
[Federal Register: November 12, 2009 (Volume 74, Number 217)]
[Notices]               
[Page 58334-58340]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12no09-115]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60933; File No. SR-FINRA-2008-067]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 2 and Order Granting 
Accelerated Approval to a Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2, to Adopt Rules Governing Financial 
Responsibility in the Consolidated FINRA Rulebook

November 4, 2009.

I. Introduction

    On December 30, 2008, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') (f/k/a National Association of Securities Dealers, 
Inc. (``NASD'')) filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt a new, consolidated set 
of financial responsibility rules as part of the process of developing 
a new consolidated rulebook (``Consolidated FINRA Rulebook'')\3\ 
without material change. The proposed rule change was published for 
comment in the Federal Register on January 28, 2009.\4\ The Commission 
received two comment letters in response to the proposed rule 
change,\5\ along with one letter from FINRA addressing certain of the 
comments.\6\ FINRA filed Amendment No. 1 to the proposed rule change on 
June 17, 2009.\7\ FINRA filed Amendment No. 2 to the proposed rule 
change on June 30, 2009.\8\ This Order approves the proposed rule 
change, as modified by Amendment No. 1 and issues notice of, and 
solicits comments on, Amendment No. 2, and approves the filing, as 
modified by Amendment No. 2, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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).
    \4\ See Securities Exchange Act Release No. 59273 (January 22, 
2009), 74 FR 4992 (January 28, 2009) (hereinafter the ``Proposing 
Release'').
    \5\ See letters from Holly H. Smith and Eric A. Arnold of 
Sutherland, Asbill & Brennan, LLP on behalf of the Committee of 
Annuity Insurers dated February 18, 2009 (the ``CAI Letter'') and 
Julian Rainero of Bracewell & Guiliani, LLP dated April 17, 2009 
(the ``B&G Letter'').
    \6\ See letter from Adam H. Arkel of FINRA, dated April 14, 2009 
(the ``FINRA Letter'').
    \7\ Amendment No. 1 is a technical amendment designed to clarify 
one sentence in the rule text.
    \8\ Amendment No. 2 adds Supplementary Material to the proposed 
FINRA Rules 4110, 4120 and 4521 to clarify that, for purposes of 
each of those rules, all requirements that apply to a member that 
clear or carry customer accounts also shall apply to any member 
that, operating pursuant to the exemptive provisions of Rule 15c3-
3(k)(2)(i), either clears customer transactions pursuant to such 
exemptive provisions or holds customer funds in a bank account 
established thereunder. FINRA explained this aspect of the rule 
change in its Notice to Members 08-23, and in greater detail in its 
original filing with the Commission. Further, one of the two 
commenters commented on this aspect of the proposed rule changes 
(See the CAI Letter). FINRA believes that incorporating this 
Supplementary Material will reduce any possible ambiguity with 
respect to this issue.
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II. Description of the Proposed Rule Change

    The proposed rule change would 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 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 proposed 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 proposed to make conforming 
revisions to Section 4(g) of Schedule A to the FINRA By-Laws.

A. Background

    Currently, both NASD and NYSE Rules \9\ 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 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.\10\
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    \9\ For convenience, the Incorporated NYSE Rules are referred to 
as the ``NYSE Rules.''
    \10\ 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 12.
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B. Proposed FINRA Rule 4110 (Capital Compliance)

1. Authority to Increase Capital Requirements
    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,

[[Page 58335]]

it provides opportunity for an expedited hearing pursuant to Proposed 
FINRA Rule 9559.\11\
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    \11\ 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'').\12\ 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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    \12\ 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 during any period of 
time in which it is not in compliance with SEA Rule 15c3-1. This 
requirement is consistent with current law.\13\
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    \13\ 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 \14\ 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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    \14\ 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.\15\
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    \15\ 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.\16\ 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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    \16\ 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,\17\ without the prior written authorization of FINRA.
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    \17\ 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

[[Page 58336]]

respect to any unsecured accounts receivable where the arrangement 
would not increase the member firm's tentative net capital by 10 
percent or more.\18\
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    \18\ See supra note 17.
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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 \19\ 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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    \19\ See supra note 17.
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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.\20\
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    \20\ See supra note 17.
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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 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.\21\ 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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    \21\ 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.

C. 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.\22\ 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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    \22\ 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

[[Page 58337]]

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).

D. 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.

E. 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 report is not timely filed, up to a maximum 
of 10 business days.

F. 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 \23\ and 421(2),\24\ 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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    \23\ 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).
    \24\ 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.\25\
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    \25\ 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.

