivery of the options disclosure document (ODD).

      FINRA Rule 4370

      FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information) requires a member firm to create, maintain, review at least annually and update upon any material change, a written business continuity plan identifying procedures relating to an emergency or significant business disruption and enumerates the minimum elements that a member firm's business continuity plan must address, to the extent those elements are applicable and necessary to the firm's business. Additionally, the rule requires each member firm to disclose (at a minimum, in writing at account opening, by posting on the member firm's Web site, and by mailing it upon request) to its customers how its business continuity plan addresses the possibility of a future significant business disruption and how the member firm plans to respond to events of varying scope.

      FINRA Rule 4370 also requires each firm to provide (and promptly update upon any material change) to FINRA via electronic process or other means as FINRA may specify, prescribed emergency contact information, including the designation of two emergency contact persons. FINRA Rule 4370, however, modifies the former requirement in NASD Rule 3520 that both persons must be registered principals and members of senior management to require, instead, that only one of those persons must be a member of senior management and a registered principal of the member firm. The rule requires, however, that someone designated as a second emergency contact person who is not a registered principal must be a member of senior management who has knowledge of the firm's business operations. FINRA Rule 4370 also clarifies that both emergency contact persons must be associated persons of the member firm. Finally, the new rule codifies current guidance that, for a firm with only one associated person (e.g., a sole proprietorship without any other associated persons), the second emergency contact person may be an individual, either registered with another firm or nonregistered, who has knowledge of the member firm's business operations, such as the firm's attorney, accountant or clearing firm contact.

      FINRA Rule 5250

      FINRA Rule 5250 (Payments for Market Making) prohibits any payments by an issuer or an issuer's affiliates and promoters, directly or indirectly, to a member firm or person associated with a member firm for publishing a quotation, acting as a market maker or submitting an application in connection therewith. The rule, however, contains two exceptions that permit a member firm to accept: (1) payment for bona fide services, including, but not limited to, investment banking services; and (2) reimbursement for registration or listing fees.

      Rule/Series Number Rule Title
      2000 Series DUTIES AND CONFLICTS
      2100 Series TRANSACTIONS WITH CUSTOMERS
      2120 Series Commissions, Mark Ups and Charges Disclosures
      Rule 2124 Net Transactions with Customers
      2200 Series COMMUNICATIONS AND DISCLOSURES
      Rule 2220 Options Communications
      4000 Series FINANCIAL AND OPERATIONAL RULES
      4300 Series OPERATIONS
      Rule 4370 Business Continuity Plans and Emergency Contact Information
      5000 Series SECURITIES OFFERING AND TRADING STANDARDS AND PRACTICES
      5200 Series QUOTATION AND TRADING OBLIGATIONS AND PRACTICES
      Rule 5250 Payments for Market Making

      FINRA Rule Filing SR-FINRA-2009-039

      www.finra.org/rulefilings/2009-039

      FINRA Rule 3310

      The rule change adopts NASD Rule 3011 (AML Compliance Program) without substantive change into the Consolidated FINRA Rulebook as FINRA Rule 3310 (AML Compliance Program) and adopts NASD IM-3011-1, subject to certain amendments, and NASD IM-3011-2 (Review of AML Compliance Person Information), without substantive change, as supplementary material to FINRA Rule 3310. Additionally, the rule change deletes Incorporated NYSE Rule 445 (AML Compliance Program) in its entirety as duplicative.

      FINRA Rule 3310 requires each member firm to develop and implement a written AML program (that must be approved, in writing, by a member of senior management) that is reasonably designed to achieve and monitor compliance with the requirements of the Bank Secrecy Act (BSA) and the implementing regulations promulgated by the Department of the Treasury. The rule also sets forth the minimum requirements for an AML compliance program, including the requirement that a firm provide for annual (on a calendar-year basis) independent testing for compliance to be conducted by member firm personnel or by a qualified outside party. The rule permits a member firm that does not execute transactions for customers or otherwise hold customer accounts or act as an introducing broker with respect to customer accounts to conduct its independent tests every two years (on a calendar-year basis).

      FINRA Rule 3310, however, does not retain the exception in NASD IM-3011-1 that permits, under certain conditions, the AML compliance program testing to be conducted by persons who report to either the AML compliance person or persons performing the functions being tested. The Financial Crimes Enforcement Network (FinCEN), a bureau within the Department of the Treasury that is responsible for administering the BSA and its implementing regulations, has stated that the independent testing provision of the BSA precludes AML program testing by personnel with an interest in the outcome of the testing and that an independent testing exception, such as the one in NASD IM-3011-1, is inconsistent with the BSA's independent testing provision and FinCEN's interpretation of this provision.

      Rule/Series Number Rule Title
      3000 Series SUPERVISION AND RESPONSIBILITIES RELATING TO ASSOCIATED PERSONS
      3300 Series ANTI-MONEY LAUNDERING
      Rule 3310 Anti-Money Laundering Compliance Program

      FINRA Rule Filing SR-FINRA-2009-044

      www.finra.org/rulefilings/2009-044

      The rule change adopts without material change NASD Rules 2240 (Disclosure of Control Relationship with Issuer), 2250 (Disclosure of Participation or Interest in Primary or Secondary Distribution) and 3340 (Prohibition on Transactions, Publication of Quotations, or Publication of Indications of Interest During Trading Halts) as FINRA rules in the Consolidated FINRA Rulebook and deletes Incorporated NYSE Rules 312(f)(1) through 312(f)(3) and 321.24. The rule change renumbers NASD Rules 2240, 2250 and 3340 as FINRA Rules 2262, 2269 and 5260, respectively, in the Consolidated FINRA Rulebook.

      FINRA Rules 2262 and 2269

      FINRA Rules 2262 (Disclosure of Control Relationship with Issuer) and 2269 (Disclosure of Participation or Interest in Primary or Secondary Distribution) address disclosures or notifications that member firms must provide to customers in connection with securities transactions. Rule 2262 provides that a member firm controlled by, controlling or under common control with the issuer of any security must, before entering into any contract with or for a customer for the purchase or sale of such security, disclose to the customer the existence of such control; if such disclosure is not made in writing, it must be supplemented by written disclosure at or before the completion of the transaction. Rule 2269 provides that if a member firm is acting as a broker for a customer, or is acting for both the customer and some other person, or is acting as a dealer and receives or has promise of receiving a fee from a customer for advising the customer with respect to securities, then the member firm must, at or before the completion of any transaction for or with the customer in any security in the primary or secondary distribution of which the member firm is participating or is otherwise financially interested, give the customer written notification of the existence of such participation or interest.

      Rule/Series Number Rule Title
      2200 Series Communications and Disclosures
      2260 Series Disclosures
      Rule 2262 Disclosure of Control Relationship with Issuer
      Rule 2269 Disclosure of Participation or Interest in Primary or Secondary Distribution

      FINRA Rule 5260

      FINRA Rule 5260 (Prohibition on Transactions, Publication of Quotations, or Publication of Indications of Interest During Trading Halts) generally prohibits members from, directly or indirectly, effecting transactions or publishing quotations or indications of interest in: (1) any security with respect to which a trading halt is in effect; (2) any security future when there is a regulatory trading halt in effect with respect to the underlying security; or (3) any future on a narrow-based securities index when one or more underlying securities that constitute 50 percent or more of the market capitalization of the index has a regulatory trading halt that is currently in effect. The rule also provides that, in the event that FINRA halts over-the-counter trading and quoting in an NMS stock because the Alternative Display Facility (ADF) or a Trade Reporting Facility (TRF) is unable to transmit real-time information to the applicable Securities Information Processor, member firms are not prohibited from trading through other markets for which trading is not halted.

      Rule/Series Number Rule Title
      5000 Series Securities Offering and Trading Standards and Practices
      5200 Series Quotation and Trading Obligations and Practices
      Rule 5260 Prohibition on Transactions, Publication of Quotations, or Publication of Indications of Interest During Trading Halts

      FINRA Rule Filing SR-FINRA-2009-048

      www.finra.org/rulefilings/2009-048

      FINRA Rule 5230

      The rule change adopts, with certain modifications, NASD Rule 3330 (Payment Designed to Influence Market Prices, Other than Paid Advertising) as FINRA Rule 5230 (Payments Involving Publications that Influence the Market Price of a Security) in the Consolidated FINRA Rulebook.

      NASD Rule 3330 provided that no member firm may, "directly or indirectly, give, permit to be given, or offer to give, anything of value to any person for the purpose of influencing or rewarding the action of such person in connection with the publication or circulation in any newspaper, investment service, or similar publication, of any matter which has, or is intended to have, an effect upon the market price of any security . . . ." The rule includes an exception for any matter that is "clearly distinguishable as paid advertising."

      FINRA Rule 5230 adopts these requirements with two changes. First, the rule change updates the list of media to which the rule refers to include electronic and other types of media, including magazines, Web sites and television programs. Second, Rule 5230 expands the exceptions in the rule beyond paid advertising to also include compensation paid in connection with research reports and communications published in reliance on Section 17(b) of the Securities Act of 1933.

      Rule/Series Number Rule Title
      5000 Series SECURITIES OFFERING AND TRADING STANDARDS AND PRACTICES
      5200 Series QUOTATION AND TRADING OBLIGATIONS AND PRACTICES
      Rule 5230 Payments Involving Publications that Influence the Market Price of a Security

      FINRA Rule Filing SR-FINRA-2009-052

      www.finra.org/rulefilings/2009-052

      FINRA Rule 2264

      The rule change adopts NASD Rule 2341 (Margin Disclosure Statement) with minor changes as FINRA Rule 2264 (Margin Disclosure Statement) in the Consolidated FINRA Rulebook.

      NASD Rule 2341 required member firms that open margin accounts for or on behalf of non-institutional customers to deliver to such customers, prior to or at the time of opening the account, a specified margin disclosure statement highlighting the risks involved in trading securities in a margin account. Member firms also had to provide the margin disclosure statement (or an abbreviated version provided by the rule) to non-institutional margin account customers not less than once a calendar year. NASD Rule 2341 also provided member firms with the flexibility to use an alternative disclosure statement provided that the alternative disclosures are substantially similar to the disclosures specified in the rule. Additionally, NASD Rule 2341 required member firms to deliver the initial and annual disclosure statement, in writing or electronically, to customers covered by the rule on an individual basis. The former rule also required member firms that permit non-institutional customers to open accounts online, or engage in transactions in securities online, to post the margin disclosure statement on their Web sites in a clear and conspicuous manner.

      FINRA Rule 2264 adopts the requirements of the former rule with two changes. First, the new rule clarifies that the initial margin disclosure statement may be furnished to customers in a separate document (or contained by itself on a separate page as part of another document), and that the annual disclosure statement may be provided within other documentation, such as the account statement, and does not have to be on a separate page. Second, because electronic documents may be considered a form of "writing," Rule 2264 revises the former requirement that disclosure statements may be provided either "in writing or electronically" to clarify that the documents may be provided "in paper or electronic form."


      1 See Exchange Act Release No. 58738 (October 6, 2008), 73 FR 60371 (October 10, 2008) (Order Approving Proposed Rule Change; File No. SR-FINRA-2008-013). FINRA recently proposed for comment substantial revisions to its general rules on communications with the public. See Regulatory Notice 09-55 (September 2009). FINRA expects to make conforming changes to FINRA Rule 2220 upon the SEC's approval of any proposed changes to the general communications rules.

    • 09-59 FINRA Provides Guidance on Pandemic Preparedness

      View PDF

      Business Continuity Planning

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      NASD Rule 3510
      NASD Rule 3520
      NTM 04-37
      NTM 05-48
      NTM 05-57
      NTM 06-31
      NTM 06-74
      NTM 07-49
      Suggested Routing

      Compliance
      Continuing Education
      Internal Audit
      Legal
      Operations
      Registration
      Senior Management
      Systems
      Trading
      Training
      Key Topics

      Business Continuity
      Capital and Financial Reporting Requirements
      Continuing Education
      Disaster Recovery
      Emergency Preparedness
      Extensions of Credit and Securities Delivery
      Filing and Reporting Requirements
      Licensing
      Pandemic Influenza
      Supervision
      Trade Reporting

      Executive Summary

      In response to the outbreak of influenza A (H1N1) or swine flu, FINRA conducted a survey of certain firms to determine pandemic preparedness. This Notice describes the results of the survey, and is designed to help firms understand the concerns and risk-mitigating actions and take appropriate measures to prepare for the effects of a pandemic. This Notice also addresses areas of regulatory guidance that FINRA has provided during previous significant business disruptions.

      The information in this Notice does not create new rules or obligations on firms, nor does the implementation of any or all of the guidance create a "safe harbor" relative to any FINRA rules or other securities regulations.

      Questions or comments concerning this Notice may be directed to Terry Miller, Member Regulation, at (202) 728-8159.

      Background & Discussion

      2009 Pandemic Survey

      In light of current events involving H1N1 swine flu, FINRA conducted a survey of selected firms to determine preparedness for a global pandemic or similar disaster.1 This survey continues FINRA's efforts to assist firms with business continuity planning by facilitating the exchange of information. The pandemic survey was modeled on the survey FINRA conducted following Hurricanes Katrina and Rita in 2005. The 2005 survey resulted in NTM 06-74, which provided valuable insight into effective business continuity planning and implementation.

      As part of having a comprehensive business continuity plan, firms must conduct their own operational risk analysis to determine their vulnerability to various types of business disruptions, such as a pandemic, hurricane, earthquake, flood or cyber event.2 In the case of a pandemic, however, all firms are susceptible in some form to this type of business disruption. The extent to which they need to prepare for one depends on, among other things, the size of the firm, its office locations, its counterparty and service provider relationships, and the nature of its business.

      FINRA is publishing this Notice to raise awareness of the regulatory and compliance issues surfaced by firms in the pandemic survey. Additionally, this Notice considers comments made in response to NTM 06-31 (NASD Requests Comment on Regulatory Relief that Should Be Granted in Response to a Possible Pandemic or Other Major Business Disruption). Depending on the nature and impact of a pandemic, FINRA may provide specific guidance on regulatory and compliance issues similar to the guidance FINRA has provided during previous significant business disruptions. Firms must not, however, prepare for the effects of a pandemic with the presumption that such regulatory guidance will come in the form of relief from compliance with rules and regulations.

      Pandemic Survey Results and Discussion

      Survey results

      The survey found that most respondents identified multiple events that could trigger implementation of their plans, indicating measured or tiered approaches to a pandemic depending on facts and circumstances. Many respondents indicated they have updated their plans to reflect developments related to H1N1, such as this virus' low death rate versus its high virulence or ability to spread infectiously (as of the publication date of this Notice).

      FINRA also found that some firms have partnered with federal, state and local health organizations to obtain better information and priority access to medications and vaccines. Many firms have performed pandemic planning drills, such as simulations, tabletop exercises, structured walkthroughs or the Financial Services Sector Coordinating Council,3 Financial Services Authority4 or Monetary Authority of Singapore pandemic exercises. And some firms performed technology-related planning exercises, such as testing remote access permissions and abilities, backup location readiness and the ability to conduct production-level business.

      Eighty-nine percent of survey respondents indicated their pandemic plans are working well or very well and 97 percent indicated their BCPs address the most significant challenges likely to be faced during a pandemic. Only 4 percent of survey respondents indicated they had experienced above-average absenteeism due to H1N1.

      The following chart details the types of pandemic plan triggers noted by survey respondents, including World Health Organization (WHO) Phase declarations5 and Center for Disease Control (CDC)6 guidance.

      Pandemic plan triggers

      Twenty percent of responses indicating "Other" triggers referenced such events as employees or their family members contracting the virus, infections in the vicinity of firm, actions by local governments and health agencies, and directions from the broker-dealer's parent company. As noted, many firms have updated their plans' triggers to include events more relevant to their situation.

      Business Challenges

      The three most significant challenges respondents identified as likely during a serious pandemic outbreak were absenteeism (25%), telecommunications disruptions (12%) and remote work arrangements (12%). Additional concerns included commuting (9%), provision of customer service (8%), transportation (6%), trade clearance and settlement (5%), counterparties (4%), market volatility (4%), regulatory filings (4%), power disruptions (2%) and access to online accounts (1%).

      Regulatory Guidance

      A majority of survey respondents indicated regulatory guidance they might request would depend on the facts and circumstances of a pandemic, including scope, duration, severity and the potential impact of deep and prolonged absenteeism. Respondents believed the two most beneficial areas of regulatory guidance in the event of a serious pandemic would relate to regulatory filings (11%) and continuing education (10%). Additionally, firms indicated potential interest in regulatory guidance relating to emergency office locations (9%), registration filings (9%), supervision (9%), books and records (8%), FOCUS filings (8%), qualification examinations (7%), communications (6%), and credit/margin regulation (4%). Eight percent of responses indicated other areas of potential guidance relating to order handling, best execution, prompt processing and forwarding requirements, providing customers access to funds and overall time extensions. NTMs 05-57 and 07-49, issued after Hurricane Katrina and the California Wildfires, respectively, provide context around the types of regulatory guidance FINRA would likely consider in the event of a pandemic.

      Activation of Plan Actions or Protocols

      Survey respondents have activated the following pandemic plan actions or protocols in response to H1N1:

      •  implementation of social distancing policies and capabilities;
      •  distribution of hand sanitizers, masks, gloves and hygiene products;
      •  increased sanitizing and disinfecting of facilities;
      •  increased use of communication channels to disseminate important health and safety information and calm employee and customer concerns;
      •  travel restrictions and quarantines (voluntary and/or mandatory) often based on CDC recommendations;
      •  minimization or elimination of group meetings;
      •  enhanced use of remote meeting and conference call capabilities;
      •  reassessment and revision of human resource policies and testing of information technology (IT) and remote work capabilities; and
      •  increased allowable sick time and encouragement to use such time.

      Regulatory and Business Considerations

      As noted above, survey respondents ranked absenteeism, remote work arrangements and telecommunications disruptions as the three most significant challenges likely to be faced during a pandemic. These and other related topics that firms may need to consider in drafting and/or refining their pandemic plans are discussed below.

      Absenteeism

      One of the most immediate impacts of a full-blown pandemic will be increased employee absenteeism, either voluntary or forced. Absentee rates could reach into the double digits during a pandemic and the federal government has recommended that companies plan for 40 percent of their staff being absent for a two-week period at the height of a pandemic.7 Personnel will stay away from work to care for themselves or dependents, or because they are concerned about falling ill or spreading the virus. Transportation difficulties leading to absenteeism would arise in a pandemic, as noted by one firm with 25 percent of its employees relying on public transportation. Government agencies may seek to limit the spread of the virus by implementing school closures and international and/or domestic travel restrictions or quarantines.

      Firms must ensure they prepare for the continuity of operations in light of increased absenteeism, which presents unique vulnerabilities in cases where vital institutional knowledge is vested in specific personnel. In such cases, firms could cross-train employees or create step-by-step instructions so that other employees can fulfill the functions of absent ones.

      Telecommuting

      During such a period of heightened absenteeism, increased stress on telecommunications networks is expected as adults work from home and out-of-school children "surf" the Internet. Many survey respondents indicated that they believe they have taken appropriate measures to ensure telecommunications and remote work arrangements will function as designed and intended during a pandemic but that they remain vulnerable to telecommunications disruptions. One firm obtained dedicated, priority broadband service for the homes of those employees it determined were most critical. The reliability of such service exceeds that of regular home and business Internet service. The firm selected representatives from various groups and departments across the firm to receive this dedicated service. Additionally, this firm negotiated employee discounts on business-level Internet service. Overall, the firm proactively confronts the potential challenge of a stressed telecommunications network by having layers of telecommunications redundancy, including dedicated service, business and home networks, wireless cards and Blackberries/PDAs residing on multiple carriers.

      Due to the heavy reliance on telecommuting in pandemic plans, many firms noted the importance of testing the assumptions and support structures on which their plans are based. Respondents have tested remote access capabilities and backup sites and servers by moving back office, trading and IT personnel to recovery locations to confirm functionality. Some firms even performed production-level activities in a live environment from recovery locations. One firm conducted a test of its system capacity and user knowledge by having over 1,000 users simultaneously attempt remote work. The firm followed this test with a survey to determine lessons learned from the employee perspective. Even with robust testing, however, firms noted they remain vulnerable to telecommunications networks being overwhelmed in a full-blown pandemic.

      The Department of Homeland Security (DHS) conducted a study in 2007 on the impact of a deadly pandemic on the nation's communication network. It was recognized that telecommuting would be a "key component of the national response to pandemic influenza." The study identified potential telecommunications congestion points, recommended preparations and best practices, and modeled pandemic impacts at multiple levels of severity. Firms are encouraged to review this study, as well as the information on FINRA's BCP and pandemic Web pages (see www.finra.org/bcp), and update their plans accordingly. Below are some key findings from the DHS study.

      Potential Congestion Points and Associated Risks
      For Enterprise Networks Remote access resources, such as VPN and firewalls, may be overloaded
      Remote access applications, such as webmail, may be overloaded
      Servers may only be able to handle a limited number of outside connections
      For Residential Internet Access Networks Competition between telecommuters and recreational users for bandwidth
      Network service provider capacity is oversubscribed in the range of 10:1 → 100:1


      Recommended Preparations and Best Practices
      For Enterprise Networks Limit remote access to critical users and applications
      Disable multimedia and social networking capabilities during critical periods
      Obtain Telecommunication Service Provider (TSP) status and capabilities through the Department of Homeland Security
      For Telecommuters Critical users should not rely on residential Internet access and should secure premium or dedicated service
      Practice bandwidth-saving through actions such as transferring large amounts of data at night and logging off corporate VPN connections when not in use
      Stagger telecommute arrangements by scheduling employees to remote-work at designated times during the day/night in order to disperse and equalize bandwidth requirements

      It is important to note that many of the preparations and best practices recommended by the DHS study would need to be designed, configured, enabled or implemented prior to the outbreak of a pandemic in order to be effective. FINRA recommends that firms consult their IT personnel as part of their pandemic planning.

      Additionally, the DHS survey addresses the heightened cyber-security risk likely present during an outright pandemic due to the significant increase in online users. For example, the study notes that personnel normally protected by corporate firewalls and IT departments would need to rely on the security of their own home networks. The DHS study includes cyber-security best practices both for business and home users.

      Remote Work Arrangements

      Many firms intend to employ a number of techniques to help limit the spread and impact of a virus. According to survey respondents, social distancing is a preferred method and may include travel restrictions, employee quarantining, revised sick leave policies, special pandemic leave time or specialized seating plans for densely populated floors/buildings. Many techniques will involve remote work arrangements, such as working from home or a backup/recovery location. Since associated persons may need to work from remote locations during a pandemic, it is important that firm's supervisory systems are adequately designed to provide reasonable supervision of employees' activities (regardless of their functions) while working from remote locations.

      Annual Review, Testing and Updating

      FINRA recognizes that it can be challenging to prepare for an event that has yet to fully materialize. As one survey respondent noted, "predictions of a pandemic are unreliable." FINRA's BCP rule requires firms to conduct an annual review of their BCPs to determine if any modifications are necessary. Testing is not only an important component of the annual review, but it is also essential to the construction and maintenance of an effective BCP program. For example, a firm may test the functionality of back-up technology or of a designated "emergency personnel team" in a simulated business disruption such as a pandemic outbreak. Testing in such a manner would help a firm determine whether it has met the "reasonably designed" threshold of FINRA's BCP rule. As noted in NTM 06-74, which describes firms' experiences involving Hurricanes Katrina and Rita, those firms that had thoroughly tested their BCPs faced minimal disruptions. Firms that had not performed adequate testing encountered unanticipated problems, such as servers and systems incapable of handling workload and capacity requirements. Additionally, basic testing should ensure relevant staff has appropriate access, permissions and connectivity to allow them to function successfully from recovery sites and remote locations. While preparing for an unpredictable event can be challenging, testing is an effective risk-reduction method.

      One respondent, who had not tested the firm's pandemic plan, indicated the plan was theory-based rather than providing detailed, practical guidance and instruction to employees. As such, the firm had not tested its plan because there was little tangible material to test. With the outbreak of H1N1, the firm found the general concepts of its pandemic plan were not useful. The firm has since begun updating its pandemic plan to provide more useful information to staff.

      As noted above, numerous firms indicated they have updated their plans based on the behavior of H1N1. Many firms originally had their plans' triggers based on WHO pandemic declarations. In practice, however, some firms found WHO H1N1 declarations to be disconnected from their local situation. These firms have since updated their plans to include more relevant triggers based on local events, such as local health department guidance and school closings.

      Key Dependencies

      Firms need to identify their key dependencies and the risks a pandemic poses to these relationships. Key dependencies and critical relationships may be both internal and external to the firm. They may include dependencies on clearing firms, telecommunications networks, outsourcing/off-shoring providers, internal departments, mail service, utilities or other counterparties. As an example, reports in the media discussed the impact of H1N1 on an Indian outsourcing company, which in turn had outsourced to lower-cost Mexico. Due to H1N1, workers in Mexico were forced into remote work arrangements, in turn impacting the level of service contracted by a U.S. firm through the Indian company. In NTM 05-48, FINRA reminds firms that outsourcing covered activities in no way diminishes a firm's responsibility for either its performance or its full compliance with all applicable federal securities laws and regulations, and FINRA and MSRB rules. Firms should consider updating service-level agreements with their vendors, if they have not done so already, to address the potential impacts of a pandemic. Whether a key dependency is internal or external, firms must understand where a pandemic may concurrently impact a critical relationship.

      Partnering with Local Health Departments

      Many respondents discussed how their local health departments, upon the encouragement of the CDC, have become allies and integral parts of their pandemic planning and response. Local health departments have sponsored scenario tabletop exercises, educated firm employees and agreed to provide real-time information on the local impacts of H1N1 to respondents so that they may respond to the pandemic accordingly.

      One firm has taken its cooperation with local health officials to a beneficial level. This firm became a "closed point of dispensing" site (also known as a "closed POD"). Under this arrangement, local health authorities, in partnership with the CDC, will dispense or "push" enough doses of the pandemic vaccine to immunize the firm's employees and their immediate families. This push method allows for local health officials to target certain population groups through advance planning. During the height of a pandemic, local health officials will not need to worry about vaccinating these groups in the traditional "pull" method, in which the public is pulled into vaccination clinics. The pull method is more labor and planning intensive for local health officials because so many variables, such as location, staffing and supplies, are unknown. To learn more about the closed (or push) point of dispensing program, contact your local city, county/parish or state health officials.

      Summary

      The survey results indicate that many firms have taken seriously the issue of pandemic preparedness. Almost all respondents have conducted a review of the potential impact of a pandemic and have BCPs specifically addressing a pandemic. The majority of firms that responded to the survey have also tested their pandemic plans. While these results are encouraging, firms must continue to prepare for the potential effects of a pandemic.

      Survey responses highlight the importance of plan testing and employee cross-training. Responses also note the importance of having a comprehensive telecommunications strategy designed to address predicted Internet traffic congestion and slowdowns. Firms should take advantage of the useful and pertinent information provided by their peers and highlighted in this Notice and on FINRA's BCP and Pandemic Web pages at www.finra.org/bcp. Importantly, remember that many of the preparations and practices noted by survey respondents would need to be enacted prior to the outbreak of a pandemic in order to be effective.


      1 Approximately 150 firms, including clearing and carrying firms and those with significant trading or retail operations, were asked to participate in this survey. 109 firms responded to the survey with some electing not to answer every question.

      2 NASD Rules 3510 (Business Continuity Plans) and 3520 (Emergency Contact Information) comprise the NASD Rule Series 3500 (Emergency Preparedness) and require, among other things, that firms establish a written business continuity plan identifying procedures relating to an emergency or significant business disruption and report to FINRA, via such electronic or other means as FINRA may specify, prescribed emergency contact information that includes the designation of two emergency contact persons.

      The SEC recently approved the adoption of NASD Rules 3510 and 3520 as FINRA Rule 4370 (Business Continuity Plans and Emergency Contact Information). See Exchange Act Release No. 60534 (August 19, 2009); 74 FR 44410 (August 28, 3009). FINRA will announce the effective date of FINRA Rule 4370 in a Regulatory Notice published pursuant to the protocol FINRA has established for announcing the effective date of new FINRA rules that are being adopted as part of the consolidated rulebook (Consolidated FINRA Rulebook). See Information Notice 10/6/08.

      3 The Financial Services Sector Coordinating Council is affiliated with the Department of Homeland Security and was established to address the protection of critical US infrastructure.

      4 The Financial Services Authority is the United Kingdom's independent, non-governmental regulatory body charged with maintaining market confidence, promoting public awareness, protecting consumers and reducing financial crime.

      5 For information on the WHO pandemic phase descriptions, visit: http://www.who.int/csr/disease/influenza/GIPA3AideMemoire.pdf

      6 The CDC, which is part of the Department of Health and Human Services, serves as the national focus for developing and applying disease prevention and control, environmental health, and health promotion and health education activities designed to improve the health of the people of the United States.

      7 Homeland Security Council. National Strategy for Pandemic Influenza Implementation Plan. May 2006.

    • 09-58 SEC Approves Amendments Regarding Best Execution and Interpositioning; Effective Date: September 8, 2009

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      Best Execution and Interpositioning

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      FINRA Rule 2010
      NASD Rule 2320
      NASD Rule 2440
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Senior Management
      Trading
      Key Topics

      Best Execution
      Interpositioning

      Executive Summary

      The SEC approved amendments to NASD Rule 2320's requirements concerning a firm's best execution obligations and interpositioning.1 As amended, the rule applies the standards in Rule 2320(a) to the execution of all customer orders, including those involving interposed third parties. The changes became effective September 8, 2009.

      The text of the amendments can be found in the online FINRA Manual at www.finra.org/finramanual.

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

      Background & Discussion

      NASD Rule 2320(a) requires firms and their associated persons to use reasonable diligence to ascertain the best market for a security when handling transactions for or with a customer or a customer of another broker-dealer. Among the factors to be considered in determining whether a firm has used reasonable diligence are:

      •   the character of the market for the security;
      •   the size and type of transaction;
      •   the number of markets checked;
      •   accessibility of the quotation; and
      •   the terms and conditions of the order.

      In addition, Rule 2320(a) requires that the firm buy or sell in the best market "so that the resultant price to the customer is as favorable as possible under prevailing market conditions." Prior to the amendments, NASD Rule 2320(b) stated that a firm was prohibited from interposing a third party between the firm and the best available market for a security unless the firm could demonstrate that, to its knowledge, "at the time of the transaction the total cost or proceeds of the transaction . . . was better than the prevailing inter-dealer market for the security."

      On September 8, 2009, the SEC approved amendments to NASD Rule 2320 regarding the interposing of a third party between a firm and the best available market for a security. The amendments delete the requirement that, if a firm interposes a third-party, the total costs and proceeds of the transaction must be better than the prevailing market and replace it with a specific obligation to apply the factors enumerated in Rule 2320(a) when a firm interjects a third party between the firm and the best available market.

      FINRA adopted the new rule language because of the substantial changes to the ways in which markets function that have taken place since the rule was originally adopted, including technological advances, increased market transparency in the equities markets, and the development of electronic communication networks and order routing services. These changes enable firms, under certain circumstances, to use intermediaries and third parties to improve the handling of customer orders with no additional cost to the customer and with minimal or no delay in the execution of the customer's order. Additionally, there are occasions when the use of a third party may be necessary to effectuate the execution of an order. For example, a firm may need to involve a third party if it receives an order for a foreign security that may not trade in the United States and the firm lacks the ability to execute the order without involving another broker-dealer. The rule change addresses the potential overbreadth of NASD Rule 2320(b) while making clear that interpositioning third parties in a way that results in customer harm is still prohibited.

      NASD Rule 2320, as amended, makes clear that the standards in paragraph (a) apply to the handling of all customer orders, including those involving interposed third parties. Although the resultant price a customer pays remains a crucial factor in determining whether a firm has fulfilled its best execution obligations under Rule 2320, particularly in the context of retail customer order executions, the rule allows an analysis of a variety of factors, based on the terms of the customer's order and instructions, rather than focusing solely on cost any time a firm interposes a third party between the firm and the best available market for a security. FINRA stresses, however, that interpositioning that is unnecessary or that violates a firm's general best execution obligations—either because of unnecessary costs to the customer or improperly delayed executions—is still prohibited.2 Thus, the rule continues to prohibit interpositioning that adversely affects the customer, and the cost to the customer remains a central part of determining whether a firm has met its best execution obligations.


      1 See Securities Exchange Act Release No. 60635 (September 8, 2009), 74 FR 47302 (September 15, 2009) (Order Approving File No. SR-FINRA-2007-024).

      2 Firms should be mindful that other FINRA rules also continue to govern the handling of customer orders and charges on those orders. In particular, FINRA Rule 2010 requires that firms and their associated persons observe high standards of commercial honor and just and equitable principles of trade. NASD Rule 2440 requires that firms charge fair prices and commissions in their dealings with customers.

    • 09-57 SEC Approves Amendments Expanding TRACE to Include Agency Debt Securities and Primary Market Transactions; Effective Date: March 1, 2010

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      Trade Reporting and Compliance Engine (TRACE)

      Regulatory Notice
      Notice Type

      Rule Amendment
      New Rule
      Referenced Rules & Notices

      FINRA Rule Series 6700
      FINRA Rule 7730
      NASD Rule 11310(d)
      Suggested Routing

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

      Agency Debt Security
      Dissemination
      Emergency Suspension
      Fees
      Government-Sponsored Enterprise
      List or Fixed Offering Price Transaction
      New Issue Notification
      Primary Market Transaction
      Reportable TRACE Transaction
      Takedown Transaction
      TRACE-Eligible Security

      Executive Summary

      The SEC approved major amendments to the TRACE Rules (FINRA Rule 6700 Series) and FINRA Rule 7730 relating to TRACE fees that will increase the number and type of securities and transactions that will be reported to TRACE. The changes become effective March 1, 2010.

      Debt securities that are issued or guaranteed by an Agency or by a Government-Sponsored Enterprise (collectively, Agency Debt Securities) will become TRACE-Eligible Securities, and transactions in such securities will be reported and disseminated. Primary market transactions in TRACE-Eligible Securities will be Reportable TRACE Transactions. For certain primary market transactions—List or Fixed Offering Price Transactions or Takedown Transactions—several significant exceptions to the current TRACE requirements will apply:

      •   the reporting period for List or Fixed Offering Price Transactions and Takedown Transactions will be extended to the close of business of the day following the day of execution (i.e., to 6:30 p.m. Eastern Time on T+1);
      •   member firms reporting such transactions will not be required to pay a standard transaction reporting fee; and
      •   transaction information will not be disseminated.

      The SEC also approved new FINRA Rule 6770, granting FINRA emergency authority to suspend the reporting and/or dissemination of certain transactions in TRACE-Eligible Securities, or certain reporting or dissemination requirements as market conditions warrant and in consultation with the SEC.

      These and other related amendments to the TRACE Rules and FINRA Rule 7730, which the SEC approved on September 28, 2009, are discussed below.1 The amended rule text is available on our Web site at www.finra.org/notices/09-57.

      Questions regarding this Notice should be directed to:

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

      Background and Discussion

      The SEC approved amendments to the FINRA Rule 6700 Series and FINRA Rule 7730 that will expand transparency in the debt securities markets by adding a significant number of securities—all Agency Debt Securities—to TRACE, and by requiring that all primary market transactions in any TRACE-Eligible Security be reported to TRACE.

      The amendments:

      1. expand TRACE to include Agency Debt Securities as TRACE-Eligible Securities and restate the definition of TRACE-Eligible Security, including deleting the criteria that a security be Investment Grade or Non-Investment Grade and depository eligible under NASD Rule 11310(d) to be a TRACE-Eligible Security in FINRA Rule 6710(a);
      2. in connection with adding Agency Debt Securities to TRACE, incorporate the following new defined terms into FINRA Rule 6710: "Agency," "Agency Debt Security," "Asset-Backed Security," "Government-Sponsored Enterprise" ("GSE"), "Money Market Instrument" and "U.S. Treasury Security";
      3. expand TRACE to include primary market transactions as Reportable TRACE Transactions, as defined in FINRA Rule 6710(c), and in connection therewith, incorporate two additional defined terms, "List or Fixed Offering Price Transaction" and "Takedown Transaction," in FINRA Rule 6710;
      4. require member firms to report transactions in Agency Debt Securities and primary market transactions under FINRA Rule 6730, and incorporate certain modified trade reporting requirements applicable to List or Fixed Offering Price Transactions and Takedown Transactions in FINRA Rule 6730(a)(5) and FINRA Rule 6730(d)(4)(D);
      5. provide for the dissemination of information on transactions in Agency Debt Securities and primary market transactions under FINRA Rule 6750, except List or Fixed Offering Price Transactions and Takedown Transactions, as provided in FINRA Rule 6750(b)(3);
      6. regarding notification requirements in Rule 6760, establish an alternative notification requirement when a new TRACE-Eligible Security is not assigned a CUSIP; require notification of the time when a new issue is priced and, if different, the time when the first transaction in the distribution or offering is executed; and extend the period for a firm to timely provide all information required in the member firm's notice to FINRA regarding a new TRACE-Eligible Security when the new issue is priced and commences on the same business day between 9:30 a.m. Eastern Time (ET) and 4:00 p.m. ET;
      7. grant FINRA emergency authority to suspend the reporting and/or dissemination of certain transactions in TRACE-Eligible Securities, or the reporting of certain data elements otherwise required to be reported and/or the dissemination of certain data elements, as market conditions warrant and in consultation with the SEC in new FINRA Rule 6770; and
      8. apply the fee rates currently in effect in FINRA Rule 7730 to transactions in Agency Debt Securities and primary market transactions, and do not require firms to pay a reporting fee when reporting List or Fixed Offering Price Transactions and Takedown Transactions as provided in FINRA Rule 7730(b)(1); distinguish TRACE market data relating to corporate debt from market data relating to Agency Debt Securities (the Agency Data Set); and establish fees for the new Agency Data Set in Rule 7730 generally, including fees that are incorporated in FINRA Rule 7730(a)(1) for "Web Browser Access."2

      The most significant changes to the FINRA Rule 6700 Series and FINRA Rule 7730 regarding the expansion of the TRACE program are highlighted below.

      Agency Debt Securities

      Under the current definition of TRACE-Eligible Security in FINRA Rule 6710(a), among other criteria, a security must be issued by a U.S. or foreign private issuer to be a TRACE-Eligible Security, which makes any security issued by an agency of the U.S. government ineligible.3 In addition, certain types of securities, including a security issued by a GSE, are specifically excluded from the defined term TRACE-Eligible Security.4

      The amendments expand the term TRACE-Eligible Security to include a debt security that is issued or guaranteed by an Agency or a GSE. For purposes of FINRA Rule 6710(k), "Agency" will be defined by incorporating a broad statutory term, "executive agency," from 5 U.S.C. 105. Although the U.S. Department of the Treasury is defined as an executive agency under this federal statutory provision, for purposes of TRACE, the term "Agency" will not include the U.S. Treasury in the exercise of its authority to issue U.S. Treasury Securities.5

      GSEs were created at different times and for different purposes, do not present uniform structures and, prior to and after the market events in 2008, have not been treated uniformly under various federal regulatory schemes. In FINRA Rule 6710(n), FINRA has defined an issuer or guarantor that is a GSE for purposes of TRACE by reference to the statutory definition in 2 U.S.C. 622(8).6 Fannie Mae and Freddie Mac are examples of issuers or guarantors that are GSEs.7

      Under new FINRA Rule 6710(l), the securities of both types of issuers (or guarantors of issues) will be defined collectively as "Agency Debt Securities," which reflects industry convention. Specifically, under FINRA Rule 6710(l) "Agency Debt Security" will be defined as a debt security (i) issued or guaranteed by an Agency as defined in paragraph (k); or (ii) issued or guaranteed by a GSE as defined in paragraph (n). The definition also explicitly excludes U.S. Treasury Securities.

      Several of the institutions that are defined as Agencies or GSEs, such as Ginnie Mae,8 Freddie Mac and Fannie Mae, are well-known issuers or guarantors of mortgage-backed and other structured securities. However, for purposes of TRACE, such securities, which are Asset-Backed Securities as broadly defined in FINRA Rule 6710(m), will not be included in the definition of TRACE-Eligible Security, as amended.9

      With the foregoing parameters included, a TRACE-Eligible Security will be defined in amended FINRA Rule 6710(a) as:

      a debt security that is United States dollar-denominated and issued by a U.S. or foreign private issuer, and, if a "restricted security" as defined in Securities Act Rule 144(a)(3), sold pursuant to Securities Act Rule 144A; or is a debt security that is U.S. dollar-denominated and issued or guaranteed by an Agency as defined in paragraph (k) or a Government-Sponsored Enterprise as defined in paragraph (n). "TRACE-Eligible Security" does not include a debt security that is:
      (1) issued by a foreign sovereign or is a U.S. Treasury Security as defined in paragraph (p);
      (2) a Money Market Instrument as defined in paragraph (o); or
      (3) an Asset-Backed Security as defined in paragraph (m).

      Primary Market Transactions

      FINRA Rule 6710(c) currently defines "Reportable TRACE Transaction" as any secondary market transaction in a TRACE-Eligible Security except transactions that are not reported as specified in FINRA Rule 6730(e). As amended, FINRA Rule 6710(c) is not limited to secondary market transactions, and firms will be required to report primary market transactions in any TRACE-Eligible Security.

      FINRA has identified two types of primary market transactions, List or Fixed Offering Price Transactions and Takedown Transactions, that will be subject to more liberal trade reporting requirements and two other significant modifications to the current TRACE requirements due to the nature of the transactions and the assumption that such transactions (in a single security) will be executed at a single price. A List or Fixed Offering Price Transaction will be defined in FINRA Rule 6710(q) as:

      a primary market sale transaction sold on the first day of trading of a new issue: (i) by a sole underwriter, syndicate manager, syndicate member or selling group member at the published or stated list or fixed offering price, or (ii) in the case of a primary market sale transaction effected pursuant to Securities Act Rule 144A, by an initial purchaser, syndicate manager, syndicate member or selling group member at the published or stated fixed offering price.

