
[Federal Register: October 1, 2008 (Volume 73, Number 191)]
[Notices]               
[Page 57174-57177]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01oc08-134]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58643; File Nos. SR-FINRA-2008-021; SR-FINRA-2008-022; 
SR-FINRA-2008-026; SR-FINRA-2008-028 and SR-FINRA-2008-029]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change, as Modified by 
Amendment No. 1, Relating to the Adoption of NASD Rules 4000 Through 
10000 Series and the 12000 Through 14000 Series as FINRA Rules in the 
New Consolidated FINRA Rulebook; Order Approving Proposed Rule Change 
Relating to the Membership Waive-In Process for Certain New York Stock 
Exchange Members; Order Approving Proposed Rule Change, as Modified by 
Amendment No. 1, To Adopt the FINRA Rule 0100 Series (General 
Standards) in the Consolidated FINRA Rulebook; Order Approving Proposed 
Rule Change To Adopt FINRA Rule 2010 (Standards of Commercial Honor and 
Principles of Trade), FINRA Rule 2020 (Use of Manipulative, Deceptive 
or Other Fraudulent Devices), and FINRA Rule 5150 (Fairness Opinions) 
in the Consolidated FINRA Rulebook; and Order Approving Proposed Rule 
Change, as Modified by Amendment No. 1, To Repeal NASD Rule 1130 and 
Incorporated Rules 405A, 440F, 440G and 447 as Part of the Process of 
Developing the Consolidated FINRA Rulebook

September 25, 2008.

I. Introduction

    On May 23, 2008, the Financial Industry Regulatory Authority, Inc 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')), filed with the Securities and Exchange Commission 
(``Commission'' or ``Exchange''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt the following NASD rules 
(which are part of the existing FINRA rulebook) as FINRA rules into a 
new consolidated rulebook (``Consolidated FINRA Rulebook''): The 4000 
through 10000 Series and the 12000 through 14000 Series (collectively, 
the ``Marketplace and Procedural Rules Proposal''). The Marketplace and 
Procedural Rules Proposal, as modified by Amendment No. 1, was 
published for comment in the Federal Register on July 23, 2008.\3\ The 
Commission received no comments on the Marketplace and Procedural Rules 
Proposal. This order approves the Marketplace and Procedural Rules 
Proposal, as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 58176 (July 16, 
2008), 73 FR 42844 (July 23, 2008) (SR-FINRA-2008-021) (``Release 
No. 34-58176'').
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    On May 23, 2008, FINRA filed with the Commission, pursuant to 
Section 19(b)(1) of the Act and Rule 19b-4 thereunder, a proposed rule 
change relating to the membership waive-in process for certain New York 
Stock Exchange LLC (``NYSE'') members (``Waive-In Firms Proposal''). 
The Waive-In Firms Proposal was published for comment in the Federal 
Register on July 28, 2008.\4\ The Commission received no comments on 
the Waive-In Firms Proposal. This order approves the Waive-In Firms 
Proposal.
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    \4\ See Securities Exchange Act Release No. 58206 (July 22, 
2008), 73 FR 43808 (July 28, 2008) (SR-FINRA-2008-022).
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    On June 13, 2008, FINRA filed with the Commission, pursuant to 
Section 19(b)(1) of the Act and Rule 19b-4 thereunder, a proposed rule 
change to adopt FINRA Rule 2010 (Standards of Commercial Honor and 
Principles of Trade), FINRA Rule 2020 (Use of Manipulative, Deceptive 
or Other Fraudulent Devices), and FINRA Rule 5150 (Fairness Opinions) 
in the Consolidated FINRA Rulebook (collectively, the ``Ethical Conduct 
and Fairness Opinion Rules Proposal''). The Ethical Conduct and 
Fairness Opinion Rules Proposal was published for comment in the 
Federal Register on July 10, 2008.\5\ The Commission received no 
comments on this proposed rule change. This order approves the Ethical 
Conduct and Fairness Opinion Rules Proposal.
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    \5\ See Securities Exchange Act Release No. 58095 (July 3, 
2008), 73 FR 39751 (July 10, 2008) (SR-FINRA-2008-028).
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    On June 16, 2008, FINRA filed with the Commission, pursuant to 
Section 19(b)(1) of the Act and Rule 19b-4 thereunder, a proposed rule 
change to adopt the FINRA Rule 0100 Series (General Standards) in the 
Consolidated FINRA Rulebook (``General Standards Proposal''). The 
General Standards Proposal, as modified by Amendment No. 1, was 
published for comment in the Federal Register on August 7, 2008.\6\ The 
Commission received no comments on the General Standards Proposal. This 
order approves the General Standards Proposal as modified by Amendment 
No. 1.
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    \6\ See Securities Exchange Act Release No. 58245 (July 29, 
2008), 73 FR 46106 (August 7, 2008) (SR-FINRA-2008-026).