G. 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.\26\ For example:
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    \26\ 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;

[[Page 58338]]

     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.\27\ 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.\28\
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    \27\ See Proposed FINRA Rule 9557(g)(2).
    \28\ See Proposed FINRA Rule 9557(e)(1).
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    If a member requests a hearing within two business days after 
service of a 9557 notice, the member may seek to contest (1) the 
validity of the requirements and/or restrictions imposed by the notice 
(as the same may have been reduced by a letter of withdrawal issued by 
FINRA staff pursuant to Rule 9557(g)(2), where applicable) and/or (2) 
FINRA staff's determination not to issue a letter of withdrawal of all 
requirements and/or restrictions imposed by the notice, if such was 
requested by the member. The Hearing Panel may then either approve or 
withdraw the requirements and/or restrictions imposed by the notice. If 
the Hearing Panel approves the requirements and/or restrictions and 
finds the member has not complied with all of them, the Hearing Panel 
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 intends to announce the effective date of the proposed rule 
change in a Regulatory Notice to be published no later than 90 days 
following Commission approval.

III. Comment Letters

    The proposed rule change was published for comment in the Federal 
Register on January 28, 2009 and the comment period closed on February 
18, 2009. The Commission received two comment letters in response to 
the proposing release; the CAI Letter and the B&G Letter.\29\ While 
neither commented generally on FINRA's rule proposal, both raised 
specific, discreet issues relating to those rules.
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    \29\ See supra, note 5.
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A. Members Operating Pursuant to SEA Rule 15c3-3(k)(2)(i) Exemption

    FINRA stated in its filing with the Commission that ``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).\30\ 
'' One commenter stated that it believes the definition of ``carrying 
or clearing'' firm should be revised in two respects: first, it 
believes that FINRA should include firms distributing variable 
annuities or life insurance within the types of firms FINRA has 
described as having ``limited business models;'' and second, it 
believes FINRA should take into consideration the extremely different 
profile of firms that use the exemption provided in SEC Rule 15c3-
3(k)(2)(i) versus the profile of traditional carrying and clearing 
firms.\31\
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    \30\ 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.
    \31\ See the CAI Letter.
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    With respect to the commenter's first point, FINRA, in its response 
letter, stated that the commenter may have misinterpreted the purpose 
of FINRA's reference to limited business models, and ``it is not 
FINRA's intention to create business model or other exemptions from the 
proposed rules.'' \32\ To clarify further, FINRA stated, ``[i]f a firm 
engages in any carrying or clearing activity, including operating 
pursuant to the exemptive provisions of 15c3-3(k)(2)(i), then such firm 
would be expected to comply with all requirements set forth in the 
proposed rules that apply to carrying and clearing firms. A firm that 
does not engage in any such activity would not be subject to those 
requirements.'' \33\
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    \32\ See the FINRA Letter
    \33\ Id.
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    With respect to the commenter's second point, FINRA noted that 
firms that operate pursuant to the Rule 15c3-3(k)(2)(i) exemption 
receive customer funds for the purpose of settling customer 
transactions and perform a clearing function, irrespective of how short 
the period they may hold customer funds.\34\ Accordingly, FINRA stated 
that it believes that firms operating pursuant to the Rule 15c3-
3(k)(2)(i) exemption should, as a matter of investor protection, be 
subject to all requirements set forth in the proposed rules that apply 
to carrying and clearing firms.\35\
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    \34\ Id.
    \35\ Id.
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B. Ability to Increase Capital Requirements

    One commenter argued that FINRA should build objective standards 
into Proposed Rule 4110(a) to ensure that firms have some 
predictability in their cash management functions and so the standards 
are applied equitably to all FINRA members. In response to similar 
comments it received in response to its Notice to Members 08-23, FINRA 
stated that it ``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'' because ``Proposed Rule 
4110(a) is intended to enable FINRA to respond promptly to 
extraordinary, unanticipated or emergency circumstances.'' \36\ FINRA 
also stated that Proposed FINRA Rule 4110(a) does not lend itself to 
prescribed parameters.\37\
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    \36\ See the Proposing Release, at 22 (74 FR at 4997). These 
comments are also reiterated by FINRA in the FINRA Letter, at page 
3.
    \37\ Id.
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C. Suspension of Business Operations

    One commenter requested clarification on the interplay between 
FINRA's Proposed Rule 4110(b) and Exchange Act Rule 17a-11. Proposed 
Rule 4110(b) states, ``[u]nless otherwise permitted by FINRA, a member 
shall suspend business operations during any period in which it is not 
in compliance with applicable net capital requirements set forth in SEA 
Rule 15c3-1.'' In

