
[Federal Register Volume 75, Number 218 (Friday, November 12, 2010)]
[Notices]
[Pages 69508-69514]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-28444]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63260; File No. SR-FINRA-2010-034]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filings of Amendments No. 1 and 2 and Order 
Granting Accelerated Approval of a Proposed Rule Change, as Amended, To 
Adopt FINRA Rule 4530 (Reporting Requirements) in the Consolidated 
FINRA Rulebook

November 5, 2010.

I. Introduction

    On July 30, 2010, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposal to (i) adopt NASD Rule 3070 (Reporting Requirements) as FINRA 
Rule 4530 in the Consolidated FINRA Rulebook, with certain amendments 
and the addition of a supplementary material section, and (ii) delete 
paragraphs (a) through (d) of Incorporated NYSE Rule 351 and 
Incorporated NYSE Rules 351.10 and 351.13. The proposal was published 
for comment in the Federal Register on August 9, 2010.\3\ The 
Commission received seven comments on the proposal.\4\ On October 18, 
2010, FINRA

[[Page 69509]]

responded to the comments and filed Amendment No. 1 to the proposed 
rule change.\5\ On October 22, 2010, FINRA filed Amendment No. 2 to the 
proposed rule change.\6\ The Commission is publishing this notice and 
order to solicit comments on Amendments No. 1 and 2 and to approve the 
proposed rule change, as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 62621 (July 30, 
2010), 75 FR 47863 (August 9, 2010) (``Notice'').
    \4\ See letter from Brendan Daly, Legal and Compliance Counsel, 
Commonwealth Financial Network, to Elizabeth M. Murphy, Secretary, 
Commission, dated August 27, 2010 (``Commonwealth Letter''); letter 
from Kristin Bulls, Products and Broker-Dealer Compliance Director, 
State Farm VP Management Corp., to Elizabeth M. Murphy, Secretary, 
Commission, dated August 30, 2010 (``State Farm Letter''); letter 
from Joan Hinchman, Executive Director, President and CEO, National 
Society of Compliance Professionals, to Elizabeth M. Murphy, 
Secretary, Commission, dated August 30, 2010 (``NSCP Letter''); 
letter from Clifford E. Kirsch and Susan S. Krawczyk, Sutherland 
Asbill & Brennan LLP, on behalf of the Committee of Annuity 
Insurers, to Elizabeth M. Murphy, Secretary, Commission, dated 
August 30, 2010 (``CAI Letter''); letter from Michael Lesutis, 
Assistant General Counsel, PFS Investments, Inc., to Elizabeth M. 
Murphy, Secretary, Commission, dated September 1, 2010 (``PFS 
Letter''); letter from James T. McHale, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association, to Elizabeth M. Murphy, Secretary, Commission, dated 
September 1, 2010 (``SIFMA Letter''); letter from Dale E. Brown, 
President and CEO, Financial Services Institute, to Elizabeth M. 
Murphy, Secretary, Commission, dated September 15, 2010 (``FSI 
Letter'').
    \5\ See Amendment No. 1, dated October 18, 2010 (``Amendment No. 
1''). The text of Amendment No. 1 is available on FINRA's Web site 
at http://www.finra.org, at the principal office of FINRA, and on 
the Commission's Web site, http://www.sec.gov/rules/sro.shtml. In 
Amendment No. 1, FINRA responded to the comment letters received 
regarding the Notice and revised the proposed rule change. Among 
other things, FINRA proposes to amend (i) proposed FINRA Rule 
4530(a)(1)(G) to require the reporting of any claims for damages by 
a customer, broker or dealer that relates to the provision of 
financial services or relates to a financial transaction; (ii) 
proposed Supplementary Material .01 to provide clarity on what 
internal conclusions of violative conduct a member must report 
pursuant to proposed FINRA Rule 4530(b); (iii) proposed 
Supplementary Material .07 to clarify the circumstances under which 
a firm would not be required to report information relating to a 
former associated person; (iv) proposed Supplementary Material .08 
to clarify a member's reporting obligations regarding customer 
complaints pursuant to proposed FINRA Rules 4530(a)(1)(B) and 
4530(d); and (v) proposed Supplementary Material .09 to provide a 
definition for the term ``financial-related.''
    \6\ See Amendment No. 2 dated October 22, 2010 (``Amendment No. 
2''). The text of Amendment No. 2 is available on FINRA's Web site 
at http://www.finra.org, at the principal office of FINRA, and on 
the Commission's Web site, http://www.sec.gov/rules/sro.shtml. In 
Amendment No. 2, FINRA proposes to further amend proposed 
Supplementary Material .07 to clarify the circumstances under which 
a firm would not be required to report information relating to a 
former associated person.
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II. Description of the Proposal, as Modified by Amendments No. 1 and 2