      A Takedown Transaction will be defined similarly in Rule 6710(r).10

      The current TRACE requirements that will be modified for List or Fixed Offering Price Transactions and Takedown Transactions are:

      •   List or Fixed Offering Price Transactions and Takedown Transactions will not be subject to 15-minute reporting. Instead, member firms will be permitted to report a List or Fixed Offering Price Transaction or a Takedown Transaction that is executed on a business day at or after 12:00 a.m. ET through 11:59:59 p.m. ET, not later than T+1 during TRACE system hours under Rule 6730(a)(5).11
      •   List or Fixed Offering Price Transactions and Takedown Transactions will not be disseminated as provided in FINRA Rule 6750(b)(3).
      •   A member firm that reports timely a List or Fixed Offering Price Transaction or a Takedown Transaction will not be required to pay the standard transaction reporting fee set forth in FINRA Rule 7730(b)(1). However, firms that report such transactions incorrectly or late will incur "Cancel/correct" and "As/of Trade Late" fees.

      Emergency Authority

      Under new Rule 6770, FINRA will possess emergency authority regarding TRACE. FINRA may suspend the reporting and/or dissemination of certain transactions in TRACE-Eligible Securities, or the reporting of certain data elements that are otherwise required to be reported under FINRA Rule 6730, and/or the dissemination of certain data elements, as market conditions warrant and in consultation with the SEC.

      Conclusion

      Effective March 1, 2010, firms must begin reporting transactions in Agency Debt Securities and primary market transactions and otherwise comply with all other requirements in the TRACE Rules, as amended, and amended FINRA Rule 7730.


      1 See Exchange Act Release No. 60726 (September 28, 2009), 74 FR 50991 (October 2, 2009) (Order Approving Proposed Rule Change; File No. SR-FINRA-2009-010).

      2 Other changes that will be incorporated in the TRACE Rules and FINRA Rule 7730 include amendments to: 1) FINRA Rule 6710(h) to state that FINRA will classify an unrated Agency Debt Security as an Investment Grade security for purposes of the dissemination of trans-action volume; and 2) the FINRA Rule 6700 Series and FINRA Rule 7730 to incorporate minor amendments that conform or clarify rule text or eliminate unnecessary provisions.

      3 In addition, FINRA Rule 6710(a) requires that a security that is a TRACE-Eligible Security be U.S. dollar denominated; depository eligible under NASD Rule 11310(d); Investment Grade or Non-Investment Grade (as defined, respectively, in FINRA Rules 6710(h) and (i)); and, if a "restricted security" as defined in Securities Act Rule 144(a)(3), sold pursuant to Securities Act Rule 144A.

      4 Other securities that are excluded are mortgage-or asset-backed securities, collateralized mortgage obligations, and money market instruments (having at issuance a maturity of one year or less).

      5 Specifically, "Agency" will be defined in FINRA Rule 6710(k) as:

      a U.S. "executive agency" as defined in 5 U.S.C. 105 that is authorized to issue debt directly or through a related entity, such as a government corporation, or to guarantee the repayment of principal and/or interest of a debt security issued by another entity. The term excludes the U.S. Department of the Treasury (Treasury) in the exercise of its authority to issue U.S. Treasury Securities as defined in paragraph (p).

      5 U.S.C. 105 defines "executive agency" broadly to include "an Executive department, a Government corporation, and an independent establishment." Debt securities issued by most government agencies or government-affiliated entities will be included under this definition. "Executive department" is defined in 5 U.S.C. 101 to include cabinet-level agencies or departments (e.g., the Department of State, the Department of the Treasury, the Department of Commerce, the Department of Homeland Security, etc.). "Government Corporation" is defined in 5 U.S.C. 103 as "a corporation owned or controlled by the Government of the United States...." (e.g., the Pension Benefit Guaranty Corporation is a wholly owned government corporation). "Independent establishment" is defined in 5 U.S.C. 104 as "(1) an establishment in the executive branch (other than the United States Postal Service or the Postal Regulatory Commission) which is not an Executive department, military department, Government corporation, or part thereof, or part of an independent establishment; and (2) the General Accounting Office." (For example, the Federal Reserve Banks are independent establishments.)

      6 In FINRA Rule 6710(l), the definition of Agency Debt Security will provide, in pertinent part, that the term Agency Debt Security excludes "an Asset-Backed Security as defined in paragraph (m) where an Agency or a Government-Sponsored Enterprise is the sponsor of the trust or other entity that issues the Asset-Backed Security, or is the guarantor of the Asset-Backed Security."

      7 Fannie Mae is the Federal National Mortgage Association. Freddie Mac is the Federal Home Loan Mortgage Corporation.

      8 Ginnie Mae is the Government National Mortgage Association.

      9 In FINRA Rule 6710(m) "Asset-Backed Security" will mean:

      an asset-backed security as used in Securities Act Regulation AB, Section 1101(c), a mortgage-backed security, a collateralized mortgage obligation, a synthetic asset-backed security, or any instrument involving or based on the securitization of mortgages or other credits or assets, including but not limited to a collateralized debt obligation, a collateralized bond obligation, a collateralized debt obligation of asset-backed securities or a collateralized debt obligation of collateralized debt obligations.

      10 Specifically, a Takedown Transaction will be defined in FINRA Rule 6710(r) as:

      a primary market sale transaction sold on the first day of trading of a new issue: (i) by a sole underwriter or syndicate manager to a syndicate or selling group member at a discount from the published or stated list or fixed offering price, or (ii) in the case of a primary market sale transaction effected pursuant to Securities Act Rule 144A, by an initial purchaser or syndicate manager to a syndicate or selling group member at a discount from the published or stated fixed offering price.

      11 Like FINRA Rule 6730(a)(4), FINRA Rule 6730(a)(5) will include extended reporting periods for transactions that occur on a Saturday, a Sunday, or a federal or religious holiday when the TRACE system is closed.

      Under FINRA Rule 6730(d)(4)(D), members will be required to append the new indicator that identifies List or Fixed Offering Price Transactions and Takedown Transactions when reporting such transactions.

    • 09-56 Proposed Changes to the Personnel Assessment and Gross Income Assessment Fees; Effective Date: Upon SEC Approval With an Implementation Date of January 1, 2010

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      Regulatory Pricing Proposal

      Regulatory Notice
      Notice Type

      Proposed Rule Amendments
      Referenced Rules & Notices

      Regulatory Notice 08-07
      Sections 1 and 2 of Schedule A of the By-Laws
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Key Topic(s)

      Regulatory Fees
      Gross Income Assessment
      Personnel Assessment

      Executive Summary

      On August 20, 2009, FINRA filed with the SEC a proposal to change FINRA's regulatory pricing structure by restructuring the Personnel Assessment and Gross Income Assessment fees in order to stabilize revenues used to fund FINRA's regulatory activities.1 If approved, the pricing changes would take effect on January 1, 2010. The SEC has published the proposal for comment. FINRA encourages firms to send comments to the SEC by the October 2, 2009, deadline.

      Questions concerning this Notice should be directed to:

      • Finance at (240) 386-5397; or
      • the Office of General Counsel at (202) 728-8071.

      Background and Discussion

      FINRA's primary pricing structure consists of the following fees: the Personnel Assessment (PA), the Gross Income Assessment (GIA), the Trading Activity Fee and the Branch Office Assessment. These fees are used to fund FINRA's regulatory activities, including its examination and enforcement programs.

      FINRA has filed with the SEC a proposed rule change that would restructure the PA and GIA to achieve a more consistent and predictable funding stream to ensure FINRA can carry out its regulatory mandate. The economic and industry downturns experienced in 2008 and 2009 have strained FINRA's financial resources, yet its regulatory responsibilities remain constant, if not increased, and its programs robust. While FINRA management already has implemented a comprehensive cost-reduction plan and will continue to seek cost savings that do not in any way compromise its regulatory mission, FINRA believes the proposed rule change is needed to stabilize its revenues and provide protection against future industry downturns.

      The GIA remains the most important component of FINRA's regulatory funding. The GIA currently is assessed through a seven-tiered rate structure with a minimum GIA of $1,200. Under the current GIA, firms are required to pay an annual GIA as follows:

      (1) $1,200 on annual gross revenue up to $1 million;
      (2) 0.1215% of annual gross revenue greater than $1 million up to $25 million;
      (3) 0.2599% of annual gross revenue greater than $25 million up to $50 million;
      (4) 0.0518% of annual gross revenue greater than $50 million up to $100 million;
      (5) 0.0365% of annual gross revenue greater than $100 million up to $5 billion;
      (6) 0.0397% of annual gross revenue greater than $5 billion up to $25 billion; and,
      (7) 0.0855% of annual gross revenue greater than $25 billion.

      For 2010, the current year GIA would remain subject to the cap set forth in Regulatory Notice 08-07 (February 2008), which describes the new funding structure that resulted from the consolidation of NASD's and the New York Stock Exchange's member regulation operations. FINRA states in the Notice that it will apply a 10-percent cap on any increase or decrease to a firm's 2010 current year GIA resulting from the new pricing structure implemented in January 2008.

      Since the GIA is assessed based on a firm's annual gross revenue for the preceding calendar year,2 FINRA's revenues derived from the GIA are subject to the year-to-year volatility of firms' revenues. In years where industry revenues are significantly down, FINRA's operating revenues can drop precipitously: in 2009, for example, GIA revenues are down approximately 37 percent due to 2008 fourth quarter write-offs taken by firms, particularly the largest ones. In 2009, FINRA absorbed a $100 million revenue shortfall from the GIA. While this did not hinder FINRA's ability to fulfill its regulatory mission, this type of revenue loss cannot be sustained in the future.

      The proposed rule change seeks to ameliorate this vulnerability by smoothing out the volatility inherent in the GIA as well as by shifting some of FINRA's revenue generation to the more consistent PA revenue stream. For the GIA, the proposed rule change would further amend Schedule A to assess a GIA of the greater of (1) the amount that would be the GIA based on the existing rate structure (current year GIA) or (2) a three-year average of the GIA to be calculated by adding the current-year GIA plus the GIA assessed on the firm over the previous two calendar years, divided by three. For a newer firm that has only been assessed in the prior year, FINRA would compare the current year GIA to the two-year average and assess the greater amount. The existing GIA rate structure and phase-in implementation through 2010 would remain the same.3 Accordingly, the proposed rule change would preserve the current rate structure, while building a buffer against industry downturns. FINRA notes that it has a history of providing rebates to firms when revenues exceed the expenditures necessary to discharge its regulatory obligations and is committed to continuing that practice in the future.

      The proposed rule change also shifts revenues previously generated from the GIA to the PA, which is a more stable revenue base. The PA is currently assessed on a three-tiered rate structure: firms with one to five registered representatives and principals are assessed $75 for each such registered person; 6 to 25 registered persons, $70 each; and 26 or more registered persons, $65 each. The proposed rule change would increase those rates to $150, $140 and $130, respectively, based on the same tiered structure. This proposal represents the first PA rate increase in more than five years. Moreover, given the correlation between the cost of FINRA's regulatory programs and the number of registered persons within a firm, FINRA notes that the population of registered persons has remained fairly stable, even throughout the recent economic downturn.4 Accordingly, FINRA believes an increase of the PA is both a fair and appropriate means to achieve a more consistent and reliable foundation to fund its regulatory operations.

      FINRA believes the proposed rule change will stabilize its operating cash flows by augmenting revenues based on the registered person population, where FINRA's costs are more closely aligned, and reducing dependency on, and exposure to, less predictable industry revenues. In aggregate, the fee proposal would result in regulatory fees comparable to those realized in 2008. FINRA estimates that if the proposed rule change had been in effect for 2009, it would have replaced about 90 percent of the revenue shortfall that resulted primarily from the significant drop in GIA receipts. In general, those replacement revenues would come from several larger firms whose steep income declines in 2008 primarily account for FINRA's current revenue deficit.

      SEC Request for Comment

      The SEC requests comment on the regulatory pricing proposal. The comment period expires October 2, 2009. The rule proposal will be implemented upon SEC approval with an effective date of January 1, 2010.


      1 Exchange Act Release No. 60624 (September 3, 2009), 74 FR 46828 (September 11, 2009) (Notice of Filing of SR-FINRA-2009-057).

      2 Gross revenue for assessment purposes is set out in Section 2 of Schedule A, which defines gross revenue as total income as reported on FOCUS form Part II or IIA excluding commodities income.

      3 In addition, the proposed rule change would remain subject to the caps on increases and decreases to GIA set forth in Regulatory Notice 08-07 (February 2008). The actual amount of GIA assessed in any given year—e.g., the capped amount or the three-year average—will be used to calculate subsequent three-year average determinations. The caps, if applicable, would be applied to the current-year assessment and the resulting number would be used to calculate the three-year average.

      4 For example, FINRA records show that since 2000, the average number of registered persons per year has been approximately 667,680 and that for each of the past three years the population has been 669,626 (2009), 676,927 (2008) and 662,742 (2007) (based on numbers at the end of the preceding calendar year).

    • 09-55 FINRA Requests Comments on Proposed New Rules Governing Communications with the Public; Comment Period Expires: November 20, 2009

      View PDF

      Communications With the Public

      Regulatory Notice
      Notice Type

      Request for Comment
      Consolidated Rulebook
      Referenced Rules & Notices

      NASD Rule 2210
      NASD IM-2210-1 through IM-2210-8
      NASD Rule 2211
      NASD Rule 3010
      NASD Rule 3110
      Incorporated NYSE Rule 472
      NTM 05-59
      Regulatory Notice 08-39
      Regulatory Notice 08-55
      Regulatory Notice 09-10
      SEA Rule 17a-4
      Suggested Routing

      Advertising
      Legal & Compliance
      Operations
      Senior Management
      Key Topic(s)

      Communications With the Public
      Supervision

      Executive Summary

      FINRA requests comments on proposed new FINRA rules governing communications with the public. These new rules would replace current NASD Rules 2210 and 2211, the Interpretive Materials that follow NASD Rule 2210, and portions of Incorporated NYSE Rule 472. While the proposed rules are based upon these rules' current provisions, the new FINRA rules would employ new communications categories and require the filing of certain types of communications that currently are not required to be filed. The proposal also would make a number of other changes to the communications rules.

      The text of the proposed rules is available on our Web site at www.finra.org/notices/09-55.

      Questions concerning this Notice should be directed to:

      • Joseph P. Savage, Vice President and Counsel, Investment Companies Regulation, at (240) 386-4534; or
      • Thomas A. Pappas, Vice President and Director, Advertising Regulation, at (240) 386-4553.

      Action Requested

      FINRA encourages all interested parties to comment on the proposed new FINRA rules. Comments must be received by November 20, 2009. Firms and other interested parties can submit their comments using the following methods:

      • Mail comments in hard copy to the address below; or
      • Email written comments to pubcom@finra.org.

      To help FINRA process and review comments more efficiently, persons commenting on these proposed changes should use only one method. Comments sent by hard copy should be mailed to:

      Marcia E. Asquith
      Senior Vice President and Corporate Secretary
      Office of the Corporate Secretary
      FINRA
      1735 K Street, NW
      Washington, DC 20006-1500

      Important Notes: The only comments that will be considered 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, comments will be posted on the FINRA Web 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 Securities and Exchange Commission (SEC) by the FINRA Board, and then must be approved by the SEC, following publication for public comment in the Federal Register.2

      Current Rules Governing Communications with the Public

      NASD Rules 2210 and 2211, and the Interpretive Materials that follow Rule 2210, generally govern all FINRA firms' communications with the public. Incorporated NYSE Rule 472 governs communications with the public of member firms that also are members of the New York Stock Exchange.

      NASD Rule 2210 divides communications into six separate categories, as follows:

      • Advertisement generally includes written (including electronic) retail communications that do not have a limited audience, such as newspaper, magazine, television and radio advertisements, billboards and Web sites.
      • Sales literature generally includes written (including electronic) retail communications that have a more targeted audience, such as brochures, performance reports, telemarketing scripts, seminar scripts and form letters.
      • Correspondence includes written letters, electronic mail, instant messages and market letters sent to (i) one or more existing retail customers; and (ii) fewer than 25 prospective retail customers within a 30-calendar-day period.
      • Institutional sales material includes communications that are distributed or made available only to institutional investors. NASD Rule 2211 defines the term "institutional investor" to include registered investment companies, insurance companies, banks, broker-dealers, investment advisers, certain retirement plans, governmental entities, individual investors and other entities with at least $50 million in assets.
      • Independently prepared reprint includes reprints of articles from independent publications, as well as reports published by independent research firms.
      • Public appearance includes unscripted participation in live events, such as interviews, seminars and call-in television and radio shows.

      These definitions are important because the principal approval, filing and content standards apply differently to each category. For example, firms generally must have a principal approve all advertisements, sales literature and independently prepared reprints prior to use. This pre-use approval requirement does not apply to (1) institutional sales material or (2) correspondence, unless it is sent to 25 or more existing retail customers and includes an investment recommendation or promotes a product or service of the firm. While such communications do not require principal approval, firms still must establish and maintain policies and procedures to supervise them for compliance with applicable standards.

      Firms must file certain advertisements and sales literature for review with FINRA's Advertising Regulation Department. For example, advertisements and sales literature concerning investment companies and variable insurance products must be filed within 10 days of first use, but firms are not required to file independently prepared reprints, correspondence or institutional sales material. The filing requirements also differ based on the firm using the material and its content.

      Firms that previously have not filed advertisements with FINRA must file all advertisements at least 10 business days prior to use for a one-year period. Additionally, under NASD Rule 2210 and related Interpretive Materials, all firms must file advertisements concerning government securities, collateralized mortgage obligations (CMOs) and security futures at least 10 business days prior to use, and must withhold them from publication until any changes specified by FINRA staff have been made.

      Incorporated NYSE Rule 472 requires a "qualified person" to approve prior to use each advertisement, sales literature or other similar type of communication. The NYSE Rule 472 definitions of "advertisement" and "sales literature" are similar to those used in NASD Rule 2210.

      The communications rules include both general and specific content standards. Certain general standards apply to all communications, such as requirements that communications be fair and balanced, and provide a sound basis for evaluating the facts in regard to any particular security, industry or service, and prohibitions on omitting material facts whose absence would make the communication misleading. More particular content standards apply to specific issues or securities.

      Proposal

      Reorganization of Rules

      The proposal creates a new FINRA Rule 2210 that would encompass, subject to certain changes, the provisions of current NASD Rules 2210 and 2211, NASD Interpretive Materials 2210-1 and 2210-4, and the provisions of Incorporated NYSE Rule 472 that do not pertain to research analysts and research reports. Each of the other Interpretive Materials that follow NASD Rule 2210 would receive its own FINRA rule number and would adopt the same communication categories used in FINRA Rule 2210.3

      Communication Categories

      The proposal reduces the number of current communication categories from six to three, as follows:

      • Institutional communication would include communications that fall under the current definition of "institutional sales material"—i.e., communications that are distributed or made available only to institutional investors. "Institutional investor" would have the same definition as under NASD Rule 2211(a)(3).
      • Retail communication would include any written (including electronic) communication that is distributed or made available to more than 25 retail investors. "Retail investor" would include any person other than an institutional investor, regardless of whether the person is an existing or prospective customer.
      • Correspondence would include any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors, regardless of whether they are existing or prospective customers.

      The proposal eliminates the current definitions of "advertisement," "sales literature," "institutional sales material," "public appearance" and "independently prepared reprint" in NASD Rule 2210, as well as all of the definitions in NASD Rule 2211.4 The proposal also eliminates the definitions of "communication," "advertisement," "market letter" and "sales literature" in Incorporated NYSE Rule 472.

      Communications that currently qualify as advertisements and sales literature generally would fall under the definition of "retail communication." Communications that currently qualify as "institutional sales material" would fall within the definition of "institutional communication."

      Some communications that currently qualify as "correspondence" would continue to fall within that definition under the proposal. In addition, the proposed definition is not limited to form letters, market letters, electronic messages or instant messages, as it is under the current rule, but encompasses all communications distributed to 25 or fewer retail investors. However, communications sent to more than 25 retail investors in all cases would be considered retail communications.5

      The proposal eliminates the terms "public appearance" and "independently prepared reprint." However, as discussed below, the proposal largely incorporates the exceptions from the filing requirements and limited application of the content standards currently applicable to those communication categories. Also, public appearances that include recommendations of securities would be subject to new disclosure standards, as set forth below.

      Approval, Review and Recordkeeping Requirements

      Proposed FINRA Rule 2210(b)(1)(A) would require an appropriately qualified registered principal of the firm to approve each retail communication before the earlier of its use or filing with FINRA. The principal registration required to approve particular communications would depend upon the permissible activities for each principal registration category. The proposal eliminates Incorporated NYSE Rule 472(a)(1), which requires a "qualified person" to approve in advance each advertisement, sales literature or other similar type of communication by an NYSE member firm.

      Proposed Rule 2210(b)(1)(B) continues to permit a Series 16 supervisory analyst approved pursuant to Incorporated NYSE Rule 344 to approve research reports on debt and equity securities. Proposed paragraph (b)(1)(C) maintains the current exception from the principal approval requirements for retail communications that another firm has filed with FINRA and that were found to meet applicable standards. Proposed paragraph (b)(1)(D) clarifies that the principal approval requirement does not apply to any retail communication that is solely administrative in nature.6

      Proposed FINRA Rules 2210(b)(2) and (3) maintain the supervision and review standards for correspondence and institutional communications that currently are found in NASD Rules 2211 and 3010(d).

      Proposed FINRA Rule 2210(b)(4)(A) sets forth the record-keeping requirements for retail and institutional communications. This provision incorporates by reference the record-keeping form and time period requirements of SEA Rule 17a-4. Paragraph (b)(4)(A) specifies that such records would have to include:

      • a copy of the communication and the dates of first and (if applicable) last use;
      • in the case of an institutional communication, the name of the person who prepared or distributed the communication;
      • the name of any registered principal who approved the communication and the date approval was given;
      • the source of any statistical table, chart, graph or other illustration used in the communication; and
      • for retail communications that rely on the exception under paragraph (b)(1)(C), the name of the firm that filed the retail communication and a copy of FINRA's review letter.

      Proposed FINRA Rule 2210(b)(4)(B) cross-references NASD Rules 3010(d) and 3110(a) with respect to correspondence record-keeping requirements.

      Filing Requirements and Review Procedures

      Proposed FINRA Rule 2210(c) generally incorporates the same filing requirements as NASD Rule 2210(c), subject to certain changes.

      NASD Rule 2210(c)(5)(A) currently requires a firm that previously has not filed advertisements with FINRA or another self-regulatory organization to file its initial advertisement with FINRA at least 10 business days prior to use. This filing requirement continues for a year after the initial filing.

      Proposed FINRA Rule 2210(c)(1)(A) alters the filing requirements for new firms in two respects. First, the proposal expands this new firm filing requirement to cover all retail communications, rather than just advertisements. Second, the proposal triggers the one-year filing requirement beginning on the effective date a firm becomes registered with FINRA, rather than on the date an advertisement is first filed with FINRA.

      NASD Rule 2210(c)(4) currently requires firms to file certain communications at least 10 business days prior to first use and to withhold them from use until any changes specified by FINRA staff have been made. These communications include advertisements and sales literature for certain registered investment companies that include self-created rankings, advertisements concerning collateralized mortgage obligations (CMOs), and advertisements concerning security futures.

      Proposed FINRA Rule 2210(c)(2) expands the categories of communications that fall within this pre-use filing requirement. These include retail communications concerning any registered investment company that include self-created rankings, retail communications concerning CMOs and security futures, and retail communications that include bond mutual fund volatility ratings.

      The proposal also requires firms for the first time to file prior to use retail communications concerning any publicly offered securities derived or based on a single security, a basket of securities, an index, a commodity, a debt issuance or a foreign currency.7 The purpose of this provision is to require the filing of retail communications concerning publicly offered structured products, such as exchange-traded notes, that currently are not required to be filed. This provision excludes retail communications that already are subject to a separate filing requirement found elsewhere in proposed paragraph (c), such as retail communications concerning registered investment companies or public direct participation programs.

      The proposal revises the current filing standards for retail communications concerning closed-end investment companies. Currently NASD Rule 2210 requires firms to file within 10 business days of first use advertisements and sales literature concerning a closed-end fund that are distributed during the fund's initial public offering (IPO) period, as well as all advertisements and sales literature concerning continuously offered (interval) closed-end funds.8 Proposed FINRA Rule 2210(c)(3)(A) requires firms to file all retail communications concerning closed-end funds within 10 business days of first use, including those that are distributed after the fund's IPO period. FINRA believes that investors deserve the same protections concerning retail communications about closed-end funds that are distributed after the IPO period as those that are distributed during the IPO.

      Proposed FINRA Rule 2210(c)(5) specifies that a firm must provide with each filing the actual or anticipated date of first use, the name, title and Central Registration Depository number of the registered principal who approved the communication, and the date approval was given. These requirements generally reflect current FINRA policy.

      Proposed FINRA Rule 2210(c)(7) generally duplicates the current exclusions from the filing requirements under NASD Rule 2210(c)(8), with certain modifications. Proposed paragraph (c)(7)(A) adds an exclusion for retail communications that are based on templates that were previously filed with FINRA, the changes to which are limited to updates of more recent statistical or other non-narrative information.9 Proposed paragraph (c)(7)(B) excludes retail communications that are solely administrative in nature.

      Proposed paragraph (c)(7)(G) maintains but streamlines the exclusion for independently prepared reprints currently found in NASD Rule 2210(c)(8)(H). Although the proposal deletes language defining investment company research reports, it deems these communications part of the category of independently prepared reprints exempt from filing.

      The proposal eliminates a current filing exclusion for press releases that are made available only to members of the media.10 FINRA staff has found that firms almost always post press releases on their Web sites, thus making them available to the general public. Accordingly, generally firms have not used this filing exclusion.

      Content Standards

      Proposed FINRA Rule 2210(d) reorganizes, but largely incorporates, the current content standards applicable to communications with the public that are found in NASD Rule 2210(d), NASD IM-2210-1, NASD IM-2210-4 and Incorporated NYSE Rules Rule 472(i) and (j), subject to certain changes. Content standards that currently apply to advertisements and sales literature generally would apply to retail communications.

      Proposed FINRA Rule 2210(d)(2)(B) expressly prohibits promissory statements or claims. FINRA staff already interprets NASD Rule 2210(d)(1)(B) to prohibit promissory language in firm communications and Incorporated NYSE Rule 472(i) specifically prohibits promissory statements.

      Proposed paragraph (d)(3) applies the standards concerning disclosure of a firm's name to correspondence as well as to retail communications. Firms would be permitted to use the name under which a firm's broker-dealer business is conducted as disclosed on the firm's Form BD, as well as a fictional name by which a firm is commonly recognized or which is required by any state or jurisdiction.

      Proposed paragraph (d)(4)(C) adds new language concerning comparative illustrations of the mathematical principles of tax-deferred versus taxable compounding. Much of this language reflects previous guidance that FINRA has provided regarding tax-deferral illustrations.11 By placing this rule language in proposed FINRA Rule 2210, FINRA is clarifying that these standards apply to any illustration of tax-deferred versus taxable compounding, regardless of whether it appears in a communication promoting variable insurance products or some other communication, such as one discussing the benefits of investing through a 401(k) retirement plan or individual retirement account.12

      NASD Rule 2210(d)(3) requires communications with the public, other than institutional sales material and correspondence, that present the performance of a non-money market mutual fund to disclose the fund's maximum sales charge and operating expense ratio as set forth in the fund's current prospectus fee table.

      Proposed FINRA Rule 2210(d)(5) alters this standard by requiring disclosure of the maximum sales charge and total operating expense ratio based on the fund's prospectus or annual report, whichever is more current as of the date of publication or submission for publication of a communication.

      Proposed Rule 2210(d)(7) revises in several ways the standards currently found in NASD IM-2210-1(6) applicable to communications that contain a recommendation.

      First, the proposal applies these standards to retail communications, correspondence and public appearances. Currently the standards apply only to advertisements and sales literature.

      Second, IM-2210-1(6)(A)(ii) requires a disclosure if the firm and/or its officers or partners have a financial interest in the securities of the recommended issuer and the nature of the financial interest. The proposal instead requires disclosure if the firm or any associated person with the ability to influence the substance of the communication has a financial interest in the recommended issuer and the nature of the financial interest. This change would substantially narrow the number of parties whose financial interests have to be disclosed, particularly for large firms with numerous officers and partners. It also would more closely align the recommendation provisions of proposed FINRA Rule 2210 with the disclosure standards of proposed FINRA Rule 2240 (which would replace current NASD Rule 2711 and portions of Incorporated NYSE Rule 47213) concerning research reports.

      Third, proposed FINRA Rule 2210(d)(7)(C) amends the provisions governing communications that include past recommendations, which are currently found in NASD IM-2210-1(6)(C) and (D) and Incorporated NYSE Rule 472(j)(2). The new proposed standards mirror those found in Rule 206(4)-1(a)(2) under the Investment Advisers Act of 1940, which apply to investment adviser advertisements that contain past recommendations.

      Under the proposed standard, retail communications and correspondence could set out or offer to furnish a list of all recommendations of the same type, kind, grade or classification of securities made by the firm within the immediate preceding period of not less than one year, if the communication stated the name of each recommended security, the date and nature of the recommendation, the market price at that time, the price at which the recommendation was to be acted upon, and the market price of each such security as of the most practicable date. The communication also would have to include a prescribed legend warning that future recommendations may not be as profitable.

      Fourth, proposed FINRA Rule 2210(d)(7)(D) expressly excludes from its coverage communications that meet the definition of "research report" for purposes of proposed FINRA Rule 2240 and that include all of the applicable disclosures required by that rule. Proposed paragraph (d)(7)(D) also excludes any communication that recommends only registered investment companies or variable insurance products.

      Proposed FINRA Rule 2210(e) replaces current NASD IM-2210-4, which addresses limitations on firms' use of FINRA's name and any other corporate name owned by FINRA. This provision adds language that codifies FINRA's current position that any reference to FINRA staff's review of a communication is limited to either "Reviewed by FINRA" or "FINRA Reviewed."

      Proposed FINRA Rule 2210(f) sets forth the standards that apply to public appearances. Public appearances would have to meet the general "fair and balanced" standards of proposed FINRA Rule 2210(d)(1), and the standards applicable to recommendations contained in proposed paragraph (d)(7) if the public appearance included a recommendation of a security. In this regard, associated persons who recommend securities in public appearances generally would be subject to the same disclosure requirements under proposed FINRA Rule 2210(f) as research analysts that recommend securities in public appearances pursuant to NASD Rule 2711(h). The proposal also requires firms to establish appropriate written policies and procedures to supervise public appearances, and makes clear that scripts, slides, handouts or other written and electronic materials used in connection with public appearances are considered communications with the public for purposes of proposed FINRA Rule 2210.14

      Use of Investment Company Rankings in Retail Communications

      Proposed FINRA Rule 2212 replaces NASD IM-2210-3 with regard to standards applicable to the use of investment company rankings in communications. The standards generally would remain the same, but would apply to retail communications instead of advertisements and sales literature. The proposal adds a new paragraph (h) that excludes from the rule's coverage reprints or excerpts of articles or reports that are excluded from FINRA's filing requirements pursuant to proposed FINRA Rule 2210(c)(7)(G).

      Requirements for the Use of Investment Analysis Tools

      Proposed FINRA Rule 2214 replaces NASD IM-2210-6 with regard to standards applicable to the use of investment analysis tools with retail customers. The standards would remain the same, but some language that is currently contained either in IM-2210-6's text or in footnotes would be moved to supplementary material.

      Guidelines for Communications With the Public Regarding Security Futures

      Proposed FINRA Rule 2215 replaces NASD IM-2210-7 with regard to standards applicable to communications concerning security futures. Proposed FINRA Rule 2215 revises the current standards in several respects to conform to NASD Rule 2220.15

      First, portions of NASD IM-2210-7 apply only to advertisements. Proposed FINRA Rule 2215 applies these provisions to all retail communications.

      Second, the proposal amends the provisions that require communications concerning security futures to be accompanied or preceded by the security futures risk disclosure document under certain circumstances. As revised, a communication concerning security futures would have to be accompanied or preceded by the risk disclosure document if it contained the names of specific securities.

      Third, proposed paragraph (b)(2)(A) prohibits security future communications that contain any statement suggesting the certain availability of a secondary market for security futures. Fourth, proposed paragraph (b)(2)(C) requires any statement referring to the potential opportunities or advantages presented by security futures to be balanced by a statement of the corresponding risks, and requires the same degree of specificity.

      Fifth, proposed paragraph (b)(4)(D) clarifies that communications that contain the historical performance of security futures must disclose all relevant costs, which must be reflected in the performance.


      1 See Notice to Members 03-73 (November 2003) (NASD Announces Online Availability of Comments). Personal identifying information, such as names or email addresses, will not be edited from submissions. Submit only information that you wish to make publicly available.

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

      3 Proposed FINRA Rule 2211 (Communications with the Public About Variable Insurance Products), which replaces NASD Interpretive Material 2210-2, is the subject of a separate, proposed rule change. See Regulatory Notice 08-39 (July 2008) (FINRA Requests Comments on Proposed New Rules Governing Communications About Variable Insurance Products).

      4 NASD Rule 2211 currently defines the terms "correspondence," "institutional sales material, institutional investor," "existing retail customer," "prospective retail customer" and "market letter."

      5 The definition of "correspondence" in NASD Rule 2211 currently includes market letters as well as written letters and electronic mail messages that are sent to one or more existing retail customers and fewer than 25 prospective retail customers. FINRA revised the definition of "correspondence" to include market letters in February 2009 in order to allow firms to send market letters to traders and other investors who base their decisions on timely market analysis without having to have a principal approve them in advance. Previously, firms were required to approve market letters prior to use, which sometimes inhibited the flow of information to these parties. See Regulatory Notice 09-10 (SEC Approves Rule Relating to Supervision of Market Letters) (Feb. 2009).

      Proposed FINRA Rule 2210 continues to allow firms to send communications (including market letters) to institutional investors without having a principal approve such communications prior to use. FINRA believes that, by continuing to allow firms to send information to institutional investors without principal approval, the proposed rule change largely addresses the concerns that led to including market letters within the current definition of "correspondence."

      6 This exception to the principal approval requirement for administrative communications is similar to the current exclusion from FINRA's filing requirements for advertisements and sales literature solely related to recruitment or changes in a firm's name, personnel, electronic or postal address, ownership, offices, business structure, partners, telephone and teletype numbers, or concerning a merger with, or acquisition by, another firm. See NASD Rule 2210(c)(8)(B).

      7 This proposed rule language is derived from a description of the term "structured product" in Notice to Members 05-59 (September 2005) (NASD Provides Guidance Concerning the Sale of Structured Products) and is intended to cover retail communications concerning such products.

      8 See "Ask the Analyst," Regulatory & Compliance Alert (Winter 1999) p. 13.

      9 This exclusion is based in part on an earlier staff interpretation concerning how NASD Rule 2210's approval, record-keeping and filing requirements apply to statistical updates contained in pre-existing templates. See Letter from Thomas M. Selman, NASD, to Forrest R. Foss, T. Rowe Price Associates, Inc. (Jan. 28, 2002).

      10 See NASD Rule 2210(c)(8)(G).

      11 See "NASD Reminds Members of Their Responsibilities Regarding Hypothetical Tax-Deferral Illustrations in Variable Annuity Illustrations," Member Alert (May 10, 2004).

      12 FINRA previously published this proposed rule language for comment as part of proposed changes to the rules governing communications about variable insurance products. See Regulatory Notice 08-39 (July 2008) (FINRA Requests Comments on Proposed New Rules Governing Communications About Variable Insurance Products). Proposed FINRA Rule 2210 would incorporate these earlier proposed changes, which have been removed from the rule proposal concerning variable insurance products communications. FINRA expects to file with the SEC the proposed rule change to adopt FINRA Rule 2211 regarding communications with the public about variable insurance products in the near future.

      13 See Regulatory Notice 08-55 (October 2008).

      14 The requirement to establish supervisory policies and procedures for public appearances is consistent with NASD Rule 3010(b) and Incorporated NYSE Rule 472(l).

      15 FINRA is proposing to adopt NASD Rule 2220 (Options Communications) without substantive change into the Consolidated FINRA Rulebook as FINRA Rule 2220. See SEC Rel. No. 34-60066 (June 8, 2009), 74 Fed. Reg. 28308 (June 15, 2009).

    • 09-54 SEC Approves Amendments Requiring Related Market Center Indicator in Non-Tape Reports Submitted to FINRA; Effective Date: March 1, 2010

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      Trade Reporting

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      FINRA Rule 7130
      FINRA Rule 7230A
      FINRA Rule 7230B
      FINRA Rule 7330
      Regulatory Notice 07-38
      Suggested Routing

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

      Agency Trades
      Alternative Display Facility
      NMS Stocks
      Non-Tape Reports
      OTC Equity Securities
      OTC Reporting Facility
      Related Market Center
      Riskless Principal Trades
      Trade Reporting
      Trade Reporting Facilities

      Executive Summary

      Effective Monday, March 1, 2010, firms submitting a non-tape report (either a non-tape, non-clearing report or clearing-only report) to the Alternative Display Facility (ADF), a Trade Reporting Facility (TRF) or the OTC Reporting Facility (ORF) (referred to herein as the "FINRA Facilities") associated with a previously executed trade that was not reported to that same FINRA Facility must identify the facility or market where the associated trade was reported for dissemination purposes (the "Related Market Center").

      The text of the amendments can be found at: www.finra.org/rulefilings/2007-012.

      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

      New Related Market Center Reporting Requirement

      Certain over-the-counter (OTC) equity transactions (including OTC transactions in NMS stocks and OTC equity securities, such as OTC Bulletin Board and Pink Sheets securities) are reported to FINRA in related tape and non-tape reports.1 For example, a riskless principal transaction2 can be submitted to FINRA as a single tape report properly marked as riskless principal, or as two separate reports: (1) a tape report to reflect the initial leg of the transaction and (2) a non-tape report to reflect the offsetting, "riskless" leg of the transaction. Agency transactions in which a firm acts as agent on behalf of another member firm also are reported in related tape and non-tape reports. Under FINRA rules, firms are not required to submit related tape and non-tape reports to the same FINRA Facility for such riskless principal and agency transactions.3

      Because a non-tape report provides no specific information linking it to a related tape report, it is difficult for FINRA to determine with certainty where the associated trade was reported, especially if that trade was reported through an exchange or to another FINRA Facility. In this regard, on May 12, 2009, the SEC approved amendments4 to FINRA trade reporting rules to require that firms identify the Related Market Center in any non-tape report (either a non-tape, non-clearing report or clearing-only report) submitted to a FINRA Facility associated with a previously executed trade that was not reported to that same FINRA Facility.5 In addition, firms are required to retain and produce to FINRA, upon request, documentation relating to the associated trade (e.g., a confirmation from the exchange identifying the "street side" of a riskless principal transaction).

      For example, if the initial leg of a riskless principal (or agency) transaction is executed on and reported through Exchange A and a firm submits a non-tape report for the offsetting leg of the transaction to a FINRA Facility, the non-tape report must include the unique indicator to identify Exchange A as the Related Market Center. By way of further example, if the initial leg is executed OTC and reported to TRF A and a firm submits a non-tape report for the offsetting leg to another FINRA Facility, the non-tape report must include the unique indicator to identify TRF A as the Related Market Center. Finally, if, for example, the initial leg is executed on and reported through a foreign exchange and a firm submits a non-tape report for the offsetting leg to a FINRA Facility, the non-tape report must include the unique indicator to identify "foreign exchange" as the Related Market Center.

      When a firm submits a non-tape report to FINRA, the firm should have an affirmative basis to believe the underlying transaction has been properly reported to the tape, and FINRA expects firms to provide as much information pertaining to the Related Market Center as is available at the time the non-tape report is submitted. FINRA notes that the submission of non-tape reports is not subject to the 90-second reporting requirement under FINRA trade reporting rules. Thus, firms have until the end of the day on trade date to submit non-tape reports with the required Related Market Center information, unless a shorter reporting time is required under other FINRA rules.6

      Populating the Related Market Center Field in Specific Reporting Scenarios

      Provided below is guidance to assist firms in populating the Related Market Center field in specific reporting scenarios. For ease of reference, this guidance also is summarized in the chart at the end of this Notice. Firms must consult the applicable technical specifications for the FINRA Facility to which they are reporting for information on the specific data entries for a particular Related Market Center.7

      FINRA expects that with this guidance, firms will be able to populate the Related Market Center field in all instances (i.e., using the specific code identifying the exchange or FINRA Facility where the associated trade was executed and/or reported for tape purposes, a "multiple venues" code or an "unknown venue" code). If a firm leaves the Related Market Center field blank, it is making an affirmative representation that the non-tape report and the associated tape report were submitted to the same FINRA Facility. In fact, that is the only instance in which it is acceptable for a firm not to populate the Related Market Center field.

      In situations where there is a one-to-one relationship between associated tape and non-tape reports (that are not submitted to the same FINRA Facility), the following guidance applies. Where a single non-tape report is related to a single tape report, the firm must identify in the non-tape report the specific exchange or FINRA Facility to which the associated tape report was submitted. Where the initial leg of the transaction was executed on and reported through a foreign exchange, the firm must include a standard indicator for "foreign exchange"; firms are not required to identify the specific foreign exchange in the Related Market Center field.

      In all other situations where there is not a one-to-one relationship between associated tape and non-tape reports, the following guidance applies. Where multiple tape reports are made to a single exchange or, in the case of OTC trades, a single FINRA Facility, that exchange or facility must be properly reflected in the associated non-tape report(s). Where multiple tape reports are made to different exchanges and/or FINRA Facilities, the firm is not required to identify the specific exchanges or facilities in the associated non-tape report(s), but is required to populate the Related Market Center field with a standard indicator representing "multiple venues." By selecting "multiple venues," a firm is affirmatively representing that it has a basis to believe the underlying transactions have been properly reported to the tape by more than one exchange or facility.