[[Page 58339]]

response, FINRA reiterated that ``the requirements set forth in the 
Proposed Rule are consistent with current law.'' FINRA also highlighted 
that the Commission, in the Proposing Release, stated ``the net capital 
rule requires that `every broker or dealer shall at all times have and 
maintain' certain specified levels of net capital,'' and further, ``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.'' \38\
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    \38\ See the FINRA Letter at page 4. See also, note 10 to the 
Proposing Release, at page 6 (74 FR at 4994). See also, Amendments 
to Financial Responsibility Rules for Broker-Dealers, Securities 
Exchange Act Release No. 55431 (March 9, 2007) (72 FR 12862, at 
12872 (March 19, 2007)), wherein the Commission states, ``section 
15(c)(3) of the Exchange Act generally prohibits a broker-dealer 
from effecting any transaction in, or inducing or attempting to 
induce the purchase or sale of, any security in contravention of the 
Commission's financial responsibility rules (which include Rule 
15c3-1).'' (15 U.S.C. 78o)
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D. Withdrawals of Equity Capital

    Both commenters raised issues with respect to FINRA's Proposed Rule 
4110(c), arguing that it should be amended or that the Commission 
should reject it because it goes further than Exchange Act Rule 15c3-
1(e). In response to this comment, FINRA noted that ``its mandate is to 
design in enforce rules to ensure investor protection.'' \39\ Further, 
as FINRA explained in the FINRA Letter ``regulation of withdrawal of 
equity capital serves to promote the financial stability of member 
firms and, accordingly, is an important element of investor 
protection.'' \40\
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    \39\ See the FINRA Letter, at page 3.
    \40\ Id. In its original filing with the Commission, FINRA 
stated that financial stability was one of the goals that Proposed 
FINRA Rule 4110(c) was designed to address (see Proposing Release, 
at page 6 (74 FR at 4994)).
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    One commenter also asserted that, ``if FINRA believes it must 
establish a pre-approval requirement, then it needs to give member 
firms certainty regarding how long firms will have to wait for FINRA's 
approval.'' \41\ In response, FINRA, in the FINRA Letter, reiterated 
the explanation it provided in its original filing with the Commission 
that ``requests for withdrawal can be handled in a routine manner and 
[..] decisions typically would be issued in approximately three 
business days.'' \42\
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    \41\ See the CAI Letter, at page 5.
    \42\ See the FINRA Letter, at page 3.
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    Finally, one commenter requested clarification with respect to 
whether the staff's review and decision will be based on an intra-month 
net capital computation.\43\ FINRA, in the FINRA letter reiterated the 
explanation it provided in its original filing with the Commission, 
stating that, for purposes of Proposed FINRA Rule 4110(c)(2), ``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.'' \44\ Further, FINRA stated that, ``the member 
must assure itself that the excess net capital so reported has not 
materially changed since the time the form was filed.'' \45\
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    \43\ See the CAI Letter, at page 5.
    \44\ See the FINRA Letter, at page 3. See also, note 13 in the 
Proposing Release, at page 7 (74 FR at 4994).
    \45\ Id.
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    This commenter further suggests that ``it would be appropriate to 
revise [Proposed FINRA Rule 4110(b)] to take into account whether the 
Net Capital Rule violation actually results in the broker-dealer 
currently being under-capitalized and is a continuing condition.'' \46\ 
In response FINRA, in the FINRA Letter, notes that ``the firm's 
obligations, both under the current regulatory framework and under the 
proposed rules, are clear--the firm must maintain the required net 
capital at all times.'' \47\ Further, ``[t]he firm may resume its 
business when it returns to net capital compliance.'' \48\
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    \46\ See the CAI Letter, at page 6.
    \47\ See the FINRA Letter, at page 4. See also NTM 07-16, Q&A 
1 (April, 2007). See also, FINRA's Interpretations of 
Financial and Operational Rules, pages 1 and 13.
    \48\ See the FINRA Letter, at page 4.
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E. Service of Notice and Hearing Procedures

