
[Federal Register: January 28, 2009 (Volume 74, Number 17)]
[Notices]               
[Page 4992-5007]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28ja09-90]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59273; File No. SR-FINRA-2008-067]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
Rules Governing Financial Responsibility in the Consolidated FINRA 
Rulebook

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 30, 2008, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been substantially prepared by 
FINRA. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt a new, consolidated set of financial 
responsibility rules. Accordingly, FINRA proposes to adopt FINRA Rules 
4110 (Capital Compliance), 4120 (Regulatory Notification and Business 
Curtailment), 4130 (Regulation of Activities of Section 15C Members 
Experiencing Financial and/or Operational Difficulties), 4140 (Audit) 
and 4521 (Notifications, Questionnaires and Reports) in the 
Consolidated FINRA Rulebook and to delete 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. FINRA also proposes to revise 
FINRA Rule 9557 (Procedures for Regulating Activities Under Rules 4110, 
4120 and 4130 Regarding a Member Experiencing Financial or Operational 
Difficulties) and FINRA Rule 9559 (Hearing Procedures for Expedited 
Proceedings Under the Rule 9550 Series). Lastly, FINRA proposes to make 
conforming revisions to Section 4(g) of Schedule A to the FINRA By-
Laws.
    The text of the proposed rule change is attached hereto as Exhibit 
A.

[[Page 4993]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change. In 
addition, FINRA discussed comments it received in response to a 
Regulatory Notice \3\ it published in May of 2008 requesting comment on 
the proposed rule change.\4\ The text of these statements may be 
examined at the places specified in Item IV below. FINRA has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant aspects of such statements.
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    \3\ See FINRA Regulatory Notice 08-23 (Proposed Consolidated 
FINRA Rules Governing Financial Responsibility) (May 2008) (the 
``Notice'').
    \4\ See infra, Item II.C. for more information on the Notice and 
the comments received in response thereto.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\5\ FINRA is proposing to adopt a 
new, consolidated set of financial responsibility rules. Accordingly, 
FINRA proposes to adopt FINRA Rules 4110 (Capital Compliance), 4120 
(Regulatory Notification and Business Curtailment), 4130 (Regulation of 
Activities of Section 15C Members Experiencing Financial and/or 
Operational Difficulties), 4140 (Audit) and 4521 (Notifications, 
Questionnaires and Reports) in the Consolidated FINRA Rulebook and to 
delete 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. FINRA also proposes to revise FINRA Rule 9557 (Procedures for 
Regulating Activities Under Rules 4110, 4120 and 4130 Regarding a 
Member Experiencing Financial or Operational Difficulties) and FINRA 
Rule 9559 (Hearing Procedures for Expedited Proceedings Under the Rule 
9550 Series). Lastly, FINRA proposes to make conforming revisions to 
Section 4(g) of Schedule A to the FINRA By-Laws.
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    \5\ The current FINRA rulebook includes, in addition to FINRA 
Rules, (1) NASD Rules and (2) rules incorporated from NYSE 
(``Incorporated NYSE Rules'') (together, the NASD Rules and 
Incorporated NYSE Rules are referred to as the ``Transitional 
Rulebook''). While the NASD Rules generally apply to all FINRA 
members, the Incorporated NYSE Rules apply only to those members of 
FINRA that are also members of the NYSE (``Dual Members''). For more 
information about the rulebook consolidation process, see FINRA 
Information Notice, March 12, 2008 (Rulebook Consolidation Process).
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    Currently, both NASD and NYSE Rules \6\ contain provisions 
governing financial responsibility. These provisions have played an 
important role in supporting the SEC's minimum net capital and other 
financial responsibility requirements by establishing criteria 
promoting the permanency of member's capital, requiring the review and 
approval of material financial transactions and establishing criteria 
intended to identify member firms approaching financial difficulty and 
to monitor their financial and operational condition. For that reason, 
FINRA has placed high priority on expeditiously developing the unified 
set of proposed rules for inclusion in the Consolidated FINRA Rulebook. 
FINRA believes that the proposed rules would incorporate many of 
[these] the provisions in the existing rules but would streamline and 
reorganize the provisions. In addition, FINRA has tiered many 
provisions to apply only to those firms that clear or carry customer 
accounts.\7\
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    \6\ For convenience, the Incorporated NYSE Rules are referred to 
as the ``NYSE Rules.''
    \7\ All requirements set forth in the proposed rules that would 
apply to firms that clear or carry customer accounts would also 
apply to firms that operate pursuant to the exemptive provisions of 
SEA Rule 15c3-3(k)(2)(i). For further clarification in response to 
commenter concerns, see Section 2 under Item II.C. See also infra 
note 9.
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(A) Proposed FINRA Rule 4110 (Capital Compliance)
(1) Authority To Increase Capital Requirement
    Proposed FINRA Rule 4110(a), based primarily on NYSE Rule 325(d), 
would enable 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 proposed rule would reside 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 would be required to issue a notice 
pursuant to Proposed FINRA Rule 9557 (a ``Rule 9557 notice''). FINRA 
believes that proposed FINRA Rule 9557, much like the current rule, 
would afford a member adequate safeguards because, among other things, 
it provides opportunity for an expedited hearing pursuant to Proposed 
FINRA Rule 9559.\8\
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    \8\ See also Section (F) under this Item.
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    Proposed FINRA Rule 4110(a) would be a new provision for FINRA 
members that are not Dual Members (``non-NYSE members'') that are 
carrying or clearing members. However, it would not apply to 
introducing firms or to certain firms with limited business models 
(together, ``non-clearing firms'').\9\ In this regard, certain Dual 
Members that currently are subject to NYSE Rule 325(d)--namely those 
NYSE member firms that are not carrying or clearing members (``NYSE 
non-clearing firms'')--would not be subject to the similar requirement 
in the FINRA Rule. All member firms that are subject to the requirement 
would have an opportunity to request an expedited hearing if they 
receive a Rule 9557 notice, which would be a new procedural right not 
available under NYSE Rule 325(d).
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    \9\ For clarification, introducing firms and firms with limited 
business models (for example, firms that engage exclusively in 
subscription-basis mutual fund transactions, direct participation 
programs, or mergers and acquisitions activities) are not deemed 
carrying or clearing members and therefore would not be subject to 
Proposed FINRA Rule 4110(a), or for that matter any of the other 
provisions of the proposed rules that would apply only to carrying 
or clearing members.
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    As FINRA has explained in the Notice, the NYSE staff historically 
employed NYSE Rule 325(d) in limited circumstances, and FINRA 
anticipates that it would apply Proposed FINRA Rule 4110(a) in similar 
fashion. The proposed rule would enable FINRA to respond promptly to 
extraordinary, unanticipated or emergency circumstances. Under Proposed 
FINRA Rule 4110(a), FINRA's EVP could require a carrying or clearing 
member to comply with increased capital requirements in circumstances 
such as where unanticipated systemic market events threaten the member 
firm's capital, or where the member firm 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
    Proposed FINRA Rule 4110(b)(1) is based in part on NASD Rule 
3130(e) and would provide that, unless otherwise permitted by FINRA, a 
member firm must suspend all business operations

[[Page 4994]]

during any period of time in which it is not in compliance with SEA 
Rule 15c3-1. This requirement is consistent with current law.\10\
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    \10\ The Commission notes that the net capital rule requires 
that ``every broker or dealer shall at all times have and maintain'' 
certain specified levels of net capital. The Commission further 
notes that to the extent a broker-dealer fails to maintain at least 
the amount of net capital specified in that rule, it must cease 
doing a securities business. [See 72 FR 12862, at 12872.]
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    As with NASD Rule 3130(e), Proposed FINRA Rule 4110(b)(1) is self-
operative (that is, a firm would automatically be 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 firm 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 firm's non-compliance 
with Proposed FINRA Rule 4110(b)(1).
(3) Withdrawal of Equity Capital
    To further the goal of financial stability, Proposed FINRA Rule 
4110(c)(1) would prohibit a member from withdrawing equity capital for 
a period of one year, unless otherwise permitted by FINRA in writing. 
In response to commenter \11\ requests for clarification of this 
provision, the proposed rule expressly provides that, subject to the 
requirements of Proposed FINRA Rule 4110(c)(2), members would not be 
precluded from withdrawing profits earned.
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    \11\ All references to ``commenters'' are to persons that 
submitted comments in response to the Notice. For further 
information on this issue, see infra Item II.C.
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    FINRA anticipates that approvals for the early withdrawal of equity 
capital pursuant to Proposed FINRA Rule 4110(c)(1) would be granted on 
a limited basis.\12\
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    \12\ See Section 4 under Item II.C.
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    Proposed FINRA Rule 4110(c)(2) would apply only to carrying or 
clearing members and would prohibit 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.\13\ This provision is based 
in part on NYSE Rule 312(h) and SEA Rule 15c3-1(e). While it would be a 
new requirement for non-NYSE members that are carrying or clearing 
members, it would not apply to non-clearing firms. In this regard, NYSE 
non-clearing firms that currently are subject to NYSE Rule 312(h) would 
not be subject to the similar provision in the FINRA Rule. FINRA 
further notes that the 10 percent limit set forth in Proposed FINRA 
Rule 4110(c)(2) would provide a de minimis exception; current NYSE Rule 
312(h) does not include such an exception.
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    \13\ 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.
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(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, Proposed 
FINRA Rule 4110(d)(1)(A) would provide 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,\14\ without the prior written authorization of FINRA.
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    \14\ 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.
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    Proposed FINRA Rule 4110(d)(1)(A) is based on NYSE Rule 328(a), but 
would apply only to carrying and clearing members. While the provision 
would be new for non-NYSE members that are carrying or clearing 
members, it would not apply to non-clearing firms. In this regard, NYSE 
non-clearing firms that currently are subject to NYSE Rule 328(a) would 
no longer be subject to the similar provision in the FINRA Rule. 
Moreover, unlike NYSE Rule 328(a), Proposed 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 firm's tentative net capital 
by 10 percent or more.\15\
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    \15\ See supra note 14.
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    Proposed FINRA Rule 4110(d)(1)(B), which is also based on NYSE Rule 
328(a), would provide 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 would be new for non-NYSE members 
that are carrying members.
    Proposed FINRA Rule 4110(d)(2) is based on NYSE Rule 328(b), but 
would apply only to carrying and clearing members. The provision would 
require 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 capital \16\ 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 would apply only to carrying and clearing members, NYSE 
non-clearing firms would be relieved from current requirements under 
NYSE Rule 328(b). In addition, unlike NYSE Rule 328(b), the proposed 
rule would include a de minimis exception.
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    \16\ See supra note 14.
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    Proposed FINRA Rule 4110(d)(3) provides that any member that is 
subject to paragraphs (d)(1)(A), (d)(1)(B) or (d)(2) of Proposed FINRA 
Rule 4110 would be 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.\17\
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    \17\ See supra note 14.
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    Proposed FINRA Rule 4110(d)(4) implements a requirement of the 
SEC's net capital rule and therefore would apply 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 Proposed FINRA Rule 
4110(d)(4), FINRA staff would, as a general matter, consider such 
factors as whether the bank would have sole recourse under the 
agreement and