      Firms have indicated to FINRA that where an order is routed to an exchange or to another firm ("routed venue"), a firm may not know where the trade was ultimately executed or, in the case of OTC trades, where the trade was ultimately reported. If the routed venue provides information about where the trade is tape reported, the firm must identify the exchange or FINRA Facility, as applicable, in the associated non-tape report(s). If, however, the routed venue does not provide such information and the firm has no other basis for identifying the relevant exchange or FINRA Facility, the firm must populate the Related Market Center field with a standard indicator representing "unknown venue." By using the "unknown venue" code, a firm is affirmatively representing that the non-tape report is associated with a tape-reported trade execution, and the firm must be able to explain and document the circumstances for using this code (e.g., the execution report from the routed venue does not specify the exchange where the trade was executed, or in the case of OTC trades, the FINRA Facility where the trade was tape reported). In instances where the firm knows that multiple tape reports were made to multiple exchanges and/or FINRA Facilities, the firm must report "multiple venues" instead of "unknown venue"—even though one or more of the multiple venues may be unknown to the firm.8

      Tape Report Populate Related Market Center Field in Associated Non-Tape Report With Indicator for...
      Single tape report through a single exchange or FINRA Facility Specific exchange or facility
      Single tape report through a single foreign exchange "Foreign exchange"
      Multiple tape reports through a single exchange or FINRA Facility Specific exchange or facility
      Multiple tape reports through one or more foreign exchanges "Foreign exchange"
      Multiple tape reports through different exchanges and/or FINRA Facilities "Multiple venues"
      Routed venue provides information about where the trade was ultimately executed and/or reported Specific exchange or facility
      Routed venue does not provide information about where the trade was ultimately executed and/or reported "Unknown venue"
      Multiple tape reports through different exchanges and/or FINRA Facilities and one or more are unknown to the firm "Multiple venues"
      Non-tape report and associated tape report(s) submitted to the same FINRA Facility Leave Related Market Center field blank (only instance this field is permitted to be blank)

      1 A non-tape report is a report that is submitted to a FINRA Facility, but is not reported to and publicly disseminated by the appropriate exclusive Securities Information Processor. A regulatory report, referred to as a "non-tape, non-clearing" report, is submitted to FINRA solely to fulfill a regulatory requirement. A clearing report, referred to as a "clearing-only" report, is used by firms to clear and settle transactions; information reported to FINRA in a clearing report is transmitted by FINRA to the National Securities Clearing Corporation for clearance and settlement. Clearing reports also can be used to satisfy a firm's obligation to provide regulatory information to FINRA, if applicable.

      2 For purposes of OTC trade reporting requirements applicable to equity securities, a "riskless principal" transaction is a transaction in which a firm, after having received an order to buy (sell) a security, purchases (sells) the security as principal (the initial leg) and satisfies the original order by selling (buying) as principal at the same price (the offsetting, "riskless" leg).

      3 See Regulatory Notice 07-38 (August 2007).

      4 See Securities Exchange Act Release No. 59905 (May 12, 2009), 74 FR 23455 (May 19, 2009) (order approving SR-FINRA-2007-012).

      5 See FINRA Rules 7130(d), 7230A(i), 7230B(h) and 7330(h).

      6 See Trade Reporting Frequently Asked Questions, FAQ 102.2, at www.finra.org/tradereportingfaq.

      7 The applicable technical specifications can be found on the FINRA Web site at: www.finra.org/Industry/Compliance/MarketTransparency/index.htm.

      8 FINRA notes that where a firm routes to an exchange and has a reasonable basis for reporting that the trade was executed on that exchange, FINRA would not consider it a violation if, unbeknownst to the firm, the trade is ultimately executed somewhere other than the routed exchange. The same approach holds true with respect to reporting to other FINRA Facilities. See supra note 4.

    • 09-53 Increased Margin Requirements for Leveraged Exchange-Traded Funds and Associated Uncovered Options; Effective Date: December 1, 2009

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      Non-Traditional ETFs

      Regulatory Notice
      Notice Type

      Special Alert
      Referenced Rules & Notices

      Incorporated NYSE Rule 431
      NASD Rule 2520
      Regulatory Notice 09-31
      Suggested Routing

      Compliance
      Legal
      Margin Department
      Operations
      Regulatory Reporting
      Risk Management
      Senior Management
      Key Topics

      ETFs
      Leveraged ETFs
      Margin Requirements
      Uncovered Options on Leveraged ETFs

      Executive Summary

      Effective December 1, 2009, FINRA is implementing increased customer margin requirements for leveraged ETFs and uncovered options overlying leveraged ETFs, in accordance with NASD Rule 2520 and Incorporated NYSE Rule 431.

      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; or
      •   Steve Yannolo, Principal Credit Specialist, Credit Regulation, at (646) 315-8621

      Background & Discussion

      ETFs are typically registered unit investment trusts (UITs) or open-end investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index.1 However, some ETFs that invest in commodities, currencies, or commodity—or currency—based instruments are not registered as investment companies. Unlike traditional UITs or mutual funds, shares of ETFs typically trade throughout the day on an exchange at prices established by the market.

      Leveraged ETFs are a subset of ETFs that are designed to generate multiples (e.g., 200%, 300% or greater) of the performance of the underlying index or benchmark they track. Some leveraged ETFs are "inverse" or "short" funds, meaning they seek to deliver the opposite of the performance of the index or benchmark they track. FINRA recently reminded firms of their sales practice obligations with respect to leveraged and inverse ETFs, including the risks caused by the fact that most of these funds are designed to achieve their stated performance on a daily basis.2

      Leveraged ETFs may include among their holdings derivative instruments such as options, futures or swaps. Leveraged ETFs are inherently more volatile than their underlying benchmark or index.

      NASD Rule 2520(f)(8)(A) and Incorporated NYSE Rule 431(f)(8)(A) permit FINRA—in response to market conditions—to prescribe higher initial and maintenance margin requirements. In view of the increased volatility of leveraged ETFs compared to their non-leveraged counterparts, FINRA believes higher margin levels are necessary.

      Strategy-Based Margin Account

      In general, FINRA is increasing the maintenance margin requirements for leveraged ETFs and associated uncovered options by a factor commensurate with their leverage.

      In a strategy-based margin account, the current maintenance margin requirement for any long ETF is 25% of the market value, and for any short ETF, the current maintenance margin requirement is generally 30% of the market value.3 Effective December 1, 2009, these maintenance margin requirements will increase by a percentage commensurate with the leverage of the ETF, not to exceed 100% of the value of the ETF, as detailed in the following examples:

      Long 100 shares ABC ETF @ 28.00 (200% leverage)
      Market Value: 2,800
      Maintenance Requirement: 2 × .25 = .50
      2,800 × .50 = 1,400
      Short 100 shares DEF ETF @ 26.00 (300% leverage)
      Market Value: 2,600
      Maintenance Requirement: 3 × .30 = .90
      2,600 × .90 = 2,3404

      FINRA also is increasing the maintenance margin requirements for listed and over-the-counter uncovered options on leveraged ETFs in a similar fashion. Currently, the maintenance margin requirement for a listed, uncovered option overlying an ETF on a broad-based index or benchmark is:

      •   100% of the option premium;
      •   plus 15% of the ETF market value;
      •   minus any out-of-the-money amount;

      subject to a minimum requirement of:

      •   100% of the option premium plus 10% of the ETF market value for call options; and
      •   100% of the option premium plus 10% of the exercise amount for put options.

      For a listed, uncovered option overlying an ETF on a narrow-based index or benchmark, the percentage of the ETF market value is currently 20%.5

      For a listed, uncovered option on a leveraged ETF, the formula above will continue to apply; however, the percentages of the underlying ETF market value will be determined using the same methodology as the underlying ETF. Thus, instead of using 15% of the ETF market value for a broad-based ETF and 20% for a narrow-based ETF, a leveraged ETF at 200% would use 30% (two times 15%,or 40% for narrow-based) of the market value, and a leveraged ETF at 300% would use 45% (three times 15%, or 60% for narrow-based).

      Portfolio Margin Account

      In a portfolio margin account, eligible products and related instruments are grouped into specific portfolio types and theoretical gains and losses are computed based on a prescribed stress range relative to the portfolio type. The stress range of 10 equidistant intervals represents assumed market price movement from the current market value of the underlying instrument. The greatest theoretical loss becomes the margin requirement for that product. Currently, the stress range applied to an ETF and related listed options is based on the portfolio type that the ETF falls under.

      For leveraged ETFs and related listed options, the Options Clearing Corporation has increased the stress ranges within its TIMS model proportionately to the amount of leverage on the ETF.6 For example, an ETF with 300% leverage that falls under the equity or narrow-based index portfolio type would have its stress range increased to -45% / +45% (3 × .15).7

      Day Trading

      For day-trading purposes, the calculations to determine day-trading buying power and day-trade calls will also be based on the amount of leverage on the ETF. Thus, the day-trading buying power on a leveraged ETF will need to include the higher margin requirements prescribed above.

      The following example should help demonstrate the calculation of day-trading buying power as it relates to a leveraged ETF:

      Customer A has a total, long market value, based on the previous nights' close of business, of $100,000. The market value is composed entirely of long positions in a 300% leveraged ETF. The customer is carrying a margin debit balance of $20,000. The day-trading buying power would be computed as follows:

      Total Market Value: $100,000
      Debit Balance: $20,000
      Account Equity: $80,000
      FINRA Maintenance Requirement: $75,000 (3 times the normal $25,000 maintenance requirement)
      FINRA Excess Equity: $5,000
      Day-Trading Buying Power: $6,665

      The day-trading buying power in this example is computed by multiplying the FINRA excess equity by 1.333, which coincides with a 75% maintenance requirement for the leveraged ETF. It also assumes that the client would be day trading the same, or similar, 300% leveraged ETF.

      Additional Margin

      FINRA is aware that other securities that contain inherent leverage (e.g., leveraged mutual funds) may be held and traded in customer accounts on a margin basis, and as such, firms are reminded to assess the adequacy of current maintenance requirements for these products and the need to increase them where appropriate.

      Pursuant to NASD Rule 2520(d) and Incorporated NYSE Rule 431(d), firms must have procedures in place to:

      •   review limits and types of credit extended to all customers;
      •   formulate their own margin requirements; and
      •   review the need for instituting higher margin requirements, mark-to-markets and collateral deposits than are required by FINRA's rules for individual securities or customer accounts.

      1 In 2008, the SEC began issuing exemptive orders that allow certain ETFs to be actively managed and, thus, not track an underlying benchmark or index. See SEC Rel. No. 338901 (Mar. 11, 2008), 73 FR 14618, 14620 n. 20 (Mar. 18, 2008). See also Regulatory Notice 09-31.

      2 See Regulatory Notice 09-31.

      3 NASD Rule 2520(c) and Incorporated NYSE Rule 431(c) prescribe a maintenance margin requirement of $2.50 per share or 100% of the current market value, whichever is greater, for each short stock priced at less than $5.00 per share, and $5.00 per share or 30% of the current market value, whichever is greater, for each short stock priced at $5.00 per share or greater.

      4 As the examples indicate, the maintenance margin levels would double for an ETF offering 200% leverage and triple for an ETF offering 300% leverage. If the leveraged ETF is designed to provide 150% of the performance of the underlying index or benchmark, then the requirement would be the current maintenance requirement for a standard ETF, multiplied by 1.5 (e.g., 1.5 × .25 = .375).

      5 For an over-the-counter uncovered option overlying an ETF on a broad-based index or benchmark, the percentage of the ETF market value to be used is currently 20%, and for an over-the-counter uncovered option overlying an ETF on a narrow-based index or benchmark, the percentage of the ETF market value is currently 30%. For over-the-counter uncovered options on a leveraged ETF, the percentages of the underlying ETF will increase by a factor commensurate with the ETFs leverage. Firms should refer to NASD Rule 2520(f)(2)(D) and Incorporated NYSE Rule 431(f)(2)(D) when calculating margin requirements on over-the-counter options.

      6 The Options Clearing Corporation's TIMS model is currently the only model approved by the SEC. For a partial list of leveraged and inverse ETFs, see www.optionsclearing.com/products/rbh_documentation.jsp.

      7 Currently, the Options Clearing Corporation's (OCC) TIMS model does not have the ability to determine theoretical pricing for all over-the-counter options, and therefore cannot determine the theoretical gains and losses for all such products. A firm that wishes to utilize a risk-based methodology for over-the-counter options that the OCC's model does not recognize must first have its proprietary model approved by the SEC. See NASD Rule 2520(g) and Incorporated NYSE Rule 431(g)).

    • 09-52 SEC Approves Amendments to FINRA Trade Reporting Rules on OTC Equity Transactions Executed Outside Normal Market Hours; Effective Date: January 11, 2010

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      Trade Reporting

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      FINRA Rule 6282
      FINRA Rule 6380A
      FINRA Rule 6380B
      FINRA Rule 6622
      Suggested Routing

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

      Alternative Display Facility
      NMS Stocks
      Outside Normal Market Hours Trades
      OTC Equity Securities
      OTC Reporting Facility
      Trade Reporting
      Trade Reporting Facilities


      Executive Summary

      Effective January 11, 2010, firms that execute OTC trades in equity securities during the hours that a FINRA trade reporting facility is closed must report the trade within 15 minutes of the opening of the facility—i.e., by 8:15 a.m. Eastern Time.

      Additionally, effective January 11, 2010, the FINRA/NASDAQ Trade Reporting Facility and the OTC Reporting Facility will allow firms to submit during normal market hours trade reports with a modifier designating the trade as executed outside normal market hours.

      The text of the amendments can be found at www.finra.org/rulefilings/2009-031.

      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

      FINRA rules prescribe special requirements for reporting over-the-counter (OTC) equity trades executed outside normal market hours (i.e., trades executed outside the hours of 9:30 a.m. to 4 p.m. Eastern Time [ET]). The rules distinguish between "outside normal market hours" trades that are executed during the hours the FINRA Facilities are open and trades that are executed during the hours the facilities are closed.1

      Specifically, trades executed outside normal market hours and during the hours that the FINRA Facility to which the firm is reporting is open must be reported within 90 seconds of execution. For example, a trade executed at 9 a.m. or a trade executed at 5 p.m. must be reported within 90 seconds.2 "Outside normal market hours" trades executed during the hours that the FINRA Facility to which the firm is reporting is closed are not subject to 90-second reporting, since the facility is not open to facilitate the reporting of the trade. Such trades are reported as follows: (1) trades executed between midnight and 8 a.m. must be reported on trade date; and (2) trades executed between the close of the facility (i.e., either 6:30 p.m. for the ADF or 8 p.m. for the TRFs and ORF) and midnight must be reported on an "as/of" basis the following business day (T+1). All "outside normal market hours" trades are designated with a unique trade report modifier, as specified by FINRA.

      On July 23, 2009, the SEC approved a proposed rule change to amend FINRA trade reporting rules to require that trades executed during the hours that the FINRA Facility is closed be reported within 15 minutes of the opening of the facility (i.e., by 8:15 a.m. ET for all FINRA Facilities).3 Specifically, firms must report as follows:

      •   Trades executed between midnight and 8 a.m. must be reported by 8:15 a.m. ET on trade date and be designated with the unique trade report modifier to denote their execution outside normal market hours. Trades reported after 8:15 a.m. on trade date will be late and marked with the "outside normal market hours trade reported late" modifier.
      •   Trades executed between the close of the FINRA Facility (i.e., either 6:30 p.m. for the ADF or 8 p.m. for the TRFs and ORF) and midnight must be reported on an "as/of" basis by 8:15 a.m. ET the following business day (T+1) and be designated with the unique trade report modifier to denote their execution outside normal market hours. Trades reported after 8:15 a.m. on T+1 will be late and marked with the "outside normal market hours trade reported late" modifier.4

      Firms that report trades to the FINRA/NASDAQ TRF or the ORF also should be aware of an additional change specific to these facilities. Under current rules and system functionality, firms cannot submit a trade with a modifier designating the trade as executed outside normal market hours to these two facilities during normal market hours. For example, if a firm executes a trade at 9:29:00 a.m. and reports the trade at 9:30:15 a.m. (in compliance with the 90-second reporting requirement under FINRA rules), the FINRA/NASDAQ TRF and ORF will reject the trade report, as the trade cannot be reported until after 4 p.m. Pursuant to the amendments, firms now can submit a trade with a modifier designating the trade as executed outside normal market hours (and late reports of such trades, as applicable) to the FINRA/NASDAQ TRF and ORF throughout the day.5

      The chart below summarizes the reporting requirements discussed above (as well as the requirements applicable to trades executed during normal market hours), including the appropriate Extended Hours/Sold—Field 3 (or "byte 3") trade report modifiers. Firms must consult the applicable technical specifications for the FINRA Facility to which they are reporting for information on specific data entries for that facility.6

      The amendments become effective January 11, 2010; however, firms can begin complying with the 8:15 a.m. ET reporting deadline at any time. Additionally, firms reporting to the FINRA/NASDAQ TRF and ORF will be able to submit trade reports with the "outside normal market hours" modifier during normal market hours prior to the January 11, 2010, effective date; technical availability will be announced shortly.

      Trade Execution Time Reporting Requirement Extended Hours/Sold—Field 3 Modifier
      Actual Report Time Field 3 Modifier
      Midnight–7:59:59 am By 8:15 am (within 15 minutes of system open) on trade date 8:00–8:15 am on trade date Outside normal market hours trade (.T)
      After 8:15 am on trade date Outside normal market hours trade reported late (.U)
      8:00–9:29:59 am Within 90 seconds of execution on trade date Within 90 seconds of execution Outside normal market hours trade (.T)
      More than 90 seconds after execution Outside normal market hours trade reported late (.U)
      9:30 am–4:00 pm (normal market hours) Within 90 seconds of execution on trade date Within 90 seconds of execution N/A
      More than 90 seconds after execution Normal market hours trade reported late (.Z)
      4:00:01–8:00 pm

      (4:00:01–6:30 pm for ADF)
      Within 90 seconds of execution on trade date Within 90 seconds of execution Outside normal market hours trade (.T)
      More than 90 seconds after execution Outside normal market hours trade reported late (.U)
      8:00:01–11:59:59 pm

      (6:30:01–11:59:59 pm for ADF)
      By 8:15 am (within 15 minutes of system open) on T+1, "as/of" 8:00–8:15 am on T+1 Outside normal market hours trade (.T)
      After 8:15 am on T+1 Outside normal market hours trade reported late (.U)

      1 As used herein, the term "FINRA Facilities" refers to the Alternative Display Facility (ADF), a Trade Reporting Facility (TRF) or the OTC Reporting Facility (ORF). The TRFs and ORF are open between 8 a.m. and 8 p.m. ET, and the ADF is open between 8 a.m. and 6:30 p.m. ET.

      2 The 90-second reporting requirement applicable to this subset of trades is not affected by the amendments described in this Notice.

      3 See Securities Exchange Act Release No. 60377 (July 23, 2009), 74 FR 38250 (July 31, 2009) (order approving SR-FINRA-2009-031).

      4 See FINRA Rules 6282(a)(2), 6380A(a)(2), 6380B(a)(2) and 6622(a)(3).

      FINRA notes that certain FINRA Facilities will automatically append a modifier to denote that a trade was executed outside normal market hours based on the trade execution time reported by the firm. See Trade Reporting Frequently Asked Questions, FAQ 400.4, at www.finra.org/tradereportingfaq.

      5 FINRA notes that the ADF and FINRA/NYSE TRF currently permit the submission of reports with the "outside normal market hours" modifier throughout the day.

      6 The applicable technical specifications can be found on the FINRA Web site at www.finra.org/Industry/Compliance/MarketTransparency/index.htm.

    • 09-51 SEC Approves Amendments Relating to Recordkeeping and the Unsolicited Customer Order Exception of SEA Rule 15c2-11; Effective Date: September 21, 2009

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      Recordkeeping Requirements

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      FINRA Rule 6440
      FINRA Rule 6540
      SEA Rule 15c2-11
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Trading and Market Making
      Key Topic(s)

      Record keeping
      Unsolicited Customer Orders

      Executive Summary

      Effective September 21, 2009, firms are required to create a contemporaneous record of certain customer and order information demonstrating eligibility for the unsolicited customer order exception of SEA Rule 15c2-11 when the firm is relying on such exception.

      The text of the amendments can be found in the online FINRA Manual at www.finra.org/finramanual.

      Questions regarding this Notice should be directed to Racquel Russell, Assistant General Counsel, Office of General Counsel, at (202) 728-8363.

      Background and Discussion

      FINRA Rule 6440 sets forth certain standards applicable to member firms to demonstrate compliance with Rule 15c2-11 under the Securities Exchange Act of 1934 (SEA). SEA Rule 15c2-11 prescribes information review and maintenance requirements for broker-dealers that publish quotations1 in a quotation medium2 for certain over-the-counter equity securities (e.g., those quoted on the OTC Bulletin Board and Pink Sheets). Specifically, SEA Rule 15c2-11 prohibits a broker-dealer from publishing, or submitting for publication, a quotation for a covered OTC equity security unless it has obtained and reviewed current information about the issuer whose security is the subject of the quotation that the broker-dealer believes is accurate and obtained from a reliable source.

      There are several exceptions to SEA Rule 15c2-11, including paragraph (f)(2) of the rule, which excepts quotations that represent a customer's unsolicited order or indication of interest (the unsolicited customer order exception).

      FINRA has found that firms maintain varying levels of documentation for demonstrating eligibility for the unsolicited customer order exception and, in some cases, have been unable to produce any proof that a quote in fact represented a customer's unsolicited order or indication of interest.

      While a firm relying on this or any exception should be able to proffer evidence of its eligibility for and compliance with the exception, FINRA believes that providing specific recordkeeping requirements for demonstrating eligibility for the SEA Rule 15c2-11(f)(2) exception is appropriate and will promote more uniform recordkeeping and compliance with this exception.

      Specifically, contemporaneous with the receipt of any unsolicited customer order or indication of interest, firms are now required to record the following details:

      •   the identity of the associated person who receives the unsolicited customer order or indication of interest directly from the customer, if applicable;3
      •   the identity of the customer;
      •   the date and time the unsolicited customer order or indication of interest was received; and
      •   the terms of the unsolicited customer order or indication of interest that is the subject of the quotation (e.g., security name and symbol, size, side of the market, the duration (if specified) and, if priced, the price).

      To the extent a firm is displaying a quote representing an unsolicited customer order or indication of interest that was received from another broker-dealer, the firm is still required to create a contemporaneous record of:

      •   the identity of the person from whom information regarding the unsolicited customer order or indication of interest was received, if applicable;4
      •   the date and time the unsolicited customer order or indication of interest was received by the firm displaying the quotation; and
      •   the terms of the unsolicited customer order or indication of interest that is the subject of the quotation (e.g., security name and symbol, size, side of the market, the duration (if specified) and, if priced, the price).

      The firm displaying the unsolicited customer order or indication of interest may rely on the information provided by the routing firm if the member firm has a reasonable basis for believing that the information is valid.5

      In addition, FINRA has amended Rule 6540 (Requirements Applicable to Market Makers) to delete footnote #1. Formerly, footnote #1 provided a summary of exemptive relief granted by the SEC from the requirements of SEA Rule 15c2-11 (subject to certain conditions). However, given that the SEC has since granted additional exemptive requests from the requirements of SEA Rule 15c2-11 that were not included in footnote #1 (and may continue to grant further requests in the future), FINRA deleted footnote #1 in its entirety and has instead specified in Rule 6540 that members must demonstrate compliance with (or qualify for an exception or exemption from) SEA Rule 15c2-11.6


      1 SEA Rule 15c2-11 defines "quotation" as any bid or offer at a specified price with respect to a security, or any indication of interest by a broker or dealer in receiving bids or offers from others for a security, or any indication by a broker or dealer that advertises its general interest in buying or selling a particular security.

      2 SEA Rule 15c2-11 defines "quotation medium" as 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. "Inter-dealer quotation system" means any system of general circulation to brokers or dealers that regularly disseminates the quotations of identified brokers or dealers.

      3 In cases where a firm is displaying a quote representing an unsolicited customer order or indication of interest that was received electronically, it is understood that there may not be a "person" associated with the receipt or submission of such unsolicited customer order or indication of interest. Thus, with respect to the requirement that firms record (1) the identity of the associated person who received the unsolicited customer order or indication of interest; or (2) the identity of the person from whom information regarding the unsolicited customer order or indication of interest was received where the unsolicited customer order or indication of interest is received from another broker-dealer, firms are only required to record such information if applicable.

      4 Id.

      5 It is critical that the firm receiving an unsolicited customer order or indication of interest be advised of and understand the terms of the order or indication of interest that are relevant to the exception so that the receiving member firm may reasonably and accurately rely on the unsolicited customer order exception. For example, if the customer order is a "day" order, the receiving member firm must be advised of that fact so that it can withdraw the quote upon the expiration of the order. Similarly, to the extent that the terms of the unsolicited customer order or indication of interest change or other significant information is received by the firm routing the order (e.g., a "good-till-cancelled" order is cancelled or there is a change in the terms of the order), the firm routing such order must promptly update the member firm displaying the quote as to the change in the terms of the order. To the extent the firm routing the unsolicited customer order or indication of interest is not a member firm, the member firm should make periodic inquiry as to whether the terms of the order have changed. Member firms may not rely on the unsolicited customer order exception where a displayed quote no longer accurately represents current unsolicited customer interest.

      6 SEA Rule 15c2-11(h) sets forth the SEC's exemptive authority with respect to the requirements of SEA Rule 15c2-11 and provides that SEA Rule 15c2-11 shall not prohibit any publication or submission of any quotation if the SEC, upon written request or upon its own motion, exempts such quotation either unconditionally or on specified terms and conditions, as not constituting a fraudulent, manipulative or deceptive practice comprehended within the purpose of the rule.

    • 09-50 SEC Approval and Effective Date for New Consolidated FINRA Rules; Effective Date (FINRA Rule 2320): October 19, 2009; Effective Date (Repeal of Incorporated NYSE Rules 134 and 440I): August 17, 2009

      View PDF

      SEC Approves New Consolidated FINRA Rules

      Regulatory Notice
      Notice Type

      Rule Approvals
      Consolidated Rulebook
      Referenced Rules & Notices

      FINRA Rule 2320
      Information Notice 03/12/08
      Information Notice 10/06/08
      Regulatory Notice 08-57
      Suggested Routing

      Compliance
      Legal
      Operations
      Senior Management
      Key Topic(s)

      Effective Dates of Consolidated Rules
      FINRA Manual
      Rulebook Consolidation
      Variable Annuity Contracts
      Variable Life Insurance

      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 FINRA is proposing new consolidated rules in phases for approval by the SEC as part of the Consolidated FINRA Rulebook.2 In June and July 2009, the SEC approved two rule filings relating to the Consolidated FINRA Rulebook. New FINRA Rule 2320 will take effect on October 19, 2009. The repeal of Incorporated NYSE Rules 134 and 440I will take effect on August 17, 2009.

      Questions regarding this Notice should be directed to:

      •   Kosha Dalal, Associate Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-6903 (regarding the repeal of Incorporated NYSE Rules 134 and 440I); or
      •   Stan Macel, Assistant General Counsel, OGC, at (202) 728-8056 (regarding FINRA Rule 2320).

      Discussion

      In June 2009, the SEC approved new consolidated FINRA Rule 2320 (Variable Contracts of an Insurance Company), which will take effect on October 19, 2009.3

      The attachment to this Notice sets forth additional information regarding this new consolidated rule and includes a hyperlink to the related rule filing. The filing provides, among other things, FINRA's statement of the purpose of the rule change and an exhibit showing the changes between the new rule text and the text of the NASD Rule as it exists in the Transitional Rulebook. Also, the text of the new FINRA Rule is available in the online FINRA Manual at www.finra.org/finramanual.4

      The attachment to this Notice further summarizes an additional rule filing relating to the Consolidated FINRA Rulebook approved by the SEC in July 2009. The rule filing addresses FINRA's repeal of Incorporated NYSE Rules 134 (Differences and Omissions—Cleared Transactions) and 440I (Records of Compensation Arrangements—Floor Brokerage) as part of the process of developing the Consolidated FINRA Rulebook.5 The repeal of Incorporated NYSE Rules 134 and 440I will take effect on August 17, 2009.

      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 its 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 consists of (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the Transitional Rulebook). While the NASD Rules generally apply to all FINRA 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. 60086 (June 10, 2009), 74 FR 28743 (June 17, 2009) (Order Approving Proposed Rule Change; File No. SR-FINRA-2009-023).

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

      5 See Exchange Act Release No. 60367 (July 22, 2009), 74 FR 38077 (July 30, 2009) (Order Approving Proposed Rule Change; File No. SR-FINRA-2009-038).


      Attachment A

      List of Approved FINRA Rules (and Related Rule Filings)

      The SEC approved the following rule filings relating to the Consolidated FINRA Rulebook in June and July 2009. The effective date of new FINRA Rule 2320 (SR-FINRA-2009-023) is October 19, 2009. The effective date of the repeal of Incorporated NYSE Rules 134 and 440I (SR-FINRA-2009-038) is August 17, 2009.

      FINRA Rule Filing SR-FINRA-2009-023

      www.finra.org/rulefilings/2009-023

      The rule change adopts, with certain modifications, NASD Rule 2820 (Variable Contracts of an Insurance Company) as FINRA Rule 2320.

      FINRA Rule 2320 regulates member firms in connection with the sale and distribution of variable life insurance and variable annuity contracts (together, variable contracts). It prohibits member firms from participating in the offer or sale of a variable contract unless certain conditions are met. It also regulates member compensation in connection with the sale and distribution of variable contracts, including both cash and non-cash compensation arrangements. The rule change requires members to determine and keep records of the value of non-cash compensation received from offerors in all cases (as opposed to NASD Rule 2820, which requires members to provide and keep records for the value of non-cash compensation only "if known"). Member firms are permitted to estimate the actual value of non-cash compensation for which a receipt (or similar documentation) assigning a value is not available. The rule change also makes certain non-substantive, technical changes to the rule to reflect FINRA's corporate name and the new format of the Consolidated FINRA Rulebook.

      Rule/Series No. Rule Title
      Rule 2000 Series DUTIES AND CONFLICTS
      Rule 2300 Series SPECIAL PRODUCTS
      Rule 2320 Variable Contracts of an Insurance Company

      FINRA Rule Filing SR-FINRA-2009-038

      www.finra.org/rulefilings/2009-038

      The rule change repeals Incorporated NYSE Rule 134 (Differences and Omissions—Cleared Transactions) and Incorporated NYSE Rule 440I (Records of Compensation Arrangements—Floor Brokerage) to remove requirements that are specific to the NYSE marketplace and relate primarily to activities by floor brokers.

    • 09-49 SEC Approves Amendments to Modernize and Simplify NASD Rule 2720 Relating to Public Offerings in Which a Member Firm With a Conflict of Interest Participates; Effective Date: September 14, 2009

      View PDF

      Conflicts of Interest

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      FINRA Rule 5110
      FINRA Rule 9600 Series
      NASD Rule 2720
      NTM 06-52
      Suggested Routing

      Compliance
      Corporate Financing
      Legal
      Operations
      Senior Management
      Key Topic(s)

      Affiliate
      Conflicts of Interest
      Control
      Investment Banking
      Public Offerings
      Qualified Independent Underwriter
      Underwriting Compensation

      Executive Summary

      Effective September 14, 2009, firms must comply with the requirements of new NASD Rule 2720 (Public Offerings of Securities with Conflicts of Interest), which governs public offerings of securities in which a member firm with a conflict of interest participates. The new rule amends and replaces the previous NASD Rule 2720 in its entirety.

      As described more fully in this Notice, the rule prohibits a member firm with a conflict of interest from participating in a public offering, unless the nature of the conflict is prominently disclosed and:

      •   a qualified independent underwriter (QIU) participates in the offering; or
      •   the member firm(s) primarily responsible for managing the offering does not itself have a conflict (and is not an affiliate of a firm with a conflict); or
      •   the offered securities are exchange-listed and satisfy the requirements for a bona fide public market or are investment grade rated by a nationally recognized statistical rating organization.

      Additionally, member firms with a conflict of interest must comply with certain net capital, discretionary accounts and filing requirements, as applicable.

      The text of new NASD Rule 2720 is set forth in Attachment A of this Notice.

      Questions regarding this Notice should be directed to:

      •   Paul Mathews, Director, Corporate Financing Department, at (240) 386-4623;
      •   Lisa Toms, Associate Director and Senior Counsel, Corporate Financing Department, at (240) 386-4661;
      •   Gary Goldsholle, Vice President and Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8104; and
      •   Lisa Horrigan, Associate General Counsel, OGC, at (202) 728-8190.

      Background & Discussion

      NASD Rule 2720 governs public offerings of securities issued by participating member firms or their affiliates, public offerings in which a member or any of its associated persons or affiliates has a conflict of interest, and public offerings that result in a FINRA member becoming a public company.

      On June 15, 2009, the SEC approved amendments to Rule 2720 to modernize and simplify the rule.1 New Rule 2720 prohibits a member firm with a "conflict of interest" from participating in a public offering unless certain requirements are met. The new rule also significantly revises the definition of "conflict of interest," as described in more detail below.

      When a member firm with a conflict of interest participates in a public offering, the new rule requires "prominent disclosure" in the prospectus, offering circular or similar document of the nature of the conflict of interest and, where a QIU is required, the name of the member firm acting as the QIU and a brief statement regarding the role and responsibilities of the QIU.2 The prominent disclosure requirement applies to all offerings within the scope of new Rule 2720, whether or not a filing with FINRA is required.3

      The new rule combines the previous rule's tests of what constitutes an affiliate and conflict of interest into a single definition of "conflict of interest."4 As defined in Rule 2720(f)(5), a conflict of interest exists, if at the time of a member firm's participation in a public offering, any of the following four conditions applies:

      •   The securities are to be issued by the member firm.
      •   The issuer controls, is controlled by or is under common control with the member firm or the member firm's associated persons.5
      •   At least five percent of the net offering proceeds, not including underwriting compensation, are intended to be: (i) used to reduce or retire the balance of a loan or credit facility extended by the member firm, its affiliates and its associated persons, in the aggregate; or (ii) otherwise directed to the member firm, its affiliates and associated persons, in the aggregate.6
      •   If, as a result of the public offering and any transactions contemplated at the time of the public offering: (i) the member firm will be an affiliate of the issuer; (ii) the member firm will become publicly owned; or (iii) the issuer will become a member firm or form a broker-dealer subsidiary.

      When a member firm with a conflict of interest participates in a public offering, a QIU may be required. If so, the QIU must participate in the preparation of the registration statement and the prospectus, offering circular or similar document (i.e., the offering document) and exercise the usual standards of due diligence with respect to the offering document. The new rule eliminates the pricing responsibilities of the QIU. Any offering that requires a QIU must be filed with FINRA's Corporate Financing Department for review pursuant to FINRA Rule 5110 (Corporate Financing Rule).7

      FINRA notes that while the term "participation in a public offering" in Rule 2720 generally has the same meaning as in FINRA Rule 5110,8 the new rule continues to apply specifically to a member firm's participation in the distribution of a public offering as an underwriter, member of the underwriting syndicate or selling group, or otherwise assisting in the distribution of the public offering (i.e., not when a member firm acts solely as a finder, consultant or advisor, given these capacities generally do not involve managing or distributing a public offering).

      There are circumstances in which a member firm with a conflict of interest may participate in a public offering without the use of a QIU. Specifically, the new rule eliminates the need for a QIU if: (i) the member firm with a conflict of interest or an affiliate is not managing the offering; or (ii) the offered securities have a "bona fide public market" or are "investment grade rated" or are securities in the same series that have equal rights and obligations as investment grade rated securities (e.g., securities issued under a medium-term note program). FINRA notes that the definition of "bona fide public market" in Rule 2720(f)(3) is changed substantially from the definition of "bona fide independent market," which it replaces, in that the new rule defines a bona fide public market in accordance with the numerical standards set forth in the SEC's Regulation M under the Exchange Act.9

      In cases where two or more book-running lead managers have equal responsibilities with regard to due diligence, each must be free of conflicts of interest, otherwise the QIU provisions under the new rule would apply and the offering would be subject to the filing requirements under Rule 5110.

      If a QIU is not required, the offering will not have to be filed with FINRA. Whether or not a filing is required, however, the new rule still requires prominent disclosure of the nature of the conflict in the offering documents. In addition, a member firm with a conflict of interest must comply with the discretionary accounts requirement, and where applicable the escrow, net capital computation and related disclosure provisions of the rule, as described below.

      Public Offering of a Member Firm: Escrow and Net Capital Computation

      When a member firm participates in a public offering of its own securities, the new rule requires that all of the offering proceeds be placed in a duly established escrow account and not be released or used by the member firm in any manner until the member firm has complied with the net capital requirements set forth in the rule.10 The new rule also requires any member firm offering its securities to disclose in the registration statement, offering circular or similar document a date by which the offering is reasonably expected to be completed and the terms upon which the proceeds will be released from the escrow account. These requirements are substantively similar to the provisions under previous Rule 2720.

      Discretionary Accounts

      The new rule also requires a member firm that has a conflict of interest to comply with a prohibition on sales to discretionary accounts, unless the member firm has received specific written approval of the transaction from the account holder and retains documentation of the approval in its records.11 These requirements only apply to the member firm with the conflict. FINRA notes, however, that they apply whether or not the offering must be filed and whether or not the securities are investment grade rated or have a bona fide public market. In addition, the "specific written approval" requirement can be satisfied by an email from the customer.

      Definitions

      New Rule 2720 provides a set of definitions for purposes of the rule and incorporates, by reference, the definitions in FINRA Rule 5110. A number of definitions in the new rule are substantially similar to the definitions set forth in previous Rule 2720, while other terms in new Rule 2720 are newly defined, including "control," "entity," "investment grade rated" and "prominent disclosure."

      FINRA notes that the definition of "control" under Rule 2720(f)(6) includes beneficial ownership of ten percent or more of the outstanding common equity (which is defined to expressly include non-voting stock), subordinated debt or preferred equity of an "entity," which is defined in Rule 2720(f)(7).12 FINRA also notes that the exclusions in the term "entity" are substantially similar to the exemptions from the conflict of interest provisions contained in previous Rule 2720, with the exception of an entity that issues financing instrument-backed securities, which is now subject to the rule.

      "Control" includes not only shares beneficially owned by a participating member firm, but also the right to receive such securities within 60 days of the member firm's participation in the public offering. As a result, the determination of control is based on when the member firm participates in an offering, not the date that a registration statement for the offering is declared effective. For example, warrants or rights to acquire voting securities that are exercisable within 60 days of the member firm's participation in the public offering would be included in the calculation of voting securities when determining whether control exists. The calculation to determine control, however, is limited to securities that could be received by the participating member firm only and would not include securities underlying warrants or rights held by other investors.13

      FINRA also notes that the term "qualified independent underwriter" is defined in new Rule 2720(f)(12). The definition retains the provisions that require Section 11 liability undertakings and eligibility requirements relating to experience in managing offerings. The new rule extends to ten years the disqualification provisions regarding the disciplinary history of associated persons responsible for due diligence.

      The new rule prohibits QIUs from receiving more than five percent of the offering proceeds. Receipt of such proceeds would disqualify a member firm from acting as a QIU because it would fall within the definition of "conflict of interest." In addition, a QIU cannot beneficially own, as of the date of its participation in the public offering, more than five percent of the class of securities that would give rise to a conflict of interest, including any right to receive any such securities exercisable within 60 days.

      Member firms are reminded that FINRA permits firms to provide information establishing that they meet the QIU qualification requirements in advance of participating in a particular public offering and that they may update this information annually. In the course of its review of information in connection with a public offering requiring a QIU, FINRA staff routinely asks for information that establishes that a member firm identified as a QIU is qualified to participate in that capacity. If a member firm has already provided this information within the last 12 months or has done an annual update, it will generally not need to provide the information in connection with that particular offering. In this regard, firms should consider updating the information that they previously provided in light of the changes to the QIU qualification requirements that are in the new rule.

      Requests for Exemption from NASD Rule 2720

      Paragraph (e) provides that, pursuant to the FINRA Rule 9600 Series, FINRA may in exceptional and unusual circumstances, taking into consideration all relevant factors, exempt a member firm unconditionally or on specified terms from any or all of the provisions of Rule 2720 that it deems appropriate.


      1 See Exchange Act Release No. 60113 (June 15, 2009), 74 FR 29255 (June 19, 2009) (order approving SR-FINRA-2007-009). See also Notice to Members (NTM) 06-52 (September 2006). The SEC also approved conforming changes to FINRA Rule 5110, including the transfer of certain definitions from Rule 2720 to FINRA Rule 5110.

      2 See Rule 2720(a)(2)(B) regarding QIU disclosure requirements. "Prominent disclosure" is defined in Rule 2720(f)(10) and may include the notation "(Conflicts of Interest)" following the listing of the Plan of Distribution in the Table of Contents section and a disclosure in the Plan of Distribution section and any Prospectus Summary section as required in SEC Regulation S-K. For offering documents not subject to SEC Regulation S-K, prominent disclosure may be provided on the front page of the offering document stating that a conflict exists, with a cross-reference to the discussion within the offering document. These methods of disclosure are non-exclusive, and FINRA will consider alternative—but equally prominent—disclosures on a case-by-case basis.

      3 With regard to a takedown from a shelf registration statement that became effective prior to September 14, 2009, the disclosure requirements in Rule 2720(a) could be included in, and would apply only to, a post effective amendment or prospectus supplement that is filed with the SEC on or after September 14, 2009.

      4 A revised definition of "affiliate" under Rule 2720(f)(1) means an entity that controls, is controlled by or is under common control with a member firm.

      5 The definition of "control" under Rule 2720(f)(6) includes beneficial ownership of ten percent or more of the outstanding common equity, subordinated debt or preferred equity of an "entity," which is defined in Rule 2720(f)(7).

      6 FINRA notes that the five-percent threshold applies to each participating member firm individually (including the member firm's affiliates and its associated persons). Thus, for example, a conflict of interest would exist where a member firm receives five percent of the offering proceeds, but not where two unaffiliated member firms each receive three percent of the proceeds.