    Finally, one commenter raised two issues relating to Proposed FINRA 
Rules 9557 and 9559. First, this commenter argues that FINRA should 
provide member firms with any or all of the documents on which FINRA 
relied in imposing restrictions on the member as soon as a hearing is 
requested to provide member firms with a fair opportunity to present 
their cases. First, FINRA highlights the fact that, pursuant to 
Proposed Rule 9559, it is the member firm that requests a hearing and 
that the hearing must take place within five business days after the 
member firm files the written hearing request. Further, FINRA states 
that ``irrespective of document deliver, the proposed rule ensures that 
a respondent would be fully informed of the factual basis of the 
action'' pursuant to Proposed FINRA Rule 9557(c).\49\
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    \49\ See the FINRA Letter, at page 4.
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    The second issue raised by this commenter is that the Proposed 
Rule, which would allow the Hearing Panel to approve or withdraw the 
requirements and/or restrictions imposed by the notice, ``would have no 
authority to modify any of the restrictions or limitations FINRA 
imposed.'' FINRA, in the FINRA letter, disagrees with the commenter's 
assertion that the Hearing Panel should have the authority to modify 
the restrictions or limitations imposed by FINRA and states that 
``FINRA believes that authorizing the Hearing Panel, apart from action 
by FINRA staff, to modify the requirements and/or restrictions imposed 
by a Rule 9557 notice would not be conducive to the efficient and 
expedited resolution of the action.''

IV. Discussion and Findings

    Generally, the Commission agrees with FINRA's responses to the 
commenters' issues. More specifically, with respect to the inclusion of 
(k)(2)(i) firms in the definition of carrying and clearing firms, the 
Commission believes that firms that operate pursuant to the Rule 15c3-
3(k)(2)(i) exemption and that receive customer funds and/or securities 
for the purpose of settling customer transactions perform a clearing 
function and should be subject to additional scrutiny designed to 
protect investors. Further, with respect to FINRA's ability to increase 
capital requirements for its members, the Commission believes that in 
extraordinary, unanticipated, or emergency situations it is important 
for FINRA to have flexibility to quickly impose restrictions on its 
members to protect investors as the situation warrants. With respect to 
FINRA's requirement that a broker-dealer cease business operations if 
it is not in compliance with Exchange Act Rule 15c3-1, the Commission 
notes that this is a restatement of the requirements of the Exchange 
Act, which states that ``no broker or dealer [..] shall make use of the 
mails or any means or instrumentality of interstate commerce to effect 
any transaction in, or to induce or attempt to induce the purchase or 
sale of, any security [..] in contravention of such rules and 
regulations as the Commission shall prescribe as necessary or 
appropriate in the public interest or for the protection of investors 
to provide safeguards with respect to the financial responsibility.'' 
Rule 15c3-1 is considered to be a financial responsibility rule.\50\ 
Consequently, to the extent that a broker-dealer fails to ``have and 
maintain net capital no less than the greater of the highest minimum 
requirement applicable'' under Rule 15c3-1, the Act would prohibit the 
broker-dealer from effecting securities transactions. With respect to 
FINRA's proposed limitations on withdrawals of equity capital set forth 
in FINRA

[[Page 58340]]

Proposed Rule 4110(c), the Commission believes that each SRO should 
closely monitor significant withdrawals of capital by its members which 
could have a material affect on the firm's financial position in order 
to fulfill its requirement to enforce its members' compliance with the 
Exchange Act, the rules promulgated thereunder and its own rules.\51\
---------------------------------------------------------------------------

    \50\ See 17 CFR 240.3a40-1.
    \51\ See Exchange Act section 19(g).
---------------------------------------------------------------------------

    After careful review of the proposed rule change, the comments, and 
FINRA's response to the comments, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and the rules and regulations thereunder that are applicable to a 
national securities association.\52\ In particular, the Commission 
believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act \53\ (which requires, among 
other things, that FINRA rules must be designed to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, and, in general, to protect investors and the public 
interest), because the proposed rule change is designed to, among other 
things, protect investors and the public interest by requiring that 
each broker-dealer maintain sufficient net capital to allow it to self-
liquidate if it experiences financial difficulty. Further, as the 
proposed rule change consolidates the NYSE and NASD financial 
responsibility rules into one rule in the consolidated FINRA rulebook, 
it should provide greater clarity with respect to financial 
responsibility requirements for broker-dealers.
---------------------------------------------------------------------------

    \52\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 17c(f).
    \53\ 15 U.S.C. 78o-3(b)(6).
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V. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\54\ for approving the proposed rule change, as amended by 
Amendment No. 2 thereto, prior to the 30th day after the date of 
publication in the Federal Register. Accordingly, the Commission finds 
that good cause exists to approve the proposal, as modified by 
Amendment No. 2, on an accelerated basis.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78o-3(b)(2)
---------------------------------------------------------------------------

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2, 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 December 3, 2009.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-FINRA-2008-067) be, and hereby is, 
approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\55\
Florence E. Harmon,
Deputy Secretary.
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    \55\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E9-27263 Filed 11-10-09; 8:45 am]

BILLING CODE 8011-01-P