[[Page 4995]]

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
    Proposed FINRA Rule 4110(e) is based in part on current NYSE Rule 
420 and would address the requirements for subordinated loans and loans 
made to general partners of members that are partnerships.
    Proposed FINRA Rule 4110(e)(1) would implement Appendix D of SEA 
Rule 15c3-1 and require 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.\18\ 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.
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    \18\ See SEA Rule 15c3-1d. Note that the proposed Supplementary 
Material would require that, for purposes of Proposed 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 
Proposed FINRA Rule 4110.01 (Compliance with Applicable Law).
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    Proposed FINRA Rule 4110(e)(2) would require 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 firm. 
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 would estop the lender from having 
that right.
(B) Proposed FINRA Rule 4120 (Regulatory Notification and Business 
Curtailment)
(1) Regulatory Notification
    Proposed FINRA Rule 4120(a) is based on current NYSE Rule 325(b), 
but would apply only to carrying and clearing members. The proposed 
rule would require any such member promptly, but in any event within 24 
hours, to notify FINRA when certain specified financial triggers are 
reached.\19\ This would be a new notification requirement for non-NYSE 
members that are carrying or clearing members; it would not, however, 
apply to non-clearing firms. Accordingly, NYSE non-clearing firms would 
no longer be subject to these requirements.
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    \19\ 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.
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(2) Restrictions on Business Expansion
    Proposed FINRA Rule 4120(b) is based on NASD Rule 3130(c) and NYSE 
Rule 326(a) and addresses circumstances under which a member would be 
prohibited from expanding its business.
    Proposed FINRA Rule 4120(b)(1), which is self-operative, would 
apply 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 Proposed FINRA Rule 4120(a)(1) continue to exist for the specified 
time period. While NASD Rule 3130(c) includes comparable provisions, 
the requirement would now be self-operative for non-NYSE members that 
are carrying or clearing members. Proposed 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 Proposed FINRA Rule 
4120(b)(1).
    Unlike the self-operative nature of paragraph (b)(1), Proposed 
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
    Proposed 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.
    Proposed FINRA Rule 4120(c)(1), which is self-operative, would 
apply 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 Proposed FINRA Rule 4120(a)(1) when any of the enumerated 
conditions continue to exist for the specified time period. While NASD 
Rule 3130(d) includes comparable provisions, the requirement would now 
be self-operative for non-NYSE members that are carrying or clearing 
members. Proposed 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 
Proposed FINRA Rule 4120(c)(1).
    Unlike the self-operative nature of paragraph (c)(1), proposed 
FINRA Rule 4120(c)(2) authorizes FINRA, for any financial or 
operational reason, to require any member firm to reduce its business 
by the issuance of a notice in accordance with Rule 9557. In all such 
cases, the member firm would have the right to request an expedited 
hearing. This same right currently applies to NASD Rule 3130(d)(2).
(C) Proposed FINRA Rule 4130 (Regulation of Activities of Section 15C 
Members Experiencing Financial and/or Operational Difficulties)
    Proposed FINRA Rule 4130 would be substantially identical to NASD 
Rule 3131 except that the proposed rule would reflect FINRA as the 
designated examining authority and make other conforming revisions. The 
proposed rule would apply only to certain firms that are subject to the 
Treasury Department's liquid capital requirements.
(D) Proposed FINRA Rule 4140 (Audit)
    Proposed FINRA Rule 4140 would incorporate 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 proposed rule would impose a late fee of $100 for 
each day that a requested

[[Page 4996]]

report is not timely filed, up to a maximum of 10 business days.
(E) Proposed FINRA Rule 4521 (Notifications, Questionnaires and 
Reports)
    Drawing in part on NASD IM-3130 and Rule 3150 and NYSE Rules 
325(b)(2), 416 \20\ and 421(2),\21\ Proposed FINRA Rule 4521 would 
address 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 would apply only to 
carrying and clearing members.
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    \20\ 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 Securities 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).
    \21\ Because FINRA proposes to delete NYSE Rule 421(2) and its 
related provision Rule 421.40, the proposed rule change would, 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), delete NYSE Rule 421 in its entirety. See Securities 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 FINRA Regulatory Notice 08-57 (SEC Approves New 
Consolidated FINRA Rules) (October 2008).
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    Proposed FINRA Rule 4521(a) would provide 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 would be new for certain non-NYSE members that 
are carrying or clearing members.\22\
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    \22\ FINRA notes that NASD Rule 3150 (Reporting Requirements for 
Clearing Firms) currently requires most carrying and clearing 
members to submit such data to FINRA. Rule 3150 will be addressed 
later in the rulebook consolidation process.
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    Proposed FINRA Rule 4521(b) would require 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.
    Proposed FINRA Rule 4521(c) would require 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 would be a new requirement for non-NYSE members that are 
carrying or clearing members.
    Proposed FINRA Rule 4521(d) would require that, unless otherwise 
permitted by FINRA in writing, member firms 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 
would be a new requirement for non-NYSE member firms that carry margin 
accounts.
    In response to commenter suggestion, Proposed FINRA Rule 4521(e) 
has been revised to provide that a late fee of $100 would 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) Proposed 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 member firms 
that are experiencing financial or operational difficulties and the 
related hearing procedures. The proposed rule change would make a 
number of conforming revisions to FINRA Rules 9557 and 9559 in light of 
several of the proposed financial responsibility rules (Proposed FINRA 
Rules 4110, 4120 and 4130). In response to commenter concerns, FINRA 
re-iterates that the proposed rule change also would include new 
provisions to afford members with an appeals process that is both more 
expedited than that currently provided under FINRA Rules 9557 and 9559 
and provides members with adequate safeguards.\23\ For example:
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    \23\ See Section 7 under Item II.C.
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     Proposed FINRA Rule 9557(d) would provide that the 
requirements referenced in a Rule 9557 notice served upon a member are 
immediately effective. Under the proposed rule change, 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 Proposed 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, Proposed FINRA Rule 
9557(e) would require 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;
     Proposed FINRA Rule 9559(f)(1) would provide 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;
     Proposed FINRA Rule 9559(o)(4)(A) would provide 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 
proposed rule change provides that, pursuant to Proposed 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.)
    Proposed FINRA Rules 9557 and 9559 set forth a number of other 
enhancements and clarifications of procedure. For example, Proposed 
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 proposed rule change would enable FINRA 
staff, in response to the member's request, either to withdraw the Rule 
9557 notice or to reduce its requirements and/or restrictions.\24\ 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.\25\
---------------------------------------------------------------------------

    \24\ See Proposed FINRA Rule 9557(g)(2).
    \25\ See Proposed FINRA Rule 9557(e)(1).
---------------------------------------------------------------------------

    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

[[Page 4997]]

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 shall impose an immediate 
suspension on the respondent that shall remain in effect unless FINRA 
staff issues a letter of withdrawal of all requirements and/or 
restrictions.
    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 90 days following 
Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\26\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change will 
further the purposes of the Act because, as part of the FINRA rulebook 
consolidation process, the proposed rule change will streamline and 
reorganize existing rules that govern financial responsibility. 
Further, FINRA believes that the proposed rule change will provide 
greater regulatory clarity with respect to these issues.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    In May 2008, FINRA published the Notice \27\ requesting comment on 
the proposed rule changes. A copy of the Notice is attached as Exhibit 
2a.\28\ The comment period ended on June 13, 2008. Seventeen commenters 
responded to the Notice. Copies of the comment letters received, and a 
list of the commenters, are attached as Exhibit 2b.\29\
---------------------------------------------------------------------------

    \27\ See supra, note 3.
    \28\ The Commission notes that while provided in Exhibit 2a to 
FINRA's filing with the Commission, the Notice is not attached 
hereto. The Notice can be accessed online at http://www.finra.org/
web/groups/industry/@ip/@reg/@notice/documents/notices/p038509.pdf.
    \29\ The Commission notes that while provided in Exhibit 2b to 
the filing, the list of the commenters and comment letters received 
by FINRA are not attached hereto. Those comment letters can be 
accessed online at http://www.finra.org/Industry/Regulation/Notices/
2008/P038501. As stated previously, all references to ``commenters'' 
are to the commenters to the Notice, which are listed in Exhibit 2b.
---------------------------------------------------------------------------

1. General Comments; Tiering of Requirements
    Commenters expressed general support for rule consolidation,\30\ 
including support specifically for FINRA's proposal to tier certain 
requirements to apply only to firms that carry or clear customer 
accounts.\31\
---------------------------------------------------------------------------

    \30\ Northwestern, Wachovia, FSI, SIFMA, ING and Federated.
    \31\ ING, Thornburg and CAI.
---------------------------------------------------------------------------

2. Members Operating Pursuant to SEA Rule 15c3-3(k)(2)(i) Exemption
    As proposed in the Notice, the requirements set forth in the 
proposed rules that would apply to carrying and clearing members would 
also apply to members that operate pursuant to the exemptive provisions 
of SEA Rule 15c3-3(k)(2)(i).\32\ The Notice referred to such members as 
``(k)(2)(i) members,'' and the relevant provisions of the proposed rule 
text as published in the Notice designated them by the phrase 
``operating pursuant to the exemptive provisions of Rule 15c3-
3(k)(2)(i).''
---------------------------------------------------------------------------

    \32\ The Notice explained that ``operating'' pursuant to the 
exemptive provisions of SEA Rule 15c3-3(k)(2)(i) is not meant to 
include firms that have elected the exemption but do not operate as 
such.
---------------------------------------------------------------------------