      7 See NASD Rule 2720(d). FINRA Rule 5110 generally requires member firms to file with FINRA public offerings for review of the proposed underwriting terms and arrangements and requires disclosure of underwriting compensation and that a member firm obtains a "no objections" opinion prior to participating in the offering. FINRA Rule 5110(b)(7) contains certain exemptions from the filing requirements for, among others, public offerings of the securities of seasoned issuers and offerings of investment grade debt, but such offerings must be filed if subject to the filing requirement under Rule 2720.

      8 See FINRA Rule 5110(a)(5).

      9 Specifically, "bona fide public market" is defined as a market for a security issued by a company that has been reporting under the Exchange Act for at least 90 days, is current in its reporting requirements and whose securities are traded on a national securities exchange with an average daily trading volume of at least $1 million, provided that the issuer's common equity securities have a public float value of at least $150 million.

      10 The rule also requires any member firm offering its securities to immediately notify FINRA when the public offering has been terminated and file with FINRA a computation of its net capital computed pursuant to the provisions of SEC Rule 15c3-1 (the net capital rule) as of the settlement date. Member firms are also reminded that additional escrow account maintenance and payment requirements may be applicable under SEC Rule 15c2-4 for "best efforts" offerings.

      11 This prohibition is independent of any provisions in NASD Rule 2510.

      12 For purposes of the rule, the percentage of control may be calculated using a "flow through" concept by looking through ownership levels to calculate the total percentage of control.

      13 FINRA clarified in Amendment No. 1 to its rule filing (SR-FINRA-2007-009) that in calculating the percentage of beneficial ownership, it is appropriate to include the securities to be received by the participating member firm in both the numerator and denominator, but that this calculation should not include securities that could be received by all other investors. See Exchange Act Release No. 60113 (June 15, 2009), 74 FR 29255 (June 19, 2009) (order approving SR-FINRA-2007-009).


      ATTACHMENT A

      Below is the text of the amendments. New language is underlined; deletions are in brackets.

      * * * * *

      5000. SECURITIES OFFERING AND TRADING STANDARDS AND PRACTICES

      5100. SECURITIES OFFERINGS, UNDERWRITING AND COMPENSATION

      5110. Corporate Financing Rule—Underwriting Terms and Arrangements

      (a) Definitions

      For purposes of this Rule, the following terms shall have the meanings stated below. The definitions in NASD Rule 2720 are incorporated herein by reference.
      (1) through (10) No Change.
      (11) Company

      A corporation, a partnership, an association, a joint stock company, a trust, a fund, or any organized group of persons whether incorporated or not; or any receiver, trustee in bankruptcy or similar official or any liquidating agent for any of the foregoing, in his capacity as such.
      (12) Effective Date

      The date on which an issue of securities first becomes legally eligible for distribution to the public.
      (13) Immediate Family

      The parents, mother-in-law, father-in-law, spouse, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, and children of an employee or associated person of a member, except any person other than the spouse and children who does not live in the same household as, have a business relationship with, provide material support to, or receive material support from, the employee or associated person of a member. In addition, the immediate family includes any other person who either lives in the same household as, provides material support to, or receives material support from, an employee or associated person of a member.
      (14) Person

      Any natural person, partnership, corporation, association, or other legal entity.
      (b) Filing Requirements
      (1) through (6) No Change.
      (7) Offerings Exempt from Filing

      Notwithstanding the provisions of subparagraph (1) above, documents and information related to the following public offerings need not be filed with FINRA for review, unless subject to the provisions of NASD Rule 2720(a)(2). However, it shall be deemed a violation of this Rule or NASD Rule 2810, for a member to participate in any way in such public offerings if the underwriting or other arrangements in connection with the offering are not in compliance with this Rule or NASD Rule 2810, as applicable:
      (A) through (G) No Change.
      (8) through (9) No Change.
      (c) through (g) No Change.
      [(h) Proceeds Directed to a Member]
      [(1) Compliance With NASD Rule 2720]

      [No member shall participate in a public offering of an issuer's securities where more than 10% of the net offering proceeds, not including underwriting compensation, are intended to be paid to participating members, unless the price at which an equity issue or the yield at which a debt issue is to be distributed to the public is established pursuant to NASD Rule 2720(c)(3).]
      [(2) Disclosure]

      [All offerings included within the scope of paragraph (h)(1) shall disclose in the underwriting or plan of distribution section of the registration statement, offering circular or other similar document that the offering is being made pursuant to the provisions of this subparagraph and, where applicable, the name of the member acting as qualified independent underwriter, and that such member is assuming the responsibilities of acting as a qualified independent underwriter in pricing the offering and conducting due diligence.]
      [(3) Exception From Compliance]

      [The provisions of paragraphs (h)(1) and (2) shall not apply to:]
      [(A) an offering otherwise subject to the provisions of NASD Rule 2720;]
      [(B) an offering of securities exempt from registration with the SEC under Section 3(a)(4) of the Securities Act;]
      [(C) an offering of a real estate investment trust as defined in Section 856 of the Internal Revenue Code; or]
      [(D) an offering of securities subject to NASD Rule 2810, unless the net offering proceeds are intended to be paid to the above persons for the purpose of repaying loans, advances or other types of financing utilized to acquire an interest in a pre-existing company.]
      (i) through (j) redesignated as (h) through (i).

      * * * * *

      NASD Rule 2720 is replaced in its entirety by the following new rule language.

      2720. Public Offerings of Securities With Conflicts of Interest

      (a) Requirements for Participation in Certain Public Offerings

      No member that has a conflict of interest may participate in a public offering unless the offering complies with subparagraphs (1) or (2).
      (1) There must be prominent disclosure of the nature of the conflict of interest in the prospectus, offering circular or similar document for the public offering, and one of the following conditions must be met:
      (A) the member(s) primarily responsible for managing the public offering does not have a conflict of interest, is not an affiliate of any member that does have a conflict of interest, and meets the requirement of paragraph (f)(12)(E);
      (B) the securities offered have a bona fide public market; or
      (C) the securities offered are investment grade rated or are securities in the same series that have equal rights and obligations as investment grade rated securities.
      (2)
      (A) A qualified independent underwriter has participated in the preparation of the registration statement and the prospectus, offering circular, or similar document and has exercised the usual standards of "due diligence" in respect thereto; and
      (B) there must be prominent disclosure in the prospectus, offering circular or similar document for the offering of:
      (i) the nature of the conflict of interest;
      (ii) the name of the member acting as qualified independent underwriter; and
      (iii) a brief statement regarding the role and responsibilities of the qualified independent underwriter.
      (b) Escrow of Proceeds; Net Capital Computation
      (1) All proceeds from a public offering by a member of its securities shall be placed in a duly established escrow account and shall not be released therefrom or used by the member in any manner until the member has complied with subparagraph (2) hereof.
      (2) Any member offering its securities pursuant to this Rule shall immediately notify FINRA when the public offering has been terminated and settlement effected and shall file with FINRA a computation of its net capital computed pursuant to the provisions of SEC Rule 15c3-1 under the Act (the net capital rule) as of the settlement date. If at such time its net capital ratio as so computed is more than 10:1 or, net capital fails to equal 120 percent of the minimum dollar amount required by Rule 15c3-1 or, in the event the member calculates its net capital requirement using the alternative standard (set forth in Rule 15c3-1(a)(1)(ii)), its net capital is less than seven percent of aggregate debit items as computed in accordance with Rule 15c3-3a, all monies received from sales of securities of the public offering must be returned in full to the purchasers thereof and the offering withdrawn, unless the member has obtained from the Commission a specific exemption from the net capital rule. Proceeds from the sales of securities in the public offering may be taken into consideration in computing net capital ratio for purposes of this paragraph.
      (3) Any member offering its securities pursuant to this Rule shall disclose in the registration statement, offering circular or similar document a date by which the offering is reasonably expected to be completed and the terms upon which the proceeds will be released from the escrow account described in paragraph (b)(1).
      (c) Discretionary Accounts

      Notwithstanding Rule 2510, no member that has a conflict of interest may sell to a discretionary account any security with respect to which the conflict exists, unless the member has received specific written approval of the transaction from the account holder and retains documentation of the approval in its records.
      (d) Application of Rule 5110

      Any public offering subject to paragraph (a)(2) is subject to Rule 5110, whether or not the offering would be otherwise exempted from the filing or other requirements of that rule.
      (e) Requests for Exemption from Rule 2720

      Pursuant to the Rule 9600 Series, FINRA may in exceptional and unusual circumstances, taking into consideration all relevant factors, exempt a member unconditionally or on specified terms from any or all of the provisions of this rule that it deems appropriate.
      (f) Definitions

      The definitions in Rule 5110 are incorporated herein by reference. For purposes of this Rule, the following words shall have the stated meanings:
      (1) Affiliate

      The term "affiliate" means an entity that controls, is controlled by or is under common control with a member.
      (2) Beneficial Ownership

      The term "beneficial ownership" means the right to the economic benefits of a security.
      (3) Bona Fide Public Market

      The term "bona fide public market" means a market for a security of an issuer that has been reporting under the Act for at least 90 days and is current in its reporting requirements, and whose securities are traded on a national securities exchange with an Average Daily Trading Volume (as provided by Regulation M under the Act) of at least $1 million, provided that the issuer's common equity securities have a public float value of at least $150 million.
      (4) Common Equity

      The term "common equity" means the total number of shares of common stock outstanding without regard to class, whether voting or non-voting, convertible or non-convertible, exchangeable or non-exchangeable, redeemable or non-redeemable, as reflected on the consolidated financial statements of the company.
      (5) Conflict of Interest

      The term "conflict of interest" means, if at the time of a member's participation in an entity's public offering, any of the following applies:
      (A) the securities are to be issued by the member;
      (B) the issuer controls, is controlled by or is under common control with the member or the member's associated persons;
      (C) at least five percent of the net offering proceeds, not including underwriting compensation, are intended to be:
      (i) used to reduce or retire the balance of a loan or credit facility extended by the member, its affiliates and its associated persons, in the aggregate; or
      (ii) otherwise directed to the member, its affiliates and associated persons, in the aggregate; or
      (D) as a result of the public offering and any transactions contemplated at the time of the public offering:
      (i) the member will be an affiliate of the issuer;
      (ii) the member will become publicly owned; or
      (iii) the issuer will become a member or form a broker-dealer subsidiary.
      (6) Control
      (A) The term "control" means:
      (i) beneficial ownership of 10 percent or more of the outstanding common equity of an entity, including any right to receive such securities within 60 days of the member's participation in the public offering;
      (ii) the right to 10 percent or more of the distributable profits or losses of an entity that is a partnership, including any right to receive an interest in such distributable profits or losses within 60 days of the member's participation in the public offering;
      (iii) beneficial ownership of 10 percent or more of the outstanding subordinated debt of an entity, including any right to receive such subordinated debt within 60 days of the member's participation in the public offering;
      (iv) beneficial ownership of 10 percent or more of the outstanding preferred equity of an entity, including any right to receive such preferred equity within 60 days of the member's participation in the public offering; or
      (v) the power to direct or cause the direction of the management or policies of an entity.
      (B) The term "common control" means the same natural person or entity controls two or more entities.
      (7) Entity

      For purposes of the definitions of affiliate, conflict of interest and control under this Rule, the term "entity":
      (A) includes a company, corporation, partnership, trust, sole proprietorship, association or organized group of persons; and
      (B) excludes the following:
      (i) an investment company registered under the Investment Company Act of 1940;
      (ii) a "separate account" as defined in Section 2(a)(37) of the Investment Company Act of 1940;
      (iii) a "real estate investment trust" as defined in Section 856 of the Internal Revenue Code; or
      (iv) a "direct participation program" as defined in Rule 2810.
      (8) Investment Grade Rated

      The term "investment grade rated" refers to securities that are rated by a nationally recognized statistical rating organization in one of its four highest generic rating categories.
      (9) Preferred Equity

      The term "preferred equity" means the aggregate capital invested by all persons in the preferred securities outstanding without regard to class, whether voting or non-voting, convertible or non-convertible, exchangeable or non-exchangeable, redeemable or non-redeemable, as reflected on the consolidated financial statements of the company.
      (10) Prominent Disclosure

      A member may make "prominent disclosure" for purposes of paragraphs (a)(1) and (a)(2)(B) by:
      (A) providing the notation "(Conflicts of Interest)" following the listing of the Plan of Distribution in the Table of Contents section required in Item 502 of SEC Regulation S-K, and by providing such disclosures in the Plan of Distribution section required in Item 508 and any Prospectus Summary section required in Item 503 of SEC Regulation S-K; or
      (B) for an offering document not subject to SEC Regulation S-K, by providing disclosure on the front page of the offering document that a conflict exists, with a cross-reference to the discussion within the offering document and in the summary of the offering document if one is included.
      (11) Public Offering

      The term "public offering" means any primary or secondary offering of securities made pursuant to a registration statement or offering circular including exchange offers, rights offerings, offerings made pursuant to a merger or acquisition and all other securities offerings of any kind whatsoever, except any offering made pursuant to:
      (A) an exemption from registration under Sections 4(1), 4(2), or 4(6) of the Securities Act of 1933;
      (B) SEC Rule 504, if the securities are "restricted securities" under SEC Rule 144(a)(3), SEC Rules 505 or 506; or
      (C) SEC Rule 144A or Regulation S.

      The term public offering shall exclude exempted securities as defined in Section 3(a)(12) of the Act.
      (12) Qualified Independent Underwriter

      The term "qualified independent underwriter" means a member:
      (A) that does not have a conflict of interest and is not an affiliate of any member that has a conflict of interest;
      (B) that does not beneficially own as of the date of the member's participation in the public offering, more than 5% of the class of securities that would give rise to a conflict of interest, including any right to receive any such securities exercisable within 60 days;
      (C) that has agreed in acting as a qualified independent underwriter to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act of 1933, specifically including those inherent in Section 11 thereof; and
      (D) that has served as underwriter in at least three public offerings of a similar size and type during the three-year period immediately preceding the filing of the registration statement or the date of first sale in an offering without a registration statement. This requirement will be deemed satisfied if, during the past three years, the member:
      (i) with respect to a proposed public offering of debt securities, has acted as sole underwriter or book-running lead or co-manager of at least three public offerings of debt securities each with gross proceeds of not less than 25% of the anticipated gross proceeds of the proposed offering; and
      (ii) with respect to a proposed public offering of equity securities, has acted as sole underwriter or book-running lead or co-manager of at least three public offerings of equity securities (or of securities convertible into equity securities), each with gross proceeds of not less than 50% of the anticipated gross proceeds of the proposed offering.
      (E) none of whose associated persons in a supervisory capacity who are responsible for organizing, structuring or performing due diligence with respect to corporate public offerings of securities:
      (i) has been convicted within ten years prior to the filing of the registration statement or the preparation of an offering circular in an offering without a registration statement of a violation of the anti-fraud provisions of the federal or state securities laws, or any rules or regulations promulgated thereunder, in connection with a registered or unregistered offering of securities;
      (ii) is subject to any order, judgment, or decree of any court of competent jurisdiction entered within ten years prior to the filing of the registration statement, or the preparation of an offering circular in an offering without a registration statement, permanently enjoining or restraining such person from engaging in or continuing any conduct or practice in violation of the anti-fraud provisions of the federal or state securities laws, or any rules or regulations promulgated thereunder in connection with a registered or unregistered offering of securities; or
      (iii) has been suspended or barred from association with any member by an order or decision of the Commission, any state, FINRA or any other self-regulatory organization within ten years prior to the filing of the registration statement, or the preparation of an offering circular in an offering without a registration statement, for any conduct or practice in violation of the anti-fraud provisions of the federal or state securities laws, or any rules, or regulations promulgated thereunder, or the anti-fraud rules of any self-regulatory organization in connection with a registered or unregistered offering of securities.
      (13) Registration Statement

      The term "registration statement" means a registration statement as defined by Section 2(a)(8) of the Securities Act of 1933; notification on Form 1A filed with the Commission pursuant to the provisions of SEC Rule 252 under the Securities Act of 1933; or any other document, by whatever name known, initiating a registration or similar process for an issue of securities which is required to be filed by the laws or regulations of any federal or state agency.
      (14) Subordinated Debt

      The term "subordinated debt" includes (A) debt of an issuer which is expressly subordinate in right of payment to, or with a claim on assets subordinate to, any existing or future debt of such issuer; or (B) all debt that is specified as subordinated at the time of issuance. Subordinated debt shall not include short-term debt with maturity at issuance of less than one year and secured debt and bank debt not specified as subordinated debt at the time of issuance.

      * * * * *

    • 09-48 SEC Approves Rule Establishing Expedited Procedures for Arbitrating Promissory Note Cases; Effective Date: September 14, 2009

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      Promissory Note Proceedings

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      FINRA Rule 13806
      FINRA Rule 13214
      FINRA Rule 13600
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Key Topic(s)

      Arbitration
      Associated Person
      Code of Arbitration Procedure
      Dispute Resolution
      Promissory Note

      Executive Summary

      Effective September 14, 2009, FINRA will begin expediting the administration of cases that solely involve a brokerage firm's claim that an associated person failed to pay money owed on a promissory note. Under the new procedures, a single public arbitrator from the roster of arbitrators approved to hear statutory discrimination claims will decide such promissory note cases. FINRA amended Rules 13214 and 13600 of the Code of Arbitration Procedure for Industry Disputes to make conforming changes.

      The SEC approved new FINRA Rule 13806 and amendments to FINRA Rules 13214 and 13600 relating to promissory note proceedings.1 The text of the rules is set forth in Attachment A, and will apply to all promissory note cases filed on or after the effective date.

      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

      FINRA is amending its Code of Arbitration Procedure for Industry Disputes (Industry Code) to establish new procedures for administering cases that solely involve a firm's claim that an associated person failed to pay money owed on a promissory note. In the absence of additional allegations by firms or associated persons, promissory note cases involve straightforward contracts with few documents entered into evidence. Rule 13806 is limited to claims related to promissory notes with no additional allegations being made in the Statement of Claim. Rule 13806 provides that a single public arbitrator from the roster of arbitrators approved to hear statutory discrimination claims will serve on the arbitration panel hearing a promissory note case. FINRA is also amending Rules 13214 and 13600 of the Industry Code to make conforming changes.

      The new procedures streamline the process for administering promissory note cases and reduce expenses for the parties while maintaining the procedural safeguards in the Industry Code for the associated person against whom a brokerage firm asserts a claim.

      Specifically, under the new procedures:

      •   Parties choose a single public arbitrator from the roster of arbitrators approved to hear statutory discrimination claims. FINRA believes that the arbitrators on this roster are especially suited to resolve these disputes because of the depth of their experience and their familiarity with employment law.2
      •   If the associated person does not file an answer, simplified discovery procedures will apply and, regardless of the amount in controversy, the single arbitrator will render an award based on the pleadings and other materials submitted by the parties.
      •   If the associated person files an answer (but does not seek any additional relief or assert any counterclaims or third party claims), regular discovery procedures will apply and, regardless of the amount in controversy, the single arbitrator will hold a hearing.
      •   If the associated person files a counterclaim or third party claim, then regular discovery procedures will apply and the number of arbitrators will be based on the amount of the counterclaim or third party claim. If the counterclaim and/or third party claim is not more than $100,000, exclusive of interest and expenses, the Director will appoint a single public arbitrator from the roster of arbitrators approved to hear statutory discrimination claims. If the counterclaim and/or third party claim is more than $100,000, then the Director will appoint a three-arbitrator panel comprised of one public arbitrator from the roster of arbitrators approved to hear statutory discrimination claims who would serve as chairperson, one arbitrator from the public roster and one arbitrator from the non-public roster. If the counterclaim or third party claim is filed after the single arbitrator is appointed, and a three-arbitrator panel is required, the Director will retain the appointed arbitrator as chair and appoint two additional arbitrators (one public and one non-public arbitrator) to the panel.

      Rule 13806(f) provides that FINRA will pay an arbitrator an honoraria of $125 for each arbitration in which the associated person does not file an answer and the award is based on the arbitrator's review of the pleadings and other materials submitted by the parties. As these are expedited proceedings, FINRA is amending Rule 13214 (Payment of Arbitrators) to reflect that FINRA will not pay an honoraria for resolving a discovery-related motion without a hearing session or for resolving a contested motion concerning issuance of a subpoena without a hearing session. In instances where full discovery is conducted under the 13500 series of rules, FINRA will pay the honoraria prescribed in Rule 13214 for deciding these motions.

      FINRA is also amending Rule 13600 (Required Hearings) to reflect that a hearing will not be held if the associated person does not file an answer. In such cases, the arbitrator will render the award on the pleadings and other materials submitted by the parties.

      The amendments become effective on September 14, 2009, and apply to all arbitration cases filed on or after the effective date.


      1 Exchange Act Release No. 60132 (June 17, 2009), 74 Federal Register 30191 (June 24, 2009) (File No. SR-FINRA-2009-015).

      2 See Rule 13802(c)(3). These specially qualified arbitrators are attorneys familiar with employment law and who have at least ten years of legal experience. In addition, the arbitrator may not have represented primarily the views of employers or employees within the last five years. "Primarily" means 50 percent or more of the arbitrator's business or professional activities within the last five years.


      Attachment A

      New language is underlined; deletions are in brackets.

      Code of Arbitration Procedure for Industry Disputes

      * * *

      13806. Promissory Note Proceedings

      (a) Applicability of Rule

      This rule applies to arbitrations solely involving a member's claim that an associated person failed to pay money owed on a promissory note. To proceed under this rule, a claim may not include any additional allegations. Except as otherwise provided in this rule, all provisions of the Code apply to such arbitrations.
      (b) Number of Arbitrators
      (1) The Director will appoint one arbitrator if:
      •   the associated person does not file an answer;
      •   the associated person files an answer but does not allege any counterclaims or third party claims; or
      •   the associated person files an answer which includes any counterclaims or third party claims requesting money damages, and the amount of the counterclaims or third party claims is not more than $100,000, exclusive of interest and expenses.
      (2) The Director will appoint three arbitrators if the associated person files any counterclaims or third party claims and the amount of the counterclaims or third party claims is more than $100,000, exclusive of interest and expenses, or is unspecified, or if the counterclaims or third party claims do not request money damages.
      (c) Composition of Panel
      (1) If the panel consists of one arbitrator, the arbitrator will be a public arbitrator qualified to resolve a statutory discrimination claim as set forth in Rule 13802(c)(3).
      (2) If the panel consists of three arbitrators, one arbitrator will be a public arbitrator who meets the qualifications in Rule 13802(c)(3); one arbitrator will be selected from the roster of public arbitrators; and one arbitrator will be selected from the roster of non-public arbitrators. The arbitrator who meets the criteria in Rule 13802(c)(3) will serve as the chairperson of the panel.
      (3) If the Director appoints a panel pursuant to (c)(1) above, and an associated person subsequently files a counterclaim or third party claim that requires appointment of a three-arbitrator panel, the appointed arbitrator will remain on the panel, and will serve as chairperson. In addition, one arbitrator will be selected from the roster of public arbitrators; and one arbitrator will be selected from the roster of non-public arbitrators.
      (d) Discovery
      (1) If the associated person does not file an answer, discovery will be conducted under Rule 13800(d) concerning Simplified Arbitration.
      (2) If the associated person files an answer, discovery will be conducted under the 13500 series of rules.
      (e) Hearings
      (1) If the associated person does not file an answer, no initial prehearing conference or hearing will be held, and the arbitrator will render an award based on the pleadings and other materials submitted by the parties.
      (2) If the associated person files an answer, a hearing will be held. If a hearing is held, the regular provisions of the Code relating to prehearing conferences and hearings, including fee provisions and payment of arbitrators, will apply.
      (f) Arbitrator Honoraria

      FINRA will pay the arbitrator an honorarium of $125 for each arbitration administered under paragraph (e)(1).

      * * * * *

      13214. Payment of Arbitrators

      (a) Except as provided in paragraph (b), [and] Rule 13800, and Rule 13806(f), FINRA will pay the panel an honorarium, as follows:
      •   $200 to each arbitrator for each hearing session in which he or she participates;
      •   an additional $75 per day to the chairperson for each hearing on the merits;
      •   $50 for travel to a hearing session that is postponed pursuant to Rule 13601; and
      •   $100 for each arbitrator if a hearing session other than a prehearing conference is postponed within three business days before a scheduled hearing session pursuant to Rules 13601(a)(2) and (b)(2).
      (b) The Director may authorize a higher or additional honorarium for the use of a foreign hearing location.
      (c) Payment for Deciding Discovery-Related Motions Without a Hearing Session
      (1) FINRA will pay each arbitrator an honorarium of $200 to decide a discovery-related motion without a hearing session. This paragraph does not apply to cases administered under Rule 13800 or pursuant to Rule 13806(d)(1).
      (2)–(3) No Change.
      (d) Payment for Deciding Contested Subpoena Requests Without a Hearing Session
      (1) The honorarium for deciding one or more contested motions requesting the issuance of a subpoena without a hearing session shall be $200. The honorarium shall be paid on a per case basis to each arbitrator who decides the contested motion(s). The parties shall not be assessed more than $600 in fees under this paragraph in any arbitration proceeding. The honorarium shall not be paid for cases administered under Rule 13800 or pursuant to Rule 13806(d)(1).
      (2)–(3) No change.

      * * * * *

      13600. Required Hearings

      (a) Hearings will be held, unless:
      •   The arbitration is administered under Rule 13800, [or] Rule 13801, or Rule 13806(e)(1);
      •   The parties agree otherwise in writing; or
      •   The arbitration has been settled, withdrawn or dismissed.
      (b)–(c) No change.

      * * *

    • 09-47 New Large Options Positions Report (LOPR) Requirements Due to Implementation of Options Symbology Initiative

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      LOPR Requirements

      Regulatory Notice
      Notice Type

      Guidance
       
      Suggested Routing

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

      Large Options Positions Report
      Options
      Options Symbology Initiative

      Executive Summary

      The Options Clearing Corporation and its participant exchanges have begun implementation of the Options Symbology Initiative, which will affect member firms' reporting of positions to the Large Options Positions Report (LOPR) system. This Notice highlights changes to LOPR reporting as a result of the implementation.

      Questions concerning this Notice should be directed to:

      •   Max Tourtelot, Director, Options Regulation, at (212) 858-4013; or
      •   Matthew E. Vitek, Counsel, Office of General Counsel, at (202) 728-8156.

      Background

      In June 2008, The Options Clearing Corporation (OCC) and its participant exchanges began the implementation of the Options Symbology Initiative (OSI). The OSI is a plan to overhaul the existing method of identifying exchange-traded options contracts that will enable market participants to provide more accurate and consistent information. All current information regarding the OSI is located at www.theocc.com/initiatives/symbology/default.jsp.

      As part of the OSI, by February 12, 2010, all exchange-traded options are expected to be described using explicit data elements, instead of the current Options Price Reporting Authority (OPRA) codes. These changes will impose new requirements related to LOPR. In conjunction with these changes, OCC will take over the collection and dissemination of all LOPR data from the Securities Industry Automation Corporation (SIAC). SIAC will no longer accept LOPR data after January 19, 2010.

      Although the threshold for the LOPR will not change, the submission of LOPR data and the LOPR layout will have significant changes that will affect the reporting of both listed and conventional options positions. Key requirements and changes related to the new LOPR include:

      •   All member firms must report LOPR data to OCC in FIXML format.
      •   The reportable window for submitting updates related to adjustments, assignments, error corrections and position transfers will be reduced from T+10 to T+5. However, firms are still required to report all reportable positions to the LOPR system by T+1.
      •   Member firms should only report a position to OCC if it has been added, modified or deleted. If a position in a series is reported to OCC that matches the previously reported position in that series, the record will be rejected.
      •   Each submitted LOPR will be required to include additional data fields (e.g., Account Type and Expiration Date) that are not present on the current LOPR.
      •   Member firms may submit one file to OCC, which will include Listed Options Positions, Conventional Options Positions, Listed LOPR Hedges and Conventional LOPR Hedges.
      •   "In Concert" data, including the addition or deletion of accounts, will be submitted directly to OCC each time there is a change to an "In Concert" Group. OCC will accept changes to "In Concert" records each day.
      •   OCC will purge all records after expiration or following a corporate event, where the option symbol is changed. Member firms will not need to send records indicating the removal of these positions; however, member firms must submit new add records for positions in the newly created option symbols following a corporate action.
      •   Member firms will be able to access their rejected LOPR records via OCC's FTP site.

      The milestone dates related to the implementation of the new LOPR are as follows:

      ACTION TARGET DATE
      LOPR firms must verify connectivity to OCC External Test Environment Complete by September 30, 2009
      LOPR firms perform external testing with OCC Starting August 17, 2009, through November 19, 2009
      LOPR firms can begin sending production LOPRs to OCC's production environment once external testing is deemed successful October 1, 2009
      LOPR firms must transmit production LOPR data to OCC on a daily basis and maintain their LOPRs at OCC Complete by November 23, 2009
      Simultaneous submission of LOPR data to SIAC and OCC 4th Quarter 2009 and first half of January 2010
      LOPR firms may stop sending LOPR data to SIAC Activity of January 19, 2010

      This Notice briefly summarizes key requirements and changes related to the new LOPR. Further information regarding the OCC's collection of LOPR data, including record layouts, field mappings and milestone dates is available online at www.optionsclearing.com/products/large_options_positions_reporting/default.jsp.

    • 09-46 FINRA Reminds Alternative Trading Systems of Their Reporting Obligations

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      Alternative Trading Systems

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      SEA Rule 3a1-1
      SEA Rule 3b-16
      SEC Regulation ATS
      NTM 99-42
      Suggested Routing

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

      Alternative Trading Systems
      Form ATS Filings

      Executive Summary

      This Notice reminds firms that are alternative trading systems or operate alternative trading systems that, in addition to filing all reports required by Regulation ATS with the Securities and Exchange Commission, they also must simultaneously file duplicate copies of most such reports with FINRA. Firms may submit these reports to FINRA either in hard copy via U.S. mail or electronically to atsfilings@finra.org.

      Questions concerning this Notice should be directed to Seth Levy, Department of Market Regulation, at (240) 386-5483.

      Background & Discussion

      On April 21, 1999, Securities Exchange Act (SEA) Rules 3a1-1 and 3b-16 and Regulation ATS became effective. Rule 301(b)(2) of Regulation ATS requires alternative trading systems (ATSs) to file an initial operation report, necessary amendments and cessation of operations reports on Form ATS within specified time frames.

      In Notice to Members 99-42, FINRA provided guidance to firms on complying with the Regulation ATS reporting requirements. This Notice reminds firms that all required reports under Regulation ATS should be filed with:

      U.S. Securities & Exchange Commission
      Division of Trading and Markets
      100 F Street, NE
      Washington, DC 20549

      All reports are considered filed upon receipt by the SEC. Firms also are reminded that, if FINRA is the designated examining authority for the ATS, duplicate originals of all reports that must be filed with the SEC on Form ATS also must be filed simultaneously with FINRA.1 Firms may submit their reports to FINRA electronically by sending them to atsfilings@finra.org, or by mailing a copy to:

      FINRA
      Department of Market Regulation
      Attn: Form ATS Maintenance Coordinator
      9509 Key West Avenue
      Rockville, MD 20850

      All reports submitted to FINRA are deemed confidential when filed.


      1 Rule 301(b)(9) of Regulation ATS requires ATSs to file certain summary transaction information on Form ATS-R within 30 calendar days after the end of each calendar quarter and 10 calendar days after the ATS ceases t operate. Originals of these reports should be filed only with the SEC. Firms must provide duplicate copies to FINRA upon request.

    • 09-45 FINRA Requests Comment on Proposed Consolidated FINRA Rule Governing Sale of Securities in a Fixed Price Offering; Comment Period Expires: September 18, 2009

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      Fixed Price Offerings

      Regulatory Notice
      Notice Type

      Request for Comment
      Consolidated FINRA Rulebook
      Referenced Rules & Notices

      NASD Rule 2730
      NASD Rule 2740
      NASD Rule 2750
      NASD IM-2730
      NASD IM-2740
      NASD IM-2750
      NTM 03-73
      FINRA Rule 5130
      Suggested Routing

      Corporate Financing
      Compliance
      Legal
      Operations
      Senior Management
      Key Topics

      Fixed Price Offerings
      Papilsky Rules

      Executive Summary

      As part of the process to develop a new consolidated rulebook (the Consolidated FINRA Rulebook),1 FINRA is requesting comment on a proposed new rule governing fixed price offerings. Proposed FINRA Rule 5141 (Sale of Securities in a Fixed Price Offering) would be a new consolidated rule that simplifies the provisions of current NASD Rules 2730, 2740 and 2750 and their associated Interpretive Materials and eliminates outdated requirements.

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

      Questions regarding 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
      •   Adam H. Arkel, Assistant General Counsel, OGC, at (202) 728-6961.

      Action Requested

      FINRA encourages all interested parties to comment on the proposed rule. Comments must be received by September 18, 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, N.W.
      Washington, D.C. 20006-1506

      To help FINRA process and review comments more efficiently, persons should only use 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 Rules 2730, 2740 and 2750 and their associated Interpretive Materials (IMs) regulate fixed price offerings.4 Generally, the purpose of the rules and the associated IMs5 is to protect the integrity of fixed price offerings by ensuring that securities in such offerings are sold to the public at the stated public offering price or prices, thereby preventing an undisclosed better price. The rules reach this goal by prohibiting the grant or reallowance of certain preferences (e.g., discounts, selling concessions, underwriting recapture or various economic equivalents) to persons outside of the selling groups and selling syndicates6 formed to distribute the offered securities.7

      FINRA believes that, though the fixed price offering rules continue to play an important role in protecting market integrity, certain requirements of the rules have become outdated. Accordingly, FINRA is proposing to delete NASD Rules 2730, 2740, 2750 and their associated IMs in their entirety from FINRA's rulebook and to adopt a single, simplified rule—proposed FINRA Rule 5141—in their place.

      Proposed FINRA Rule 5141

      Like the current fixed price offering rules, the goal of proposed FINRA Rule 5141 is to ensure that, if an offering is presented to the public as a fixed price offering, then the public should be able to have confidence that no one is able to gain an unfair advantage by obtaining the securities at less than the stated public offering price. Paragraph (a) of the proposed rule addresses this core objective by providing that no member or person associated with a member that participates in a selling syndicate or selling group in connection with a fixed price offering may offer or grant, directly or indirectly, to any person8 or account that is not a member of such selling syndicate or selling group any securities in the offering at a price below the stated public offering price (i.e., a "reduced price").

      The proposed rule provides that, subject to the requirements of FINRA Rule 5130, a member of a selling syndicate or selling group is permitted to sell securities in the offering to an affiliated person, provided the member does not sell the securities to the affiliated person at a reduced price (as set forth under the rule).9 The requirements of the proposed rule would apply until the termination of the offering.

      Proposed FINRA Rule 5141(b) provides that nothing in the rule shall prohibit the purchase and sale of securities in a fixed price offering between members of the selling syndicate or selling group.

      The proposed rule contains supplementary material that elaborates the concept of "reduced price" and prohibits various means—addressed in the current fixed price offering rules—by which the economic equivalent of a reduced price could be offered or granted. The supplementary material largely preserves NASD Rule 2740's exclusion for research services. Further, the supplementary material generally protects ordinary-course business transactions between members of a selling syndicate or selling group members and affiliates from being deemed transactions that confer a reduced price. The proposed supplementary material provides the following:

      •   Reduced Price: Proposed FINRA Rule 5141.01 provides that, for purposes of the rule, "reduced price" includes, without limitation, any offer or grant of any selling concession, discount or other allowance, credit, rebate, reduction of any fee (including any advisory or service fee), any sale of products or services at prices below reasonable commercially available rates for similar products or services (except for research, which, as noted below, is subject to proposed FINRA Rule 5141.02), or any purchase of or arrangement to purchase securities from the person or account at more than their fair market price in exchange for securities in the offering;10
      •   Research: Proposed FINRA Rule 5141.02 generally preserves the allowance that NASD Rule 2740 makes with respect to research services. Specifically, the supplementary material provides that nothing in the new rule prohibits a member or person associated with a member that participates in a selling syndicate or selling group from selling securities in the offering to a person or account to which it has provided or will provide research, provided the person or account pays the stated public offering price for the securities and the research is in conformity with the requirements of Exchange Act Section 28(e)(3)(A) and (B) and SEC guidance. The supplementary material provides, like the current NASD rule, that investment management or investment discretionary services are not research. The supplementary material further requires that any product or service provided by a member or person associated with a member that does not qualify as research must not confer a reduced price as set forth in proposed FINRA Rule 5141.01;
      •   Ordinary-Course Transactions with Affiliates: Proposed FINRA Rule 5141.03 provides that transactions between a member of a selling syndicate or selling group and an affiliated person that are part of the normal and ordinary course of business and are unrelated to the sale or purchase of securities in a fixed price offering shall not be deemed to confer a reduced price under the rule;
      •   Definition of Fixed Price Offering: The supplementary material incorporates the current definition of "fixed price offering" as set forth in NASD Rule 0120(h) with only minor changes, primarily to reflect the new conventions of the Consolidated FINRA Rulebook;
      •   Asset-Based Fees: Lastly, the rule's supplementary material clarifies that a member that is an investment adviser may exempt securities that are purchased as part of a fixed price offering from the calculation of annual or periodic asset-based fees that the member charges a customer, provided the exemption is part of the member's normal and ordinary course of business with the customer and is not in connection with the offering.

      1 The current FINRA rulebook consists of: (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the Transitional Rulebook). While the NASD Rules generally apply to all FINRA member firms, the Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (Dual Members). The FINRA Rules apply to all FINRA member firms, unless such rules have a more limited application by their terms. 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 Notice to Members (NTM) 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 SEA Section 19 and rules thereunder.

      4 NASD Rule 0120(h) defines the term "fixed price offering" to mean the offering of securities at a stated public offering price or prices, all or part of which securities are publicly offered in the United States or any territory thereof, whether or not registered under the Securities Act of 1933. The term does not include offerings of "exempted securities" or "municipal securities" as those terms are defined in Sections 3(a)(12) and 3(a)(29), respectively, of the Exchange Act or offerings of redeemable securities of investment companies registered pursuant to the Investment Company Act of 1940 which are offered at prices determined by the net asset value of the securities. The definition of "fixed price offering" would be incorporated into the proposed rule in substantially identical form (see proposed FINRA Rule 5141.04).

      5 The fixed price offering rules are also known as the Papilsky rules because of the court decision with which they are commonly associated. See Papilsky v. Berndt, et al., No. 71 Civ. 2534, 1976 U.S. Dist. LEXIS 14442 (S.D.N.Y., June 24, 1976). For more information regarding the rules' background, see Exchange Act Release No. 17371 (December 12, 1980), 45 FR 83707 (December 19, 1980) (Order Approving Proposed Rule Change; File No. SR-NASD-78-3) (Approval Order). See also Exchange Act Release No. 15807 (May 9, 1979), 44 FR 28574 (May 15, 1979) (Notice of Proposed Rule Change; File No. SR-NASD-78-3); NTM 77-31 (September 23, 1977) (Proposed Rule Changes and Interpretations Concerning Securities Distribution Practices).

      6 The terms "selling group" and "selling syndicate" are defined in NASD Rules 0120(p) and (q), respectively. Other than to reflect the new conventions of the Consolidated FINRA Rulebook, FINRA does not propose to alter these definitions, which will be addressed later in the rulebook consolidation process.

      7 The fixed price offering rules address three broad areas. First, NASD Rule 2730 generally provides that a member, engaged in a fixed price offering, that purchases or arranges the purchase of other securities in connection with or in exchange for the underwritten securities must purchase the other securities at value equating to the current market price at the time of purchase or act as agent in the sale of such securities and charge the commission at the rate applied by members in the normal course of business. (The rule thereby prohibits overtrading.) The rule sets forth, among other things, certain presumptions of compliance versus non-compliance and recordkeeping requirements.

      Second, NASD Rule 2740 generally requires that in connection with a fixed price offering, selling concessions, discounts or other allowances may only be paid to brokers or dealers actually engaged in the investment banking or securities business and only as consideration for services rendered in distribution. (The rule permits an exception where the member has provided, or will provide, "bona fide research" consistent with Exchange Act Section 28(e), if the purchaser pays the stated public offering price for the securities.) The rule sets forth, among other things, certain requirements with respect to written agreements to comply with the rule that members must obtain and interpretive material on "bona fide research," as well as certain transaction reporting and recordkeeping requirements.

      Third, NASD Rule 2750 generally bars any member engaged in a fixed price offering from selling the securities to, or placing the securities with, any person or account that is a related person of the member, unless the related person is itself subject to the rule or is a non-member broker-dealer that has entered into the agreements required under Rule 2740. (The rule thereby operates to prevent underwriting recapture through an affiliate.) See also Approval Order.

      8 NASD Rule 0120(n) defines "person" to include any natural person, partnership, corporation, association, or other legal entity.

      9 FINRA Rule 5130 (former NASD Rule 2790) addresses restrictions on the purchase and sale of initial equity public offerings. The rule generally prohibits sales to and purchases by a broker-dealer and accounts in which a broker-dealer has a beneficial interest.

      10 The supplementary material defines "fair market price" to refer generally to a price or range of prices at which a willing buyer and a willing seller, each unrelated to the other, would purchase the securities in the ordinary course of business in transactions that are of similar size and similar characteristics and are independent of any other transaction.


      ATTACHMENT A

      Below is the text of proposed FINRA Rule 5141.

      * * * * *

      5000. SECURITIES OFFERING AND TRADING STANDARDS AND PRACTICES

      5100. SECURITIES OFFERINGS, UNDERWRITING AND COMPENSATION

      * * * * *

      5140. Integrity of Fixed Price Offerings

      5141. Sale of Securities in a Fixed Price Offering

      (a) No member or person associated with a member that participates in a selling syndicate or selling group in connection with a fixed price offering shall offer or grant, directly or indirectly, to any person or account that is not a member of such selling syndicate or selling group any securities in the offering at a price below the stated public offering price ("reduced price"). Subject to the requirements of Rule 5130, a member of a selling syndicate or selling group is permitted to sell securities in the offering to an affiliated person, provided such member does not sell the securities to the affiliated person at a reduced price under this Rule. The requirements of this Rule shall apply until the termination of the offering.
      (b) Nothing in this Rule shall prohibit the purchase and sale of securities in a fixed price offering between members of the selling syndicate or selling group.