    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''), FINRA proposes to (i) adopt NASD 
Rule 3070 (Reporting Requirements) as FINRA Rule 4530 in the 
Consolidated FINRA Rulebook, subject to certain amendments described 
below and the addition of a supplementary material section as detailed 
below and (ii) delete paragraphs (a) through (d) of Incorporated NYSE 
Rule 351 and Incorporated NYSE Rules 351.10 and 351.13 from the 
Transitional Rulebook.
    NASD Rule 3070 and Incorporated NYSE Rule 351 require members to 
report to FINRA certain specified events (e.g., regulatory actions, 
certain customer settlements, securities-related law suits or 
arbitrations, etc.), to file with FINRA documents related to such 
events, and to report to FINRA quarterly statistical and summary 
information regarding written customer complaints. FINRA uses the 
reported information for regulatory purposes; the information, among 
other things, assists FINRA in identifying and investigating firms, 
offices and associated persons that may pose a regulatory risk.\7\
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    \7\ See Notice, supra note 3, 75 FR at 47863.
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    Because proposed FINRA Rule 4530 is based upon NASD Rule 3070, the 
following description sets forth a summary of the ways in which 
proposed FINRA Rule 4530 differs from NASD Rule 3070.

A. Reporting Deadline (Proposed FINRA Rules 4530(a) and 4530.03)

    The substantive changes to proposed FINRA Rule 4530(a) clarify that 
a firm must report to FINRA after the firm ``knows or should have 
known'' of the existence of any of the events specified in paragraph 
(a) of the proposed rule and extends the time period for reporting the 
events from 10 business days (as provided under NASD Rule 3070(b)) to 
no later than 30 calendar days after the firm knows or should have 
known of the event. FINRA states that the proposed 30-calendar-day 
reporting deadline is consistent with Incorporated NYSE Rule 351 \8\ 
and the reporting deadlines for disclosing information on forms BD 
(Uniform Application for Broker-Dealer Registration),\9\ U4 (Uniform 
Application for Securities Industry Registration or Transfer) \10\ and 
U5 (Uniform Termination Notice for Securities Industry Registration) 
\11\ (collectively referred to as the ``Uniform Forms'').
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    \8\ See Incorporated NYSE Rule 351(b); NYSE Information Memo 90-
17, ``Timely and Complete Filings and Responses to Enforcement 
Inquiries'' (April 30, 1990) (defining ``prompt'' filing as 
occurring within 30 days of the reportable event).
    \9\ See Article IV, Section 1 of FINRA's By-Laws.
    \10\ See Article V, Section 2 of FINRA's By-Laws.
    \11\ See Article V, Section 3 of FINRA's By-Laws.
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B. External Findings (Proposed FINRA Rule 4530(a)(1)(A))

    NASD Rule 3070(a)(1) requires a firm to report findings of 
violations of ``any provision of any securities laws, or regulation, 
any rule or standards of conduct of any governmental agency, self-
regulatory organization, or financial business or professional 
organization.'' Proposed FINRA Rule 4530(a)(1)(A) would instead require 
a firm to report findings of violations of any ``securities-, 
insurance-, commodities-, financial- or investment-related laws, rules, 
regulations or standards of conduct of any domestic or foreign 
regulatory body, self-regulatory organization or business or 
professional organization'' and eliminates the requirement for firms to 
report findings that a member or associated person has engaged in 
conduct inconsistent with just and equitable principles of trade.\12\ 
Proposed Supplementary Material .03 clarifies the meaning of the term 
``found'' for the purpose of determining when a firm or associated 
person has been ``found to have'' engaged in violative conduct.
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    \12\ FINRA members would still be required to report findings of 
violations of an SRO's just and equitable principles of trade rule, 
such as FINRA Rule 2010. See Notice, supra note 3, 75 FR at 47864.
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C. Civil Litigation or Arbitration; Claims for Damages (Proposed FINRA 
Rules 4530(a)(1)(G), 4530.06 and 4530.09)