    Commenters suggested that the application of the term ``(k)(2)(i) 
member'' was in need of further explanation or reconsideration,\33\ and 
that it would be better either to eliminate references to Rule 15c3-
3(k)(2)(i) from the proposed rules or to specify that the proposed 
rules apply to (k)(2)(i) members that hold customer cash or 
securities.\34\
---------------------------------------------------------------------------

    \33\ SIFMA, CAI and Kinkade.
    \34\ SIFMA and ING.
---------------------------------------------------------------------------

    FINRA agrees that the application of the proposed rules with 
respect to (k)(2)(i) members as put forward in the Notice should be 
clarified. Accordingly, the proposed rules have been revised to 
eliminate the phrase ``operating pursuant to the exemptive provisions 
of Rule 15c3-3(k)(2)(i).'' Further, in response to commenter requests 
for clarification, FINRA notes that a firm ``operates'' pursuant to the 
exemptive provisions of Rule 15c3-3(k)(2)(i), and is therefore included 
as a clearing or carrying member for purposes of the proposed rules, if 
it either holds customer funds in a bank account established pursuant 
to Rule 15c3-3(k)(2)(i) or clears customer transactions through such an 
account. FINRA's records currently indicate that there are 
approximately seventy such member firms.
3. Authority To Increase Capital Requirements
    Four commenters expressed concern regarding the scope of FINRA's 
authority under Proposed FINRA Rule 4110(a).\35\ Three of the four 
suggested that the factors under which FINRA would take action pursuant 
to the rule should be clearly spelled out (including one suggestion 
that procedural protections are needed); \36\ the fourth of these 
commenters suggested FINRA should not undermine haircut determinations 
that the SEC makes pursuant to SEA Rule 15c3-1.\37\ One commenter 
suggested that new rules are not needed.\38\
---------------------------------------------------------------------------

    \35\ FSI, ING, Federated and Fischer.
    \36\ FSI, ING and Fischer.
    \37\ Federated.
    \38\ Cantella.
---------------------------------------------------------------------------

    FINRA staff understands the noted concerns, but believes that the 
proposed rule does not lend itself to prescribed parameters. As 
explained in Section (A)(1) of Item II.A.1, because Proposed Rule 
4110(a) is intended to enable FINRA to respond promptly to 
extraordinary, unanticipated or emergency circumstances (a goal 
acknowledged by at least one commenter),\39\ FINRA does not agree that 
it is in the public interest to limit the rule's application by listing 
specific circumstances under which FINRA would exercise its authority. 
FINRA expects to employ its authority pursuant to the proposed rule 
judiciously. Further, FINRA rejects the argument that the proposed rule 
does not provide adequate safeguards; FINRA would be expressly required 
to issue a Rule 9557 notice, which among other things permits a member 
opportunity for an expedited hearing pursuant to Proposed FINRA Rule 
9559.
---------------------------------------------------------------------------

    \39\ Federated.
---------------------------------------------------------------------------

4. Withdrawal of Equity Capital
    Three commenters said that Proposed FINRA Rule 4110(c)(1) is too 
restrictive or is more stringent than current or proposed SEC 
requirements.\40\ One suggested that the proposed rule be revised to 
clarify that withdrawal of profits from an earlier period would be 
permitted.\41\ Two said that the proposed rule should either be deleted 
or, if adopted, the factors that FINRA would take into consideration in 
approving requests should be articulated; \42\ one of

[[Page 4998]]

these two commenters suggested that a period of time should be 
established within which FINRA would process any requests pursuant to 
the proposed rule.\43\ One suggested that the proposed rule would 
restrict a parent company's support of a broker-dealer subsidiary.\44\ 
One raised concerns regarding the proposed rule's potential impact on 
smaller or start-up firms.\45\
---------------------------------------------------------------------------

    \40\ FSI, Northwestern and CAI.
    \41\ SIFMA.
    \42\ FSI and Northwestern.
    \43\ FSI.
    \44\ Northwestern.
    \45\ FSI.
---------------------------------------------------------------------------

    Proposed FINRA Rule 4110(c)(2) drew comments that were similar to 
those for Proposed FINRA Rule 4110(c)(1). Five commenters said that the 
proposed rule is too restrictive or is more stringent than current or 
proposed SEC requirements.\46\ One suggested the proposed rule would 
put the financial management of firms in FINRA's hands, rather than the 
firms exercising their own management.\47\ Two suggested that a period 
of time should be established within which FINRA would process any 
requests pursuant to the proposed rule.\48\ Three suggested that the 
factors FINRA would consider in approving requests should be 
articulated.\49\ One suggested that the proposed rule would be 
burdensome for smaller firms.\50\
---------------------------------------------------------------------------

    \46\ SIFMA, ING, Kinkade, Baum and CAI. See also note 52 infra 
and accompanying text.
    \47\ Capstone.
    \48\ SIFMA and FSI.
    \49\ FSI, Baum and TBT.
    \50\ Baum.
---------------------------------------------------------------------------

    In response, FINRA notes that Proposed FINRA Rule 4120 (Regulatory 
Notification and Business Curtailment)--in particular Proposed FINRA 
Rule 4120.01--sets forth examples of the types of factors that FINRA 
staff would take into consideration when considering whether to approve 
a request for a withdrawal of equity capital pursuant to Proposed Rules 
4110(c)(1) or (c)(2). FINRA would consider the overall risks particular 
to the member and what the member's condition would be after the 
proposed withdrawal. FINRA believes that the proposed rules are not 
burdensome because, as a general matter, requests for a withdrawal can 
be handled in a routine manner--FINRA's decision typically would be 
issued in approximately three business days. Further, FINRA notes that 
Proposed FINRA Rule 4110(c)(2) provides a 10 percent de minimis 
threshold. Lastly, FINRA agrees that Proposed FINRA Rule 4110(c)(1) 
should not preclude the withdrawal of profits, and has accordingly 
revised the proposed rule to clarify that, subject to the requirements 
of Proposed FINRA Rule 4110(c)(2), the rule does not preclude a member 
from withdrawing profits earned.\51\
---------------------------------------------------------------------------

    \51\ See Section (A)(3) under Item II.A.1.
---------------------------------------------------------------------------

    Several commenters appeared to express concerns regarding Proposed 
FINRA Rule 4110(c)(2) based on the belief that the rule would apply to 
introducing firms or firms with limited business models.\52\ Because 
such members generally are not carrying or clearing members, they would 
not be subject to the proposed rule. As explained in the Notice and re-
iterated in FINRA's filing with the Commission, non-clearing firms 
generally include, for example, firms that engage exclusively in 
subscription-basis mutual fund transactions, direct participation 
programs, or mergers and acquisitions activities.\53\
---------------------------------------------------------------------------

    \52\ Colonnade, TBT and Capstone.
    \53\ See note 9 under Item II.A.1.
---------------------------------------------------------------------------

5. Audits
    One commenter said that Proposed FINRA Rule 4140 is too broad and 
that the imposition of an audit pursuant to the rule would essentially 
operate as a sanction, for which reason there should be an appeal 
process in the event an audit is imposed.\54\ FINRA disagrees. Though 
NASD Rule 3130 and NASD IM-3130 provide for an appeal process pursuant 
to current Rule 9557, NYSE Rule 418 includes no such provision. FINRA 
emphasizes that the purpose of Proposed FINRA Rule 4140 is to confer 
upon FINRA necessary authority, especially in emergency circumstances. 
The proposed rule would be invoked only in situations where there are 
``concerns regarding the accuracy or integrity of a member's financial 
statements, books and records or prior audited financial statements.'' 
\55\ FINRA emphasizes that only FINRA's EVP, or his or her written 
officer delegate, would have the authority to request an audit.
---------------------------------------------------------------------------

    \54\ ING.
    \55\ See Proposed FINRA Rule 4140(a).
---------------------------------------------------------------------------

6. Notifications, Questionnaires and Reports
    One commenter suggested expanding the late fee provided for under 
Proposed FINRA Rule 4521(e) to include all reports, notifications and 
information required under Rule 4521. (As published in the Notice, the 
rule would have limited the late fee to financial and operational 
information regarding a member or its correspondents as required under 
Proposed FINRA Rule 4521(a); the commenter proposed to expand that to 
include for instance the margin account information required under the 
rule.) \56\ FINRA agrees with this proposal as consistent with the goal 
of clarity and ease of administration, and has revised the proposed 
rule accordingly.\57\
---------------------------------------------------------------------------

    \56\ Thornburg.
    \57\ See Section (E) under Item II.A.1.
---------------------------------------------------------------------------

7. Service of Notice and Hearing Procedures
    Two commenters expressed concern regarding the scope of the 
discretion that Proposed FINRA Rule 9557 would grant to FINRA 
staff.\58\ Two commenters suggested that the proposed rule change does 
not provide sufficient time to broker-dealers; \59\ one suggested 
giving members five days to decide whether to pursue an appeal rather 
than two.\60\ One commenter suggested that the effectiveness of a Rule 
9557 notice should be two days after being issued, rather than 
immediately effective.\61\ This same commenter also said that the 
proposed rule change grants substantial discretion to FINRA's CEO to 
deny a stay of a Rule 9557 notice after a member requests a hearing and 
that FINRA should be required either to present the member with a 
factual finding in the event a stay is denied, or that the FINRA 
decision be made in consultation with a third party, such as the 
National Adjudicatory Council or the SEC.
---------------------------------------------------------------------------

    \58\ SIFMA and Cantella.
    \59\ FSI and ING.
    \60\ FSI.
    \61\ SIFMA.
---------------------------------------------------------------------------

    In response, FINRA emphasizes that because Proposed FINRA Rules 
9557 and 9559 are designed to enable FINRA to respond to emergency 
circumstances, FINRA does not believe that the effectiveness of a Rule 
9557 notice should be anything other than immediate. Similarly, FINRA 
sees no reason to extend the time within which a member must decide 
whether to pursue an appeal. FINRA intentionally designed Rules 9557 
and 9559 to provide an expedited hearing process for affected parties. 
Moreover, because the restrictions or requirements set forth in a Rule 
9557 notice generally are stayed during the appeal process, it is 
imperative that the matter be resolved expeditiously in the event the 
Hearing Panel approves the restrictions and/or requirements. With 
respect to stays, FINRA further notes that the proposed rule change 
provides that the Rule 9557 notice is routinely stayed during the time 
of the hearing. The proposed rule change does not require the member to 
request the stay--the stay is provided for unless the CEO makes a 
determination otherwise, when