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

      .01 Reduced Price. For the purposes of this Rule, "reduced price" includes, without limitation, any offer or grant of any selling concession, discount or other allowance, credit, rebate, reduction of any fee (including any advisory or service fee), any sale of products or services at prices below reasonable commercially available rates for similar products and services (except for research subject to Rule 5141.02), or any purchase of or arrangement to purchase securities from the person or account at more than their fair market price in exchange for securities in the offering. For purposes of this Supplementary Material, "fair market price" refers generally to a price or range of prices at which a willing buyer and a willing seller, each unrelated to the other, would purchase the securities in the ordinary course of business in transactions that are of similar size and similar characteristics and are independent of any other transaction.
      .02 Research. Nothing in this Rule shall prevent a member or person associated with a member that participates in a selling syndicate or selling group from selling securities in the offering to a person or account to which it has provided or will provide research, provided the person or account pays the stated public offering price for the securities and the research is in conformity with the requirements of Section 28(e)(3)(A) and (B) of the Exchange Act and SEC guidance. Investment management or investment discretionary services are not research for purposes of this Supplementary Material. Any product or service provided by a member or person associated with a member that does not qualify as research under this Supplementary Material must not confer a reduced price as set forth in Rule 5141.01.
      .03 Affiliated Persons. Transactions between a member of a selling syndicate or selling group and an affiliated person that are part of the normal and ordinary course of business and are unrelated to the sale or purchase of securities in a fixed price offering shall not be deemed to confer a reduced price under this Rule.
      .04 Fixed Price Offering. The term "fixed price offering" means the offering of securities at a stated public offering price or prices, all or part of which securities are publicly offered in the United States or any territory thereof, whether or not registered under the Securities Act, except that the term does not include offerings of "exempted securities" or "municipal securities" as those terms are defined in Sections 3(a)(12) and 3(a)(29), respectively, of the Exchange Act or offerings of redeemable securities of investment companies registered pursuant to the Investment Company Act which are offered at prices determined by the net asset value of the securities.
      .05 Asset-Based Fees. A member that is an investment adviser may exempt securities that are purchased as part of a fixed price offering from the calculation of annual or periodic asset-based fees that such member charges to a customer, provided such exemption is part of the member's normal and ordinary course of business with the customer and is not in connection with an offering.

      * * * * *

    • 09-44 FINRA Requests Comment on Proposed Consolidated FINRA Rule Governing Fidelity Bonds; Comment Period Expires: September 14, 2009

      View PDF

      Fidelity Bonds

      Regulatory Notice
      Notice Type

      Request for Comment
      Consolidated FINRA Rulebook
      Referenced Rules & Notices

      NASD Rule 3020
      NYSE Rule 319 and Its Interpretation
      SEA Rule 15c3-1
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topic(s)

      Fidelity Bonds


      Executive Summary

      As part of the process to develop a new consolidated rulebook (the Consolidated FINRA Rulebook),1 FINRA is requesting comment on a proposed consolidated FINRA rule governing fidelity bond requirements.

      The text of the proposed rule is set forth in Attachment A. Examples of estimated fidelity bond premiums for different-sized firms under the proposed rule are set forth in Attachment B.

      Questions concerning this Notice may be directed to:

      •   Susan DeMando Scott, Associate Vice President, Financial Operations Policy, at (202) 728-8411; or
      •   Erika L. Lazar, Senior Attorney, Office of General Counsel, at (646) 315-8512.

      Action Requested

      FINRA encourages all interested parties to comment on the proposed rule. Comments must be received by September 14, 2009.

      Members 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, N.W.
      Washington, D.C. 20006-1506

      To help FINRA process and review comments more efficiently, persons should only use 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

      NASD Rule 3020 and NYSE Rule 3194 (and its Interpretation) require member firms to maintain minimum amounts of fidelity bond coverage for officers and employees, and that such coverage address losses incurred due to certain specified events. The purpose of a fidelity bond is to protect a firm against certain types of losses, including, but not limited to, those caused by the malfeasance of its officers and employees, and the effect of such losses on the firm's capital.

      FINRA proposes adopting NASD Rule 3020 as FINRA Rule 4360, taking into account requirements under NYSE Rule 319 (and its Interpretation). The proposed FINRA rule updates the fidelity bond requirements to clarify the rule and reflect current industry practices. Unless otherwise noted below, the provisions in NASD Rule 3020 would transfer, subject only to non-substantive changes, as part of the consolidated FINRA rule.

      Proposed FINRA Rule 4360 (Fidelity Bonds)

      General Requirements

      Proposed FINRA Rule 4360 requires each firm that is required to join the Securities Investor Protection Corporation (SIPC) to maintain a blanket fidelity bond with specified amounts of coverage based on its net capital requirement, with certain exceptions. The proposed rule requires each firm to maintain, at a minimum, fidelity bond coverage for any person associated with the firm, except directors or trustees of a firm who are not performing acts within the scope of the usual duties of an officer or employee.

      Proposed FINRA Rule 4360 requires all firms to maintain fidelity bond coverage with the Securities Dealer Blanket Bond (securities blanket bond), unless the firm is unable to obtain this coverage. Today, firms that carry $5 million or more in fidelity bond coverage, or that have had an insurance claim paid out by the insurance company within the past five years, cannot obtain the securities blanket bond, so they use the Financial Institution Form 14 Bond (Form 14 bond). The securities blanket bond provides "per event" coverage and the Form 14 bond provides "per year" coverage.5 FINRA believes that all firms required to maintain fidelity bond coverage should carry "per event" coverage offered by the securities blanket bond, unless they are unable to secure such coverage, in which case, they may carry the Form 14 bond as long as it offers coverage that is otherwise consistent with the requirements of the proposed rule. If a firm is unable to obtain either the securities blanket bond or the Form 14 bond, the firm must maintain coverage with a bond that is substantially similar to the securities blanket bond and is otherwise consistent with the requirements of the proposed rule.

      Like NASD Rule 3020, proposed FINRA Rule 4360 requires that a firm's fidelity bond include a cancellation rider providing that the insurer will use its best efforts to promptly notify FINRA in the event the bond is cancelled, terminated or "substantially modified." Also, the proposed rule adopts the definition of "substantially modified" in NYSE Rule 3196 and incorporates NYSE Rule 319's standard that a firm must immediately advise FINRA in writing if its insurance is cancelled, terminated or substantially modified.

      Minimum Required Coverage

      Proposed FINRA Rule 4360 increases the minimum required fidelity bond coverage for firms, while continuing to base the coverage on their net capital requirement.7 To that end, the proposed rule requires a firm with a net capital requirement that is less than $250,000 to maintain minimum coverage of the greater of 120 percent of the firm's required net capital under SEA Rule 15c3-1 or $100,000. The increase to $100,000 modifies the present minimum requirement of $25,000. FINRA believes this increase is warranted since the NASD and NYSE fidelity bond rules have not been materially modified since adoption—over 30 years ago—and $25,000 in 1974 (the year the NASD rule was adopted) is equal to approximately $124,000 today (adjusted for inflation).

      Historically, firms that have maintained minimum coverage of $25,000 have had claims that exceed this amount. Although firms may experience a slight increase in costs for their premiums under the proposal, FINRA believes that the proposed changes to the fidelity bond minimum requirements are necessary to provide meaningful and practical coverage for losses covered by the bond.

      Under proposed FINRA Rule 4360, firms with a net capital requirement of at least $250,000 will use a table in the rule to determine their minimum fidelity bond coverage requirement. The table is a modified version of the table in NASD Rule 3020, incorporating aspects of NYSE Rule 319. The identical NASD and NYSE requirements for firms that have a minimum net capital requirement that exceeds $1 million are retained in proposed FINRA Rule 4360. However, the proposed rule adopts the higher requirements in NYSE Rule 319 for a firm with a net capital requirement of at least $250,000, but less than $1 million.8

      Insuring Agreements

      The securities blanket bond provides the same level of coverage (100 percent) for all Insuring Agreements required by the NASD and NYSE rules. To reflect this industry practice, proposed FINRA Rule 4360 eliminates the specific coverage provisions in the NASD and NYSE rules that permit less than 100 percent of coverage9 for certain Insuring Agreements (i.e., fraudulent trading and securities forgery) to require that coverage for all Insuring Agreements be equal to 100 percent of the bond coverage. Firms may elect to carry optional Insuring Agreements not required by proposed FINRA Rule 4360 for an amount less than 100 percent of the bond coverage.

      Also, proposed FINRA Rule 4360 aligns the Insuring Agreements required by the rule with the securities blanket bond that is offered to FINRA member firms. Under the proposed rule, a firm's fidelity bond must provide against loss and have Insuring Agreements covering at least the following: fidelity, on premises, in transit, forgery and alteration, securities and counterfeit currency. These areas of coverage are modified, in part, from NASD Rule 3020; however, the proposal does not substantively change what is required to be covered by the bond.

      Deductibles

      Proposed FINRA Rule 4360 provides for an allowable deductible amount of up to 25 percent of the fidelity bond coverage purchased by a firm. Similar to NASD Rule 3020, any deductible amount elected by the firm that is greater than 10 percent of the coverage purchased by the member is deducted from the firm's net worth in the calculation of its net capital for purposes of SEA Rule 15c3-1.10 FINRA notes that a firm may elect, subject to availability, a deductible less than 10 percent of the coverage purchased.

      Annual Review and Adjustments

      Consistent with NASD Rule 3020 and NYSE Rule 319, proposed FINRA Rule 4360 requires each firm—including a firm that signs a multi-year insurance policy—annually as of the yearly anniversary date of the issuance of the fidelity bond to review the adequacy of its fidelity bond coverage and make any required adjustments to its coverage, as set forth in the rule. Under the proposed rule, a firm's highest net capital requirement during the preceding 12-month period, based on the applicable method of computing net capital (dollar minimum, aggregate indebtedness or alternative standard), is used as the basis for determining the firm's required minimum fidelity bond coverage for the succeeding 12-month period. The "preceding 12-month period" includes the 12-month period that ends 60 days before the yearly anniversary date of a member's fidelity bond. This gives a firm time to determine its required fidelity bond coverage by the anniversary date of the bond.

      Exemptions

      Proposed FINRA Rule 4360 provides an exemption from the fidelity bond requirements for firms in good standing with a national securities exchange that maintain a fidelity bond subject to requirements of such exchange that are equal to or greater than the requirements set forth in the proposed rule.11

      Additionally, consistent with NYSE Rule Interpretation 319/01, proposed FINRA Rule 4360 continues to exempt from the fidelity bond requirements any firm that acts solely as a Designated Market Maker (DMM),12 floor broker or registered floor trader and does not conduct business with the public.

      Proposed FINRA Rule 4360 does not maintain the exemption in NASD Rule 3020 for a one-person firm.13 Historically, a sole proprietor or sole stockholder member firm was excluded from the fidelity bond requirements based upon the assumption that such firms were one-person shops and, therefore, could not obtain coverage for their own acts. FINRA has determined that sole proprietor and sole stockholder firms can and often do acquire fidelity bond coverage, even though it is currently not required, since all claims (irrespective of firm size) are likely to be paid or denied on a facts-and-circumstances basis. Also, certain provisions of the fidelity bond benefit a one-person shop (e.g., those covering customer property lost in transit).

      Implementation Date

      FINRA understands that changes to a firm's fidelity bond policy, in coordination with insurance providers, may be impacted by bond renewal cycles and changes required by the insurance industry. As such, FINRA will work with firms to establish a reasonable implementation date for the proposed rule change upon approval by the SEC.


      1 The current FINRA rulebook consists of (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the Transitional Rulebook). While the NASD Rules generally apply to all FINRA member firms, the Incorporated NYSE Rules apply only to those member firms of FINRA that are also members of the NYSE (Dual Members). The FINRA Rules apply to all FINRA member firms, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process, see Information Notice 3/12/08 (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 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 SEA Section 19 and rules thereunder.

      4 For convenience, the Incorporated NYSE Rules are referred to as the NYSE Rules.

      5 Since 1982, firms electing to acquire coverage through the FINRA-sponsored Insurance Program (Sponsored Program) have been provided with the securities blanket bond. It is the "default" insurance for FINRA member firms in that when a firm completes the application for the Sponsored Program, they are applying for the securities blanket bond.

      6 NYSE Rule 319 defines the term "substantially modified" as any change in the type or amount of fidelity bonding coverage, or in the exclusions to which the bond is subject, or any other change in the bond such that it no longer complies with the requirements of the rule.

      7 See Attachment B for examples of estimated premiums for different sized firms under the proposed rule.

      8 For example, NASD Rule 3020 permits a small clearing and carrying firm (i.e., one subject to a $250,000 net capital requirement) to obtain $300,000 in coverage. The same firm, had it been designated to NYSE, would have needed $600,000 in coverage. FINRA believes the increased coverage requirements are appropriate given the larger number/amount of claims that can be satisfied at these levels.

      9 See NASD Rule 3020(a)(4) and (a)(5); NYSE Rule 319(d)(ii)(B) and (C), and (e)(ii)(B) and (C).

      10 NASD Rule 3020 bases the deduction from net worth for an excess deductible on a firm's minimum required coverage while proposed FINRA Rule 4360 bases such deduction from net worth on coverage purchased by the firm.

      11 In general, the notification provisions of the corresponding exchange rules (i.e., cancellation rider and notification upon cancellation, termination or substantial modification of the bond) require notification to the respective exchange rather than to FINRA. Accordingly, the practical effect for a firm that avails itself of the proposed exemption is that such firm must maintain a fidelity bond subject to the same requirements as in Proposed FINRA Rule 4360; however, such firm is exempt from the requirement that FINRA be notified of changes to the bond and will alternatively comply with the notification provisions of the respective exchange.

      12 See Exchange Act Release No. 58845 (October 24, 2008), 73 FR 64379 (October 29, 2008) (Approval Order; SR-NYSE-2008-46). In this rule filing, the role of the specialist was altered in certain respects and the term "specialist" was replaced with the term "Designated Market Maker."

      13 A one-person firm (that is, a firm owned by a sole proprietor or stockholder that has no other associated persons, registered or unregistered) has no "employees" for purposes of NASD Rule 3020, and therefore such a firm currently is not subject to the fidelity bonding requirements. Conversely, a firm owned by a sole proprietor or stockholder that has other associated persons has "employees" for purposes of NASD Rule 3020, and currently is, and will continue to be, subject to the fidelity bonding requirements.


      Attachment A

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

      * * * * *

      Text of Proposed New FINRA Rule

      (Marked to Show Changes from NASD Rule 3020; NASD Rule 3020 and NYSE Rule 319 (and Its Interpretation) to Be Deleted in Their Entirety from the Transitional Rulebook)

      * * * * *

      [3020]4360. Fidelity Bonds

      (a) [Coverage Required]General Provision
      (1) Each member required to join the Securities Investor Protection Corporation [who has employees and who is not a member in good standing of the American Stock Exchange, Inc.; the Boston Stock Exchange; the Midwest Stock Exchange, Inc.; the New York Stock Exchange, Inc.; the Pacific Stock Exchange, Inc.; the Philadelphia Stock Exchange, Inc.; or the Chicago Board Options Exchange] shall[:]

      [(1) M]maintain [a] blanket fidelity bond coverage[, in a form substantially similar to]with the [standard form of] Securities Dealer [Brokers] Blanket Bond, [promulgated by the Surety Association of America, covering officers and employees] which provides against loss and has Insuring [a]Agreements covering at least the following:
      (A) Fidelity
      (B) On Premises
      (C) In Transit
      [(D) Misplacement]
      ([E]D) Forgery and Alteration [(including check forgery)]
      ([F]E) Securities [Loss (including securities forgery)]
      ([G]F) [Fraudulent Trading] Counterfeit Currency
      ([H]2) The fidelity bond must include a [C]cancellation [R]rider providing that the insurance carrier will use its best efforts to promptly notify [the National Association of Securities Dealers, Inc.] FINRA in the event the bond is cancelled, terminated or substantially modified.
      (b) Minimum Required Coverage
      ([2]1) A member with a net capital requirement of less than $250,000 must [M]maintain minimum fidelity bond coverage for all [i]Insuring [a]Agreements required [in this] by paragraph (a) of this Rule of [not less than $25,000;] the greater of (1) 120% of the member's required net capital under SEA Rule 15c3-1 or (2) $100,000. A member with a net capital requirement of $250,000 or more must maintain minimum fidelity bond coverage for all Insuring Agreements required by paragraph (a) of this Rule in accordance with the following table:

      [(3) Maintain required minimum coverage for Fidelity, On Premises, In Transit, Misplacement and Forgery and Alteration insuring agreements of not less than 120% of its required net capital under SEC Rule 15c3-1 up to $600,000. Minimum coverage for required net capital in excess of $600,000 shall be determined by reference to the following table:]

      Net Capital Requirement under SE[C]A Rule 15c3-1 Minimum Coverage
      $250,000–300,000 $600,000
      300,001–500,000 700,000
      [$6]500,00[0]1–1,000,000 [75]800,000
      1,000,001–2,000,000 1,000,000
      2,000,001–3,000,000 1,500,000
      3,000,001–4,000,000 2,000,000
      4,000,001–6,000,000 3,000,000
      6,000,001–12,000,000 4,000,000
      12,000,001[—]and above 5,000,000
      (2) At a minimum, a member must maintain fidelity bond coverage for any person associated with the member, except directors or trustees who are not performing acts within the scope of the usual duties of an officer or employee.
      [(4) Maintain Fraudulent Trading coverage of not less than $25,000 or 50% of the coverage required in paragraph (a)(3), whichever is greater, up to $500,000;]
      [(5) Maintain Securities Forgery coverage of not less than $25,000 or 25% of the coverage required in paragraph (a)(3), whichever is greater, up to $250,000.]
      ([b]c) Deductible Provision
      [(1) A deductible provision may be included in the bond of up to $5,000 or 10% of the minimum insurance requirement established hereby, whichever is greater.]
      [(2) If a member desires to maintain coverage in excess of the minimum insurance requirement then a deductible provision may be included in the bond of up to $5,000 or 10% of the amount of blanket coverage provided in the bond purchased, whichever is greater. The excess of any such deductible amount over the maximum permissible deductible amount described in subparagraph (1) above must be deducted from the member's net worth in the calculation of the member's net capital for purposes of SEC Rule 15c3-1. Where the member is a subsidiary of another Association member the excess may be deducted from the parent's rather than the subsidiary's net worth, but only if the parent guarantees the subsidiary's net capital in writing.]
      A provision may be included in a fidelity bond to provide for a deductible of up to 25% of the coverage purchased by a member. Any deductible amount elected by the member that is greater than 10% of the coverage purchased by the member must be deducted from the member's net worth in the calculation of its net capital for purposes of SEA Rule 15c3-1. If the member is a subsidiary of another FINRA member, this amount may be deducted from the parent's rather than the subsidiary's net worth, but only if the parent guarantees the subsidiary's net capital in writing.
      ([c]d) Annual Review of Coverage
      (1) [Each]A member, including a member that signs a multi-year insurance policy,[other than members covered by subparagraph (2),] shall, annually [review,] as of the yearly anniversary date of the issuance of the fidelity bond, review the adequacy [thereof] of its coverage and make any required adjustments, as set forth in paragraphs (d)(2) and (d)(3) of this Rule. [by reference to the highest required net capital during the immediately preceding twelve-month period, which amount shall be used to determine minimum required coverage for the succeeding twelve-month period pursuant to subparagraphs (a)(2), (3), (4) and (5).]
      (2) A member's highest net capital requirement during the preceding 12-month period, based on the applicable method of computing net capital (dollar minimum, aggregate indebtedness or alternative standard), shall be used as the basis for determining the member's required minimum fidelity bond coverage for the succeeding 12-month period. For the purpose of this paragraph, the "preceding 12-month period" shall include the 12-month period that ends 60 days before the yearly anniversary date of a member's fidelity bond. [Each member which has been in business for one year shall, as of the first anniversary date of the issuance of its original bond, review the adequacy thereof by reference to an amount calculated by dividing the highest it experienced during its first year by 15. Such amount shall be used in lieu of required net capital under SEC Rule 15c3-1 in determining the minimum required coverage to be carried in the member's second year pursuant to subparagraphs (a)(2), (3), (4) and (5). Notwithstanding the above, no such member shall carry less minimum bonding coverage in its second year than it carried in its first year.]
      [(3) Each member shall make required adjustments not more than 60days after the anniversary date of the issuance of such bond.]
      (3) A member that has only been in business for one year and elected the aggregate indebtedness ratio for calculating its net capital requirement may use, solely for the purpose of determining the adequacy of its fidelity bond coverage for its second year, the 15 to 1 ratio of aggregate indebtedness to net capital in lieu of the 8 to 1 ratio (required for broker-dealers in their first year of business) to calculate its net capital requirement. Notwithstanding the above, such member shall not carry less minimum bonding coverage in its second year than it carried in its first year.
      [(4) Any member subject to the requirements of this paragraph (c) may apply for an exemption from the requirements of this paragraph (c). The application shall be made pursuant to Rule 9610 of the Code of Procedure. The exemption may be granted upon a showing of good cause, including a substantial change in the circumstances or nature of the member's business that results in a lower net capital requirement. The NASD may issue an exemption subject to any condition or limitation upon a member's bonding coverage that is deemed necessary to protect the public and serve the purposes of this Rule.]
      ([d]e) Notification of Change

      Each member shall report the cancellation, termination or substantial modification of the fidelity bond to [the Association] FINRA within ten business days of such occurrence.
      [(e) Definitions]

      [For purposes of fidelity bonding the term "employee" or "employees" shall include any person or persons associated with a member firm (as defined in Article I, paragraph (q) of the By-Laws) except:]
      [(1) Sole Proprietors]
      [(2) Sole Stockholders]
      [(3) Directors or Trustees of member firms who are not performing acts coming within the scope of the usual duties of an officer or employee.]
      (f) Exemptions
      (1) The requirements of this Rule shall not apply to:
      (A) members that maintain a fidelity bond as required by a national securities exchange, registered with the SEC under Section 6 of the Exchange Act, provided that the member is in good standing with such national securities exchange and the fidelity bond requirements of such exchange are equal to or greater than the requirements of this Rule; and
      (B) members whose business is solely that of a Designated Market Maker, Floor broker or registered Floor trader and who does not conduct business with the public.
      (2) Any member may apply for an exemption, pursuant to the Rule 9600 Series, from the requirements of paragraphs (d)(2) and (d)(3) of this Rule. An exemption may be granted, at the discretion of FINRA, upon a showing of good cause, including a substantial change in the circumstances or nature of the member's business that would result in a lower net capital requirement.

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

      .01 Alternative Coverage. Where a member is unable to obtain the Securities Dealer Blanket Bond, the member shall maintain fidelity bond coverage with the Financial Institution Form 14 Bond that is otherwise consistent with the requirements of this Rule. Where a member is unable to obtain either the Securities Dealer Blanket Bond or the Financial Institution Form 14 Bond, the member shall maintain fidelity bond coverage with a bond that is substantially similar to the Securities Dealer Blanket Bond and is otherwise consistent with the requirements of this Rule.
      .02 Definitions. For purposes of this Rule, the term "substantially modified" shall mean any change in the type or amount of fidelity bonding coverage, or in the exclusions to which the bond is subject, or any other change in the bond such that it no longer complies with the requirements of this Rule.

      Attachment B

      Examples:1

      Firm with four employees, no branches. Estimated Premiums
      Present coverage of $25,000 with $5,000 deductible. $364
      Proposed coverage of $100,000 with $10,000 deductible. $598
      Proposed coverage of $100,000 with $25,000 deductible. $569
      Firm with 18 employees, three branches.  
      Present coverage of $25,000 with $5,000 deductible. $790
      Proposed coverage of $100,000 with $10,000 deductible. $1,140
      Proposed coverage of $100,000 with $25,000 deductible. $1,085
      Firm with 100 employees, 45 branches.  
      Present coverage of $25,000 with $5,000 deductible. $3,278
      Proposed coverage of $100,000 with $10,000 deductible. $4,168
      Proposed coverage of $100,000 with $25,000 deductible. $3,964
      Firm with 375 employees, 150 branches.  
      Present coverage of $25,000 with $5,000 deductible. $9,823
      Proposed coverage of $100,000 with $10,000 deductible. $12,346
      Proposed coverage of $100,000 with $25,000 deductible. $11,743

      1 Branch charges have been factored into the estimated premiums. The above examples do not include the 10 percent discount available to FINRA member firms electing a two-year policy.

    • 09-43 SEC Approves Amendments to the Panel Composition Rules of the Arbitration Code for Industry Disputes; Effective Date: August 31, 2009

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      Arbitration Panel Composition

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      FINRA Rule 13402
      FINRA Rule 13403
      FINRA Rule 13406
      Suggested Routing

      Compliance
      Legal
      Registered Representatives
      Senior Management
      Key Topic(s)

      Arbitration
      Code of Arbitration Procedure
      Dispute Resolution
      Panel Composition

      Executive Summary

      Effective August 31, 2009, the criteria for determining the panel composition for an arbitration when the claim involves an associated person1 will change. The amendment to the Arbitration Code for Industry Disputes will apply to claims filed on or after the effective date.

      The text of the amendment is set forth in Attachment A.

      Questions concerning this Notice should be directed to:

      •   Kenneth L. Andrichik, Senior Vice President, Chief Counsel and Director of Mediation and Strategy, Dispute Resolution, at (212) 858-3915 or ken.andrichik@finra.org; or
      •   Mignon McLemore, Assistant Chief Counsel, Dispute Resolution, at (202) 728-8151 or mignon.mclemore@finra.org.

      Background and Discussion

      Currently, FINRA Rule 13402(a) of the Industry Code requires an all non-public panel for disputes between member firms, and for employment disputes between or among member firms and associated persons that relate exclusively to employment contracts, promissory notes or receipt of commissions.2 In all other disputes between or among member firms and associated persons, Rule 13402(b) requires a majority public panel, where one arbitrator would be a non-public arbitrator and two would be public arbitrators.3

      The amendments to Rules 13402, 13403 and 13406 of the Arbitration Code for Industry Disputes (Industry Code) change the criteria for determining panel composition when the claim involves an associated person in industry disputes.4 Specifically, the amendments to the rules of the Industry Code:

      •   require that the parties receive a majority public panel for all industry disputes involving associated persons (excluding disputes involving statutory employment discrimination claims, which require a specialized all public panel);5
      •   clarify that in disputes involving only member firms, parties will receive an all non-public panel; and
      •   provide that if a party amends its pleadings to add an associated person to a previously all-member firm case, parties will receive a majority public panel.

      Employment Disputes Involving Associated Persons

      Currently, in employment disputes between or among member firms and associated persons, FINRA requires that the panel consist of all non-public arbitrators in cases that arise out of the employment or termination of employment of an associated person, and that relate exclusively to employment contracts, promissory notes or receipt of commissions. However, if a party adds a claim that does not meet these criteria, the parties receive a majority public panel.

      The amendments to Rule 13402 provide that for all employment disputes between or among member firms and associated persons (except for statutory employment discrimination cases), the parties must select a majority public panel. To implement this change, FINRA is deleting the title of Rule 13402(a), which contains the exceptions to the majority public panel requirement, and is replacing it with a concise description, which clarifies that Rule 13402(a) would apply to disputes involving only member firms ("Disputes Between Members").

      Further, FINRA is modifying the title of Rule 13402(b) to provide that for all industry disputes involving associated persons (excluding disputes involving statutory employment discrimination claims), the parties will select a majority public panel (i.e., "Disputes Between Associated Persons or Between or Among Members and Associated Persons"). FINRA is also making similar, consistent title changes to Rules 13403(a) and 13403(b), which govern generating and sending lists to parties, and to Rules 13406(a) and 13406(b), which govern appointment of arbitrators and discretion to appoint arbitrators not on the list.

      Disputes Involving Only Member Firms

      The amendments to the rule also clarify that, in all disputes involving only member firms, the parties will select an all non-public panel.

      Amendments to Pleadings that Add an Associated Person

      Occasionally, in a case that begins with an all non-public arbitrator panel, a party will amend its pleadings in such a way that a majority public panel will be required. For example, if a party files a claim regarding only an issue of compensation (one of the three "causes of action" listed in the existing rule), FINRA currently requires parties to select an all non-public panel. However, if a party adds a claim that falls outside of those three causes of action (e.g., adds a cause of action involving a tort), then the parties receive a majority public panel instead.

      Under the new rule, if a member firm (in a dispute involving only member firms) amends a pleading to add a party who is an associated person, the parties will select a majority public panel.

      The deadlines for arbitrator list selection determine how FINRA processes an amended pleading. For example, if lists of potential arbitrators have not been sent to parties, the Neutral List Selection System (NLSS)6 generates three lists of arbitrators to send to the parties: a public chairperson list, a public arbitrator list and a non-public arbitrator list.7 If the panel consists of one arbitrator,8 NLSS will generate a public chairperson list, and FINRA sends only this list to the parties.9

      If lists of potential non-public arbitrators have been sent to parties but the deadline for their return to FINRA has not yet passed, FINRA provides two new lists of public arbitrators to the parties, so that the parties may select a majority public panel. Specifically, FINRA sends a public chairperson list and a public arbitrator list to the parties,10 and the parties select the two public arbitrators for the panel from these lists using the striking and ranking procedures set forth in the Code.11 The arbitrator selected from the public chairperson list becomes the chairperson of the panel. The parties keep the non-public chairperson list previously provided to them, and select the non-public arbitrator from this list.12 In a single arbitrator case, FINRA sends only a new public chairperson list to the parties, including the newly added party, so that the parties may select a public arbitrator.13

      If the ranked lists of potential arbitrators are due to FINRA, then the parties may not amend a pleading to add a new party until a panel is selected and the panel grants a motion to add the party.14 Once the panel is selected, if it grants the motion to add an associated person, FINRA retains the non-public chairperson from the panel, and removes the remaining non-public arbitrators.15 The parties select two public arbitrators from new lists that FINRA sends to them in the same manner as if the ranked lists are not yet due to be returned to FINRA. The arbitrator selected from the public chairperson list becomes the chairperson of the panel. If the panel consists of one non-public arbitrator and the non-public arbitrator grants a motion to add an associated person, the non-public arbitrator will be replaced with a public chair-qualified arbitrator that the parties select from a new public chairperson list that NLSS generates.16

      Effective Date

      The amendment becomes effective on August 31, 2009, and will apply to claims filed on or after this date.


      1 Exchange Act Release No. 60061 (June 5, 2009), 74 Federal Register 28318 (June 15, 2009) (File No. SR-FINRA-2009-011).

      2 If the panel consists of one arbitrator, the arbitrator will be a non-public arbitrator selected from the non-public chairperson roster described in Rule 13400(c). See Rule 13402(a).

      3 If the panel consists of one arbitrator, the arbitrator will be a public arbitrator selected from the chairperson roster described in Rule 12400(c) of the Code of Arbitration Procedure for Customer Disputes (Customer Code). See Rule 13402(b).

      4 The amendments discussed in this Notice do not apply to claims filed under the Customer Code.

      5 The amendments will not apply to disputes involving a claim of statutory employment discrimination. See Rule 13802.

      6 The NLSS is a computer system that generates, on a random basis, lists of arbitrators from FINRA's rosters of arbitrators. The parties select their panel through a process of striking and ranking the arbitrators on lists generated by NLSS. See Rule 13400(a).

      7 See Rule 13403(b)(2).

      8 In a dispute between member firms, if the panel consists of one arbitrator, the arbitrator will be selected from FINRA's non-public chairperson arbitrator roster. See Rule 13402(a).

      9 See Rule 13403(b)(1). FINRA has raised the amount in controversy that will be heard by a single chair-qualified arbitrator to $100,000. See Securities Exchange Rel. No. 59340 (Feb. 2, 2009), 74 FR 6335 (Feb. 6, 2009) (File No. FINRA-2008-047); see also Regulatory Notice 09-13.

      10 Each new list will contain eight arbitrators. See Rule 13403(b)(2).

      11 See Rule 13404.

      12 FINRA will send the list of non-public arbitrators to the new party, with employment history for the past 10 years and other background information for each arbitrator listed. The newly added party may rank and strike arbitrators in accordance with Rule 13404. See Rule 13407(a).

      13 Notes 9 and 12.

      14 See Rule 13309(c).

      15 Under Rule 13407(b), the newly added party may not strike the non-public arbitrator, but may challenge the arbitrator for cause in accordance with Rule 13410.

      16 Note 9.


      Attachment A

      New language is underlined; deleted language is in brackets.

      Code of Arbitration Procedure for Industry Disputes

      Industry Code

      13402. Composition of Arbitration Panels in Cases Not Involving a Statutory Discrimination Claim

      For disputes involving statutory employment discrimination claims, see Rule 13802.

      (a) [Disputes Between Members, or Employment Disputes Between or Among Member Firms and Associated Persons Relating Exclusively To Employment Contracts, Promissory Notes, or Receipt of Commissions] Disputes Between Members
      (1) In an arbitration between members, the panel composition will be as follows:
      •   No change.
      •   No change.
      (2) If an arbitration involves only members and a member amends a pleading, pursuant to Rule 13309(c) to add an associated person, the majority of the panel will be public arbitrators, as described in Rule 13402(b). Once an associated person has been added to the proceeding, the rules that apply to cases between associated persons and members will govern list selection and the administration of the arbitration proceeding.
      (b) [Other] Disputes Between Associated Persons or Between or Among Members and Associated Persons
      •   No change.
      •   No change.

      13403. Generating and Sending Lists to the Parties

      For disputes involving statutory employment discrimination claims, see Rule 13802.

      (a) [Disputes Between or Among Members, or Employment Disputes Between or Among Member Firms and Associated Persons Relating Exclusively To Employment Contracts, Promissory Notes, or Receipt of Commissions] Lists Generated in Disputes Between Members
      (1)–(4) No change.
      (b) [Other Disputes Between or Among Members and Associated Persons] Lists Generated in Disputes Between Associated Persons or Between or Among Members and Associated Persons
      (1)–(4) No change.
      (c) Sending Lists to Parties

      No change.

      * * * *

      13406. Appointment of Arbitrators; Discretion to Appoint Arbitrators Not on List

      For disputes involving statutory employment discrimination claims, see Rule 13802.

      (a) [Disputes Between Members, or Employment Disputes Between or Among Member Firms and Associated Persons Relating Exclusively To Employment Contracts, Promissory Notes, or Receipt of Commissions] Appointment of Arbitrators in Disputes Between Members
      (1)–(2) No change.
      (b) [Other] Appointment of Arbitrators in Disputes Between Associated Persons or Between or Among Members and Associated Persons
      (1)–(2) No change.
      (c) No change.
      (d) No change.

      * * * * *

    • 09-42 FINRA Reminds Firms of Their Obligations With Variable Life Settlement Activities

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      Variable Life Settlement Transactions

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      FINRA Rule 2010
      NASD Rule 1017
      NASD Rule 2210
      NASD Rule 2310
      NASD Rule 2430
      NASD Rule 2440
      NASD IM-2440-1
      NTM 75-65
      NTM 00-73
      NTM 03-71
      NTM 05-26
      NTM 06-38
      Regulatory Notice 07-43
      Regulatory Notice 08-57
      SEA Rule 10b-5
      Suggested Routing

      Advertising
      Compliance
      Legal
      Registered Representatives
      Senior Management
      Variable Contracts
      Key Topics

      Communications with the Public
      Commissions
      Fees
      Membership Rules
      Suitability
      Variable Insurance Policies
      Variable Life Settlements

      Executive Summary

      Sales of existing life insurance policies to third parties—referred to as life settlements—have increased in recent years and the trend appears likely to continue. FINRA is concerned about variable life settlements because they involve materially different factors and raise materially different issues than more widely held securities such as stocks or bonds. Additionally, firms' marketing of variable life settlements is directed almost exclusively toward senior investors who, concerned about current economic conditions and retirement, may consider selling their variable life insurance policies without fully appreciating the risks and costs of variable life settlements.

      FINRA reminds firms that:

      •   variable life settlements are securities transactions that are subject to the federal securities laws and all applicable FINRA rules;
      •   if they seek to enter the business of variable life settlements, they must file an application for approval of this material change in business under NASD Rule 1017;
      •   they must present balanced and fair information in their advertising and other communications with the public and customers about variable life settlements and related products,1 and otherwise comply with all aspects of NASD Rule 2210; and
      •   they must adhere to suitability obligations under NASD Rule 2310; fair and reasonable commissions under FINRA Rule 2010 (formerly NASD Rule 2110), NASD Rule 2440 and related guidance; and fair fees and the disclosure of fees under NASD Rule 2430.

      Questions concerning this Notice should be directed to:

      •   Lawrence Kosciulek, Director, Investment Companies Regulation, at (240) 386-4535;
      •   Matthew E. Vitek, Counsel, Office of General Counsel (OGC), at (202) 728-8156 (regarding membership); or
      •   Sharon Zackula, Associate Vice President and Associate General Counsel, OGC, at (202) 728-8985 (regarding compensation).

      Background & Discussion

      Current poor economic conditions, volatility in the financial markets and negative economic forecasts have depressed the value of housing and many traditional financial instruments, such as stocks and corporate bonds. Many individual investors, particularly those who are retired or close to retirement, may be concerned about their financial situation. In this economic environment, and at all times, FINRA is concerned that investors may consider selling their variable life insurance policies to obtain additional cash without fully appreciating the risks of variable life settlements, such as:

      •   unexpected tax liabilities;
      •   decreased access to insurance coverage, if needed; and
      •   the release of the individual's private medical information.

      In addition, investors may not fully understand the transaction-related costs of selling their variable life insurance policy in a life settlement transaction. Business models differ, but often a number of intermediaries are involved in a single, variable life settlement transaction. In some, the number of intermediaries can result in increased commission charges and additional expenses, which substantially reduce the amount of money the selling investor receives as proceeds from the variable life settlement.2

      The sale of investment products that are derivative of or based on life settlements—"related products"—is also likely to increase.3 Transactions in related products are also securities transactions that are subject to the federal securities laws and all applicable FINRA rules. FINRA is also concerned about investors who purchase these related products, as investors may not fully understand the risks of such investments.4 Retail investors may be attracted to related products that pay a higher yield than conventional investments or, in some cases, guarantee a return by a specific date, without being aware that generally, related products are illiquid investments and an investor may be unable to sell the investment, or may be forced to sell at a steep discount, if the investor needs the funds prior to maturity. Also, the yield on a related product may be adversely affected by the parties structuring the related product—by an inexpert or incomplete actuarial analysis or an incomplete assessment of the medical conditions of any insured(s) covered by any policy in which an investor has an interest, or by a failure to follow applicable law regarding life settlements that may result in legal challenges at the time a death benefit is payable.

      External developments, such as advances in medical research and treatment regarding certain diseases, also may reduce the yield of related products. In addition, an investor purchasing certain related products, such as a "guaranteed" life settlement—e.g., the investment matures and repayment with interest is guaranteed not later than a specific date, even if the insured person has not passed away—may rely on the credit-worthiness of the firm that structured the guaranteed life settlement or of a third-party guarantor whose creditworthiness may be unknown.

      Material Change in Business Operations

      Notice to Members (NTM) 00-73 describes the factors that identify a "material change in business operations." Among the factors FINRA considers are the relationship, if any, between the proposed new business line and the firm's existing business, and the degree to which the firm's existing financial, operational, supervisory and compliance systems can accommodate the proposed new business activity.

      Based on these factors, firms should be aware that expansion into business activities related to variable life settlements constitutes a material change in business operations under NASD Rule 1011(k). Therefore, before engaging in variable life settlements, a firm must first file a Continuing Membership Application and receive approval of this change in business operations under NASD Rule 1017. Some of the most important obligations and applicable FINRA rules in connection with variable life settlements are addressed in NTM 06-38.5 In addition, other FINRA Notices provide guidance regarding a firm's responsibilities and obligations when a firm introduces a new product or buys or sells products that are complex or non-conventional, and the special concerns that are present when marketing a product focused almost exclusively toward senior retail investors.6

      Suitability and Disclosure

      The unique factors involved in an investor's decision to enter into a variable life settlement are also the factors that a firm recommending such a transaction must consider when determining, among other things, if the transaction is suitable. In accordance with a firm's suitability obligation under NASD Rule 2310, a firm recommending a variable life settlement to a customer must determine the necessity and extent of disclosure of those aspects of a life settlement transaction that may be material to a potential seller. A firm may not be in a position to complete its due diligence obligations under the suitability requirement in the absence of disclosure and detailed conversations with solicited customers. Often, the unique particularity of factors determining the suitability of a recommended life settlement transaction are such that disclosure to and detailed conversations with the customer are necessary to make the due diligence determinations required of firms under the suitability obligation.

      There are several financial issues that an investor selling a variable life policy may need to consider. An investor should understand the tax treatment of the cash payment when paid in a variable life settlement as compared to the tax treatment of the death benefit to the beneficiary. Balancing the investor's need for current income with the future financial needs of a survivor also may be an important part of the analysis. An investor should also be aware that a variable life settlement transaction takes a longer time to complete than a typical securities transaction. The investor may need to consider how the sale could affect his or her eligibility for certain public assistance programs, such as Medicaid. The benefits of a sale must be weighed against the transaction-related costs of a variable life settlement, which are often substantial. Also, if an investor needs or desires to obtain replacement life insurance, there should be an understanding and consideration of the impact that the variable life settlement may have on the ability to obtain replacement insurance. If replacement insurance will be sought, there needs to be consideration of the costs of premiums of the policy to be sold compared to a new policy, and the comparability of the coverage.

      An investor interested in selling his or her variable life policy in a variable life settlement must provide complete access to the investor's medical history (e.g., all past and current medical conditions, their treatment, all drugs prescribed) and any other information, no matter how personal, that may affect the investor's life expectancy, and must do so without any assurance that the life settlement will occur. This access may be granted to many people, including persons involved in the transaction at the closing, third parties evaluating the transaction, investors and potential investors. Most of these people will never be identified to the investor. Also, the investor may have an on-going obligation to disclose personal information, including his or her general health, new medical conditions and changes in pre-existing conditions, until his or her death. Moreover, the investor should appreciate fully that the buyer has a financial interest in the seller's death.