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[[Page 57175]]

    On June 16, 2008, FINRA filed with the Commission, pursuant to 
Section 19(b)(1) of the Act and Rule 19b-4 thereunder, a proposed rule 
change to repeal NASD Rule 1130 and Incorporated NYSE Rules NYSE 405A, 
440F, 440G and 477 as part of the process of developing the 
Consolidated FINRA Rulebook (collectively, the ``Miscellaneous Rules 
Proposal''). The Miscellaneous Rules Proposal, as modified by Amendment 
No. 1, was published for comment in the Federal Register on August 4, 
2008.\7\ The Commission received no comments on the Miscellaneous Rules 
Proposal. This order approves the Miscellaneous Rules Proposal, as 
modified by Amendment No. 1.
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    \7\ See Securities Exchange Act Release No. 58244 (July 29, 
2008), 73 FR 45258 (August 4, 2008) (SR-FINRA-2008-029).
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II. Description

    On July 30, 2007, the NASD and NYSE Regulation, Inc. (``NYSE 
Regulation''), a wholly-owned subsidiary of NYSE, consolidated their 
member firm regulation operations into a combined organization, 
FINRA.\8\ As part of the transaction, FINRA incorporated into its 
existing rulebook, comprised of NASD rules, certain NYSE rules related 
to member firm conduct (``Incorporated NYSE Rules''). Consequently, the 
current FINRA rulebook consists of two sets of rules: (1) NASD rules; 
and (2) the Incorporated NYSE Rules (together referred to as the 
``Transitional Rulebook''). Following the consolidation of NASD and 
NYSE Regulation into FINRA, FINRA established a process to develop the 
Consolidated FINRA Rulebook. During this process, FINRA members 
generally will be subject to both the Consolidated FINRA Rulebook, as 
it becomes populated with rules filed with and approved by the 
Commission, and the Transitional Rulebook. As the Consolidated FINRA 
Rulebook expands with Commission-approved FINRA rules, the Transitional 
Rulebook will be reduced by the elimination of those rules, or sections 
thereof, that address the same subject matter. Therefore, when the 
Consolidated FINRA Rulebook is complete, the Transitional Rulebook will 
have been eliminated in its entirety. The proposed rule changes would 
incorporate various rules into the Consolidated FINRA Rulebook, 
eliminate certain Incorporated NYSE Rules, and apply the consolidated 
FINRA rules to the NYSE firms admitted pursuant to IM-1013-1 (``Waive-
In Firms'').
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    \8\ See Securities Exchange Act Release No. 56145 (July 26, 
2007); 72 FR 42169 (August 1, 2007) (Order Approving SR-NASD-2007-
023).
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the Marketplace and 
Procedural Rules Proposal, as amended, the Waive-In Firms Proposal, the 
General Standards Proposal, as amended, the Ethical Conduct and 
Fairness Opinion Rules Proposal, and the Miscellaneous Rules Proposal, 
as amended, are consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
association.\9\ In particular, the Commission finds that these proposed 
rule changes are consistent with Section 15A(b)(6) of the Act,\10\ 
which requires, among other things, that FINRA rules must be designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, and in general to protect 
investors and the public interest. In addition, for purposes of the 
Marketplace and Procedural Rules Proposal, the Commission finds that 
this proposed rule change is consistent with Section 15A(b)(5) of the 
Act,\11\ which requires, among other things, that FINRA rules provide 
for the equitable allocation of reasonable dues, fees and other charges 
among members and issuers and other persons using any facility or 
system that FINRA operates and controls.
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    \9\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78o-3(b)(6).
    \11\ 15 U.S.C. 78o-3(b)(5).
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    The Commission notes that FINRA will announce the implementation 
date of the proposed rule changes in a Regulatory Notice to be 
published no later than 60 days following Commission approval. The 
discussion below does not review every detail of each of the proposed 
rule changes, but focuses on the most significant rules and policy 
issues considered by the Commission in reviewing the proposals.