[[Page 4999]]

necessary for the safety of investors, creditors or other member firms. 
Moreover, FINRA anticipates that the CEO would use such authority only 
in extraordinary circumstances. Accordingly, the only revisions that 
FINRA has made with respect to Proposed Rules 9557 and 9559 have been 
with a view to further procedural enhancements and clarifications of 
the rules as published in the Notice.\62\
---------------------------------------------------------------------------

    \62\ See Section (F) under Item II.A.1.
---------------------------------------------------------------------------

8. Additional Comments
    In response to comments, FINRA has made a number of additional 
clarifying revisions to the proposed rules or has provided clarifying 
explanations, including:
     One commenter suggested that the language of Proposed 
FINRA Rule 4110(e)(2) be clarified with respect to LLCs.\63\ In 
response, FINRA has reconsidered the proposed rule and determined that 
it is not necessary to apply it to LLCs; \64\
---------------------------------------------------------------------------

    \63\ SIFMA.
    \64\ See Section (A)(5) under Item II.A.1.
---------------------------------------------------------------------------

     One commenter proposed clarifying language for Proposed 
FINRA Rule 4120(c)(3)(I).\65\ In response, FINRA has made clarifying 
revisions;
---------------------------------------------------------------------------

    \65\ SIFMA.
---------------------------------------------------------------------------

     One commenter suggested that FINRA clarify that though the 
requirements of Proposed FINRA Rule 4120(a) would only apply to 
carrying and clearing members, all members nonetheless remain subject 
to the requirements of SEA Rule 17a-11, and that the notification that 
would be required under the proposed rule is in addition to the 
notification required under SEA Rules 17a-11(b) and (c).\66\ FINRA 
agrees that all members should be mindful of their obligations under 
Rule 17a-11 in addition to those that the proposed rule would impose;
---------------------------------------------------------------------------

    \66\ Thornburg. This commenter also suggested a number of 
clarifying edits with respect to Proposed FINRA Rules 4130(a) and 
4521. FINRA has aligned Proposed FINRA Rule 4130(a) with the current 
requirements of NASD Rule 3131(a) (see Section (C) under Item 
II.A.1) and has re-organized Proposed FINRA Rule 4521 for purposes 
of clarity.
---------------------------------------------------------------------------

     Three commenters objected to provisions in the proposed 
rules (one commenter as to Proposed FINRA Rule 4110(d)(4),\67\ the 
others as to Proposed FINRA Rule 4110(e)(2) \68\ pertaining to review 
by FINRA of loan documentation. In response, FINRA believes that the 
documentation reviews as set forth in the proposed rules are a 
necessary part of FINRA's function. FINRA encourages members to consult 
Proposed FINRA Rule 4120.01 for examples of the types of factors that 
FINRA staff would consider when reviewing loan documentation.
---------------------------------------------------------------------------

    \67\ Baum.
    \68\ Cantella and Kinkade.
---------------------------------------------------------------------------

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2008-067 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2008-067. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method.
    The Commission will post all comments on the Commission's Internet 
Web site (http://www.sec.gov/rules/sro.shtml). Copies of the 
submission, all subsequent amendments, all written statements with 
respect to the proposed rule change that are filed with the Commission, 
and all written communications relating to the proposed rule change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for inspection and copying in the Commission's 
Public Reference Room, 100 F Street, NE., Washington, DC 20549, on 
official business days between the hours of 10 a.m. and 3 p.m. Copies 
of such filing also will be available for inspection and copying at the 
principal office of FINRA.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-FINRA-2008-067 
and should be submitted on or before February 18, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\69\
---------------------------------------------------------------------------

    \69\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.

Exhibit A

    Proposed new language is italicized; deletions are in brackets.
* * * * *

Text of Proposed New FINRA Rules 4110, 4120, 4130, 4140, 4521, 9557 and 
9559 (Proposed FINRA Rules 9557 and 9559 Are Marked to Show Changes 
from FINRA Rules 9557 and 9559, Respectively)

* * * * *

4000. FINANCIAL AND OPERATIONAL RULES

4100. FINANCIAL CONDITION

4110. Capital Compliance

    (a) When necessary for the protection of investors or in the public 
interest, FINRA may, at any time or from time to time with respect to a 
particular carrying or clearing member or all carrying or clearing 
members, pursuant to authority exercised by FINRA's Executive Vice 
President charged with oversight for financial responsibility, or his 
or her written officer delegate, prescribe greater net capital or net 
worth requirements than those otherwise applicable, including more 
stringent treatment of items in computing net capital or net worth, or 
require such member to restore or increase its net capital or net 
worth. In any such instance, FINRA shall issue a notice pursuant to 
Rule 9557.
    (b) (1) Unless otherwise permitted by FINRA, a member shall suspend 
all business operations during any period in which it is not in 
compliance with applicable net capital requirements set forth in SEA 
Rule 15c3-1.
    (2) FINRA may issue a notice pursuant to Rule 9557 directing a

[[Page 5000]]

member that is not in compliance with applicable net capital 
requirements set forth in SEA Rule 15c3-1 to suspend all or a portion 
of its business.
    (c) (1) Any equity capital contributed by a member may not be 
withdrawn for a period of one year, unless otherwise permitted by FINRA 
in writing. Subject to the requirements of paragraph (c)(2) of this 
Rule, this paragraph shall not preclude a member from withdrawing 
profits earned.
    (2) A carrying or clearing member shall not, without the prior 
written approval of FINRA, withdraw capital, pay a dividend or effect a 
similar distribution that would reduce such member's equity, or make 
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 35 rolling 
calendar day period, on a net basis, exceeds 10% of its excess net 
capital.
(d) Sale-And-Leasebacks, Factoring, Financing, Loans and Similar 
Arrangements
    (1)(A) No carrying or clearing member shall 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% or more, without the prior 
written authorization of FINRA.
    (B) No carrying member shall consummate any arrangement concerning 
the sale or factoring of customer debit balances, irrespective of 
amount, without the prior written authorization of FINRA.
    (2) Any loan agreement entered into by a carrying or clearing 
member, the proceeds of which exceed 10% of such member's tentative net 
capital and which is intended to reduce the deduction in computing net 
capital for fixed assets and other assets which cannot be readily 
converted into cash under SEA Rule 15c3-1(c)(2)(iv), must be submitted 
to and be acceptable to FINRA, prior to such reduction becoming 
effective.
    (3) Members subject to paragraphs (d)(1)(A), (d)(1)(B) or (d)(2), 
shall not consummate any arrangement pursuant to such paragraph(s) if 
the aggregate of all such arrangements outstanding would exceed 20% of 
such member's tentative net capital, without the prior written 
authorization of FINRA.
    (4) 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.''
(e) Subordinated Loans, Notes Collateralized by Securities and Capital 
Borrowings
    (1) All subordinated loans or notes collateralized by securities 
shall meet such standards as FINRA may require to ensure the continued 
financial stability and operational capability of the member, in 
addition to those specified in Appendix D of SEA Rule 15c3-1.
    (2) Unless otherwise permitted by FINRA, each member partnership 
whose general partner enters into any secured or unsecured borrowing, 
the proceeds of which will be contributed to the capital of the member, 
shall submit the following for approval in order for such proceeds to 
qualify as capital acceptable for inclusion in the computation of the 
net capital of the member:
    A signed copy of the loan agreement which must:
    (A) Have at least a 12 month duration; and
    (B) Provide non-recourse to the assets of the member.
    Additional documents may be required, the nature of which will 
vary, depending upon the legal status of the lender e.g., an 
individual, bank, estate, trust, corporation, partnership, etc.

   Supplementary Material: ----

    .01 Compliance with Applicable Law. For purposes of paragraph 
(e)(1), the member shall 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.

4120. Regulatory Notification and Business Curtailment

(a) Notification
    (1) Each carrying or clearing member shall promptly, but in any 
event within 24 hours, notify FINRA in writing if its net capital falls 
below the following percentages:
    (A) The member's net capital is less than 150 percent of its 
minimum dollar net capital requirement or such greater percentage 
thereof as may from time to time be designated by FINRA;
    (B) The member is subject to the aggregate indebtedness requirement 
of SEA Rule 15c3-1, and its aggregate indebtedness is more than 1,000 
percent of its net capital;
    (C) The member elects to use the alternative method of computing 
net capital pursuant to SEA Rule 15c3-1(a)(1)(ii), and its net capital 
is less than the level specified in SEA Rule 17a-11(c)(2);
    (D) The member is approved to use the alternative method of 
computing net capital pursuant to SEA Rule 15c3-1e, and
    (i) Its tentative net capital as defined in SEA Rule 15c3-1(c)(15) 
is less than 50 percent of the early warning notification amount 
required by SEA Rule 15c3-1(a)(7)(ii), or
    (ii) Its net capital is less than $1.25 billion;
    (E) The member is registered as a Futures Commission Merchant 
pursuant to the Commodity Exchange Act, and its net capital is less 
than 120% of the minimum risk-based capital requirements of Commodity 
Exchange Act Rule 1.17; or
    (F) The member's deduction of capital withdrawals, which it 
anticipates making, whether voluntarily or as a result of a commitment, 
including maturities of subordinated liabilities entered into pursuant 
to Appendix D of SEA Rule 15c3-1, during the next six months, would 
result in any one of the conditions described in paragraph (a)(1)(A) 
through (E) of this Rule.
(b) Restrictions on Business Expansion
    (1) Except as otherwise permitted by FINRA in writing, a member 
that carries customer accounts or clears transactions shall not expand 
its business during any period in which any of the conditions described 
in paragraph (a)(1) continue to exist for more than 15 consecutive 
business days, provided that such condition(s) has been known to FINRA 
or the member for at least five consecutive business days. FINRA may 
issue a notice pursuant to Rule 9557 directing any such member not to 
expand its business; however, FINRA's authority to issue such notice 
does not negate the member's obligation not to expand its business in 
accordance with this paragraph (b)(1).
    (2) No member may expand its business during any period in which 
FINRA restricts the member from expanding its business for any 
financial or operational reason. In any such instance, FINRA shall 
issue a notice pursuant to Rule 9557.
    (3) For purposes of paragraph (b) of this Rule, the term 
``expansion of business'' may include:
    (A) Net increase in the number of registered representatives or 
other producing personnel;
    (B) Exceeding average capital commitments over the previous three