      Consequently, it is FINRA's view that NASD Rule 2310's due diligence component requires, before firms can make a suitability determination, that firms must take appropriate steps to make investors aware of the issues raised above and other pertinent information regarding a variable life settlement. If a firm fails to disclose information that would be viewed as material to a reasonable investor in making a decision to buy or sell a security, or the firm does not present pertinent information clearly, the firm may violate the anti-fraud provisions of the federal securities laws in addition to FINRA's suitability rule.7

      Communications

      FINRA understands that advertising and marketing materials and sales campaigns about variable life settlements are directed almost exclusively towards senior investors because their remaining life expectancy provides the potential of an attractive yield to investors. Firms seeking to identify investors who may consider selling their variable life insurance policy to a third party must present balanced, fair and comprehensive information in its advertising and marketing materials and any other communication. Firms, their associated persons and other intermediaries must not use high-pressure sales tactics and other aggressive advertising, marketing and sales efforts. Some investors may be unduly influenced by communications that are overly aggressive, not fair or balanced, or lack important information or disclosures. This may be especially true if an investor is concerned about current cash needs, is under financial pressure because his or her retirement assets have fallen in value or interest income from fixed income securities has been reduced, or the investor is concerned about current or future medical expenses, long-term care or other needs.

      NASD Rule 2210 prohibits firms from making any false, exaggerated, unwarranted or misleading statement or claim in any communication with the public. A firm's communications, including those about variable life settlements or related products—whether the firm is acting as a broker soliciting business or a dealer—must be fair and balanced and based on principles of fair dealing and good faith. These obligations may not be waived or met by disclaimer.

      New firms that engage in the business of variable life settlements or related products must file their advertisements with FINRA. NASD 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. In addition, all firms must file advertisements and sales literature concerning variable life settlements or related products (involving any variable products) within 10 business days of first use or publication. Finally, NASD Rule 2210's internal approval and recording-keeping provisions apply to communications in connection with variable life settlement or related products activities. The rule requires that a registered principal approve all advertisements and sales literature prior to use, in writing.

      Commissions and Fees

      FINRA is concerned that investors selling their variable life policies may be charged excessively high commissions or fees. Under NASD Rule 2440 and IM-2440-1 (collectively, the "commission rules"), a firm is prohibited from charging a customer more than a fair and reasonable commission in any securities transaction, which include variable life settlements and transactions in related products.8 In addition, under FINRA Rule 2010, a firm that charges an unfair commission violates the firm's obligation to observe just and equitable principles of trade in the conduct of the firm's business.9 Similarly, any fees a firm charges a customer must be reasonable. Under NASD Rule 2430, firms are prohibited from charging unreasonable fees or fees that unfairly discriminate among the firm's customers for miscellaneous services.10 In 2006, FINRA discussed variable life settlements and reminded firms and associated persons of their obligations under various FINRA rules, including those related to compensation.11 At that time, FINRA noted its concern that the lure of very high commissions might lead firms and their associated persons to aggressively market such transactions and engage in other inappropriate sales practices.

      FINRA continues to receive questions about the application of the commission rules with regard to variable life settlements. Often these inquiries reflect, in membership applications or other sources, a firm's intention to charge commissions that exceed, by 100 percent or more, any commission that FINRA historically has considered fair and reasonable. Firms are reminded that although the commission rules do not state specific commission amounts for a variable life settlement or any other security, most securities products are sold for commissions of considerably less than five percent and those in excess of five percent are subject to heightened scrutiny.

      Under NASD Rule 2440, the fairness of a commission is determined by the factors set out in the rule. A firm is required to take into consideration all relevant facts and circumstances regarding the transaction, including market conditions with respect to the security, the expense of executing the transaction and the value of the services the firm renders in setting the firm's commission. A firm should be prepared to justify that its commission is fair as to each customer and transaction.12

      Additional guidance is provided in NASD IM-2440-1, which applies to commission charges. Some factors that may be relevant are set forth in NASD IM-2440-1(b)(1) through (7) and include:

      •   the type of security;
      •   any unusual circumstances connected with the acquisition or sale of a security, including availability of the security in the market;
      •   the price of a security;
      •   transactions involving small amounts of money;
      •   disclosure of the firm's commission to the customer;
      •   the firm's pattern of mark-ups; and
      •   the nature of the firm's business.

      Depending on the particular transaction, additional factors may be part of the facts and circumstances to be considered when determining if a commission is fair.

      According to some firms, the completion of variable life settlement transactions may take much longer than other securities transactions and include unique costs. Nevertheless, such summary conclusions supporting increased commission costs are not sufficient as a basis; a firm should be prepared to justify and evidence that its commission is fair and reasonable as to each customer and variable life settlement and apply the factors in the commission rules, including those in NASD IM-2440-1(b). Additionally, disclosures of commissions (if made) on a variable life settlement transaction, should be based on the gross offer (the readily available market value of the policy) made to the seller, not the face value of the policy or the net offer.

      Firms should understand that:

      •   the length of time that a transaction takes to complete does not by itself translate into the effort or cost in completing that transaction on the part of the firm;
      •   the paperwork that a selling investor may need to provide is not necessarily indicative of the firm's effort in completing the transaction;
      •   the general level of liquidity in the market does not necessarily mean that any particular transaction was difficult or required enhanced efforts to complete;
      •   the use of interpositioned parties may not necessarily form a basis for higher commission rates, as some firms are able to complete these transactions without such parties; and
      •   the general level of compensation for such similar transactions outside of the securities industry is not relevant because of the lack of applicability to non-regulated parties of FINRA's fair and reasonable commission rules.

      Firms Currently Engaged in Life Settlement or Related Products Activity

      Firms that currently engage in variable life settlement or related products business activities must be aware of their obligations under all applicable FINRA rules. As discussed in this Notice and NTM 06-38, variable life settlements and transactions in related products raise a number of unique regulatory and compliance issues. Among other things, firms must carefully and thoroughly address these issues and other relevant compliance matters in their policies and procedures, and supervision of such transactions and associated persons engaged in such transactions.13


      1 For the purpose of this Notice, "related products" are defined as a security that is an interest in a single life policy, or a group or a pool of such policies, whether variable or not, such as an asset-backed security backed by life insurance policies, or a security where the obligation to pay interest or principal to the holder is contingent or partially contingent upon the death of one or more insured persons under life insurance policies, or a bonded or a guaranteed life settlement security based on one or more policies.

      A bonded or guaranteed life settlement security may include the following elements:

      •   the maturity of the bond is set at approximately the same time or occurs shortly after the death benefit(s) is expected to be paid under the life insurance policy(ies) that is the reference policy(ies) for the security;
      •   the security includes a call, which the issuer may exercise if the issuer receives the death benefit(s) earlier than projected; and
      •   if, at maturity, the issuer has not received the death benefit(s), the bondholder(s) will be paid the accrued interest and principal by the issuer, who may look to a bonding entity or a guarantor.

      2 For purposes of this Notice, "commission charges" refers to commissions, commission-equivalents, fees and any other compensation, however named, that a firm charges a customer in a life settlement.

      3 See endnote 1.

      4 Generally, the returns or yields to investors on life settlements, including variable life settlements and related products, do not correlate to other investments. During periods when many assets decline in value, there may be more demand for non-correlated investments.

      5 See NTM 06-38 (August 2006) (Life Settlements: Member Obligations with Respect to the Sale of Existing Variable Life Insurance Policies to Third Parties).

      6 See NTM 05-26 (April 2005) (New Products: NASD Recommends Best Practices for Reviewing New Products); NTM 03-71 (November 2003) (Non-Conventional Investments); and Regulatory Notice 07-43 (September 2007) (Senior Investors: FINRA Reminds Firms of Their Obligations Relating to Senior Investors and Highlights Industry Practices to Serve these Customers). In Regulatory Notice 07-43, FINRA discusses specific issues (e.g., exhibiting diminished capacity and suspected financial abuse) that firms sometime encounter when dealing with senior investors, including providing guidance about steps that some firms have taken as a matter of sound business practice and as a way of serving their senior customers.

      7 See NASD Rule 2310 and NASD IM-2310-2; NASD Rule 2120; and Securities Exchange Act Rule 10b-5. Professionals must discuss clearly all issues because some statements, although literally accurate, can become, through their context and manner of presentation, misleading.

      8 Under NASD Rule 2440, if a firm charges a customer a commission, the firm

      shall not charge his customer more than a fair commission or service charge, taking into consideration all relevant circumstances, including market conditions with respect to such security at the time of the transaction, the expense of executing the order and the value of any service he may have rendered by reason of his experience in and knowledge of such security and the markets therefore.

      NASD IM-2440-1 provides additional guidance regarding fair and reasonable commissions. A second interpretation to NASD Rule 2440, IM-2440-2, primarily deals with mark-ups and is not included in this discussion.

      9 FINRA Rule 2010 (formerly NASD Rule 2110) requires a firm to observe high standards of commercial honor and just and equitable principles of trade. NASD Rule 2110 was transferred without change to the new consolidated FINRA rulebook (Consolidated FINRA Rulebook) as FINRA Rule 2010 and became effective on December 15, 2008. See Regulatory Notice 08-57 (October 2008) (FINRA Announces SEC Approval and Effective Date for New Consolidated FINRA Rules).

      10 NASD Rule 2430 provides that charges, if any, for services performed, including miscellaneous services such as collection of moneys due for principal, dividends or interest; exchange or transfer of securities; appraisals, safe-keeping or custody of securities, and other services, shall be reasonable and not unfairly discriminatory among customers.

      11 See NTM 06-38.

      12 See NTM 75-65 (October 1975).

      13 See NTM 06-38.

    • 09-41 SEC Approves Rule Change Creating New Limited Representative – Investment Banker Registration Category and Series 79 Investment Banking Exam; Effective Date: November 2, 2009

      View PDF

      Investment Banking Representative

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      NASD Rule 1022
      NASD Rule 1032
      Suggested Routing

      Compliance
      Continuing Education
      Investment Banking
      Legal
      Operations
      Registration
      Sales
      Senior Management
      Key Topics

      Continuing Education
      Investment Banking
      Qualification Examinations
      Registration
      Supervision

      Executive Summary

      Effective November 2, 2009, amendments to NASD Rules 1022 and 1032 require individuals whose activities are limited to investment banking and principals who supervise such activities to pass the new Limited Representative—Investment Banking Qualification Examination (Series 79 Exam). Individuals who are registered as a General Securities Representative (Series 7) and engage in the member firm's investment banking business as described in NASD Rule 1032(i) may "opt in" to the new registration category by May 3, 2010 (within six months of the effective date).

      Frequently asked questions about registration as an investment banking representative are listed in Attachment A. The text of the rule change is set forth in Attachment B.

      Questions concerning this Notice should be directed to:

      •   Philip Shaikun, Associate Vice President and Associate General Counsel, at (202) 728-8451;
      •   Joe McDonald, Director, Qualifications and Examinations, at (240) 386-5065; or
      •   Tina Freilicher, Director, Psychometrics and Qualifications, at (646) 315-8752.

      Background and Discussion

      NASD Rule 1032(i) requires an associated person to register with FINRA as a Limited Representative—Investment Banking (Investment Banking Representative) and pass a corresponding qualification examination if such person's activities involve:

      (1) advising on or facilitating debt or equity securities offerings through a private placement or a public offering, including but not limited to origination, underwriting, marketing, structuring, syndication, and pricing of such securities and managing the allocation and stabilization activities of such offerings, or
      (2) advising on or facilitating mergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions, including but not limited to rendering a fairness, solvency or similar opinion.

      The registration category does not cover individuals whose investment banking work is limited to public (municipal) finance or direct participation programs as defined in NASD Rule 1022(e)(2). Moreover, individuals whose investment banking work is limited to effecting private securities offerings as defined in NASD Rule 1032(h)(1)(A) may continue to function in such capacity by registering as a Limited Representative—Private Securities Offerings and passing the corresponding Series 82 exam.

      Individuals whose activities require registration as an Investment Banking Representative will be required to pass the Investment Banking Representative Qualification Examination (Series 79) or obtain a waiver. FINRA has developed this exam to provide a more targeted assessment of the job functions performed by the individuals that fall within the registration category. The exam will be required in lieu of the current General Securities Representative (Series 7) exam or equivalent exams1 by the individuals who perform the job functions described in the new registration category. Any person whose activities go beyond those of the Investment Banking Representative registration category must separately qualify and register in the appropriate category or categories of registration attendant to such activities.

      Transition "Opt-In" Period

      Beginning on the effective date of NASD Rule 1032(i) and ending May 3, 2010, six months following implementation of these requirements, registered individuals as well as new applicants whose job functions are described in Rule 1032(i) will be able to register as an Investment Banking Representative as follows:

      •   Currently registered representatives who have passed the Series 7 or a Series 7-equivalent exam.

      Investment bankers who hold the Series 7 registration, as well as those who have passed and are registered with a "Series 7-equivalent exam" may opt in to the Investment Banking Representative registration,2 provided that, as of the date they opt in, such individuals are engaged in investment banking activities covered by Rule 1032(i).3 Those individuals who choose to opt in will retain their Series 7 or Series 7-equivalent registered representative registration in addition to the investment banking registration. After May 3, 2010, any person who wishes to engage in the specified investment banking activities will be required to pass the Series 79 Exam or obtain a waiver.
      •   New Investment Banking Representative Candidates

      During the six-month transition period, FINRA will permit new Limited Representative—Investment Banking candidates to take either the Series 7 Exam, Series 7-equivalent exam (if eligible) or Series 79 Exam. Those who choose to take and pass the Series 7 Exam or Series 7-equivalent exam may then opt in to the Investment Banking Representative registration.

      Training Program Exception

      Rule 1032 provides an exception for member firms that operate training programs in which certain new employees are exposed to the firm's various business lines by rotating among departments, including investment banking. Specifically, Rule 1032(i) does not require an employee placed in such program to register as an Investment Banking Representative for a period of up to six months from the time the employee first engages in activities that otherwise would trigger the requirement to register as an Investment Banking Representative. This exception is available for up to two years after the employee commences the training program. Firms that wish to avail themselves of this exception are required to maintain documents evidencing the details of the training program and identifying the program participants who engage in activities that otherwise would require registration as an Investment Banking Representative and the date on which such participants commenced such activities.

      Principals

      The Series 79 Exam will be added to the list of representative exams that satisfy the prerequisite requirement for the General Securities Principal exam (Series 24). Note that the scope of the general securities principal's supervisory responsibility will be determined by the representative-level exam passed. Individuals who wish to act as a general securities principal for activities requiring registration under Rule 1032(i) must obtain the Investment Banking Representative registration—either by opting in or passing the Series 79 Exam—and also pass the General Securities Principal exam. Such individuals will be limited to acting as a general securities principal for the investment banking activities covered by Rule 1032(i). Individuals who wish to function in the capacity of general principal for broader securities-related activities must take another appropriate qualification examination, such as the Series 7 or Series 7-equivalent exam, in addition to the General Securities Principal exam.

      Individuals currently functioning as a general securities principal supervising investment banking activities as described in Rule 1032(i) have the same six-month period during which they may opt in to the Investment Banking Representative registration. Those individuals who choose to opt in will retain their Series 7 or Series 7-equivalent registered representative registration in addition to the Investment Banking Representative registration. After the end of the opt-in period, individuals who wish function as a general securities principal overseeing investment banking activities covered by the rule change will be required to pass the Series 79 Exam to function as a general securities principal supervising investment banking activities pursuant to Rules 1022 and 1032(i).

      Exam Content

      The qualification exam consists of 175 multiple-choice questions. Candidates are allowed 300 minutes (five hours) to take the exam. Candidates will receive an informational breakdown of their performance on each section of the exam, along with their overall score and pass/fail status at the completion of the exam session.

      A content outline that provides a comprehensive guide to the topics covered on the examination and is intended to familiarize candidates with the range of subjects covered by the examination is available at www.finra.org/brokerqualifications/series79. Firms may wish to use the content outline to structure or prepare training material, develop lecture notes and seminar programs, and as a training aide for the candidates. The examination questions are distributed among four major functions reflecting the overall knowledge, skills and abilities required of an investment banker. Detail on the content of each of these four major job functions, the tasks associated with the job functions and the knowledge necessary to perform the tasks is included in the text of the content outline. The allocation of test questions among the four major functions is described below:

      Section Description Number of Questions
      1 Collection, Analysis and Evaluation of Data 75
      2 Underwriting/New Financing Transactions, Types of Offerings and Registration Of Securities 43
      3 Mergers and Acquisitions, Tender Offers and Financial Restructuring Transactions 34
      4 General Securities Industry Regulations 23
        Total 175

      The questions used in the examination will be updated to reflect the most current interpretations of the rules and regulations on which they are based. Questions on new rules will be added to the pool of questions for this examination within a reasonable time period of the effective dates of those rules. Questions on rescinded rules will be deleted promptly from the pool of questions. Candidates will be asked questions only pertaining to rules that are effective at the time they take the exam.

      The test is administered as a closed-book exam. Severe penalties are imposed on candidates who cheat on FINRA-administered examinations. The proctor will provide scratch paper, an exhibits book and a basic electronic calculator to candidates. These items must be returned to the proctor at the end of the session.

      The Investment Banking Representative Qualification Examination will be administered at test centers operated by Pearson VUE and Prometric professional testing center networks. Appointments to take the examinations can be scheduled through either network:

      •   Pearson Professional Centers: contact Pearson VUE Registration Center at (866) 396-6273 (toll free), or (952) 681-3873 (toll number).
      •   Prometric Testing Centers: contact Prometric's National Call Center at (800) 578-6273 (toll free) or go to www.2test.com for Web-based scheduling.

      Registration Procedures

      A Uniform Application for Securities Industry Registration or Transfer Form (Form U4) must be submitted to FINRA via Web CRD in order to register an individual as an Investment Banking Representative. For persons already registered with a firm who currently hold the Series 7 or Series 7-equivalent registration and who are opting in to the Investment Banking Representative registration category, the firm need only submit an amended Form U4 to request the Limited Representative—Investment Banking registration.

      For new employees, a firm must submit a full Form U4 application to request the registration and any other documents required for registration. The exam fee is $265; the registration fee for new applicants is $85.

      For new Investment Banking Representative candidates who choose to first take the Series 7 Exam or Series 7-equivalent exam during the opt-in period and then opt in to the Investment Banking Representative registration, the firm must first submit a Form U4 to request the General Securities Representative or Series 7-equivalent registration. Once the candidate has passed the Series 7 Exam or Series 7-equivalent exam, the firm may then submit an amended Form U4 to request the Limited Representative—Investment Banking Representative registration.

      Effective Date

      The registration and qualification requirements for Investment Banking Representatives will become effective November 2, 2009. The six-month opt-in period will begin November 2, 2009, and end May 3, 2010.


      1. The "Series 7 equivalent exams" and registrations are the Limited Representative—Corporate Securities (Series 62), the United Kingdom (Series 17) or Canada (Series 37/38) Modules of the Series 7.

      2 The Web CRD registration position code for individuals who pass the Investment Banking Representative Series 79 Exam is "IB." The registration position codes for individuals who pass the Limited Representative—Corporate Securities Series 62 exam, Limited Registered Representative Series 17 exam and Canada Modules of the Series 7 exam Series 37/38 exams are "CS," "IE" and "CD/CN," respectively.

      3 No associated persons of a firm will be eligible to opt in unless the firm's current Form BD indicates that the firm engages in investment banking activities.


      Attachment A

      FAQ About Registration as an Investment Banking Representative

      General

      Q 1: If I currently hold a Series 7 registration and am engaged in investment banking activities, must I take the Series 79 Exam to engage in a member firm's investment banking business?
      A 1: No, provided you opt in by May 3, 2010. Current Series 7 or Series 7-equivalent registered representatives who function in the firm's investment banking business as described in NASD Rule 1032(i) may opt in to the Investment Banking Representative position without having to take the Series 79 Exam for a period of six months after implementation of the registration category. Such persons also will be able to retain their Series 7 or Series 7 equivalent registration.
      Q 2: How do I opt in to the new investment banker registration category?
      A 2: For persons registered with a firm who currently hold the Series 7 or Series 7-equivalent registration and who function in the firm's investment banking business as described in NASD Rule 1032(i), the person's firm need only submit an amended Form U4 to request the Limited Representative—Investment Banking registration. The submission must be made during the six-month opt-in period (November 2, 2009–May 3, 2010). The Form U4 will not reflect the new registration category until the start of the opt-in period.
      Q 3: My firm has not yet developed a training program for the Series 79 Exam. Will I have to take the Series 79 Exam once it is implemented in order to get the Investment Banking Representative registration?
      A 3: No, during the six-month transition period (November 2, 2009–May 3, 2010), new Investment Banking Representative candidates who are in the process of qualifying for the new Investment Banking Representative registration category can take either the Series 79, the Series 7 or a Series 7-equivalent exam. A candidate who takes and passes the Series 7 Exam or Series 7-equivalent exam could then opt in to the Investment Banking Representative registration.
      Q 4: I plan on taking the Series 79 Exam to qualify for the Investment Banking Representative registration. If in the future I move into a different position within my firm, such as retail sales, will I need to take the Series 7 Exam?
      A 4: Yes. The Series 79 Exam will qualify an Investment Banking Representative for only those activities covered under Rule 1032(i). If the representative engages in activities not covered by the Investment Banking Representative registration, such as retail or institutional sales, the representative will need to take the appropriate qualification exam, such as the Series 7 or Series 7-equivalent exam.
      Q 5: I currently have a Series 7 registration. If I do not opt in to the Investment Banking Representative registration during the opt-in period, but subsequently decide to become an investment banker, must I take the Series 79 Exam to get the Investment Banking Representative registration?
      A 5: Yes. FINRA is providing a grace period of six months for Series 7 or Series 7-equivalent representatives who function in the member firm's investment banking business as described in NASD Rule 1032(i) to opt in to the Investment Banking Representative registration position. After May 3, 2010, persons who seek Investment Banking Representative registration will need to take and pass the Series 79 Exam, regardless of whether or not they have a Series 7 or Series 7-equivalent registration.
      Q 6: I work at a small investment banking firm and engage in activities ranging from investment banking to institutional and retail sales. I have a Series 7 registration. How will this new exam and registration category affect me?
      A 6: If you opt-in to the Investment Banking Representative registration position within the designated time period, you will have both the General Securities Representative and Investment Banking Representative registrations. Therefore, you would be able to engage in activities covered in both registration categories.
      Q 7: I own a small investment banking firm and have employees that engage in activities ranging from investment banking to institutional and retail sales. These employees have a Series 7 registration. If I hire a new employee after the end of the opt-in period, how will this new exam and registration category affect this employee?
      A 7: If the new employee engages in activities that fall into both the General Securities Representative and Investment Banking Representative registration categories, then he or she will need to take and pass both the Series 7 and Series 79 Exams.
      Q 8: Will I be able to register as agent with a state after passing the Series 63 Exam if I have the Investment Banking Representative registration?
      A 8: Yes (provided all of the other state requirements are met).
      Q 9: Currently, for a candidate to qualify to register as agent and investment adviser with a state with the Series 66 Exam in lieu of the Series 63 and 65 Exams, the Series 7 Exam is required. Will the Series 79 Exam also allow me to qualify in those capacities with the Series 66 Exam?
      A 9: No. States will continue to require the Series 7 Exam for use with the Series 66 Exam.

      Test Administration

      Q 10: Since the Series 79 Exam is a five-hour test, will I be allowed to take a break during the session?
      A 10: The Series 79 Exam must be taken in one continuous, five-hour session. Candidates are permitted to take an unscheduled break during the exam session. However, the test clock will not stop while the candidate takes a break.
      Q 11: Will I be allowed to use my own calculator during the exam session?
      A 11: No. Series 79 Exam candidates are only allowed to use a basic electronic calculator provided by the testing center.

      Principals

      Q 12: I am currently a General Securities Principal supervising investment bankers. Do I need to opt in to the Investment Banking Representative position?
      A 12: Yes. However, if you do not opt in prior to the end of the opt-in period, you will need to take and pass the Series 79 Exam in order to continue supervising Investment Banking Representatives.
      Q 13: I plan on taking the Series 79 Exam. In the future, will I be able to qualify for the General Securities Principal registration category by taking and passing the Series 24 exam?
      A 13: Yes, the Series 79 Exam will meet the prerequisite for taking the Series 24 Exam. However, such persons will be limited to acting as a general principal for investment banking-related activities and will need to take and pass another qualification examination, such as the Series 7 or Series 7 equivalent exam, to act as a general securities principal for broader securities-related activities.
      Q 14: I am currently a General Securities Principal in a non-investment banking firm. If I do not opt in now and then move in five years to an investment banking firm in which I will supervise investment bankers, will I need to take the Series 79 Exam?
      A 14: Yes. The opt-in accommodation is available only to individuals who are currently functioning in a firm's investment banking business. A General Securities Principal who qualifies via the Series 7 or Series 7 equivalent exam cannot act as a general principal for investment banking activities. Such person would need to take and pass the Series 79 Exam to do so.
      Q 15: I currently hold a Series 7 registration and plan to opt in to the Investment Banking Representative position. If in the future I become a General Securities Principal by passing the Series 24 Exam, will I be able to supervise other securities-related activities including investment banking activities?
      A 15: Yes. If you are eligible to opt in and do so, you will be able to supervise the firm's investment banking activities upon passing the Series 24 Exam. In addition, because you also held the Series 7 position, you will be able to act as a general securities principal for broader securities-related activities.

      Public Financing

      Q 16: Are public finance offerings (municipals) covered on the Series 79 Exam?
      A 16: No. Individuals who work on public finance offerings will continue to take the Series 7 or Series 52 Exams.
      Q 17: I work on both corporate and public finance offerings. I have a Series 7 registration. How will this new exam and registration category affect me?
      A 17: If you opt in to the Investment Banking Representative position by May 3, 2010, you can continue to engage in all activities without taking the Series 79 Exam.
      Q 18: I plan on taking the Series 79 Exam to qualify for the Investment Banking Representative position. If in the future I want to work on public finance offerings, will I need to take the Series 7 or Series 52 Exams?
      A 18: Yes. The Series 79 Exam will qualify you for only the Investment Banking Representative position and activities covered under that registration position. If you begin to work on public finance offerings, you will need to take the Series 7 or Series 52 Exam.

      Prerequisites

      Q 19: Aside from satisfying the prerequisite for taking the Series 24 Exam, will the Series 79 Exam meet the prerequisite for any other exams that currently require either a Series 7 or Series 7 equivalent exam?
      A 19: No. The Series 79 Exam will not fulfill the prerequisite requirement for the following exams:

      Series 4—Registered Options Principal

      Series 9/10—General Securities Sales Supervisor

      Series 23—General Securities Principal Sales Supervisor Module

      Series 26—Investment Company Products/Variable Contracts Principal

      Series 39—Direct Participation Program Principal

      Series 42—Registered Options Representative

      Series 52—Municipal Securities Principal

      Series 55—Equity Trader Limited Representative

      Series 86/87—Research Analyst/Research Principal

      Continuing Education

      Q 20: If I pass the Series 79 Exam and hold an Investment Banking Representative registration, will I still take the Regulatory Element S101 continuing education session?
      A 20: Yes. A person holding an Investment Banking Representative registration will continue to take the Regulatory Element S101. However, in the future, FINRA is planning to modify the Regulatory Element to tailor it to certain types of job functions, such as investment banking.

      Attachment B

      Text of Amended Rule

      New language is underlined; deletions are in brackets.

      * * * * *

      1022. Categories of Principal Registration

      (a) General Securities Principal
      (1) Each person associated with a member who is included within the definition of principal in Rule 1021, and each person designated as a Chief Compliance Officer on Schedule A of Form BD, shall be required to register with the Association as a General Securities Principal and shall pass an appropriate Qualification Examination before such registration may become effective unless such person's activities are so limited as to qualify such person for one or more of the limited categories of principal registration specified hereafter. A person whose activities in the investment banking or securities business are so limited is not, however, precluded from attempting to become qualified for registration as a General Securities Principal, and if qualified, may become so registered.
      (A) Subject to paragraphs (a)(1)(B), (a)(2) and (a)(5), [E]each person seeking to register and qualify as a General Securities Principal must, prior to or concurrent with such registration, become registered, pursuant to the Rule 1030 Series, either as a General Securities Representative or [as] a Limited Representative-Corporate Securities.
      (B) A person seeking to register and qualify as a General Securities Principal who will have supervisory responsibility over investment banking activities described in NASD Rule 1032(i)(1) must, prior to or concurrent with such registration, become registered as a Limited Representative—Investment Banking.
      (C) A person who has been designated as a Chief Compliance Officer on Schedule A of Form BD for at least two years immediately prior to January 1, 2002, and who has not been subject within the last ten years to any statutory disqualification as defined in Section 3(a)(39) of the Act; a suspension; or the imposition of a fine of $5,000 or more for violation of any provision of any securities law or regulation, or any agreement with or rule or standard of conduct of any securities governmental agency, securities self-regulatory organization, or as imposed by any such regulatory or self-regulatory organization in connection with a disciplinary proceeding shall be required to register as a General Securities Principal, but shall be exempt from the requirement to pass the appropriate Qualification Examination. If such person has acted as a Chief Compliance Officer for a member whose business is limited to the solicitation, purchase and/or sale of "government securities," as that term is defined in Section 3(a)(42)(A) of the Act, or the activities described in Rule 1022(d)(1)(A) or Rule 1022(e)(2), he or she shall be exempt from the requirement to pass the appropriate Qualification Examination only if he or she registers as a Government Securities Principal, or a Limited Principal pursuant to Rules 1022(d) or Rule 1022(e), as the case may be, and restricts his or her activities as required by such registration category. A Chief Compliance Officer who is subject to the Qualification Examination requirement shall be allowed a period of 90 calendar days following January 1, 2002, within which to pass the appropriate Qualification Examination for Principals.
      (2) through (5) No change.
      (b) through (h) No change.

      * * * * *

      1032. Categories of Representative Registration

      (a) through (h) No change.
      (i) Limited Representative-Investment Banking
      (1) Each person associated with a member who is included within the definition of a representative as defined in NASD Rule 1031 shall be required to register with FINRA as a Limited Representative-Investment Banking and pass a qualification examination as specified by the Board of Governors if such person's activities involve:
      (A) advising on or facilitating debt or equity securities offerings through a private placement or a public offering, including but not limited to origination, underwriting, marketing, structuring, syndication, and pricing of such securities and managing the allocation and stabilization activities of such offerings, or
      (B) advising on or facilitating mergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions, including but not limited to rendering a fairness, solvency or similar opinion.
      (2) Notwithstanding the foregoing, an associated person shall not be required to register as a Limited Representative-Investment Banking if such person's activities described in paragraph (i)(1) are limited to:
      (A) advising on or facilitating the placement of direct participation program securities as defined in NASD Rule 1022(e)(2);
      (B) effecting private securities offerings as defined in paragraph (h)(1)(A);
      or
      (C) retail or institutional sales and trading activities.
      (3) An associated person who participates in a new employee training program conducted by a member shall not be required to register as a Limited Representative-Investment Banking for a period of up to six months from the time the associated person first engages within the program in activities described in paragraphs (i)(1)(A) or (B), but in no event more than two years after commencing participation in the training program. This exception is conditioned upon the member maintaining records that:
      (A) evidence the existence and details of the training program, including but not limited to its scope, length, eligible participants and administrator; and
      (B) identify those participants whose activities otherwise would require registration as a Limited Representative-Investment Banking and the date on which each participant commenced such activities.
      (4) Any person qualified solely as a Limited Representative-Investment Banking shall not be qualified to function in any area not described in paragraph (i)(1) hereof, unless such person is separately qualified and registered in the appropriate category or categories of registration.
      (5) Any person who was registered with FINRA as a Limited Representative-Corporate Securities or General Securities Representative (including persons who passed the UK (Series 17) or Canada (Series 37/38) Modules of the Series 7) prior to [effective date of the proposed rule change], shall be qualified to be registered as a Limited Representative-Investment Banking without first passing the qualification examination set forth in paragraph (i)(1), provided that such person requests registration as a Limited Representative-Investment Banking within the time period prescribed by FINRA.

      * * * * *

    • 09-40 SEC Approval and Effective Dates for New Consolidated FINRA Rules on Electronic Filing Requirements for Uniform Forms and Arbitration Disclosures; Effective Date (FINRA Rule 1010): July 27, 2009; Effective Date (FINRA Rule 2263): September 25, 2009

      View PDF

      SEC Approves New Consolidated FINRA Rules

      Regulatory Notice
      Notice Type

      Rule Approvals
      Consolidated FINRA Rulebook
      Referenced Rules & Notices

      FINRA Rule 1010
      FINRA Rule 2263
      NASD Rule 1140
      NASD Rule 3080
      NTM 99-63
      Regulatory Notice 09-16
      Regulatory Notice 09-23
      SEA Rule 17a-4
      Suggested Routing

      Compliance
      Legal
      Operations
      Registered Representatives
      Senior Management
      Training
      Key Topics

      Arbitration Disclosures
      Central Registration Depository (CRD®)
      Electronic Filing Requirements
      Form U4
      Form U5
      Regulatory Disclosure Questions


      Executive Summary

      The SEC recently approved the adoption of NASD Rule 1140, subject to certain amendments, as new FINRA Rule 1010 (Electronic Filing Requirements for Uniform Forms). FINRA Rule 1010 supports the information reported by firms to Web CRD and, among other things, permits a firm to file amendments to Form U4 disclosure information without obtaining the associated person's manual signature, subject to specified conditions (the mandatory signature exception).1 The effective date of FINRA Rule 1010 is July 27, 2009.2

      The SEC also approved the adoption of NASD Rule 3080, subject to minor amendments, as new FINRA Rule 2263 (Arbitration Disclosure to Associated Persons Signing or Acknowledging Form U4). FINRA Rule 2263 requires firms to provide each associated person with arbitration disclosures whenever the firm asks an associated person, pursuant to FINRA Rule 1010, to manually sign a new or amended Form U4, or to otherwise provide written acknowledgment of an amendment to the Form U4. The effective date of FINRA Rule 2263 is September 25, 2009, to provide firms with additional time to make the necessary changes to forms and any related systems to reflect the slightly revised disclosure language.

      The text of the rule amendments are set forth in Attachment A.

      Questions concerning this Notice should be directed to:

      •   Richard E. Pullano, Associate Vice President and Chief Counsel, Registration and Disclosure, at (240) 386-4821; or
      •   Patricia Albrecht, Assistant General Counsel, Office of General Counsel, at (202) 728-8026.

      Background

      Web CRD is an interactive, Web-based registration system that maintains the qualification, employment and disclosure information of more than half a million registered persons, and it facilitates the processing of fingerprint submissions, registration fees and renewal fees.3 The SEC recently approved the adoption of NASD Rule 1140, subject to certain amendments, as new FINRA Rule 1010 (Electronic Filing Requirements for Uniform Forms). FINRA Rule 1010 supports the information reported by firms to Web CRD.

      The SEC also approved the adoption of NASD Rule 3080, subject to minor amendments, as new FINRA Rule 2263 (Arbitration Disclosure to Associated Persons Signing or Acknowledging Form U4). FINRA Rule 2263 requires firms to provide each associated person with arbitration disclosures whenever the firm asks an associated person, pursuant to FINRA Rule 1010, to manually sign a new or amended Form U4, or to otherwise provide written acknowledgment of an amendment to the Form U4.

      Discussion

      FINRA Rule 1010

      Uniform Form Filing and Signature Requirements

      FINRA Rule 1010(a) retains, without substantive changes, the requirement in NASD Rule 1140 that each firm file Forms U4, U5, BR, BDW and BD amendments (collectively, the Uniform Forms) electronically (or via another process that FINRA may prescribe) to Web CRD. In addition, FINRA Rule 1010(c) retains the requirement in NASD Rule 1140 that an initial and transfer electronic Form U4 be based on a signed Form U4,4 and codifies FINRA's position that such electronic documents be based on an original, manually signed Form U4 provided to the firm by the person on whose behalf the Form U4 is being filed.5 FINRA believes it is important to have clear evidence of the associated person's execution of the initial and transfer Forms U4, including his or her agreement to the attestations set forth in the form.

      FINRA Rule 1010(c), however, modifies the signature requirement with respect to amendments to disclosure information in the Form U4.6 Previously, Form U4 disclosure information amendments had to be manually signed by the associated person on whose behalf the filing was being made. FINRA Rule 1010 permits a firm to file amendments to the Form U4 disclosure information without obtaining the registered person's manual signature if the firm uses reasonable efforts to:

      •   provide the registered person with a copy of the amended disclosure information prior to filing; and
      •   obtain the registered person's written acknowledgment (which may be electronic) prior to filing that the information has been received and reviewed.7

      FINRA Rule 1010(c) also requires a firm, as part of its recordkeeping requirements, to retain the written acknowledgment in accordance with SEA Rule 17a-4(e)(1) and make it available promptly upon regulatory request.8

      FINRA Rule 1010(c) also clarifies a firm's responsibility to submit disclosure information of which it has knowledge in those cases where the firm is not able to obtain an associated person's manual signature or written acknowledgement of the amendment.9 This provision codifies the firm's obligation to submit such disclosure information, consistent with the obligation under the FINRA By-Laws that every Form U4 be kept current.10 Supplementary Material .03 (Filing of Amendments Involving Disclosure Information) sets forth examples of reasons why a firm may not be able to obtain the associated person's manual signature or written acknowledgement. They include, but are not limited to, the associated person:

      •   refusing to acknowledge the information in writing;
      •   being on active military duty; or
      •   otherwise being unavailable during the period provided for filing the amendment.

      In such instances, a firm should enter "Representative Refused to Sign/Acknowledge," "Representative Not Available" or a substantially similar entry in the signature box of the electronic form. This instruction is generally consistent with current practice in instances where an associated person is unable or unavailable to sign a disclosure information amendment.11

      In addition, FINRA Rule 1010(c) incorporates Web CRD's current practice of permitting Form U4 administrative information to be amended without obtaining the associated person's signature (manual or otherwise).12 Supplementary Material .04 (Filing of Amendments Involving Disclosure Information) explains that administrative information includes such items as the addition of state or self-regulatory organization registrations, exam scheduling and updates to residential, business and personal history. Finally, FINRA Rule 1010 incorporates, without substantive change, NASD Rule 1140's provisions regarding the submission of fingerprint information and Form U5 filing requirements, and notes the applicable retention periods for Form U5 under SEA Rule 17a-4.13

      Supervisory Requirements

      FINRA Rule 1010(b) retains NASD Rule 1140's requirement that each firm identify a registered principal(s) or corporate officer(s) who has a position of authority over registration functions to be responsible for supervising the firm's electronic filings pursuant to the rule. Supplementary Material .01 (Delegation of Electronic Filing Functions) permits the registered principal(s) or corporate officer(s) who is responsible for supervising a firm's electronic filings to delegate to another associated person (who need not be registered) the electronic filing of the firm's forms via Web CRD. The Supplementary Material, however, makes clear that the principal(s) or corporate officer(s) may not delegate any of the supervision, review and approval responsibilities and must take reasonable and appropriate action to ensure that all delegated electronic filing functions are properly executed and supervised.

      FINRA Rule 1010 also retains as Supplementary Material .02 (Third-Party Agreements), NASD Rule 1140's provision that a firm may use third parties to file forms electronically on behalf of the firm and its associated persons, but makes clear that, notwithstanding the existence of such an arrangement, the firm remains responsible for complying with FINRA Rule 1010.

      Effective Date

      FINRA Rule 1010 is effective July 27, 2009. Firms may choose to rely on FINRA Rule 1010's mandatory signature exception to comply with recent amendments to Form U4 that, among other things, added new regulatory disclosure information questions (relating to willful violations) to the Form that must be answered by November 14, 2009.14 These new disclosure questions will require firms to amend (or refile) the Forms U4 that they have submitted on behalf of their registered persons. Firms have represented that this requirement to amend the Forms U4 for their registered persons will place a significant additional administrative burden on firms in completing the amendments. FINRA believes that such burden may be alleviated in part by FINRA Rule 1010's mandatory signature exception.

      FINRA Rule 2263

      Nearly identical to NASD Rule 3080, FINRA Rule 2263 requires firms to provide each associated person with certain written disclosures regarding the nature and process of arbitration proceedings whenever the firm asks an associated person, pursuant to FINRA Rule 1010, to manually sign a new or amended Form U4, or to otherwise provide written acknowledgment of an amendment to the form. FINRA Rule 2263 makes no significant changes to the required disclosures other than updating the disclosure language to reflect recent amendments to FINRA's Code of Arbitration Procedure for Customer Disputes and Code of Arbitration Procedure for Industry Disputes requiring arbitrators to provide an explained decision to the parties in eligible cases if there is a joint request by all parties at least 20 days before the first scheduled hearing date.15 The effective date of FINRA Rule 2263 is September 25, 2009, to provide firms with additional time to make the necessary changes to forms and any related systems to reflect the modified disclosure language.


      1 See Exchange Act Release No. 60348 (July 20, 2009), 74 FR 37077 (July 27, 2009) (SEC Order Approving SR-FINRA-2009-019).

      2 FINRA notes that it is deviating from the protocol by which FINRA generally announces the effective dates of the new FINRA rules that are being adopted as part of the consolidated rulebook in establishing the effective dates of FINRA Rules 1010 and 2263. See Information Notice 10/06/08 (Rulebook Consolidation Process: Effective Dates of New Consolidated Rules; Introduction of Rule Conversion Chart). As further discussed in this Notice, FINRA is establishing a July 27, 2009 effective date for FINRA Rule 1010 to, among other things, allow firms to promptly avail themselves of the mandatory signature exception.

      3 The CRD system, which was developed jointly by FINRA and the North American Securities Administrators Association (NASAA), was first launched in 1981 to centralize the registration process for the securities industry. During the last two decades, FINRA has expanded and modified the system extensively to meet the evolving needs of its constituents. CRD became an interactive, Web-based registration system (Web CRD) on August 16, 1999. See NTM 99-63 (August 1999) (SEC Approves and Adopts Revised Forms and Electronic Filing Requirement; New Member Applicants Should Continue to File Paper Forms).