A. Marketplace and Procedural Rules Proposal (SR-FINRA-2008-021)

    The Marketplace and Procedural Rules Proposal will transfer from 
the Transitional Rulebook to the Consolidated FINRA Rulebook the NASD 
Rule 4000 through 14000 Series, with the exception of the Rule 11000 
Series (Uniform Practice Code). The proposed rule change generally will 
transfer these rules into the Consolidated FINRA Rulebook in their 
entirety with certain non-material changes, including: Replacing 
references to NASD or the Association with FINRA; renumbering and 
relocating certain rules, or sections thereof, to effectuate a new 
organizational framework; and making certain other non-substantive and 
conforming changes. Additionally, the Marketplace and Procedural Rules 
Proposal will reserve Rule Series 0100 through 5000 for future 
transfers and amendments to member conduct rules relating to 
requirements such as the member application processes and associated 
person registration, transactions with customers, supervision, 
communications and disclosures, and financial responsibility. Further, 
with the exception of the arbitration and meditation procedures, the 
Consolidated FINRA Rulebook will no longer contain Interpretive 
Materials (``IMs''). The IMs will become stand-alone rules or will be 
integrated into existing rule text or moved to a ``Supplementary 
Material'' section at the end of a rule. The ``Supplementary Material'' 
will set forth the same type of legally binding guidance and additional 
information that IMs provide presently and will be filed with the 
Commission.
    The Marketplace and Procedural Rules Proposal also provides that 
certain rules in the Transitional Rulebook have general application to 
the entirety of rules that govern FINRA members. These rules, described 
in greater detail in the Marketplace and Procedural Rules Proposal, 
will apply to both the Transitional Rulebook and the Consolidated 
Rulebook.
    The Commission believes that the Marketplace and Procedural Rules 
Proposal is consistent with Section 15A(b)(6) of the Act and would 
further the objective of the NASD/NYSE Regulation consolidation to 
create a more efficient regulatory system for firms that are members of 
both FINRA and NYSE. The Commission believes that the proposed rule 
change is designed to clarify, harmonize and streamline the Rule 4000 
through 14000 Series (not including the 11000 Series) for adoption as 
FINRA rules in the new Consolidated FINRA Rulebook. The Commission also 
believes that the proposed rule change is consistent with Section 
15A(b)(5) of the Act by providing for the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using any facility or system that FINRA operates or 
controls.

B. Waive-In Firms Proposal (SR-FINRA-2008-022)

    As part of the consolidation process, NYSE required that its 
members also be

[[Page 57176]]