[[Page 5001]]

months for market making or block positioning;
    (C) Initiation of market making in new securities or any new 
proprietary trading or other commitment in securities or commodities in 
which a market is not made (other than riskless trades associated with 
customer orders);
    (D) Exceeding average commitments over the previous three months 
for underwritings;
    (E) Opening of new branch offices;
    (F) Entering any new line of business or deliberately promoting or 
expanding any present lines of business;
    (G) Making unsecured or partially secured loans, advances, 
drawings, guarantees or other similar receivables; and
    (H) Such other activities as FINRA deems appropriate under the 
circumstances, in the public interest or for the protection of 
investors.
(c) Reduction of Business
    (1) Except as otherwise permitted by FINRA in writing, a member 
that carries customer accounts or clears transactions is obligated to 
reduce its business to a point enabling its available capital to exceed 
the standards set forth in paragraph (a)(1)(A) through (F) of this 
Rule, when any of the following conditions continue to exist for more 
than 15 consecutive business days, provided that such condition(s) has 
been known to FINRA or the member for at least five consecutive 
business days:
    (A) The member's net capital is less than 125 percent of its 
minimum dollar net capital requirement or such greater percentage 
thereof as may from time to time be designated by FINRA;
    (B) The member is subject to the aggregate indebtedness requirement 
of SEA Rule 15c3-1, and its aggregate indebtedness is more than 1,200 
percent of its net capital;
    (C) The member elects to use the alternative method of computing 
net capital pursuant to SEA Rule 15c3-1(a)(1)(ii), and its net capital 
is less than one percentage point below the level specified in SEA Rule 
17a-11(c)(2);
    (D) The member is approved to use the alternative method of 
computing net capital pursuant to SEA Rule 15c3-1e, and
    (i) Its tentative net capital as defined in SEA Rule 15c3-1(c)(15) 
is less than 40 percent of the early warning notification amount 
required by SEA Rule 15c3-1(a)(7)(ii), or
    (ii) Its net capital is less than $1 billion;
    (E) The member is registered as a Futures Commission Merchant 
pursuant to the Commodity Exchange Act, and its net capital is less 
than 110% of the minimum risk-based capital requirements of Commodity 
Exchange Act Rule 1.17; or
    (F) The member's deduction of capital withdrawals, including 
maturities of subordinated liabilities entered into pursuant to 
Appendix D of SEA Rule 15c3-1, scheduled during the next six months, 
would result in any one of the conditions described in paragraph 
(c)(1)(A) through (E) of this Rule.
    FINRA may issue a notice pursuant to Rule 9557 directing any such 
member to reduce its business to a point enabling its available capital 
to exceed the standards set forth in paragraph (a)(1)(A) through (F) of 
this Rule; however, FINRA's authority to issue such notice does not 
negate the member's obligation to reduce its business in accordance 
with this paragraph (c)(1).
    (2) A member must reduce its business as directed by FINRA for any 
financial or operational reason. In any such instance, FINRA shall 
issue a notice pursuant to Rule 9557.
    (3) For purposes of paragraph (c) of this Rule, the term ``business 
reduction'' shall mean reducing or eliminating parts of a member's 
business in order to reduce the amount of capital required, which may 
include:
    (A) Promptly paying all or a portion of free credit balances to 
customers;
    (B) Promptly effecting delivery to customers of all or a portion of 
fully paid securities in the member's possession or control;
    (C) Introducing all or a portion of its business to another member 
on a fully disclosed basis;
    (D) Reducing the size or modifying the composition of its inventory 
and reducing or ceasing market making;
    (E) Closing of one or more existing branch offices;
    (F) Collecting unsecured or partially secured loans, advances, 
drawings, guarantees or other similar receivables;
    (G) Accepting no new customer accounts;
    (H) Restricting the payment of salaries or other sums to partners, 
officers, directors, shareholders, or associated persons of the member;
    (I) Effecting liquidating or closing customer and/or proprietary 
transactions;
    (J) Accepting only unsolicited customer orders; and
    (K) Such other activities as FINRA deems appropriate under the 
circumstances in the public interest or for the protection of 
investors.

   Supplementary Material ----

    .01 Exercise of Discretion by FINRA. The following are examples of 
the conditions under which FINRA may exercise its discretion pursuant 
to paragraphs (b)(2) or (c)(2) above:
    (a) The member has experienced a substantial change in the manner 
in which it processes its business, which, in the view of FINRA, 
increases the potential risk of loss to customers or other members;
    (b) The member's books and records are not maintained in accordance 
with the provisions of SEA Rules 17a-3 or 17a-4;
    (c) The member is not in compliance, or is unable to demonstrate 
compliance, with applicable net capital requirements;
    (d) The member is not in compliance, or is unable to demonstrate 
compliance, with SEA Rule 15c3-3 (Customer Protection--Reserves and 
Custody of Securities);
    (e) The member is unable to clear and settle transactions promptly; 
or
    (f) The member's overall business operations are in such condition, 
given the nature of its business that, notwithstanding the absence of 
any of the conditions enumerated in paragraphs (a) through (e), a 
determination of financial or operational difficulty should be made.
    .02 Correspondent Firms. The Rule contemplates that any 
restrictions or conditions imposed on a carrying or clearing member's 
business under this Rule may require that member to restrict the 
business activities of one or more correspondent firms for which the 
member clears, insofar as such business would be handled by such 
carrying or clearing member.

4130. Regulation of Activities of Section 15C Members Experiencing 
Financial and/or Operational Difficulties

    (a) Application--For purposes of this Rule, the term ``member'' 
shall be limited to any member of FINRA registered with the SEC 
pursuant to Section 15C of the Exchange Act that is not designated to 
another self-regulatory organization by the SEC for financial 
responsibility pursuant to Section 17 of the Exchange Act and SEA Rule 
17d-1.
    (b) Each member subject to Section 402.2 of the rules of the 
Treasury Department shall comply with the capital requirements 
prescribed therein and with the provisions of this Rule.
    (c) A member, when so directed by FINRA shall not expand its 
business during any period in which:
    (1) Any of the following conditions continue to exist for more than 
15 consecutive business days:
    (A) The member's liquid capital is less than 150 percent of the 
total haircuts or such greater percentage thereof as may

[[Page 5002]]

from time to time be prescribed by FINRA;
    (B) The member's liquid capital minus total haircuts is less than 
150 percent of its minimum dollar capital requirement; or
    (C) The deduction of ownership equity and maturities of 
subordinated debt scheduled during the next six months would result in 
any one of the conditions described in (A) or (B) of this subparagraph 
(1); or
    (2) FINRA restricts the member for any other financial or 
operational reason.
    (d) A member, when so directed by FINRA, shall forthwith reduce its 
business:
    (1) To a point at which the member would not be subject to a 
prohibition against expansion of its business as set forth in 
paragraphs (c)(1)(A), (B), or (C) of this Rule if any of the following 
conditions continue to exist for more than 15 consecutive business 
days:
    (A) The member's liquid capital is less than 125 percent of total 
haircuts or such greater percentage thereof as may from time to time be 
prescribed by FINRA;
    (B) The member's liquid capital minus total haircuts is less than 
125 percent of its minimum dollar capital requirement; or
    (C) The deduction of ownership equity and maturities of 
subordinated debt scheduled during the next six months would result in 
any one of the conditions described in (A) or (B) of this subparagraph 
(1); and
    (2) As required by FINRA when it restricts a member for any other 
financial or operational reason.
    (e) A member shall suspend all business operations during any 
period of time when the member is not in compliance with applicable 
liquid capital requirements as set forth in Section 402.2 of the rules 
of the Treasury Department. FINRA staff may issue a notice to such 
member directing it to suspend all business operations; however, the 
member's obligation to suspend all business operations arises from its 
obligations under Section 402.2 of the rules of the Treasury Department 
and is not dependent on any notice that may be issued by FINRA staff.
    (f) Any notice directing a member to limit or suspend its business 
operations shall be issued by FINRA staff pursuant to Rule 9557.

4140. Audit

    (a) FINRA may at any time, due to concerns regarding the accuracy 
or integrity of a member's financial statements, books and records or 
prior audited financial statements, direct any member to cause an audit 
to be made by an independent public accountant of its accounts, or 
cause an examination to be made in accordance with attestation, review 
or consultation standards prescribed by the AICPA. Such audit or 
examination shall be directed pursuant to authority exercised by 
FINRA's Executive Vice President charged with oversight for financial 
responsibility, or his or her written officer delegate, and shall be 
made in accordance with such requirements as FINRA may prescribe.
    (b) Any member failing to file an audited financial and/or 
operational report or examination report under this Rule in the 
prescribed time shall be subject to a late fee as set forth in Schedule 
A Section 4(g)(1) to the FINRA By-Laws.
* * * * *

4500. BOOKS, RECORDS AND REPORTS

* * * * *

4520. Financial Records and Reporting Requirements

4521. Notifications, Questionnaires and Reports

    (a) Each carrying or clearing member shall submit to FINRA, or its 
designated agent, at such times as may be designated, or on an ongoing 
basis, in such form and within such time period as may be prescribed, 
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.
    (b) 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 shall file such supplemental and alternative 
reports as may be prescribed by FINRA.
    (c) Each carrying or clearing member shall 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. For purposes of this 
paragraph, ``tentative net capital as computed pursuant to SEA Rule 
15c3-1'' shall exclude withdrawals of capital previously approved by 
FINRA.
    (d)(1) Unless otherwise permitted by FINRA in writing, members 
carrying margin accounts for customers are required to submit, on a 
settlement date basis, the information specified in paragraphs 
(d)(2)(A) and (d)(2)(B) of this Rule as of the last business day of the 
month. If a member has no information to submit, a report should be 
filed with a notation thereon to that effect. Reports are due as 
promptly as possible after the last business day of the month, but in 
no event later than the sixth business day of the following month. 
Members shall use such form as FINRA may prescribe for these reporting 
purposes.
    (2) Each member carrying margin accounts for customers shall submit 
reports containing the following customer information:
    (A) Total of all debit balances in securities margin accounts; and
    (B) Total of all free credit balances in all cash accounts and all 
margin accounts.
    (3) For purposes of this paragraph (d):
    (A) Only free credit balances in cash and margin accounts shall be 
included in the member's report. Balances in short accounts and in 
Special Memorandum Accounts (as defined in Section 2.2 of Regulation T 
under the Exchange Act) shall not be considered as free credit 
balances.
    (B) Reported debit or credit balance information shall not include 
the accounts of other organizations that are FINRA members, or of the 
associated persons of the member submitting the report where such 
associated person's account is excluded from the definition of customer 
pursuant to SEA Rule 15c3-3.
    (e) Unless a specific temporary extension of time has been granted, 
there shall be imposed upon each member required to file any report, 
notification or information pursuant to this Rule, a late fee as set 
forth in Schedule A Section 4(g)(1) to the FINRA By-Laws.
    (f) For purposes of this Rule, any report filed pursuant to this 
Rule containing material inaccuracies shall be deemed not to have been 
filed until a corrected copy of the report has been resubmitted.
* * * * *