      4 Under the CRD system, the firm submits the electronic Form U4 on behalf of the associated person by typing the person's name into the signature box on the electronic form.

      5 FINRA Rule 1010(c)(1). In addition, FINRA Rule 1010(c) clarifies that initial and amendments to Forms U4 must be retained until at least three years after the registered person's employment and any other connection with the firm has terminated. See Rule 17a-4(e)(1) under the Securities Exchange Act of 1934 (SEA).

      6 FINRA Rule 1010(c)(2).

      7 FINRA Rule 1010(c)(2)(A) and (B).

      8 FINRA Rule 1010(c)(2)(B). In February 2008, at FINRA's request, the SEC staff issued a no-action letter regarding the ability of FINRA member firms to rely on Web CRD to satisfy their record retention requirements under SEA Rule 17a-4 with respect to certain Forms U4, U5 and BR filed in Web CRD. See Letter from Thomas K. McGowan, Assistant Director, Division of Trading and Markets, SEC, to Richard E. Pullano, Associate Vice President and Chief Counsel, Registration and Disclosure, FINRA, February 19, 2008 (www.sec.gov/divisions/marketreg/mr-noaction/2008/finra021908.pdf).

      In short, such relief extends to, among other things, Form U4 amendments that do not require the registered person's signature. Because FINRA's request for no-action relief excluded Form U4 amendments that provide or update disclosure information (on the basis that such amendments required the registered person's signature), FINRA sought clarification from SEC staff on the extent of the relief in light of the mandatory signature exception set forth in (then proposed) FINRA Rule 1010. SEC staff has affirmed in a conversation with FINRA staff that the no-action relief provided in the February 19, 2008, letter will extend to Form U4 amendments that provide or update disclosure information that is submitted pursuant to FINRA Rule 1010 without obtaining the registered person's manual signature. Telephone conversation between Thomas K. McGowan, Assistant Director, Division of Trading and Markets, SEC, and Patrice Gliniecki, Senior Vice President & Deputy General Counsel and Richard E. Pullano, Associate Vice President & Chief Counsel, Registration and Disclosure, FINRA, March 5, 2009.

      9 FINRA Rule 1010(c)(3).

      10 FINRA By-Laws Article V, Section 2.

      11 FINRA will consider future enhancements to the CRD system that may include incorporating a "drop down" menu, or some substantially similar method for recording the reason the registered person has not acknowledged the filing, to assist firms in completing the signature section in these circumstances.

      12 FINRA Rule 1010(c)(4); see also Exchange Act Release No. 41575 (June 29, 1999), 64 FR 36728, 36729 n.7 (July 7, 1999) (SEC Order Approving SR-NASD-99-28); Exchange Act Release No. 37439 (July 15, 1996), 61 FR 37950 (July 22, 1996) (SEC Order Approving SR-NASD-96-21).

      13 See FINRA Rule 1010(d) (Fingerprint Information) and (e) (Form U5 Filing Requirements).

      14 See Exchange Act Release No. 60086 (June 10, 2009); 74 FR 28743 (June 17, 2009) (SEC Order Approving SR-FINRA-2009-008); see also Regulatory Notice 09-23 (May 2009).

      15 See Exchange Act Release No. 59358 (Feb. 4, 2009), 74 FR 6928 (Feb. 11, 2009) (Order Approving File No. SR-FINRA-2008-051); see also Regulatory Notice 09-16 (March 2009).


      Attachment A

      Below is the text of new FINRA Rules 1010 and 2263. New rule language is underlined; deletions are in brackets.

      * * * * *

      1000. Member Application and Associated Person Registration

      [1140] 1010. Electronic Filing [Rules]Requirements for Uniform Forms

      (a) Filing Requirement

      Except as provided in NASD Rule 1013(a)(2), all forms required to be filed by Article IV, Sections 1, 7, and 8, and Article V, Sections 2 and 3, of the FINRA By-Laws shall be filed through an electronic process or such other process [the Association]FINRA may prescribe to the Central Registration Depository.
      (b) Supervisory Requirements
      (1) In order to comply with the supervisory procedures requirement in NASD Rule 3010, each member shall identify a [R]registered [P]principal(s) or corporate officer(s) who has a position of authority over registration functions, to be responsible for supervising the electronic filing of appropriate forms pursuant to this Rule.
      (2) The [R]registered [P]principal(s) or corporate officer(s) who has or have the responsibility to review and approve the forms filed pursuant to this Rule shall be required to acknowledge, electronically, that he is filing this information on behalf of the member and the member's associated persons.
      (c) Form U4 Filing Requirements
      (1) Except as provided in paragraphs (c)(2) and (c)(3) below, [E]every initial and transfer electronic Form U4 filing and any amendments to the disclosure information on Form U4 shall be based on a manually signed Form U4 provided to the member or applicant for membership by the person on whose behalf the Form U4 is being filed. As part of the member's recordkeeping requirements, it shall retain the person's manually signed Form U4 or amendments to the disclosure information on Form U4 in accordance with SEA Rule 17a-4(e)(1) and make [it] them available promptly upon regulatory request. An applicant for membership also [must] shall retain in accordance with SEA Rule 17a-4(e)(1) every manually signed Form U4 it receives during the application process and make them available promptly upon regulatory request.
      (2) A member may file electronically amendments to the disclosure information on Form U4 without obtaining the subject associated person's manual signature on the form, provided that the member shall use reasonable efforts to:
      (A) provide the associated person with a copy of the amended disclosure information prior to filing; and
      (B) obtain the associated person's written acknowledgment (which may be electronic) prior to filing that the information has been received and reviewed. As part of the member's recordkeeping requirements, the member shall retain this acknowledgment in accordance with SEA Rule 17a-4(e)(1) and make it available promptly upon regulatory request.
      (3) In the event a member is not able to obtain an associated person's manual signature or written acknowledgement of amended disclosure information on Form U4 prior to filing of such information pursuant to paragraph (c)(1) or (2), the member is obligated to file the disclosure information as to which it has knowledge in accordance with Article V, Section 2 of the FINRA By-Laws. The member shall use reasonable efforts to provide the associated person with a copy of the amended disclosure information that was filed.
      (4) A member may file electronically amendments to administrative data on Form U4 without obtaining the subject associated person's signature on the form. The member shall use reasonable efforts to provide the associated person with a copy of the amended administrative information that was filed.
      [(2]) (d) Fingerprint [Cards]Information

      Upon filing an electronic Form U4 on behalf of a person applying for registration, a member shall promptly submit [a] fingerprint [card]information for that person. [NASD]FINRA may make a registration effective pending receipt of the fingerprint [card]information. If a member fails to submit [a]the fingerprint [card]information within 30 days after [NASD]FINRA receives the electronic Form U4, the person's registration shall be deemed inactive. In such case, [NASD]FINRA shall notify the member that the person must immediately cease all activities requiring registration and is prohibited from performing any duties and functioning in any capacity requiring registration. [NASD]FINRA shall administratively terminate a registration that is inactive for a period of two years. A person whose registration is administratively terminated may reactivate the registration only by reapplying for registration and meeting the qualification requirements of the applicable provisions of the NASD Rule 1020 Series and the NASD Rule 1030 Series. Upon application and a showing of good cause, FINRA[NASD] may extend the 30-day period.
      [(d)] (e) Form U[-]5 Filing Requirements

      Initial filings and amendments of Form U[-]5 shall be submitted electronically. As part of the member's recordkeeping requirements, it shall retain such records for a period of not less than three years, the first two years in an easily accessible place, in accordance with SEA Rule 17a-4, and make such records available promptly upon regulatory request.
      [(e) Third Party Filing]

      [A member may employ a third party to file the required forms electronically on its behalf.]

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

      .01 Delegation of Electronic Filing Functions. The designated registered principal(s) or corporate officer(s) required by paragraph (b)(1) to supervise the member's electronic filings may delegate to an associated person (who need not be registered) the electronic filing of the member's appropriate forms via Web CRD. The registered principal(s) or corporate officer(s) responsible for supervising the member's electronic filings may also delegate to the associated person making the electronic filings the requirement in paragraph (b)(2) to acknowledge, electronically, that he is making the filing on behalf of the member and the member's associated persons. However, the registered principal(s) or corporate officer(s) may not delegate any of the supervision, review, and approval responsibilities mandated in paragraphs (b)(1) and (2) and shall take reasonable and appropriate action to ensure that all delegated electronic filing functions are properly executed and supervised.
      .02 Third-Party Agreements. A member may enter into an agreement with a third party pursuant to which the third party agrees to file the required forms electronically on behalf of the member and the member's associated persons. Notwithstanding the existence of such an agreement, the member remains responsible for complying with the requirements of this Rule.
      .03 Filing of Amendments Involving Disclosure Information. In the event a member is not able to obtain an associated person's manual signature or written acknowledgement of amended disclosure information on that person's Form U4 prior to filing of such amendment reflecting the information pursuant to paragraph (c)(3) (examples of reasons why a member may not be able to obtain the manual signature or written acknowledgement may include, but are not limited to, the associated person refuses to acknowledge such information, is on active military service or otherwise is unavailable during the period provided for filing of such amendments under Article V of the FINRA By-Laws), the member shall enter "Representative Refused to Sign/Acknowledge" or "Representative Not Available" or a substantially similar entry in the electronic Form U4 field for the associated person's signature.
      .04 Filing of Amendments Involving Administrative Information. For purposes of paragraph (c)(4) of the Rule, administrative data includes such items as the addition of state or self-regulatory organization registrations, exam scheduling, and updates to residential, business and personal history.

      * * * * *

      2000. Duties and Conflicts

      * * * * *

      2200. Communications and Disclosures

      * * * * *

      2260. Disclosures

      * * * * *

      [3080] 2263. Arbitration Disclosure to Associated Persons [When] Signing or Acknowledging Form U[-]4

      A member shall provide an associated person with the following written statement whenever the associated person is asked, pursuant to FINRA Rule 1010, to manually sign an [new] initial or amended Form U4, or to otherwise provide written (which may be electronic) acknowledgement of an amendment to the Form U4[.]:

      The Form U4 contains a predispute arbitration clause. It is in item 5 of Section 15A of the Form U4. You should read that clause now. Before signing the Form U4, you should understand the following:

      (1) You are agreeing to arbitrate any dispute, claim or controversy that may arise between you and your firm, or a customer, or any other person[,] that is required to be arbitrated under the rules of the self-regulatory organizations with which you are registering. This means you are giving up the right to sue a member, customer, or another associated person in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed.
      (2) A claim alleging employment discrimination, including a sexual harassment claim, in violation of a statute is not required to be arbitrated under [NASD] FINRA rules. Such a claim may be arbitrated at [the NASD] FINRA only if the parties have agreed to arbitrate it, either before or after the dispute arose. The rules of other arbitration forums may be different.
      (3) Arbitration awards are generally final and binding; a party's ability to have a court reverse or modify an arbitration award is very limited.
      (4) The ability of the parties to obtain documents, witness statements and other discovery is generally more limited in arbitration than in court proceedings.
      (5) The arbitrators do not have to explain the reason(s) for their award unless, in an eligible case, a joint request for an explained decision has been submitted by all parties to the panel at least 20 days prior to the first scheduled hearing date.
      (6) The panel of arbitrators may include arbitrators who were or are affiliated with the securities industry or[,] public arbitrators, as provided by the rules of the arbitration forum in which a claim is filed.
      (7) The rules of some arbitration forums may impose time limits for bringing a claim in arbitration. In some cases, a claim that is ineligible for arbitration may be brought in court.

      * * * * *

    • 09-39 SEC Approves Changes to the FINRA Regulation Board Composition and Conforming Changes to the FINRA Regulation By-Laws; Effective Date: August 20, 2009

      View PDF

      FINRA Regulation Board Composition

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      FINRA Regulation By-Laws
      Suggested Routing

      Executive Representative
      Senior Management
      Key Topic(s)

      By-Laws
      FINRA Regulation Board Composition

      Executive Summary

      Effective August 20, 2009, the Board composition of FINRA Regulation, Inc. (a subsidiary of FINRA) will more closely parallel the composition and governance structure of the FINRA Inc. Board of Governors (FINRA Board).1 The revisions to the FINRA Regulation, Inc. By-Laws (By-Laws) also reflect current business and legal practices concerning the administration of FINRA Regulation. In addition, the revisions make non-substantive or conforming changes to the By-Laws, including updates to reflect the corporate name change. The revised By-Laws are available at www.finra.org/finramanual/bylaws.

      Questions concerning this Notice should be directed to Stacy Paxson Chittick, Associate Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-8375.

      Background & Discussion

      On July 30, 2007, NASD and the New York Stock Exchange consolidated their member firm regulation, enforcement and arbitration functions and became FINRA. As part of the consolidation transaction, the Securities and Commission (SEC) approved amendments to the NASD By-Laws to implement governance and related changes,2 including a FINRA Board governance structure that balanced public and industry representation.

      FINRA Regulation is a subsidiary of FINRA. FINRA Regulation's By-Laws were not amended at the time of the consolidation, other than in a few sections where those By-Laws conflicted with the new FINRA By-Laws.

      On November 6, 2008, the SEC approved amendments to the FINRA Regulation By-Laws that:

      •   restructured the industry representation on the National Adjudicatory Council (NAC)3 to parallel the firm-size criteria for industry representation on the FINRA Board;
      •   modified the nomination process for certain industry member seats on the NAC by using the FINRA Nominating Committee and by discontinuing the Regional Nominating Committees; and
      •   adopted conforming changes to reflect the corporate name change and similar matters.4

      The SEC approved the current changes to the FINRA Regulation By-Laws on May 21, 2009.5 These changes complete the process of updating the FINRA Regulation By-Laws to reflect the consolidation transaction and harmonizing them with the FINRA By-Laws. The effective date for these changes is August 20, 2009.

      Revisions to FINRA Regulation By-Laws

      The FINRA By-Laws provide that the FINRA Board of Governors must consist of:

      •   the Chief Executive Officer of FINRA;
      •   the Chief Executive Officer of NYSE Regulation;
      •   eleven Public Governors; and
      •   ten Industry Governors, including the following:
      •   a Floor Member Governor;
      •   an Independent Dealer/Insurance Affiliate Governor;
      •   an Investment Company Affiliate Governor;
      •   three Small Firm Governors;
      •   one Mid-Size Firm Governor; and
      •   three Large-Firm Governors.6

      The Small Firm Governors, Mid-Size Firm Governor and Large-Firm Governors are elected by FINRA member firms according to their classification as a Small Firm, Mid-Size Firm, or Large Firm.7

      Under the revised By-Laws, the FINRA Regulation Board will continue to consist of between five and 15 members.8 The FINRA Regulation Board members will be drawn exclusively from, and elected by, the FINRA Board. In addition, the revised By-Laws require the FINRA Regulation Board, like the FINRA Board, to have a greater number of Public Directors than Industry Directors.9 To foster industry representation on the FINRA Regulation Board, the revised By-Laws also require that at least two, and not less than 20 percent, of the FINRA Regulation Board Directors be Small, Mid-Size or Large Firm Governors.10

      The revised By-Laws provide that FINRA Regulation's stockholder, FINRA, has the authority to remove FINRA Regulation Directors and select the Chair of the FINRA Regulation Board. The revised By-Laws reflect other current business and legal practices concerning the administration of FINRA Regulation and its capital stock.

      Finally, the revised By-Laws are updated by using the FINRA name throughout and by making several non-substantive or conforming changes, such as making the provision on communicating views about contested elections or nominations consistent with the FINRA By-Laws.


      1 See Exchange Act Release No. 59962 (May 21, 2009), 74 FR 25792 (May 29, 2009) (SEC Order Approving SR-FINRA-2009-020).

      2 See Exchange Act Release No. 56145 (July 26, 2007), 72 FR 42169 (August 1, 2007), as amended by Exchange Act Release No. 56145A (May 30, 2008), 73 FR 32377 (June 6, 2008) (File No. SR-NASD-2007-023).

      3 The NAC is appointed by the FINRA Board of Governors to review all disciplinary decisions issued by FINRA hearing panels and presides over disciplinary matters that have been appealed to or called for review by the NAC. The NAC also reviews statutory disqualification matters and considers appeals of membership proceedings and exemption requests.

      4 See Exchange Act Release No. 58909 (November 6, 2008), 73 FR 68467 (Nov. 18, 2008) (SEC Order Approving SR-FINRA-2008-046).

      5 See Exchange Act Release No. 59962 (May 21, 2009), 74 FR 25792 (May 29, 2009) (SEC Order Approving SR-FINRA-2009-020).

      6 See FINRA By-Laws, Article VII, Section 4 and Article XXII, Section 2(a).

      7 See FINRA By-Laws, Article I(z), (dd) & (xx) (defining Small Firm Governor, Mid-Size Firm Governor, and Large-Firm Governor), and Article VII, Section 4(a).

      8 See FINRA Regulation By-Laws, Article IV, Section 4.2 (Number of Directors).

      9 See FINRA Regulation By-Laws, Article IV, Section 4.3(a) (Qualifications).

      10 See id.

    • 09-38 Guidance on the Net Capital and Reserve Formula Treatment of Senior Unsecured Debt Securities Issued Under the Debt Guarantee Program Component of the FDIC's Temporary Liquidity Guarantee Program; Effective Date: July 15, 2009

      View PDF

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      SEA Rule 15c3-1
      SEA Rule 15c3-3
      Suggested Routing

      Compliance
      Finance
      Legal
      Operations
      Regulatory Reporting
      Senior Management
      Key Topic(s)

      Customer Protection
      FDIC Guaranteed Debt
      Net Capital

      Executive Summary

      FINRA is issuing this Notice to advise firms of the Net Capital and Reserve Formula treatment of senior unsecured debt securities issued under the Debt Guarantee Program component of the Federal Deposit Insurance Corporation's (FDIC) Temporary Liquidity Guarantee Program. Terms of the guidance are detailed in a July 15, 2009, letter to the Securities and Exchange Commission (SEC), included as Attachment A to this Notice.

      Questions concerning this Notice should be directed to:

      •    Yui Chan, Managing Director, Risk Oversight and Operational Regulation (ROOR), at (646) 315-8426;
      •    Joanne Li, Director, ROOR, at (646) 315-8403; or
      •    Kathryn Mahoney, Director, ROOR, at (646) 315-8428.

      Background & Discussion

      In November 2008, the Board of Directors of the FDIC adopted a final rule regarding the Temporary Liquidity Guarantee Program (TLGP). The TLGP was announced by the FDIC as an initiative to counter the system-wide credit crisis in the nation's financial sector.

      To assist firms in proper treatment of senior unsecured debt securities issued pursuant to the Debt Guarantee Program component of the FDIC's TLGP (the Program) under Rules 15c3-1 (Net Capital) and 15c3-3 (Reserve Formula) of the Securities Exchange Act of 1934, the SEC's Division of Trading and Markets staff has provided guidance to FINRA. The guidance is detailed in Attachment A of this Notice.

      As prescribed in the FDIC's final rule regarding the Program, the FDIC will fully and unconditionally guarantee senior unsecured debt securities issued by participating entities pursuant to the Program between October 14, 2008, and June 30, 2009, through the earlier of

      •    the maturity of such debt;
      •    the mandatory conversion date of any mandatory convertible debt; or
      •    June 30, 2012.

      In addition, as prescribed in the FDIC's subsequent rule amendment regarding the Program, the FDIC will fully and unconditionally guarantee senior unsecured debt securities issued by participating entities pursuant to the Program between April 1, 2009, and October 31, 2009, through the earlier of

      •    the maturity of such debt;
      •    the mandatory conversion date of any mandatory convertible debt; or
      •    December 31, 2012.

      The debt securities issued pursuant to the Program, which include commercial paper, non-convertible debt securities and mandatory convertible debt securities, may be:

      1. full-term guaranteed by the FDIC: any debt securities issued pursuant to the Program that have a maturity date that ends, or a mandatory conversion date that is effective, on or before the aforementioned Program end-dates, such that the debt securities are guaranteed by the FDIC for the entire term from the date they are issued until their maturity date or mandatory conversion date;
      2. partial-term guaranteed by the FDIC: any debt securities, except mandatory convertible debt securities, issued pursuant to the Program that have a maturity date that ends after the aforementioned Program end-dates, such that the debt securities are guaranteed by the FDIC for the entire period from the date they are issued until the Program's end-date, but are not guaranteed by the FDIC for any remaining period beyond the Program's end-date through their maturity date; or
      3. non-guaranteed by the FDIC: any debt securities issued pursuant to the Program that are not guaranteed by the FDIC for any period from the date they are issued until their maturity date.

      Based on the above, the SEC's Division of Trading and Markets staff has advised that FINRA firms may apply the Net Capital and Reserve Formula treatment on the debt securities issued pursuant to the Program as detailed in FINRA's July 15, 2009, letter to the SEC (see Attachment A of this Notice).


      Attachment A

      July 15, 2009

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

      Dear Mr. Macchiaroli,

      FINRA has requested guidance from the Division of Trading and Markets staff of the Securities and Exchange Commission as to the treatment of senior unsecured debt securities issued pursuant to the Debt Guarantee Program component of the Federal Deposit Insurance Corporation's (FDIC) Temporary Liquidity Guarantee Program (the Program), under Rules 15c3-1 (Net Capital) and 15c3-3 (Reserve Formula) of the Securities Exchange Act of 1934.

      As prescribed in the FDIC's final rule regarding the Program, and confirmed through discussions with FDIC staff, the FDIC will fully and unconditionally guarantee senior unsecured debt securities issued by participating entities pursuant to the Program between October 14, 2008, and June 30, 2009, through the earlier of the maturity of such debt, the mandatory conversion date of any mandatory convertible debt or June 30, 2012. In addition, as prescribed in the FDIC's subsequent rule amendment regarding the Program, the FDIC will fully and unconditionally guarantee senior unsecured debt securities issued by participating entities pursuant to the Program between April 1, 2009, and October 31, 2009, through the earlier of the maturity of such debt, the mandatory conversion date of any mandatory convertible debt or December 31, 2012.

      The debt securities issued pursuant to the Program, which include commercial paper, non-convertible debt securities and mandatory convertible debt securities, may be:

      1. full-term guaranteed by the FDIC: any debt securities issued pursuant to the Program that have a maturity date that ends, or a mandatory conversion date that is effective, on or before the aforementioned Program end-dates, such that the debt securities are guaranteed by the FDIC for the entire term from the date they are issued until their maturity date or mandatory conversion date;
      2. partial-term guaranteed by the FDIC: any debt securities, except mandatory convertible debt securities, issued pursuant to the Program that have a maturity date that ends after the aforementioned Program end-dates, such that the debt securities are guaranteed by the FDIC for the entire period from the date they are issued until the Program's end-date, but are not guaranteed by the FDIC for any remaining period beyond the Program's end-date through their maturity date; or
      3. non-guaranteed by the FDIC: any debt securities issued pursuant to the Program that are not guaranteed by the FDIC for any period from the date they are issued until their maturity date.

      Based on the foregoing and our subsequent discussions with you, it is our understanding that the SEC's Division of Trading and Markets staff is in agreement with FINRA staff that FINRA firms may apply the following Net Capital and Reserve Formula treatment on the debt securities issued pursuant to the aforementioned Program:

      SEA Rule 15c3-1 - Net Capital Treatment

      Proprietary positions in full-term guaranteed commercial paper and non-convertible debt securities issued by an unaffiliated entity shall be subject to the haircut deductions under SEA Rule 15c3-1(c)(2)(vi)(A) (Government Securities).

      Proprietary positions in partial-term guaranteed and non-guaranteed commercial paper issued by an unaffiliated entity shall be subject to the haircut deductions under SEA Rule 15c3-1(c)(2)(vi)(E) (Commercial Paper), if such securities meet all the required provisions thereunder. Otherwise, the applicable haircut deductions of SEA Rule 15c3-1(c)(2)(vii) and the interpretations thereunder shall be applied on such debt securities.

      Proprietary positions in partial-term guaranteed and non-guaranteed non-convertible debt securities issued by an unaffiliated entity shall be subject to the haircut deductions under SEA Rule 15c3-1(c)(2)(vi)(F) (Non-Convertible Debt Securities), if such securities meet all the required provisions thereunder. Otherwise, the applicable haircut deductions of SEA Rule 15c3-1(c)(2)(vii) and the interpretations thereunder shall be applied on such debt securities.

      Proprietary positions in any mandatory convertible debt securities issued by an unaffiliated entity shall be subject to the haircut deductions under SEA Rule 15c3-1(c)(2)(vi)(G) (Convertible Debt Securities), pursuant to the prescribed provisions thereunder.

      Proprietary positions in any commercial paper or non-convertible debt securities issued by an affiliated entity shall be treated as a non-allowable asset, unless the broker-dealer can satisfy the requirements prescribed under interpretation /061 of SEA Rule 15c3-1(c)(2)(vi).

      Proprietary positions in any mandatory convertible debt securities issued by an affiliated entity shall be treated as a non-allowable asset. Broker-dealers that are allocated any debt securities issued by an affiliated entity pursuant to the Program, as part of a pool of collateral to a reverse repurchase transaction pursuant to the FICC General Collateral Financing Repo Program, need not apply a deduction to net capital on the reverse repurchase contract if the allocated collateral is returned the next morning. The foregoing applies irrespective of the duration of the reverse repurchase contract (i.e., overnight or term). Broker-dealers must apply a charge to their net capital for the computed deficit, if any, on such reverse repurchase contracts pursuant to SEA Rule 15c3-1(c)(2)(iv)(F)(2). In addition, where the underlying collateral received from the FICC allocation includes the aforementioned debt securities issued by an affiliated entity, broker-dealers must maintain records to evidence that the reverse repurchase contracts were effected pursuant to the FICC General Collateral Financing Repo Program.

      Any reverse repurchase contracts that are not transacted pursuant to the FICC General Collateral Financing Repo Program, where the underlying collateral received consists of debt securities issued by an affiliated entity pursuant to the Program, shall be treated as a non-allowable asset.

      SEA Rule 15c3-3 Reserve Formula Treatment

      Full-term guaranteed commercial paper and non-convertible debt securities issued by an unaffiliated entity pursuant to the Program, either held in inventory by a broker-dealer or obtained through a reverse repurchase contract, may be deemed a "qualified security" under SEA Rule 15c3-3(a)(6) for deposit into a Reserve Bank Account under the following conditions:

      1. The total amount of all unaffiliated full-term guaranteed commercial paper and non-convertible debt securities deposited into a Reserve Bank Account may not exceed 25 percent of the broker-dealer's aggregate SEA Rule 15c3-3 Reserve Bank Account deposit(s) (Customer and PAIB); and
      2. The total amount of all unaffiliated full-term guaranteed commercial paper and non-convertible debt securities of any single issuer deposited into a Reserve Bank Account may not exceed 10 percent of the broker-dealer's aggregate SEA Rule 15c3-3 Reserve Bank Account deposit(s) (Customer and PAIB).

      The foregoing limitations have been established in view of the 20 percent risk weighting applied by federal banking agencies to debt that is guaranteed by the FDIC under the Program, which is also consistent with such agencies' capital treatment of FDIC-insured deposits.

      All other commercial paper, non-convertible debt and mandatory convertible debt securities issued by either an unaffiliated or affiliated entity pursuant to the Program, may not be deemed a "qualified security" under SEA Rule 15c3-3(a)(6) for deposit into a Reserve Bank Account.

      We understand that the foregoing represents a SEC staff position with respect to the Net Capital and Reserve Formula treatment of debt securities issued pursuant to the Program. Furthermore, this guidance may be withdrawn or modified if your staff determines that such action is necessary in the public interest, for the protection of investors, or otherwise in furtherance of the purpose of the securities laws.

      Very truly yours,

      Krisoula Dailey
      Vice President
      FINRA

    • 09-37 Trading in Motors Liquidation Company (Formerly Known as General Motors Corporation)

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      Regulatory Notice
      Notice Type

      Alert
      Referenced Rules & Notices

      FINRA Rule 2114
      FINRA Rule 6460
      NASD Rule 2310
      Suggested Routing

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

      Bankruptcy
      Suitability
      Symbol Change
      Trading Halt

      Executive Summary

      On July 10, 2009, FINRA halted over-the-counter trading in Motors Liquidation Company (formerly known as General Motors Corporation) because it believed the trading volume in the security represented a potential widespread misunderstanding that this security may be related to interests in the new General Motors Company, as opposed to Motors Liquidation Company. Commencing July 15, 2009, trading in Motors Liquidation Company common stock will resume and the security will begin trading under the symbol MTLQQ. The former common stock symbol, GMGMQ, will be deleted and should only be used for the limited purpose of reporting as-of reports, corrections or cancellations of trades effected on or prior to July 10, 2009, as described in this Notice.

      Questions regarding this Notice should be directed to:

      •    FINRA Operations at (866) 776-0800; or
      •    FINRA Office of General Counsel at (202) 728-8071.

      Background & Discussion

      On July 10, 2009, pursuant to authority under Rule 6460(a)(3), FINRA halted over-the-counter trading in Motors Liquidation Company (formerly known as General Motors Corporation) because it believed the trading volume in the security represented a potential widespread misunderstanding that this security may be related to interests in the new General Motors Company post-bankruptcy (the new GM), as opposed to Motors Liquidation Company.1 As stated on the Web sites of both Motors Liquidation Company and the new GM, the new GM currently has no publicly traded securities and none of Motors Liquidation Company's publicly owned stocks or bonds are or will become securities of new GM; Motors Liquidation Company is independent from, and unaffiliated with, the new GM.2

      Further, management of Motors Liquidation Company has stated the following:

      Management continues to remind investors of its strong belief that there will be no value for the common stockholders in the bankruptcy liquidation process, even under the most optimistic of scenarios. Stockholders of a company in chapter 11 generally receive value only if all claims of the company's secured and unsecured creditors are fully satisfied. In this case,management strongly believes all such claims will not be fully satisfied, leading to its conclusion that the common stock will have no value.3

      Commencing July 15, 2009, trading in Motors Liquidation Company will resume and the security will begin trading under the new symbol, MTLQQ.4 The former common stock symbol, GMGMQ, will be deleted and should only be used for the limited purpose of reporting of as-of transactions, corrections or cancellations of trades effected on or prior to July 10, 2009.

      Member firms are reminded that the suitability requirements of NASD Rule 2310 (Recommendations to Customers (Suitability)) apply to the recommendation of any security and that firms must have reasonable grounds for believing that a security recommended to a customer is suitable for that customer. Further, FINRA Rule 2114 (Recommendations to Customers in OTC Equity Securities) applies specifically to unlisted securities, such as Motors Liquidation Company,5 and supplements existing FINRA rules and the federal securities law, including suitability obligations, for these securities. The rule requires that firms, at a minimum, conduct a due diligence review of an issuer's current financial statements and material business information, and make a determination that such information, and any other information available, provides a reasonable basis under the circumstances for making the recommendation.

      Firms and other interested parties that have operational questions concerning the FINRA trading halt or the symbol change should contact FINRA Operations at (866) 776-0800. Questions concerning Motors Liquidation Company or the new GM should be directed to those companies directly.


      1 Rule 6460(a)(3) provides that FINRA may direct member firms to halt trading and quotations in OTC equity securities if FINRA determines, among other things, that an extraordinary event has occurred or is ongoing that has had a material effect on the market for the OTC equity security. As provided in Supplementary Material .02 to Rule 6460, FINRA considered among the factors in making its determination that questions from brokers and dealers and the trading volume in GMGMQ indicated a potential widespread misunderstanding that these securities represented interests in new GM, which in fact, is not the case

      2 See the Motors Liquidation Company Web site at www.motorsliquidation.com and the new GM at www.gm.com/corporate/investor_information.

      3 See the Motors Liquidation Company Web site at www.motorsliquidation.com.

      4 See the Uniform Practice Code Advisory at www.finra.org/upc/023-09.

      5 Certain limited exemptions apply. See Rule 2114(e).

    • 09-36 SEC Approves an Amendment to the Tolling Provision in the Arbitration Codes for Customer and Industry Disputes; Effective Date: August 10, 2009

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      Arbitration Time Limits

      Regulatory Notice
      Notice Type

      Rule Amendment
      Referenced Rules & Notices

      Rules 12206(c)
      Rules 13206(c)
      Suggested Routing

      Compliance
      Legal
      Senior Management
      Key Topic(s)

      Arbitration
      Code of Arbitration Procedure
      Dispute Resolution
      Tolling

      Executive Summary

      An amendment to the Arbitration Codes for Customer and Industry Disputes that clarifies that the rules toll—i.e., temporarily suspend—the applicable statutes of limitation when a person files an arbitration claim with FINRA1 becomes effective August 10, 2009, and will apply to claims filed on or after that date.

      The text of the amendments is set forth in Attachment A.

      Questions concerning this Notice should be directed to:

      •   Kenneth L. Andrichik, Senior Vice President, Chief Counsel and Director of Mediation and Business Strategy, Dispute Resolution, at (212) 858-3915 or ken.andrichik@finra.org; or
      •   Mignon McLemore, Assistant Chief Counsel, Dispute Resolution, at (202) 728-8151 or mignon.mclemore@finra.org.

      Background and Discussion

      Currently, Rule 12206(a) of the Code of Arbitration Procedure for Customer Disputes (Customer Code) and Rule 13206(a) of the Code of Arbitration Procedure for Industry Disputes (Industry Code) (referred to as the "eligibility rules") provide that, "no claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim." The current eligibility rule does not extend applicable statutes of limitation, but does provide that, "where permitted by applicable law, when a claimant files a statement of claim in arbitration, any time limits for the filing of the claim in court will be tolled while FINRA retains jurisdiction of the claim."2 This means that, where permitted by applicable law, statutes of limitation will be tolled (i.e., temporarily suspended) when a person files an arbitration claim with FINRA.

      FINRA has interpreted the tolling provision of the current eligibility rule to mean that any applicable statutes of limitation would be tolled in all cases when a person files an arbitration claim with FINRA. However, one state court found that the phrase "where permitted by applicable law," means that state law must permit tolling expressly, or the statutes of limitation period will not be tolled.3 In its analysis, the court determined that the eligibility rule did not toll the statute of limitations, unless applicable law permitted such tolling expressly.4 Further, the court also determined that there were no federal or state statutes that expressly permitted tolling of the applicable statute of limitations and, as a result, the customer's case was dismissed.5

      FINRA is concerned that courts may begin citing this interpretation as a reason to dismiss those customer claims that are filed in court because their arbitration claims were dismissed on eligibility grounds from FINRA's arbitration forum.6 In these instances, FINRA believes that the court's interpretation of the phrase "where permitted by applicable law" could limit or foreclose customers' access to other judicial forums to address their disputes, which would be an unfair result. Therefore, FINRA is deleting the phrase "where permitted by applicable law" from Rules 12206(c) and 13206(c). The amendment would leave the parties in the same position in court as they were at the start of the arbitration with regard to any statutes of limitation: The time period before the claim was filed in arbitration would not be extended, but applicable statutes of limitation would not run while the matter was in arbitration.

      Effective Date Provisions

      The amendment becomes effective on August 10, 2009, and will apply to claims filed on or after August 10, 2009.


      1 Exchange Act Release No. 59906 (May 12, 2009), 74 Federal Register 23462 (May 19, 2009) (File No. SR-FINRA-2009-013).

      2 See Rules 12206(c) and 13206(c) of the Codes.

      3 See Friedman v. Wheat First Securities, Inc., 64 F. Supp. 2d 338 (S.D.N.Y. 1999). See also Individual Securities v. Ross, 1998 U.S. App. Lexis 12618, and Rampersad v. Deutsche Bank Securities, Inc., 2004 U.S. Dist. Lexis 5031 (finding the phrase "where permitted by law" did not toll the applicable statute to limitation, but deciding the case on other grounds).

      4 Id.

      5 Id.

      6 Rules 12206(b) and 13206(b) of the Codes state that "dismissal of a claim under this rule does not prohibit a party from pursuing the claim in court. By filing a motion to dismiss a claim under this rule, the moving party agrees that if the panel dismisses a claim under this rule, the non-moving party may withdraw any remaining related claims without prejudice and may pursue all of the claims in court."


      ATTACHMENT A

      Deleted language is in brackets.

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

      * * * * *

      Customer Code

      12206. Time Limits

      (a)–(b) No change.
      (c) Effect of Rule on Time Limits for Filing Claim in Court

      The rule does not extend applicable statutes of limitations; nor shall the six-year time limit on the submission of claims apply to any claim that is directed to arbitration by a court of competent jurisdiction upon request of a member or associated person. However, [where permitted by applicable law,] when a claimant files a statement of claim in arbitration, any time limits for the filing of the claim in court will be tolled while FINRA retains jurisdiction of the claim.
      (d) No change.

      * * * * *

      Industry Code

      13206. Time Limits

      (a)–(b) No change.
      (c) Effect of Rule on Time Limits for Filing Claim in Court

      The rule does not extend applicable statutes of limitations; nor shall the six-year time limit on the submission of claims apply to any claim that is directed to arbitration by a court of competent jurisdiction upon request of a member or associated person. However, [where permitted by applicable law,] when a claimant files a statement of claim in arbitration, any time limits for the filing of the claim in court will be tolled while FINRA retains jurisdiction of the claim.
      (d) No change.

      * * * * *

    • 09-35 FINRA Recommends Review of Municipal Securities Activities

      View PDF

      Municipal Securities

      Regulatory Notice
      Notice Type

      Guidance
      Referenced Rules & Notices

      MSRB Rule G-17
      MSRB Rule G-19
      MSRB Rule G-27
      MSRB Rule G-32
      MSRB Rule G-36
      MSRB Notice 2008-47
      MSRB Notice 2009-22
      SEA Rule 15c2-12
      Suggested Routing

      Compliance
      Legal
      Municipal Securities
      Registered Representatives
      Senior Management
      Key Topic(s)

      Disclosure
      EMMA
      Municipal Securities
      Suitability
      Supervision

      Executive Summary

      FINRA recommends that firms engaged in municipal securities business review and, if necessary, modify their policies and procedures in light of changes to the Municipal Securities Rulemaking Board's (MSRB) Electronic Municipal Market Access system (EMMA) that take effect July 1, 2009, Registered Representatives and changes to MSRB rules that went into effect June 1, 2009.

      FINRA also encourages firms to review the overall adequacy and effectiveness of their current policies and procedures for municipal securities activities generally, particularly those relating to the disclosure of material information, the suitability of recommendations to retail customers and the general supervision of their municipal securities activities.

      Questions concerning this Notice should be directed to the Member Regulation Fixed Income Group at (202) 728-8085 or (202) 728-8133.

      For information about compliance with MSRB rules, including the Referenced Rules & Notices upcoming amendments to Rule 15c2-12, contact FINRA at the numbers above, or the MSRB at (703) 797-6600.

      Background and Discussion

      Municipal Securities Disclosure

      Securities Exchange Act Rule 15c2-12 imposes certain obligations on municipal securities dealers in connection with disclosure, with both initial offerings and the secondary market.

      With respect to initial offerings, the rule prohibits a municipal securities dealer from acting as a participating underwriter of an offering unless, among other things, the underwriter has reviewed an official statement that the issuer has deemed final as of its date. The participating underwriter also must have reasonably determined that the issuer, or an "obligated person," has entered into a written agreement (the continuing disclosure agreement) to provide certain disclosure to each of the four nationally recognized municipal securities information repositories (NRMSIRs), as well as the appropriate state information depository (SID), if any. This required disclosure includes certain financial information and "notices of certain enumerated material events."

      The requirement to ensure that such an agreement has been reached is critical because of the importance of these notices and of the required financial information to the municipal securities market. The rule enumerates the following material events:

      •   Principal and interest payment delinquencies;
      •   Non-payment related defaults;
      •   Unscheduled draws on debt service reserves reflecting financial difficulties;
      •   Unscheduled draws on credit enhancements reflecting financial difficulties;
      •   Substitution of credit or liquidity providers or their failure to perform;
      •   Adverse tax opinions or events affecting the tax-exempt status of the security;
      •   Modifications to rights of security holders;
      •   Bond calls;
      •   Defeasances;
      •   Release, substitution or sale of property securing repayment of the securities; and
      •   Rating changes.

      With respect to the secondary market, Rule 15c2-12(c) prohibits any municipal securities dealer from recommending the purchase or sale of a municipal security unless it has procedures in place that provide reasonable assurance that it will receive prompt notice of any material event notice.

      Changes to EMMA

      On December 5, 2008, the U.S. Securities and Exchange Commission (SEC) approved amendments to Rule 15c2-121 and certain MSRB rules relating to EMMA, the MSRB's electronic repository of municipal market information. EMMA already provides municipal securities dealers and other market participants with access to official statements filed with the MSRB, as well as advance refunding documents, 529 college savings plan offering documents and real-time and historic trade data for municipal bonds. Beginning July 1, 2009, EMMA will also include continuing disclosures submitted by municipal bond issuers, and will become the sole entity designated by the SEC as a NRMSIR.2

      These changes may require municipal securities underwriters and dealers to modify current policies and procedures related to compliance with Rule 15c2-12, as well as certain MSRB rules. For example, underwriters will have to reasonably determine that required disclosure is made to the MSRB rather than to the current NRMSIRs as of July 1, 2009.3 Firms also should review their policies and procedures to make certain they reflect the requirement that material event notices and notices of failure to provide required financial disclosure will be available through EMMA.

      The amendments also will affect the small issuer exemption in Rule 15c2-12(d)(2), which may in turn require municipal securities underwriters and dealers to amend their existing policies and procedures with respect to small offerings. The small issuer exemption currently allows for limited or no financial or operating data disclosures if certain requirements are met (including no more than $10 million in aggregate amount of outstanding municipal securities). For offerings made on or after July 1, 2009, issuers who are eligible for and use the small issuer exemption will need to agree, in writing, to file such financial information or operating data at least annually with the MSRB in an electronic format, as prescribed by the MSRB if such information is customarily prepared and is publicly available.