registered FINRA members. Accordingly, FINRA adopted IM-1013-1, which 
provided an expedited waive-in process for NYSE member organizations to 
become FINRA members.\12\ IM-1013-1 requires these Waive-In Firms to be 
subject to the Incorporated NYSE Rules, FINRA's By-Laws, the Schedules 
to the By-Laws, including Schedule A (Assessments and Fees), and the 
NASD Rule 8000 (Investigations and Sanctions) and Rule 9000 (Code of 
Procedure) Series, provided that their securities business is limited 
to permitted floor activities.\13\ FINRA proposed to amend IM-1013-1 to 
add that the Waive-In Firms also will be subject to the consolidated 
FINRA rules and to remove references to the NASD Rule 8000 and Rule 
9000 Series, whose content is being transferred without substantive 
change to the Consolidated FINRA Rulebook.\14\ The amended IM-1013-1 
will continue to require that the Waive-In Firms be subject to the 
Incorporated NYSE Rules until they are eliminated from the Transitional 
Rulebook and replaced by rules adopted into the FINRA Consolidated 
Rulebook.
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    \12\ See Securities Exchange Act Release No. 56653 (October 12, 
2007), 72 FR 59127 (October 18, 2007) (SR-NASD-2007-056).
    \13\ If a Waive-In Firm wished to expand its business beyond the 
permitted floor activities indicated in IM-1013-1, it must apply for 
such business expansion pursuant to NASD Rule 1017 and, upon 
approval, become subject to all NASD rules in addition to the 
consolidated FINRA rules and the Incorporated NYSE Rules.
    \14\ See Release No. 34-58176, supra note 3.
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    The Commission notes that the proposed rule change would ensure 
that Waive-In Firms will continue to be subject to FINRA's 
investigation and disciplinary procedure rules as those rules will be 
incorporated into the Consolidated FINRA Rulebook. The Commission 
further notes that the proposed rule change, by subjecting the Waive-In 
Firms to all the consolidated FINRA rules, also would ensure that 
Waive-In Firms will continue to be subject to FINRA's regulation 
throughout the consolidation process, as the Incorporated NYSE Rules 
are eliminated and replaced by rules adopted into the FINRA 
Consolidated Rulebook. Thus, the Commission believes that the proposed 
rule change should minimize the potential for regulatory and 
jurisdictional gaps during the period that the rule consolidation 
process occurs. Therefore, because the Waive-In Firms will continue to 
be subject to FINRA's regulation, the Commission believes that the 
proposed rule change is consistent with the requirements of the Act, in 
particular, Section 15A(b)(6),\15\ which requires the rules of a 
national securities association to be designed to prevent fraudulent 
and manipulative acts and practices, promote just and equitable 
principles of trade and, in general, to protect investors and the 
public interest.
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    \15\ 15 U.S.C. 78o-3(b)(6).
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C. General Standards Proposal (SR-FINRA-2008-026)

    The General Standards proposal will adopt the NASD Rule 0100 Series 
(General Provisions) as FINRA rules in the Consolidated FINRA Rulebook, 
with the exception of NASD Rule 0120, which FINRA advises will be 
addressed at a later date in a separate filing. The NASD Rule 0100 
Series governs the adoption, application and interpretation of NASD 
rules and sets forth certain definitions not contained in the FINRA By-
Laws. In addition, these rules address FINRA's delegation of certain 
responsibilities to its subsidiaries, and its authority and access with 
respect to its subsidiaries. FINRA is proposing to transfer this rule 
series as the FINRA Rule 0100 Series, to be renamed as ``General 
Standards,'' to the Consolidated FINRA Rulebook, with only minor, non-
substantive changes. The proposed rule change will not impose any new 
requirements on FINRA members, but will clarify and streamline these 
rules for inclusion in the Consolidated FINRA Rulebook. FINRA notes 
that, notwithstanding their transfer to the Consolidated FINRA 
Rulebook, these rules of general applicability will apply equally to 
both the Transitional Rulebook and the Consolidated FINRA Rulebook.\16\
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    \16\ See Release No. 34-58176, supra note 3.
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    The Commission believes that the General Standards Proposal is 
consistent with the Act and is appropriate in light of the objective to 
create a Consolidated FINRA Rulebook. The Commission believes that the 
proposed rule change is designed to clarify and streamline the Rule 
0100 Series for adoption as FINRA rules in the new Consolidated FINRA 
Rulebook.