9000. CODE OF PROCEDURE

* * * * *

9500. OTHER PROCEEDINGS

* * * * *

9557. Procedures for Regulating Activities Under [NASD] Rules 4110, 
[3130] 4120 and 4130 [3131] Regarding a Member Experiencing Financial 
or Operational Difficulties

(a) Notice of Requirements and/or Restrictions; FINRA Action
    FINRA staff may issue a notice directing a member to comply with 
the

[[Page 5003]]

provisions of Rule 4110, 4120 or 4130 or restrict its business 
activities, either by limiting or ceasing to conduct those activities 
consistent with Rule 4110, 4120 or 4130, if FINRA staff has reason to 
believe that a condition specified in [NASD] Rule 4110, 4120 [3130] or 
4130 [Rule 3131] exists. A notice served under this Rule shall 
constitute FINRA action.
    (b) No Change.
    (c) Contents of Notice
    A notice issued under this Rule shall:
    (1) State the specific grounds and include the factual basis for 
the FINRA action[.];
    (2) Specify the date of the notice and the requirements and/or 
restrictions being imposed by the notice;
    (3) [The notice shall] state [when the FINRA action will take 
effect and] that the requirements and/or restrictions imposed by the 
notice are immediately effective;
    (4) Specify [explain what the respondent must do to avoid such 
action] the conditions for complying with and, where applicable, 
avoiding or terminating the requirements and/or restrictions imposed by 
the notice[.];
    (5) Inform the member that, pursuant to paragraph (f) of this Rule, 
the failure to comply with the requirements and/or restrictions imposed 
by an effective notice under this Rule shall be deemed, without further 
notice from FINRA staff, to result in automatic and immediate 
suspension unless FINRA staff issues a letter of withdrawal of all 
requirements and/or restrictions imposed by the notice pursuant to 
paragraph (g)(2) of this Rule;
    (6) Explain that the member may make a request for a letter of 
withdrawal of the notice pursuant to paragraph (e) of this Rule;
    (7) [The notice shall] state that, in addition to making a request 
for a letter of withdrawal of the notice, the [respondent] member may 
file a written request for a hearing with the Office of Hearing 
Officers pursuant to Rule 9559[.];
    (8) [The notice also shall] inform the [respondent] member of the 
applicable deadline for filing a request for a hearing and [shall] 
state that a request for a hearing must set forth with specificity any 
and all defenses to the FINRA action[.]; and
    (9) [In addition, the notice shall] explain that, pursuant to 
Rule[s 8310(a) and] 9559(n), a [Hearing Officer or, if applicable,] 
Hearing Panel[,] may approve[, modify] or withdraw the requirements 
and/or restrictions [any and all sanctions or limitations] imposed by 
the notice, and [may impose any other fitting sanction] that if the 
Hearing Panel approves the requirements and/or restrictions imposed by 
the notice and finds that the member has not complied with all of them, 
the Hearing Panel shall impose an immediate suspension on the member.
(d) Effectiveness [Date] of the Requirements and/or Restrictions
    The requirements and/or restrictions imposed by a notice issued and 
served under this Rule are immediately effective, except that a timely 
request for a hearing shall stay the effective date for ten business 
days after service of the notice or until the Office of Hearing 
Officers issues a written order under Rule 9559(o)(4)(A) (whichever 
period is less), unless FINRA's Chief Executive Officer (or such other 
senior officer as the Chief Executive Officer may designate) determines 
that such a stay cannot be permitted with safety to investors, 
creditors or other members. Such a determination by FINRA's Chief 
Executive Officer (or such other senior officer as the Chief Executive 
Officer may designate) cannot be appealed. An extension of the stay 
period is not permitted. Where a timely request for a hearing stays the 
action for ten business days after service of the notice or until the 
Office of Hearing Officers issues a written order under Rule 
9559(o)(4)(A) (whichever period is less), the notice shall not be 
deemed to have taken effect during that entire period. [The 
restrictions referenced in a notice issued and served under this Rule 
shall become effective seven days after service of the notice, unless 
stayed by a request for a hearing pursuant to Rule 9559.]
    Any requirements and/or restrictions imposed by an effective notice 
shall remain in effect unless FINRA staff shall remove or reduce the 
requirements and/or restrictions pursuant to a letter of withdrawal of 
the notice issued as set forth in paragraph (g)(2) of this Rule.
(e) Request for a Letter of Withdrawal of the Notice; Request for a 
Hearing
    A member served with a notice under this Rule may request from 
FINRA staff a letter of withdrawal of the notice pursuant to paragraph 
(g)(2) of this Rule and/or file with the Office of Hearing Officers a 
written request for a hearing pursuant to Rule 9559.
    (1) A request for a letter of withdrawal of the notice may be made 
at any time after service of a notice under this Rule. The member 
making the request must demonstrate to the satisfaction of FINRA staff 
that the requirements and/or restrictions imposed by the notice should 
be removed or reduced. If such a request is denied by FINRA staff, the 
member shall not be precluded from making a subsequent request or 
requests.
    (2) A request for a hearing shall be made within two business days 
after service of a notice under this Rule [before the effective date of 
the notice, as indicated in paragraph (d) of this Rule]. A request for 
a hearing must set forth with specificity any and all defenses to the 
FINRA action. A request for a hearing may seek to contest:
    (A) The validity of the requirements and/or restrictions imposed by 
the notice (as the same may have been reduced by a letter of withdrawal 
pursuant to paragraph (g)(2) of this Rule, where applicable); and/or
    (B) 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.
(f) [Failure to Request Hearing]
    [If a member does not timely request a hearing, the restrictions 
specified in the notice shall become effective seven days after service 
of the notice. The restrictions specified in the notice shall remain in 
effect until the head of the FINRA department or office that issued the 
notice or, if another FINRA department or office is named as the party 
handling the matter on behalf of the issuing department or office, the 
head of the FINRA department or office that is so designated reduces or 
removes the restrictions pursuant to paragraph (h) of this Rule.]
(g) [Order to] Enforcement of [Sanctions] Notice
    [If FINRA staff determines that a] A member that has failed to 
comply with the [any] requirements and/or restrictions imposed by [a 
decision or] an effective notice under this Rule shall be deemed, 
without further notice from FINRA staff, automatically and immediately 
suspended [that have not been stayed, FINRA staff shall issue an order 
imposing the sanctions set forth in the decision or notice and 
specifying the effective date and time of such sanctions. The order 
shall inform the member that it may apply for relief from the sanctions 
imposed by the order by filing a written request for a hearing before 
the Office of Hearing Officers under Rule 9559. The procedures 
delineated in this Rule shall be applicable]. Such suspension shall 
remain in effect unless FINRA staff shall issue a letter, pursuant to 
paragraph (g)(2) of this Rule, stating that the suspension is lifted.

[[Page 5004]]

[(h)] (g) Additional Requirements and/or Restrictions or the Removal or 
Reduction [or Removal] of Requirements and/or Restrictions; Letter of 
Withdrawal of the Notice
(1) Additional Requirements and/or Restrictions
    If a member continues to experience financial or operational 
difficulty specified in [NASD] Rule 4110 or 4120 [3130] or 4130 [3131], 
notwithstanding an effective notice[, order or decision under this 
Rule], FINRA staff may impose additional requirements and/or 
restrictions by [issuing] serving [a] an additional notice under 
paragraph (b) of this Rule. The additional notice shall inform the 
member that it may apply for relief from the additional requirements 
and/or restrictions by filing a written request for a letter of 
withdrawal of the notice and/or a written request for a hearing before 
the Office of Hearing Officers under Rule 9559. The procedures 
delineated in this Rule shall be applicable to such [a] additional 
notice.
(2) [Reduction or] Removal or Reduction of Requirements and/or 
Restrictions and/or Lifting of Suspension; Letter of Withdrawal
(A) Removal or Reduction of Requirements and/or Restrictions
    If, upon the member's demonstration to the satisfaction of FINRA 
staff, FINRA staff determines that any requirements and/or restrictions 
[previously] imposed by a notice under this Rule should be [reduced or] 
removed or reduced, FINRA staff shall serve the member, pursuant to 
paragraph (b) of this Rule, a written letter of withdrawal that shall, 
in the sole discretion of FINRA staff, withdraw the notice in whole or 
in part [on the member pursuant to Rule 9134]. A notice that is 
withdrawn in part shall remain in force, unless FINRA staff shall 
remove the remaining requirements and/or restrictions.
(B) Lifting of Suspension
    If, upon the member's demonstration to the satisfaction of FINRA 
staff, FINRA staff determines that a suspension imposed by a notice 
under this Rule should be lifted, FINRA staff shall serve the member, 
pursuant to paragraph (b) of this Rule, a letter that shall, in the 
sole discretion of FINRA staff, lift the suspension. Where all or some 
of the requirements and/or restrictions imposed by a notice issued 
under this Rule remain in force, the letter shall state that the 
member's failure to continue to comply with those requirements and/or 
restrictions that remain effective shall result in the member being 
immediately suspended.
    (h) FINRA Staff For purposes of this Rule, ``FINRA staff'' shall 
mean:
    (1) The head of the FINRA department or office that issued the 
notice, or his or her written officer delegate; or
    (2) If another FINRA department or office is named as the party 
handling the matter on behalf of the issuing department or office, the 
head of the FINRA department or office that is so designated, or his or 
her written officer delegate.
(i) Notice to Membership
    FINRA shall provide notice of any suspension [final FINRA action 
taken] pursuant to this Rule in the next notice of Disciplinary and 
Other FINRA Actions.
* * * * *