    As proposed, FINRA Rule 4530(a)(1)(G) extends the reporting 
requirement relating to securities- and commodities-related civil suits 
and arbitrations and claims for damages by customers and broker-dealers 
disposed of by judgment, award or settlement (in an amount exceeding 
certain monetary thresholds) to include ``any financial-related 
insurance civil litigation or arbitration'' but limits the requirement 
to report claims for damages by customers, brokers or dealers to those 
claims for damages that relate to the provision of financial services 
or a financial transaction.\13\ Proposed Supplemental Material .06 
clarifies that for purposes of determining whether a civil suit, 
arbitration or claim for damages exceeds the monetary threshold and 
must be reported pursuant to proposed FINRA Rule 4530(a)(1)(G), (1) 
members must take into account awards of attorneys fees and interest, 
and (2) if parties are subject to ``joint and several'' liability, each 
party is considered separately liable for the aggregate amount.\14\ 
Proposed Supplemental Material .09 defines the term ``financial 
related'' to mean ``related to the provision of financial services.'' 
\15\
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    \13\ See proposed FINRA Rule 4530(a)(1)(G), as modified by 
Amendment No. 1.
    \14\ See proposed FINRA Rule 4530.06.
    \15\ See proposed FINRA Rule 4530.09, as modified by Amendment 
No. 1.
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D. Statutory Disqualifications (Proposed FINRA Rule 4530(a)(1)(H))

    Proposed FINRA Rule 4530(a)(1)(H) modifies the reporting 
requirement in NASD Rule 3070(a)(9) relating to statutory 
disqualifications to clarify that a member must report to FINRA 
whenever the member itself is subject to a ``statutory 
disqualification,'' or whenever an associated person of the firm is 
subject to a ``statutory disqualification.'' While NASD Rule 3070(a)(9) 
requires a member to report to FINRA if the member or an associated 
person of the member ``is associated in any business or financial 
activity'' with a person subject to a ``statutory

[[Page 69510]]

disqualification,'' proposed FINRA Rule 4530(a)(1)(H) instead requires 
a member to report to FINRA whenever the member or an associated person 
of the member ``is involved in the sale of any financial instrument, 
the provision of any investment advice or the financing of any such 
activities'' with a person subject to a ``statutory disqualification.'' 
\16\
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    \16\ FINRA notes that this provision is consistent with 
Incorporated NYSE Rule 351(a)(9). See Notice, supra note 3, 75 FR at 
47864.
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E. Internal Disciplinary Actions Against Associated Persons (Proposed 
FINRA Rule 4530(a)(2))

    Similar to NASD Rule 3070(a)(10), proposed FINRA Rule 4530(a)(2) 
requires a firm to report certain disciplinary actions taken by the 
firm against its associated persons. Proposed FINRA Rule 4530(a)(2) 
states that disciplinary actions involving the withholding of 
compensation or of any other remuneration in excess of $2,500 are 
reportable events (as opposed to just the withholding of commissions, 
as provided by NASD Rule 3070(a)(10)).

F. Internal Conclusions (Proposed FINRA Rules 4530(b), 4530.01 and 
4530.02)

    Proposed FINRA Rule 4530(b) requires firms to report internal 
conclusions of certain enumerated violative conduct.\17\ Specifically, 
a firm would be required to report to FINRA no later than 30 calendar 
days after the firm has concluded, or reasonably should have concluded, 
that an associated person of the firm or the firm itself has violated 
any securities-, insurance-, commodities-, financial- or investment-
related laws, rules, regulations or standards of conduct of any 
domestic or foreign regulatory body or SRO.
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    \17\ FINRA notes that this proposed rule is generally based on 
Incorporated NYSE Rule 351(a)(1), which requires a firm to report 
whenever it or its associated persons have violated any provision of 
any securities law or regulation, any agreement with or rule or 
standard of conduct of any governmental agency, self-regulatory 
organization (``SRO''), or business or professional organization, or 
engaged in conduct that is inconsistent with just and equitable 
principles of trade or detrimental to the interests or welfare of 
the NYSE. See Notice, supra note 3, 75 FR at 47864.
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    Pursuant to proposed Supplementary Material .01, if a firm 
disciplines an associated person in the manner described in proposed 
FINRA Rule 4530(a)(2), the firm would be required to report the event 
under proposed FINRA Rule 4530(a)(2).\18\ In addition, proposed 
Supplementary Material .01 clarifies that FINRA only expects a member 
to report internal conclusions pursuant to proposed FINRA Rule 4530(b) 
relating to violative conduct that has widespread or potentially 
widespread effect on the member, its customers or markets, or, in the 
case of violative conduct of the member, that arises from a material 
failure of the member's systems, policies or practices involving 
numerous customers, multiple errors or significant dollar amounts, or, 
in the case of violative conduct by an associated person, has a 
significant monetary result with respect to a member(s), customer(s) or 
market(s) or where there are multiple instances of any violative 
conduct.\19\
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    \18\ See proposed FINRA Rule 4530.01, as modified by Amendment 
No. 1.
    \19\ Id.
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    In addition, proposed Supplementary Material .02 states that 
proposed FINRA Rule 4530(b) only requires reporting where a member has 
concluded or reasonably should have concluded on its own that violative 
conduct has occurred, as opposed to where there has been a finding of 
violative conduct by an external body, such as a court, domestic or 
foreign regulatory body, SRO or business or professional organization 
(which would be reportable pursuant to proposed FINRA Rule 
4530(a)(1)(A)).\20\
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    \20\ See proposed FINRA Rule 4530.02.
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G. Reporting Obligation (Proposed FINRA Rule 4530(e))