D. Ethical Conduct and Fairness Opinion Rules Proposal (SR-FINRA-2008-
028)

    FINRA proposed to adopt NASD Rules 2110, 2120, and 2290 as FINRA 
Rules 2010, 2020, and 5150, respectively, in the Consolidated FINRA 
Rulebook. The rules, which include the general standards of commercial 
honor and principles of trade, anti-fraud and manipulation 
requirements, and disclosure of conflicts of interest in fairness 
opinions, will be adopted without change, with the exception of re-
numbering the rules to reflect the new organizational structure of the 
Consolidated FINRA Rulebook. As noted above, this proposal does not 
address the Interpretive Materials (``IMs'') to NASD Rule 2110, which 
FINRA advises will be considered in a later phase of the rulebook 
consolidation process. Consequently, the IMs will remain in the 
Transitional Rulebook. In the process of transferring NASD Rule 2110, 
which requires adherence to just and equitable principles of trade, 
FINRA proposed to delete Incorporated NYSE Rule 401(a) and its two 
accompanying Interpretations because they are subsumed under the 
general principles of NASD Rule 2110. In addition, FINRA proposed to 
delete paragraphs (1), (3) and (4) of Incorporated NYSE Rule 435, 
because they are subsumed under the anti-fraud and manipulation 
requirements of NASD Rule 2120.\17\
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    \17\ FINRA also proposed to delete as obsolete paragraphs (6) 
and (7) of Incorporated NYSE Rule 435, but retained paragraph (5) of 
this rule.
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    The transfer of NASD Rules 2110 and 2020 to the Consolidated FINRA 
Rulebook, in addition to the deletion of Incorporated NYSE Rule 401(a), 
its corresponding Interpretations, and certain provisions of 
Incorporated NYSE Rule 435, will continue to require FINRA members to 
adhere to the requirements of the overarching principles of just and 
equitable trade and the prohibitions against fraudulent and 
manipulative acts and practices. The Commission believes that the 
proposed rule change is consistent with the requirements of Section 15A 
of the Act, and with Section 15A(b)(6) in particular, because the rules 
to be transferred to the Consolidated FINRA Rulebook are designed to 
allow FINRA to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, and in general, to 
protect investors and the public interest.\18\ The Commission also 
believes that it is reasonable for FINRA to transfer to the 
Consolidated FINRA Rulebook the provisions of NASD Rule 2290, which 
requires the disclosure of conflicts of interest in connection with 
fairness opinions and procedures designed to mitigate those conflicts.
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    \18\ 15 U.S.C. 78o-3.
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E. Miscellaneous Rules Proposal (SR-FINRA-2008-029)

    FINRA proposed a rule change to repeal various NASD and 
Incorporated NYSE Rules to eliminate duplicative provisions and remove 
requirements

[[Page 57177]]

that are specific to the NYSE marketplace. NASD Rule 1130 (Reliance on 
Current Membership List) is to be deleted as it is duplicative of 
Article IV, Section 4 of the FINRA By-Laws. Also, Incorporated NYSE 
Rules 405A (Non-Managed Fee-Based Account Programs--Disclosure and 
Monitoring) will be repealed because it is subsumed under NASD Rule 
2110's Notice to Members 03-68. Further, Incorporated NYSE Rules 440F 
(Public Short Sale Transactions Effected on the Exchange) and 440G 
(Transactions in Stocks and Warrants for the Accounts of Members, 
Allied Members and Member Organizations) will be eliminated because 
they are specific to the NYSE marketplace and relate solely to exchange 
transactions. Finally, Incorporated NYSE Rule 477 (Retention of 
Jurisdiction--Failure to Cooperate) will be repealed because it retains 
jurisdiction over former members and associated person for initiating 
disciplinary action, which is also specified under Article IV, Section 
6 and Article V, Section 4 of the FINRA By-Laws.
    The Commission notes that the deletion of these rules will 
eliminate duplicative provisions covered by other rules in the 
Consolidated FINRA Rulebook and remove unnecessary requirements that 
are specific to the NYSE marketplace. In eliminating duplicative and 
unnecessary rules, the proposed rule change should further the 
objectives of Section 15A(b)(6) of the Act,\19\ which requires that 
FINRA rules must be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
and in general, to protect investors and the public interest.
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    \19\ 15 U.S.C. 78o-3(b)(6).
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Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the Marketplace and Procedural Rules Proposal (SR-FINRA-
2008-021), as modified by Amendment No. 1; the Waive-In Firms Proposal 
(SR-FINRA-2008-022); the General Standards Proposal (SR-FINRA-2008-
026), as modified by Amendment No. 1; the Ethical Conduct and Fairness 
Opinion Rules Proposal (SR-FINRA-2008-028); and the Miscellaneous Rules 
Proposal (SR-FINRA-2008-029), as modified by Amendment No. 1, be, and 
hereby are, approved.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-23040 Filed 9-30-08; 8:45 am]

BILLING CODE 8011-01-P