9559. Hearing Procedures for Expedited Proceedings Under the Rule 9550 
Series

(a) No Change
(b) Computation of Time
    Rule 9138 shall govern the computation of time in proceedings 
brought under the Rule 9550 Series, except that intermediate Saturdays, 
Sundays and Federal holidays shall be included in the computation in 
proceedings brought under Rules 9556 through 9558, unless otherwise 
specified.
(c) Stays
    (1) Unless the Chief Hearing Officer or the Hearing Officer 
assigned to the matter orders otherwise for good cause shown, a timely 
request for a hearing shall stay the effectiveness of a notice issued 
under Rules 9551 through 9556[7], except that the effectiveness of a 
notice of a limitation or prohibition on access to services offered by 
FINRA or a member thereof under Rule 9555 with respect to services to 
which the member or person does not have access shall not be stayed by 
a request for a hearing.
    (2) A timely request for a hearing shall stay the effectiveness of 
a notice issued under Rule 9557 for ten business days after service of 
the notice or until the Office of Hearing Officers issues a written 
order under Rule 9559(o)(4)(A) (whichever period is less), unless 
FINRA's Chief Executive Officer (or such other senior officer as the 
Chief Executive Officer may designate) determines that a notice under 
Rule 9557 shall not be stayed. Where a notice under Rule 9557 is stayed 
by a request for a hearing, such stay shall remain in effect only for 
ten business days after service of the notice or until the Office of 
Hearing Officers issues a written order under Rule 9559(o)(4)(A) 
(whichever period is less) and shall not be extended.
    (3) A timely request for a hearing shall not stay the effectiveness 
of a notice issued under Rule 9558, unless the Chief Hearing Officer or 
the Hearing Officer assigned to the matter orders otherwise for good 
cause shown.
(d) Appointment and Authority of Hearing Officer and/or Hearing Panel
    (1) For proceedings initiated under Rules 9553 and 9554, the Chief 
Hearing Officer shall appoint a Hearing Officer to preside over and act 
as the sole adjudicator for the matter.
    (2) For proceedings initiated under Rules 9551, 9552, 9555, 9556, 
9557 and 9558, the Chief Hearing Officer shall appoint a Hearing Panel 
composed of a Hearing Officer and two Panelists. The Hearing Officer 
shall serve as the chair of the Hearing Panel. For proceedings 
initiated under Rules 9551, 9552, 9555, 9556 and 9558, [T]the Chief 
Hearing Officer shall select as Panelists persons who meet the 
qualifications delineated in Rules 9231 and 9232. For proceedings 
initiated under Rule 9557, the Chief Hearing Officer shall select as 
Panelists current or former members of the FINRA Financial 
Responsibility Committee.
    (3) Rules 9231(e), 9233 and 9234 shall govern disqualification, 
recusal or withdrawal of a Hearing Officer or, if applicable, Hearing 
Panelist.
    (4) A Hearing Officer appointed pursuant to this provision shall 
have authority to do all things necessary and appropriate to discharge 
his or her duties as set forth under Rules 9235 and 9280.
    (5) Hearings under the Rule 9550 Series shall be held by telephone 
conference, unless the Hearing Officer orders otherwise for good cause 
shown.
    (6) For good cause shown, or with the consent of all of the parties 
to a proceeding, the Hearing Officer or, if applicable, the Hearing 
Panel may extend or shorten any time limits prescribed by this Rule 
other than those relating to Rule 9557.
(e) Consolidation or Severance of Proceedings
    Rule 9214 shall govern the consolidation or severance of 
proceedings, except that, where one of the notices that are the subject 
of consolidation under this Rule requires that a hearing be held before 
a Hearing Panel, the hearing of the consolidated matters shall be held 
before a Hearing Panel. Where two consolidated matters contain 
different timelines under this Rule, the Chief Hearing Officer or

[[Page 5005]]

Hearing Officer assigned to the matter has discretion to determine 
which timeline is appropriate under the facts and circumstances of the 
case. Where one of the consolidated matters includes an action brought 
under a Rule [9558] that does not permit a stay of the effectiveness of 
the notice or where FINRA's Chief Executive Officer (or such other 
senior officer as the Chief Executive Officer may designate), in the 
case of Rule 9557, or Hearing Officer, in the case of Rule 9558(d), 
determines that a request for a hearing shall not stay the 
effectiveness of the notice, the limitation, prohibition, condition, 
requirement, restriction, or suspension specified in the notice shall 
not be stayed pending resolution of the case [unless the Chief Hearing 
Officer or Hearing Officer assigned to the matter orders otherwise for 
good cause shown. Where one of the consolidated matters includes an 
action brought under Rule 9555 with respect to services to which the 
member or person does not have access, the effectiveness of a notice of 
a limitation or prohibition on access to services offered by FINRA or a 
member thereof shall not be stayed pending resolution of the case]. 
Where one of the consolidated matters includes an action brought under 
Rule 9557 that is stayed for up to ten business days, the requirement 
and/or restriction specified in the notice shall not be further stayed.
(f) Time of Hearing
    (1) A hearing shall be held within five business days after a 
respondent subject to a notice issued under Rule 9557 files a written 
request for a hearing with the Office of Hearing Officers.
    ([1]2) A hearing shall be held within 14 days after a respondent 
subject to a notice issued under Rules 9556 [through] and 9558 files a 
written request for a hearing with the Office of Hearing Officers.
    ([2]3) A hearing shall be held within 60 days after a respondent 
subject to a notice issued under Rules 9551 through 9555 files a 
written request for a hearing with the Office of Hearing Officers.
    ([3]4) The timelines established by paragraphs (f)(1) [and] through 
(f)[(2)](3) confer no substantive rights on the parties.
(g) Notice of Hearing
    The Hearing Officer shall issue a notice stating the date, time, 
and place of the hearing as follows:
    (1) At least two business days prior to the hearing in the case of 
an action brought pursuant to Rule 9557;
    ([1]2) At least seven days prior to the hearing in the case of an 
action brought pursuant to Rules 9556 [through] and 9558; and
    ([2]3) At least 21 days prior to the hearing in the case of an 
action brought pursuant to Rules 9551 through 9555.
(h) Transmission of Documents
    (1) Not less than two business days before the hearing in an action 
brought under Rule 9557, not less than seven days before the hearing in 
an action brought under Rules 9556 [through] and 9558, and not less 
than 40 days before the hearing in an action brought under Rules 9551 
through 9555, FINRA staff shall provide to the respondent who requested 
the hearing, by facsimile or overnight courier, all documents that were 
considered in issuing the notice unless a document meets the criteria 
of Rule 9251(b)(1)(A), (B) or (C). A document that meets such criteria 
shall not constitute part of the record, but shall be retained by FINRA 
until the date upon which FINRA serves a final decision or, if 
applicable, upon the conclusion of any review by the SEC or the federal 
courts.
    (2) Not less than two business days before the hearing in an action 
brought under Rule 9557, not less than three days before the hearing in 
an action brought under Rules 9556 [through] and 9558, and not less 
than 14 days before the hearing in an action brought under Rules 9551 
through 9555, the parties shall exchange proposed exhibit and witness 
lists. The exhibit and witness lists shall be served by facsimile or by 
overnight courier. (i) through (m) No Change.
(n) Sanctions, Costs and Remands
    (1) In any action brought under the Rule 9550 Series, other than an 
action brought under Rule 9557, [T]the Hearing Officer or, if 
applicable, the Hearing Panel may approve, modify or withdraw any and 
all sanctions, requirements, restrictions or limitations imposed by the 
notice[. The Hearing Officer or, if applicable, the Hearing Panel] and, 
pursuant to Rule 8310(a), [also] may also impose any other fitting 
sanction[, pursuant to Rule 8310(a)].
    (2) In an action brought under Rule 9557, the Hearing Panel shall 
approve or withdraw the requirements and/or restrictions imposed by the 
notice. If the Hearing Panel approves the requirements and/or 
restrictions and finds that the respondent has not complied with all of 
them, the Hearing Panel shall impose an immediate suspension on the 
respondent that shall remain in effect unless FINRA staff issues a 
letter of withdrawal of all requirements and/or restrictions pursuant 
to Rule 9557(g)(2).
    (3) The Hearing Officer or, if applicable, the Hearing Panel may 
impose costs pursuant to Rule 8330 regarding all actions brought under 
the Rule 9550 Series.
    ([3]4) In any action brought under the Rule 9550 Series, other than 
an action brought under Rule 9557, [T]the Hearing Officer or, if 
applicable, the Hearing Panel may remand the matter to the department 
or office that issued the notice for further consideration of specified 
matters.
(o) Timing of Decision
(1) Proceedings initiated under Rules 9553 and 9554
    Within 60 days of the date of the close of the hearing, the Hearing 
Officer shall prepare a proposeed written decision and provide it to 
the National Adjudicatory Council's Review Subcommittee.
(2) Proceedings initiated under Rules 9556 [through] and 9558
    Within 21 days of the date of the close of the hearing, the Hearing 
Officer shall prepare a proposed written decision that reflects the 
views of the Hearing Panel, as determined by majority vote, and provide 
it to the National Adjudicatory Council's Review Subcommittee.
(3) Proceedings initiated under Rules 9551, 9552 and 9555
    Within 60 days of the date of the close of the hearing, the Hearing 
Officer shall prepare a proposed written decision that reflects the 
views of the Hearing Panel, as determined by majority vote, and provide 
it to the National Adjudicatory Council's Review Subcommittee.
(4) Proceedings initiated under Rule 9557
(A) Written Order
    Within two business days of the date of the close of the hearing, 
the Office of Hearing Officers shall issue a written order that 
reflects the Hearing Panel's summary determinations, as decided by 
majority vote, and shall serve the Hearing Panel's written order on the 
Parties. The Hearing Panel's written order under Rule 9557 is effective 
when issued. The Hearing Panel's written order will be followed by a 
written decision explaining the reasons for the Hearing Panel's summary 
determinations, as required by paragraphs (o)(4)(B) and (p) of this 
Rule.
(B) Written Decision
    Within seven days of the issuance of the Hearing Panel's written 
order, the Office of Hearing Officers shall issue a written decision 
that complies with the