      Amendments to MSRB Rule G-32 and G-36

      On May 21, 2009, the SEC also approved amendments to MSRB rules that will consolidate and amend current Rule G-36, relating to the delivery of official statements, and Rule G-32, governing disclosures in connection with new issues. As a result, firms will have to modify their policies and procedures relating to the delivery of official statements in connection with primary offerings of municipal securities.4 The amendments were effective June 1, 2009, and, in addition to implementing some transitional and recordkeeping requirements, accomplish the following:

      •   Authorize the MSRB to launch EMMA as its primary municipal market disclosure service;
      •   Allow the MSRB to implement an "access equals delivery"standard for dissemination of official statements;
      •   Consolidate the new issue disclosure requirements of MSRB Rule G-32 and the official statement filing requirements of Rule G-36 into new Rule G-32 on disclosures in connection with primary offerings, which requires underwriters to file official statements with the MSRB electronically via EMMA;
      •   Implement new filing and/or notification requirements when an issue of municipal securities is exempt from Rule 15c2-12; and
      •   Replace Forms G-36(OS) and G-36(ARD) with new Form G-32.

      Firms underwriting or selling primary offerings of municipal securities should familiarize themselves with these rule amendments and review and modify their existing policies and procedures concerning the delivery of official statements accordingly. For additional information, please refer to MSRB Notice 2009-22 (www.msrb.org/msrb1/whatsnew/2009-22.asp).

      Disclosure, Suitability and Supervision

      FINRA urges municipal securities dealers—including those whose business activities are limited to the secondary market—to reassess the adequacy of their current policies and procedures for complying with their obligations under MSRB rules generally, giving particular attention to those relating to:

      •   the disclosure of material information;
      •   the suitability of recommendations to customers; and
      •   the supervision of the firm's municipal securities activities.

      MSRB Rule G-17 provides that, in the conduct of its municipal securities activities, each dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest or unfair practice. The MSRB has interpreted Rule G-17 to require a dealer, in connection with any transaction in municipal securities, to disclose to its customer, at or prior to the sale, all material facts about the transaction known by the dealer, as well as material facts about the security that are reasonably accessible to the market.

      In addition, MSRB Rule G-19 requires a dealer that recommends a municipal security to have reasonable grounds for believing that the recommendation is suitable, based upon information available from the issuer of the security, or otherwise, and the facts disclosed by or otherwise known about the customer.5

      If a firm discovers through its Rule 15c2-12 procedures or otherwise that an issuer has failed to make filings required under its continuing disclosure agreements, the firm must take this information into consideration in meeting its obligations under Rule G-17 and in assessing the suitability of the issuer's bonds under Rule G-19.

      Finally, MSRB G-27 requires firms to supervise their municipal securities business, and to ensure that they have adequate policies and procedures in place for monitoring the effectiveness of their supervisory systems. Specifically, firms must:

      •   supervise the conduct of the municipal securities activities of the firm and associated persons to ensure compliance with all MSRB rules, the Exchange Act and the rules thereunder;
      •   have adequate written supervisory procedures; and
      •   implement supervisory controls to ensure that their supervisory procedures are adequate.

      Beginning July 1, 2009, these procedures should include requiring and training associated persons to access all relevant information from EMMA and other established industry sources before selling or recommending a municipal security, whether in connection with an initial offering or in the secondary market.

      The MSRB has published information and guidance about its rules, as well as changes to EMMA, at www.msrb.org. The EMMA Web site may be accessed at www.emma.msrb.org.


      1 See MSRB Notice 2008-47 (www.msrb.org/MSRB1/whatsnew/2008-47.asp)

      2 The amendments also eliminate the requirement that underwriters ensure that the continuing disclosure agreement obligates issuers to file with applicable SIDs; however, issuers may still be required to do so under state law.

      3 For disclosure prior to July 1, 2009, underwriters would need to look to the NRMSIRs that were then operating rather than EMMA, unless the issuer voluntarily files pre-July 1, 2009, disclosures with EMMA.

      4 See Exchange Act Release No. 59966 (May 21, 2009).

      5 Like NASD Rule 2310, MSRB Rule G-19's suitability obligation requires both a "reasonable basis" determination that the recommended security is suitable for at least some investors, and a "customer-specific" analysis that the security is suitable for the specific customer to whom the recommendation is made. To meet the customer-specific prong of the suitability obligation, a dealer must make reasonable efforts to obtain information concerning the customer's financial status, tax status and investment objectives, as well as any other information reasonable and necessary in making the recommendation. See MSRB Reminder of Customer Protection Obligations in Connection With Sales of Municipal Securities (May 30, 2007); and MSRB Interpretation on Customer Protection Obligations Relating to the Marketing of 529 College Savings Plans (August 7, 2006).

    • 09-34 FINRA Requests Comment on Proposed Consolidated FINRA Rule Governing Investment Company Securities; Comment Period Expires: August 3, 2009

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      Investment Company Securities

      Regulatory Notice
      NoticeType

      Request for Comment
      Consolidated FINRA Rulebook
      Referenced Rules & Notices

      FINRA Rule 5110
      NASD Rule 2830
      NASD Rule 2810
      NTM 03-54
      NTM 99-55
      Suggested Routing

      Compliance
      Executive Representatives
      Investment Companies
      Legal
      Mutual Fund
      Registered Representative
      Senior Management
      Key Topics

      Cash Compensation
      Exchange-Traded Funds
      Investment Companies
      Non-Cash Compensation
      Revenue Sharing

      Executive Summary

      As part of the process to develop a new consolidated rulebook (the Consolidated FINRA Rulebook),1 FINRA is requesting comment on a proposed FINRA rule regarding the distribution and sale of investment company securities. The proposal is based on NASD Rule 2830, subject to certain changes, including proposed new requirements regarding disclosure of cash compensation.

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

      Questions concerning this Notice should be directed to:

      •   Joe Savage, Vice President and Counsel, Investment Companies Regulation, at (240) 386-4534; or
      •   Stan Macel, Assistant General Counsel, Office of General Counsel, at (202) 728-8056.

      Action Requested

      FINRA encourages all interested parties to comment on the proposal. Comments must be received by August 3, 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 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

      Discussion

      FINRA is proposing to adopt FINRA Rule 2341 regarding the regulation of members' activities in connection with the sale and distribution of registered investment company securities. Proposed FINRA Rule 2341 is based largely on NASD Rule 2830, with some significant changes, discussed below.4

      NASD Rule 2830

      NASD Rule 2830 regulates member firms' activities in connection with the distribution and sale of investment company securities. Proposed FINRA Rule 2341 revises the provisions of NASD Rule 2830 in four areas. It:

      •   requires firms to make new disclosures to investors regarding the receipt of cash compensation;
      •   makes a minor change to the recordkeeping requirements for non-cash compensation;
      •   eliminates a condition regarding discounted sales of investment company securities to dealers; and
      •   codifies past FINRA staff interpretations regarding the purchases and sales of exchange-traded funds (ETFs).

      These proposed changes are discussed in more detail below.

      Proposed Changes to the Cash Compensation Provisions

      NASD Rule 2830(l) governs the payment and acceptance of cash and non-cash compensation in connection with the sale of investment company securities. Among other things, NASD Rule 2830(l)(4) prohibits member firms from accepting cash compensation from an "offeror" (generally an investment company and its affiliates), unless the compensation is described in the fund's current prospectus. If a member firm enters into a "special cash compensation" arrangement with an offeror, and the offeror does not make the arrangement available on the same terms to all member firms that sell the fund's shares, the member firm's name and the details of the arrangement must be disclosed in the prospectus.5

      FINRA proposes to modify the disclosure requirements for cash compensation arrangements in several respects.6 First, the proposal requires that standard "sales charges and service fees" (rather than all cash compensation) be described in the prospectus.7 Second, the proposal eliminates the term "special cash compensation" and instead requires prospectus disclosure where a member firm received greater (or special) sales charges or service fees than are ordinarily paid in connection with sales of fund shares. Other types of cash compensation, such as revenue-sharing payments,8 would not require prospectus disclosure. Like the current rule, the proposal requires the names of the firms that have entered into arrangements to receive special sales charges or service fees and the details of these arrangements to be disclosed in the prospectus or SAI.

      Third, the proposal requires a member firm that receives cash payments in addition to the standard sales charges and service fees paid in connection with the sale of fund shares to make certain disclosures to its customers at the time the account is opened.9 These additional cash payments could take the form of higher sales commissions or service fees, or revenue sharing payments made by offerors to firms. If a member firm receives additional cash compensation from an offeror, it would have to:

      (1) disclose that information about a fund's fees and expenses may be found in the fund's prospectus;
      (2) if applicable, disclose the following:
      •   that the firm receives cash payments from offerors in addition to the standard sales charges and service fees disclosed in the prospectus;
      •   the nature of such payments received in the last 12 months; and
      •   a list of offerors making such payments listed in descending order of payments received; and
      (3) provide a reference to a Web page or toll-free number containing updated information, which must be updated at least every six months. Alternatively, if the firm elects not to maintain a Web page or toll-free number, it must disclose updated information to customers every six months.

      FINRA seeks comment on how this information should be disclosed to investors, particularly given the availability of the Internet. Should firms be permitted to deliver initial disclosure information (i.e., information described in items 1 and 2 above) to customers electronically, unless a customer specifically requests paper-based disclosure? Alternatively, should the rule allow firms to provide generalized disclosure (in either paper or electronic format) to an investor when an account is opened regarding the receipt of cash compensation that refers the investor to a Web site address or toll-free number that provides the information described in items 1 and 2 above?

      Fourth, the staff proposes to add supplementary material that clarifies provisions regarding the disclosure of cash compensation and that would supersede all prior guidance with respect to these provisions. Among other things, the supplementary material provides that:

      (1) cash compensation includes revenue sharing paid in connection with the sale and distribution of investment company securities (and therefore member firms would be required to disclose revenue sharing arrangements pursuant to the rule); and
      (2) a special sales charge or service fee arrangement includes any arrangement under which a member firm receives greater sales charges or service fees than other member firms selling the same investment company securities, even if an offeror would have made the same arrangement available to other member firms had they requested it.

      Proposed Changes to the Non-Cash Compensation Provisions

      NASD Rule 2830(l)(5) generally prohibits member firms and their associated persons from accepting or making payments of non-cash compensation in connection with the sale of investment company securities, subject to certain exceptions. These exceptions allow gifts of under $100, entertainment that does not raise questions of propriety, certain training or education meetings, and sales contests that do not favor particular products.

      NASD Rule 2830(l)(3) requires member firms to keep records of all compensation received by the member firm or its associated persons from offerors, other than small gifts and entertainment permitted by the rule. Currently, this provision requires the records to include the nature of and, "if known," the value of any non-cash compensation received. FINRA proposes to modify this requirement by deleting the phrase "if known" regarding the value of non-cash compensation. This change would make the provision more consistent with the non-cash compensation recordkeeping requirements in other FINRA rules.10 Firms would be permitted to estimate in good faith the actual value of non-cash compensation received for which a receipt (or similar documentation) assigning a value is not available.11

      Proposed Changes Regarding Conditions for Discounts to Dealers

      NASD Rule 2830(c) currently prohibits investment company underwriters from selling the fund's securities to a retail broker-dealer at a price other than the public offering price unless they meet two requirements:

      •   the sale must be in conformance with NASD Rule 2420 (Dealing with Non-Members); and
      •   for certain investment company securities, a sales agreement must be in place that sets forth the concessions paid to the retail firm.

      The requirement that the sale be in conformance with NASD Rule 2420 is based on historical concerns that both underwriters and dealers of investment company securities be members. Since the time this provision was adopted, the laws governing broker-dealers have changed, and today virtually all broker-dealers doing business with the public are FINRA members. As a result of this change, FINRA proposes eliminating the requirement that the sale be in conformance with Rule 2420.

      Proposed Changes Regarding Sales of ETFs

      In recent years, member firms have bought and sold shares of ETFs, which are open-end investment companies or unit investment trusts (UITs) that differ from traditional mutual funds and UITs, since their shares typically are traded on securities exchanges. Because ETF shares are sometimes traded at prices that differ from the fund's current net asset value, ETFs can raise issues both under the Investment Company Act and NASD Rule 2830. For example, Section 22(d) of the Investment Company Act requires dealers to sell shares of an open-end investment company at the current public offering price described in its prospectus (i.e., the fund's net asset value plus any applicable sales load). Similarly, NASD Rule 2830(i) generally prohibits member firms from purchasing fund shares at a price lower than the bid price next quoted by or for the issuer (for traditional mutual funds, this price is the fund's current net asset value).

      To address these issues, the SEC has issued a series of exemptive orders that allow ETFs to trade on exchanges at prices that differ from the fund's public offering price. The SEC also has proposed a rule that would codify the exemptive relief provided by its orders.12 Similarly, FINRA staff has issued letters interpreting NASD Rule 2830 that allow member firms to purchase and sell shares of ETFs at prices other than the current net asset value consistent with SEC exemptive orders.13 As proposed, the new FINRA rule would add a provision, FINRA Rule 2341(o), to codify earlier FINRA staff interpretive letters that permit the trading of ETF shares at prices other than the current net asset value consistent with applicable SEC rules or exemptive orders.


      1 The current FINRA rulebook consists of (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the Transitional Rulebook). While the NASD Rules generally apply to all FINRA member firms, the Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (Dual Members). The FINRA Rules apply to all FINRA member firms, unless such rules have a more limited application by their terms. 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 Notice to Members 03-73 (Nov. 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 As with NASD Rule 2830, FINRA Rule 2341 would not regulate member firms' activities in connection with variable insurance contracts, which are regulated by NASD Rule 2820. The SEC recently approved FINRA's proposal to adopt NASD Rule 2820 with minor changes as FINRA Rule 2320 in the Consolidated FINRA Rulebook. See Exchange Act Release No. 60086 (June 10, 2009) (Order Approving Proposed Rule Change; File No. SR-FINRA-2009-023).

      5 FINRA staff has interpreted this provision as permitting disclosure in a fund's statement of additional information (SAI) rather than in its statutory (printed) prospectus. See Notice to Members 99-55 (July 1999), Question #18.

      6 FINRA previously proposed similar changes to the cash compensation provisions of Rule 2830 in 2003. See Notice to Members 03-54 (Sept. 2003).

      7 The terms "sales charge" and "service fees" are defined in NASD Rule 2830 and would retain the same definitions in FINRA Rule 2341. "Sales charge" means "all charges or fees that are paid to finance sales or sales promotion expenses, including front-end, deferred and asset-based sales charges, excluding charges and fees for ministerial, recordkeeping or administrative activities and investment management fees." NASD Rule 2830(b)(8). "Service fees" include "payments by an investment company for personal service and/or the maintenance of shareholder accounts." NASD Rule 2830(b)(9).

      8 Revenue-sharing payments can take many different forms. For example, a fund company may pay a firm additional amounts at year-end based on the amount a firm's customers currently hold in the offeror's funds, or based on the firm's total sales of the offeror's funds in the previous year. They can also take the form of other cash payments, such as an offeror helping to pay the costs of a firm's annual sales meeting. See, e.g., Securities Act Release No. 8358 (Jan. 24, 2004), 69 FR 6438 (Feb. 10, 2004), at 6441 n.17.

      9 If the customer does not open an account with the broker-dealer or its clearing firm, such as when the customer has an account with a mutual fund transfer agent, this disclosure would have to be made before the initial shares are purchased.

      10 See, e.g., recordkeeping requirements for non-cash compensation regarding public offerings of securities in FINRA Rule 5110(i)(2) and direct participation programs in NASD Rule 2810(c)(2). The SEC recently approved FINRA's proposal to adopt NASD Rule 2810 without material change as FINRA Rule 2310 in the Consolidated FINRA Rulebook. See Exchange Act Release No. 59987 (May 27, 2009), 74 FR 26909 (June 4, 2009) (Order Approving Proposed Rule Change; File No. SR-FINRA-2009-016).

      11 The SEC recently approved FINRA's proposal to make a similar change to the recordkeeping requirements for non-cash compensation received in connection with the offer or sale of variable insurance products pursuant to current NASD Rule 2820 (which will become FINRA Rule 2320). See supra note 4.

      12 Securities Act Release No. 8901 (Mar. 11, 2008), 73 FR 14618 (Mar. 18, 2008).

      13 See, e.g., Letter from Joseph P. Savage, Counsel, Investment Companies Regulation, NASD, to Kathleen H. Moriarty, Carter, Ledyard & Milburn (Oct. 30, 2002).


      Attachment A

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

      * * * * *

      Text of Proposed New FINRA Rule

      (Marked to Show Changes from NASD Rule 2830; NASD Rule 2830 to be Deleted in its Entirety from the Transitional Rulebook)

      * * * * *

      2000. DUTIES AND CONFLICTS

      * * * * *

      2300. SPECIAL PRODUCTS

      * * * * *

      2340. Investment Companies

      * * * * *

      [2830]2341. Investment Company Securities

      (a) Application

      This Rule shall apply exclusively to the activities of members in connection with the securities of companies registered under the Investment Company Act]of 1940 ("the 1940 Act")]; provided, however, that Rule 2320[2820]1 shall apply, in lieu of this Rule, to members' activities in connection with "variable contracts" as defined therein.
      (b) Definitions
      (1) The terms "affiliated member," "compensation," "cash compensation," "non-cash compensation" and "offeror" as used in paragraph (l) of this Rule shall have the following meanings:
      (A) "Affiliated Member" shall mean a member which, directly or indirectly, controls, is controlled by, or is under common control with a non-member company.
      (B) "Compensation" shall mean cash compensation and non-cash compensation.
      (C) "Cash compensation" shall mean any discount, concession, fee, service fee, commission, asset-based sales charge, loan, override or cash employee benefit received in connection with the sale and distribution of investment company securities.
      (D) "Non-cash compensation" shall mean any form of compensation received in connection with the sale and distribution of investment company securities that is not cash compensation, including but not limited to merchandise, gifts and prizes, travel expenses, meals and lodging.
      (E) "Offeror" shall mean an investment company, an adviser to an investment company, a fund administrator, an underwriter and any affiliated person (as defined in Section 2(a)(3) of the Investment Company [1940] Act) of such entities.
      (2) "Brokerage commissions," as used in paragraph (k), shall not be limited to commissions on agency transactions but shall include underwriting discounts or concessions and fees paid to members in connection with tender offers.
      (3) "Covered account," as used in paragraph (k), shall mean (A) any other investment company or other account managed by the investment adviser of such investment company, or (B) any other account from which brokerage commissions are received or expected as a result of the request or direction of any principal underwriter of such investment company or of any affiliated person (as defined in the Investment Company [1940] Act) of such investment company or of such underwriter, or of any affiliated person of an affiliated person of such investment company.
      (4) "Person" shall mean "person" as defined in the Investment Company [1940] Act.
      (5) "Prime rate," as used in paragraph (d), shall mean the most preferential interest rate on corporate loans at large U.S. money center commercial banks.
      (6) "Public offering price" shall mean a public offering price as set forth in the prospectus of the issuing company.
      (7) "Rights of accumulation" as used in paragraph (d), shall mean a scale of reducing sales charges in which the sales charge applicable to the securities being purchased is based upon the aggregate quantity of securities previously purchased or acquired and then owned plus the securities being purchased. The quantity of securities owned shall be based upon:
      (A) The current value of such securities (measured by either net asset value or maximum offering price); or
      (B) Total purchases of such securities at actual offering prices; or
      (C) The higher of the current value or the total purchases of such securities.
      The quantity of securities owned may also include redeemable securities of other registered investment companies having the same principal underwriter.
      (8) "Sales charge" and "sales charges," as used in paragraph (d) and paragraph (l)(4), shall mean all charges or fees that are paid to finance sales or sales promotion expenses, including front-end, deferred and asset-based sales charges, excluding charges and fees for ministerial, recordkeeping or administrative activities and investment management fees. For purposes of this Rule, members may rely on the sales-related fees and charges disclosed in the prospectus of an investment company.
      (A) An "asset-based sales charge" is a sales charge that is deducted from the net assets of an investment company and does not include a service fee.
      (B) A "deferred sales charge" is any amount properly chargeable to sales or promotional expenses that is paid by a shareholder after purchase but before or upon redemption.
      (C) A "front-end sales charge" is a sales charge that is included in the public offering price of the shares of an investment company.
      (9) "Service fees," as used in paragraph (d) and paragraph (l)(4), shall mean payments by an investment company for personal service and/or the maintenance of shareholder accounts.
      (10) The terms "underwriter," "principal underwriter," "redeemable security," "periodic payment plan," "open-end management investment company," and unit investment trust," shall have the same definitions used in the Investment Company [1940] Act.
      (11) A "fund of funds" is an investment company that acquires securities issued by any other investment company registered under the Investment Company [1940] Act in excess of the amounts permitted under paragraph (A) of Section 12(d)(1) of the Investment Company [1940] Act. An "acquiring company" in a fund of funds is the investment company that purchases or otherwise acquires the securities of another investment company, and an "acquired company" is the investment company whose securities are acquired.
      (12) "Investment companies in a single complex" are any two or more companies that hold themselves out to investors as related companies for purposes of investment and investor services.
      (c) Conditions for Discounts to Dealers

      No member who is an underwriter of the securities of an investment company shall sell any [such security to any dealer or broker at any price other than a public offering price unless such sale is in conformance with Rule 2420 and, if the] security that is issued by an open-end management company or by a unit investment trust which invests primarily in securities issued by other investment companies[,] to any dealer or broker at any price other than a public offering price unless a sales agreement is in effect between the parties as of the date of the transaction, which agreement shall set forth the concessions to be received by the dealer or broker.
      (d) Sales Charge

      No member shall offer or sell the shares of any open-end investment company, any closed-end investment company that makes periodic repurchase offers pursuant to Rule 23c-3(b) under the Investment Company [1940] Act and offers its shares on a continuous basis pursuant to Rule 415(a)(1)(xi) under the Securities Act]of 1933], or any "single payment" investment plan issued by a unit investment trust (collectively "investment companies") registered under the Investment Company [1940] Act if the sales charges described in the prospectus are excessive. Aggregate sales charges shall be deemed excessive if they do not conform to the following provisions:
      (1) Investment Companies Without an Asset-Based Sales Charge
      (A) Aggregate front-end and deferred sales charges described in the prospectus which may be imposed by an investment company without an asset-based sales charge shall not exceed 8.5% of the offering price.
      (B)
      (i) Rights of accumulation (cumulative quantity discounts) may be made available to any person in accordance with one of the alternative quantity discount schedules provided in subparagraph (C)(i) below, as in effect on the date the right is exercised.
      (ii) If rights of accumulation are not made available on terms at least as favorable as those specified in subparagraph (C)(i) the maximum aggregate sales charge shall not exceed 8.0% of the offering price.
      (C)
      (i) Quantity discounts, if offered, shall be made available on single purchases by any person in accordance with one of the following two alternatives:
      a. A maximum aggregate sales charge of 7.75% on purchases of $10,000 or more and a maximum aggregate sales charge of 6.25% on purchases of $25,000 or more; or
      b. A maximum aggregate sales charge of 7.50% on purchases of $15,000 or more and a maximum aggregate sales charge of 6.25% on purchases of $25,000 or more.
      (ii) If quantity discounts are not made available on terms at least as favorable as those specified in subparagraph (C)(i) the maximum aggregate sales charge shall not exceed:
      a. 7.75% of offering price if the provisions of subparagraphs (B) are met.
      b. 7.25% of offering price if the provisions of subparagraph (B) are not met.
      (D) If an investment company without an asset-based sales charge pays a service fee, the maximum aggregate sales charge shall not exceed 7.25% of the offering price.
      (2) Investment Companies with an Asset-Based Sales Charge
      (A) Except as provided in subparagraphs (C) and (D), the aggregate asset-based, front-end and deferred sales charges described in the prospectus which may be imposed by an investment company with an asset-based sales charge, if the investment company has adopted a plan under which service fees are paid, shall not exceed 6.25% of total new gross sales (excluding sales from the reinvestment of distributions and exchanges of shares between investment companies in a single complex, between classes of an investment company with multiple classes of shares or between series of a series investment company) plus interest charges on such amount equal to the prime rate plus one percent per annum. The maximum front-end or deferred sales charge resulting from any transaction shall be 6.25% of the amount invested.
      (B) Except as provided in subparagraphs (C) and (D), if an investment company with an asset-based sales charge does not pay a service fee, the aggregate asset-based, front-end and deferred sales charges described in the prospectus shall not exceed 7.25% of total new gross sales (excluding sales from the reinvestment of distributions and exchanges of shares between investment companies in a single complex, between classes of an investment company with multiple classes of shares or between series of a series investment company) plus interest charges on such amount equal to the prime rate plus one percent per annum. The maximum front-end or deferred sales charge resulting from any transaction shall be 7.25% of the amount invested.
      (C) The maximum aggregate sales charge on total new gross sales set forth in subparagraphs (A) and (B) may be increased by an amount calculated by applying the appropriate percentages of 6.25% or 7.25% to total new gross sales which occurred after an investment company first adopted an asset-based sales charge until July 7, 1993 plus interest charges on such amount equal to the prime rate plus one percent per annum less any front-end, asset-based or deferred sales charges on such sales or net assets resulting from such sales.
      (D) The maximum aggregate sales charges of an investment company in a single complex, a class of shares issued by an investment company with multiple classes of shares or a separate series of a series investment company, may be increased to include sales of exchanged shares provided that such increase is deducted from the maximum aggregate sales charges of the investment company, class or series which redeemed the shares for the purpose of such exchanges.
      (E) No member shall offer or sell the shares of an investment company with an asset-based sales charge if:
      (i) The amount of the asset-based sales charge exceeds .75 of 1% per annum of the average annual net assets of the investment company; or
      (ii) Any deferred sales charges deducted from the proceeds of a redemption after the maximum cap described in subparagraphs (A), (B), (C) and (D) hereof, has been attained are not credited to the investment company.
      (3) Fund of Funds
      (A) If neither an acquiring company nor an acquired company in a fund of funds structure has an asset-based sales charge, the maximum aggregate front-end and deferred sales charges that may be imposed by the acquiring company, the acquired company and those companies in combination, shall not exceed the rates provided in paragraph (d)(1).
      (B) Any acquiring company or acquired company in a fund of funds structure that has an asset-based sales charge shall individually comply with the requirements of paragraph (d)(2), provided:
      (i) If the acquiring and acquired companies are in a single complex and the acquired fund has an asset-based sales charge, sales made to the acquiring fund shall be excluded from total gross new sales for purposes of acquired fund's calculations under [sub]paragraphs (d)(2)(A) through (d)(2)(D); and
      (ii) If both the acquiring and acquired companies have an asset-based sales charge:
      a. the maximum aggregate asset-based sales charge imposed by the acquiring company, the acquired company and those companies in combination, shall not exceed the rate provided in [sub]paragraph (d)(2)(E)(i); and
      b. the maximum aggregate front-end or deferred sales charges shall not exceed 7.25% of the amount invested, or 6.25% if either company pays a service fee.
      (C) The rates described in [sub]paragraphs (d)(4) and (d)(5) shall apply to the acquiring company, the acquired company and those companies in combination. The limitations of [sub]paragraph (d)(6) shall apply to the acquiring company and the acquired company individually.
      (4) No member or person associated with a member shall, either orally or in writing, describe an investment company as being "no load" or as having "no sales charge" if the investment company has a front-end or deferred sales charge or whose total charges against net assets to provide for sales related expenses and/or service fees exceed .25 of 1% of average net assets per annum.
      (5) No member or person associated with a member shall offer or sell the securities of an investment company if the service fees paid by the investment company, as disclosed in the prospectus, exceed .25 of 1% of its average annual net assets or if a service fee paid by the investment company, as disclosed in the prospectus, to any person who sells its shares exceeds .25 of 1% of the average annual net asset value of such shares.
      (6) No member or person associated with a member shall offer or sell the securities of an investment company if:
      (A) The investment company has a deferred sales charge paid upon redemption that declines over the period of a shareholder's investment ("contingent deferred sales load"), unless the contingent deferred sales load is calculated as if the shares or amounts representing shares not subject to the load are redeemed first, and other shares or amounts representing shares are then redeemed in the order purchased, provided that another order of redemption may be used if such order would result in the redeeming shareholder paying a lower contingent deferred sales load; or
      (B) The investment company has a front-end or deferred sales charge imposed on shares, or amounts representing shares, that are purchased through the reinvestment of dividends, unless the registration statement registering the investment company's securities under the Securities Act [of 1933] became effective prior to April 1, 2000.
      (e) Selling Dividends

      No member shall, in recommending the purchase of investment company securities, state or imply that the purchase of such securities shortly before an ex-dividend date is advantageous to the purchaser, unless there are specific, clearly described tax or other advantages to the purchaser, and no member shall represent that distributions of long-term capital gains by an investment company are or should be viewed as part of the income yield from an investment in such company's securities.
      (f) Withhold Orders

      No member shall withhold placing customers' orders for any investment company security so as to profit [himself]itself as a result of such withholding.
      (g) Purchase for Existing Orders

      No member shall purchase from an underwriter the securities of any open-end investment company and no member who is an underwriter of such securities shall purchase such securities from the issuer, except (1) for the purpose of covering purchase orders previously received or (2) for its own investment. Nothing herein shall be deemed to prohibit any member from purchasing securities of any investment company specifically designed for short-term investment (e.g., money market fund).
      (h) Refund of Sales Charge

      If any security issued by an open-end management investment company is repurchased by the issuer, or by the underwriter for the account of the issuer, or is tendered for redemption within seven business days after the date of the transaction, (1) the dealer or broker shall forthwith refund to the underwriter the full concession allowed to the dealer or broker on the original sale and (2) the underwriter shall forthwith pay to the issuer the underwriter's share of the sales charge on the original sale by the underwriter and shall also pay to the issuer the refund which [he]it received under subparagraph (1) when [he]it receives it. The dealer or broker shall be notified by the underwriter of such repurchase or redemption within ten days of the date on which the certificate or written request for redemption is delivered to the underwriter or issuer. If the original sale was made directly to the investor by the principal underwriter, the entire sales charge shall be paid to the issuer by the principal underwriter.
      (i) Purchases as Principal

      No member who is a party to a sales agreement referred to in paragraph (c) shall, as principal, purchase any security issued by an open-end management investment company or unit investment trust from a record holder at a price lower than the bid price next quoted by or for the issuer.
      (j) Repurchase from Dealer

      No member who is a principal underwriter of a security issued by an open-end investment company or a closed-end investment company that makes periodic repurchase offers pursuant to Rule 23c-3(b) under the Investment Company [1940] Act and offers its shares on a continuous basis pursuant to Rule 415(a)(1)(xi) under the Securities Act [of 1933] shall repurchase such security, either as principal or as agent for the issuer, from a dealer acting as principal who is not a party to a sales agreement with a principal underwriter, nor from any investor, unless such dealer or investor is the record owner of the security so tendered for repurchase. No member who is a principal underwriter shall participate in the offering or in the sale of any such security if the issuer voluntarily redeems or repurchases its securities from a dealer acting as principal who is not a party to such a sales agreement nor from any investor, unless such dealer or investor is the record owner of the security so tendered for repurchase. Nothing in this paragraph shall relate to the compulsory redemption of any security upon presentation to the issuer pursuant to the terms of the security.

      Nothing in this Rule shall prevent any member, whether or not a party to a sales agreement, from selling any such security for the account of a record owner to the underwriter or issuer at the bid price next quoted by or for the issuer and charging the investor to a reasonable charge for handling the transaction, provided that such member discloses to such record owner that direct redemption of the security can be accomplished by the record owner without incurring such charges.
      (k) Execution of Investment Company Portfolio Transactions
      (1) No member shall, directly or indirectly, favor or disfavor the sale or distribution of shares of any particular investment company or group of investment companies on the basis of brokerage commissions received or expected by such member from any source, including such investment company, or any covered account.
      (2) No member shall sell shares of, or act as underwriter for, an investment company, if the member knows or has reason to know that such investment company, or an investment adviser or principal underwriter of the company, has a written or oral agreement or understanding under which the company directs or is expected to direct portfolio securities transactions (or any commission, markup or other remuneration resulting from any such transaction) to a broker or a dealer in consideration for the promotion or sale of shares issued by the company or any other registered investment company.
      (3) No member shall, directly or indirectly, demand or require brokerage commissions or solicit a promise of such commissions from any source as a condition to the sale or distribution of shares of an investment company.
      (4) No member shall, directly or indirectly, offer or promise to another member, brokerage commissions from any source as a condition to the sale or distribution of shares of an investment company and no member shall request or arrange for the direction to any member of a specific amount or percentage of brokerage commissions conditioned upon that member's sales or promise of sales of shares of an investment company.
      (5) No member shall circulate any information regarding the amount or level of brokerage commissions received by the member from any investment company or covered account to other than management personnel who are required, in the overall management of the member's business, to have access to such information.
      (6) No member shall, with respect to such member's activities as underwriter of investment company shares, suggest, encourage, or sponsor any incentive campaign or special sales effort of another member with respect to the shares of any investment company which incentive or sales effort is, to the knowledge or understanding of such underwriter-member, to be based upon, or financed by, brokerage commissions directed or arranged by the underwriter-member.
      (7) No member shall, with respect to such member's retail sales or distribution of investment company shares:
      (A) provide to salesmen, branch managers or other sales personnel any incentive or additional compensation for the sale of shares of specific investment companies based on the amount of brokerage commissions received or expected from any source, including such investment companies or any covered account. Included in this prohibition are bonuses, preferred compensation lists, sales incentive campaign or contests, or any other method of compensation which provides an incentive to sales personnel to favor or disfavor any investment company or group of investment companies based on brokerage commissions;
      (B) recommend specific investment companies to sales personnel, or establish "recommended," "selected," or "preferred" lists of investment companies, regardless of the existence of any special compensation or incentives to favor or disfavor the shares of such company or companies in sales efforts, if such companies are recommended or selected on the basis of brokerage commissions received or expected from any source;
      (C) grant to salesmen, branch managers or other sales personnel any participation in brokerage commissions received by such member from portfolio transactions of an investment company whose shares are sold by such member, or from any covered account, if such commissions are directed by, or identified with, such investment company or any covered account; or
      (D) use sales of shares of any investment company as a factor in negotiating the price of, or the amount of brokerage commissions to be paid on, a portfolio transaction of an investment company or of any covered account, whether such transaction is executed in the over-the-counter market or elsewhere.
      (8) Provided that the member does not violate any of the specific provisions of this paragraph (k), nothing herein shall be deemed to prohibit:
      (A) the execution of portfolio transactions of any investment company or covered account by members who also sell shares of the investment company; or
      (B) a member from compensating its salesmen and managers based on total sales of investment company shares attributable to such salesmen or managers, whether by use of overrides, accounting credits, or other compensation methods, provided that such compensation is not designed to favor or disfavor sales of shares of particular investment companies on a basis prohibited by this paragraph (k).
      (l) Member Compensation

      In connection with the sale and distribution of investment company securities:
      (1) Except as described below, no associated person of a member shall accept any compensation from anyone other than the member with which the person is associated. This requirement will not prohibit arrangements where a non-member company pays compensation directly to associated persons of the member, provided that:
      (A) the arrangement is agreed to by the member;
      (B) the member relies on an appropriate rule, regulation, interpretive release, interpretive letter, or "no-action" letter issued by the [Commission] SEC or its staff that applies to the specific fact situation of the arrangement;
      (C) the receipt by associated persons of such compensation is treated as compensation received by the member for purposes of FINRA rules [the Rules of the Association]; and
      (D) the record[]keeping requirement in paragraph (l)(3) is satisfied.
      (2) No member or person associated with a member shall accept any compensation from an offeror which is in the form of securities of any kind.
      (3) Except for items described in [sub]paragraphs (l)(5)(A) and (B), a member shall maintain records of all compensation received by the member or its associated persons from offerors. The records shall include the names of the offerors, the names of the associated persons, the amount of cash, and the nature and[, if known, the] value of non-cash compensation received.
      (4)
      (A) No member shall accept any [cash compensation]sales charges or service fees from an offeror unless such compensation is described in a current prospectus of the investment company. When special [cash compensation]sales charges or service fee arrangements are made available by an offeror to a member, which arrangements are not made available on the same terms to all members who distribute the investment company securities of the offeror, a member shall not enter into such arrangements unless the name of the member and the details of the arrangements are disclosed in the prospectus. [Prospectus disclosure requirements shall not apply to cash compensation arrangements between:]
      [(A) principal underwriters of the same security; and]
      [(B) the principal underwriter of a security and the sponsor of a unit investment trust which utilizes such security as its underlying investment.]
      (B) Any member that has within the previous 12 months received from an offeror any form of cash compensation, other than sales charges or service fees disclosed in the prospectus fee table, must:
      (i) disclose that information about an investment company's fees and expenses may be found in the fund's prospectus;
      (ii) disclose, if applicable, that the member receives cash payments from an offeror, other than sales charges or service fees disclosed in the prospectus fee table, the nature of any such cash payments received in the past 12 months, and the name of each offeror that made such a cash payment, listed in descending order based upon the amount of compensation received from each offeror; and
      (iii) provide a reference (or in the case of electronically delivered documents, a hyperlink) to the web page or toll-free telephone number described in subparagraph (D). If the member elects not to maintain a web page or toll-free telephone number as described in subparagraph (D), the member must disclose that updated information described in this subparagraph (B) will be sent to the customer on a semi-annual basis.
      (C) The disclosure required by subparagraph (B) must be updated on a semi-annual basis and must be made in written documentation:
      (i) at the time that the customer establishes an account with the member or the member's clearing broker;
      (ii) if no such account is established, by the time the customer first purchases shares of an investment company; or
      (iii) with respect to accounts existing when subparagraph (B) becomes effective, the later of (a) 90 days after the effective date, or (b) the time the customer first purchases shares of an investment company after the effective date (other than purchases through reinvestment of dividends or capital distributions or through automatic investment plans).
      (D) Any member that receives cash payments from investment companies and their affiliates, other than sales charges or service fees disclosed in the prospectus fee table must either:
      (i) maintain a web page or toll-free telephone number that is available to the public and that provides updated information described in subparagraph (B); or
      (ii) send updated information described in subparagraph (B) in written form on a semi-annual basis to its customers who originally received this disclosure.
      (E) The requirements of Rule 2341(l)(4)(B) shall not apply to cash compensation in the form of a sales charge or service fee disclosed in the prospectus fee table of the offeror's investment company.
      (5) No member or person associated with a member shall directly or indirectly accept or make payments or offers of payments of any non-cash compensation, except as provided in this provision. Notwithstanding the provisions of [sub]paragraph (l)(1), the following non-cash compensation arrangements are permitted:
      (A) Gifts that do not exceed an annual amount per person fixed periodically by FINRA[the Association]1 and are not preconditioned on achievement of a sales target.
      (B) An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target.
      (C) Payment or reimbursement by offerors in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member, provided that:
      (i) the record[]keeping requirement in paragraph (l)(3) is satisfied;
      (ii) associated persons obtain the member's prior approval to attend the meeting and attendance by a member's associated persons is not preconditioned by the member on the achievement of a sales target or any other incentives pursuant to a non-cash compensation arrangement permitted by paragraph (l)(5)(D);
      (iii) the location is appropriate to the purpose of the meeting, which shall mean an office of the offeror or the member, or a facility located in the vicinity of such office, or a regional location with respect to regional meetings;
      (iv) the payment or reimbursement is not applied to the expenses of guests of the associated person; and
      (v) the payment or reimbursement by the offeror is not preconditioned by the offeror on the achievement of a sales target or any other non-cash compensation arrangement permitted by paragraph (l)(5)(D).
      (D) Non-cash compensation arrangements between a member and its associated persons or a non-member company and its sales personnel who are associated persons of an affiliated member, provided that:
      (i) the member's or non-member's non-cash compensation arrangement, if it includes investment company securities, is based on the total production of associated persons with respect to all investment company securities distributed by the member;
      (ii) the non-cash compensation arrangement requires that the credit received for each investment company security is equally weighted;
      (iii) no unaffiliated non-member company or other unaffiliated member directly or indirectly participates in the member's or non-member's organization of a permissible non-cash compensation arrangement; and
      (iv) the record[]keeping requirement in paragraph (l)(3) is satisfied.
      (E) Contributions by a non-member company or other member to a non-cash compensation arrangement between a member and its associated persons, provided that the arrangement meets the criteria in paragraph (l)(5)(D).
      (m) Prompt Payment for Investment Company Shares
      (1) Members (including underwriters) that engage in direct retail transactions for investment company shares shall transmit payments received from customers for such shares, which such members have sold to customers, to payees (i.e., underwriters, investment companies or their designated agents) by (A) the end of the third business day following a receipt of a customer's order to purchase such shares or by (B) the end of one business day following receipt of a customer's payment for such shares, whichever is the later date.
      (2) Members that are underwriters and that engage in wholesale transactions for investment company shares shall transmit payments for investment company shares, which such members have received from other members, to investment company issuers or their designated agents by the end of two business days following receipt of such payments.
      (n) Disclosure of Deferred Sales Charges

      In addition to the requirements for disclosure on written confirmations of transactions contained in NASD Rule 2230, if the transaction involves the purchase of shares of an investment company that imposes a deferred sales charge on redemption, such written confirmation shall also include the following legend: "On selling your shares, you may pay a sales charge. For the charge and other fees, see the prospectus." The legend shall appear on the front of a confirmation and in, at least, 8-point type.
      (o) Exchange-Traded Funds

      Nothing in this Rule shall be deemed to prohibit the trading of an exchange-traded fund on a secondary market or securities exchange at prices other than the exchange-traded fund's current net asset value, provided that such transactions are consistent with applicable SEC rules and orders. For purposes of this paragraph, "exchange-traded fund" means an open-end investment company or unit investment trust registered under the Investment Company Act that either has received an exemptive order from the SEC permitting trading of the investment company's shares at prices other than its current net asset value, or is operating in a manner consistent with SEC rules applicable to registered open-end investment companies or unit investment trusts that trade in the secondary market.
      1. The current annual amount fixed by FINRA[the Association] is $100.

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

      .01 "Cash Compensation." Paragraph (b)(1)(C) of t