[[Page 5006]]

requirements of paragraph (p) of this Rule and shall serve the Hearing 
Panel's written decision on the Parties.
    (5) If not timely called for review by the National Adjudicatory 
Council's Review Subcommittee pursuant to paragraph (q) of this Rule, 
the Hearing Officer's or, if applicable, the Hearing Panel's written 
decision shall constitute final FINRA action. For decisions issued 
under Rules 9551 through 9556 and 9558, [T]the Office of Hearing 
Officers shall promptly serve the decision of the Hearing Officer or, 
if applicable, the Hearing Panel on the Parties and provide a copy to 
each FINRA member with which the respondent is associated.
    ([5]6) The timelines established by paragraphs (o)(1) through 
[(4)](5) confer no substantive rights on the parties.
(p) Contents of Decision
    The decision, which for purposes of Rule 9557 means the written 
decision issued under paragraph (o)(4)(B) of this Rule, shall include:
    (1) a statement describing the investigative or other origin of the 
notice issued under the Rule 9550 Series;
    (2) the specific statutory or rule provision[s that were] alleged 
to have been violated or providing the authority for the FINRA action;
    (3) a statement setting forth the findings of fact with respect to 
any act or practice the respondent was alleged to have committed or 
omitted or any condition specified in the notice;
    (4) the conclusions of the Hearing Officer or, if applicable, 
Hearing Panel regarding the alleged violation or condition specified in 
the notice [as to whether the respondent violated any provision alleged 
in the notice];
    (5) a statement of the Hearing Officer or, if applicable, Hearing 
Panel in support of the disposition of the principal issues raised in 
the proceeding; and
    (6) a statement describing any sanction, requirement, restriction 
or limitation imposed, the reasons therefore, and the date upon which 
such sanction, requirement, restriction or limitation shall become 
effective.
(q) Call for Review by the National Adjudicatory Council
    (1) For proceedings initiated under the Rule 9550 Series (other 
than Rule 9557), [T]the National Adjudicatory Council's Review 
Subcommittee may call for review a proposed decision [issued] prepared 
by a Hearing Officer or, if applicable, Hearing Panel [under the Rule 
9550 Series] within 21 days after receipt of the decision from the 
Office of Hearing Officers. For proceedings initiated under Rule 9557, 
the National Adjudicatory Council's Review Subcommittee may call for 
review a written decision issued under paragraph (o)(4)(B) of this Rule 
by a Hearing Panel within 14 days after receipt of the written decision 
from the Office of Hearing Officers. Rule 9313(a) is incorporated 
herein by reference.
    (2) No Change.
    (3) For good cause shown, or with the consent of all of the parties 
to a proceeding, the Review Subcommittee, the National Adjudicatory 
Council Subcommittee or the National Adjudicatory Council may extend or 
shorten any time limits prescribed by this Rule other than those 
relating to Rule 9557.
    (4) through (6) No Change.
    (r) through (s) No Change.
* * * * *

Text of Proposed Changes to Section 4 of Schedule A to the FINRA By-
Laws

SCHEDULE A TO THE BY-LAWS OF THE CORPORATION

Section 1 through Section 3 No Change.

Section 4--Fees

    (a) through (f) No Change.
    (g)(1) Unless a specific temporary extension of time has been 
granted, there shall be imposed upon each member required to file 
reports, as designated by this paragraph (``Designated Reports''), a 
fee of $100 for each day that such report is not timely filed. The fee 
will be assessed for a period not to exceed 10 business days. Requests 
for such extension of time must be submitted to FINRA at least three 
business days prior to the due date; and
    (2) Any report filed pursuant to this Rule containing material 
inaccuracies or filed incompletely shall be deemed not to have been 
filed until a corrected copy of the report has been resubmitted.
    (3) List of Designated Reports:
    (A) SE[C]A Rule 17a-5--Monthly and quarterly FOCUS reports and 
annual audit reports; [and]
    (B) SE[C]A Rule 17a-10--Schedule I[.];
    (C) FINRA Rule 4140--any audited financial and/or operational 
report or examination report required pursuant to Rule 4140; and
    (D) FINRA Rule 4521--any report, notification or information 
required pursuant to Rule 4521.
    (h) No Change.
    IM-Section 4(b)(1) and (e) through Section 13 No Change.
* * * * *

Text of Incorporated NYSE Rules To Remain in the Transitional Rulebook

Incorporated NYSE Rules

* * * * *

Rule 312. Changes Within Member Organizations

    (a) through (g) No Change.
    (h) Reserved. [No member corporation subject to Rule 325 shall, 
without the prior written consent of the Exchange, redeem or repurchase 
any shares of its stock on less than six months notice given to the 
Exchange no sooner than six months after the original issuance of such 
shares (or any predecessor shares). Each member corporation shall 
promptly notify the Exchange if any redemption or repurchase of any of 
its stock is postponed because prohibited under the provisions of 
Exchange Act Rule 15c3-1 (see 15c3-1(e)).]
    (i) through (j) No Change.

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

    (a) through (c) No Change.
    (d) Reserved. [Whenever a member organization shall offer or sell 
any security, as defined under the Securities Act of 1933, as amended, 
or the General Rules and Regulations thereunder (the 1933 Act), or 
under the ``blue sky'' law or the regulations thereunder of any state 
in which it is proposed that the security be offered, which security is 
issued by the member organization for the purpose of raising capital 
under Rules 325 and 326 of the Board of Directors of the Exchange, the 
member organization must furnish the Exchange with an opinion of 
counsel in form and substance satisfactory to the Exchange as to 
whether or not the securities being offered or sold need be registered 
under the 1933 Act and a survey of the type customarily prepared in 
respect of the underwriting of securities, but not an opinion, as to 
what action, if any, need be taken with respect to such offer or sale 
under any applicable state ``blue sky'' law. If, in counsel's opinion, 
the securities need not be registered under the 1933 Act, his opinion 
shall state the exemption from the registration requirements of the 
1933 Act upon which he is relying and the basis for such reliance. If 
the securities are required to be registered under the 1933 Act 
counsel's opinion shall include, in addition to such other statements 
as the Exchange in any particular case may require, a statement 
substantially to the effect that at the time the registration statement 
became effective, the registration statement and the prospectus (other 
than the financial

[[Page 5007]]

statements contained therein) complied as to form in all material 
respects with the requirements of the 1933 Act (and with the Trust 
Indenture Act of 1939, as amended, if applicable) and nothing has come 
to counsel's attention that would lead counsel to believe that the 
registration statement at the time it became effective contained an 
untrue statement of a material fact or omitted to state a material fact 
required to be stated therein or necessary to make the statements 
therein not misleading or that the prospectus at the time the 
registration statement became effective or at the time of sale of the 
security contained an untrue statement of a material fact or omitted to 
state a material fact necessary in order to make the statements 
therein, in the light of the circumstances under which they were made, 
not misleading.]
    [Prior to the consummation of the sale of the security, counsel 
shall furnish a statement to the Exchange as to the action taken in 
order to comply with the state ``blue sky'' law of any state in which 
the security is offered or sold.]
    [Without limiting the generality of the foregoing, counsel, among 
other things, is expected to give appropriate consideration to (a) any 
other transactions pursuant to which the member organization has raised 
capital in the past, or expects to do so in the future, (b) the 
disclosure of material information regarding the member organization to 
offerees of the security, and (c) the need for representation by the 
purchaser of the securities as to his intention to hold the securities 
for investment.]
    (e) through (f) No Change.

   Supplementary Material: ----

Information Regarding Partnership Articles

    .10 through .12 No Change.
    [.14 A-B-C agreements.--[Rescinded by NYSE-2005-77].]
    [.18 Sole board member provision.--[Removed by NYSE-2005-77].]

Information Regarding Member Corporations

    .20 through. 23 No Change.
* * * * *

Rule 416. Questionnaires and Reports

    (a) No Change.
    (b) No Change.
    (c) No Change.

   Supplementary Material: ----

    .10 No Change.
    .20 Reserved. [Each member and member organization shall, on an 
ongoing basis and in such format as the Exchange may require, submit to 
the Exchange, or its designated agent, prescribed data of the member or 
member organization, and of any broker-dealer that is a party to a 
carrying agreement with a member or member organization pursuant to 
NYSE Rule 382.]
* * * * *

Text of NASD Rules to be Deleted in Their Entirety from the 
Transitional Rulebook

* * * * *

3100. BOOKS AND RECORDS, AND FINANCIAL CONDITION

* * * * *
    [3130. Regulation of Activities of Members Experiencing Financial 
and/or Operational Difficulties]
    Entire text deleted.
    [IM-3130. Restrictions on a Member's Activity]
    Entire text deleted.
    [3131. Regulation of Activities of Section 15C Members Experiencing 
Financial and/or Operational Difficulties]
    Entire text deleted.
* * * * *

Text of Incorporated NYSE Rules and NYSE Rule Interpretations to be 
Deleted in Their Entirety from the Transitional Rulebook

Incorporated NYSE Rules

* * * * *
    [Rule 325. Capital Requirements Member Organizations]
    Entire text deleted.
    [Rule 326(a). Growth Capital Requirement]
    Entire text deleted.
    [Rule 326(b). Business Reduction Capital Requirement]
    Entire text deleted.
    [Rule 326(c). Unsecured Loans and Advances]
    Entire text deleted.
    [Rule 326(d). Reduction of Elimination of Loans and Advances]
    Entire text deleted.
* * * * *
    [Rule 328. Sale-And-Leasebacks, Factoring, Financing and Similar 
Arrangements]
    Entire text deleted.
* * * * *
    [Rule 418. Audit]
    Entire text deleted.
* * * * *
    [Rule 420. Reports of Borrowings and Subordinate Loans For Capital 
Purposes]
    Entire text deleted.
    [Rule 421. Periodic Reports]
    Entire text deleted.
* * * * *

NYSE RULE INTERPRETATION

    [NYSE Rule 313 SUBMISSION OF PARTNERSHIP ARTICLES]
    [SUBMISSION OF CORPORATE DOCUMENTS]
    [(d) OPINION OF COUNSEL]
    [/01 Loans, Demand Notes and Partners' Contributions]
    Entire text deleted.
    [/02 Independent Counsel]
    Entire text deleted.
* * * * *
    [Rule 325 CAPITAL REQUIREMENTS]
    [(c)(1) Long Put or Call Options]
    Entire text deleted.
    [/01 SEC no-action letter to NYSE dated January 31, 1990 provides 
interim conditions for recognition of long unlisted options, for U.S. 
Government debt securities endorsed or guaranteed by a limited group of 
narrowly defined issuers.]
    Entire text deleted.
* * * * *
    [Rule 416 QUESTIONNAIRES AND REPORTS]
    [/01 Gold and Silver Offerings]
    Entire text deleted.
* * * * *
[FR Doc. E9-1807 Filed 1-27-09; 8:45 am]

BILLING CODE 8011-01-P