    Similar to NASD Rule 3070(d), proposed FINRA Rule 4530(e) provides 
that proposed FINRA Rule 4530 does not relieve a firm or an associated 
person from other obligations, such as the requirement to disclose 
information on the Uniform Forms, as applicable. In addition, proposed 
FINRA Rule 4530(e) clarifies that a firm must comply with the reporting 
obligations under proposed FINRA Rules 4530(a) and (b) and must report 
quarterly statistical and summary information regarding written 
customer complaints pursuant to proposed FINRA Rule 4530(d), regardless 
of whether such information is reported or disclosed pursuant to any 
other rule or requirement, including the requirements of the Forms BD 
or U4.\21\
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    \21\ Proposed FINRA Rule 4530(e) provides that a firm is not 
required to report an event otherwise required to be reported under 
proposed FINRA Rules 4530(a) or (b) if the firm discloses the event 
on a Form U5, consistent with the requirements of that form.
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H. Elimination of the Exemption for Dual Members Subject to Another 
SRO's Rule

    Proposed FINRA Rule 4530 does not include the exemption set forth 
in NASD Rule 3070(e) for firms subject to substantially similar 
reporting requirements of another SRO because this provision was 
intended to exempt Dual Members subject to the reporting requirements 
of NASD Rule 3070 and the reporting requirements of Incorporated NYSE 
Rule 351.\22\
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    \22\ See Notice, supra note 3, 75 FR at 47865.
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I. Filing of Related Documents With FINRA (Proposed FINRA Rule 4530(f))

    Consistent with NASD Rule 3070(f), proposed FINRA Rule 4530(f) 
requires a firm to file copies of certain criminal and civil complaints 
and arbitration claims with FINRA. However, proposed FINRA Rule 4530(f) 
expands the filing requirement to include (1) copies of any complaint 
in which a member is named as a defendant or respondent in any 
``financial-related insurance private civil litigation'' and (2) any 
``financial-related insurance arbitration claim'' filed against a 
member in any forum other than the FINRA Dispute Resolution forum.

J. Additional Supplementary Material (Proposed FINRA Rules 4530.05, .07 
and .08)

    In addition to the supplementary material discussed above, FINRA 
also proposes as supplementary material the following clarifications: 
(1) For purposes of proposed FINRA Rules 4530(a) and (b), firms should 
not report a single event under more than one paragraph or 
subparagraph; however, members may be required to report related events 
under more than one paragraph or subparagraph; \23\ (2) for purposes of 
proposed FINRA Rules 4530(a), (b) and (d), firms should report an event 
relating to a former associated person if the event occurred while the 
individual was associated with the member; however, a member is not 
required to report such an event where, based on its records or 
information available through Web CRD, the member cannot determine that 
the person was an associated person of the member; \24\ and (3) any 
written customer complaint reported under proposed FINRA Rule 
4530(a)(1)(B) must also be reported pursuant to proposed FINRA Rule 
4350(d); \25\ however, for the purpose of reporting under proposed 
FINRA Rule 4350(d), a member must report (1) any written grievance 
involving the member or its associated person by a person,

[[Page 69511]]

other than a broker or dealer, with whom the member has engaged in 
securities activities and (2) any securities-related written grievance 
involving the member or its associated person and any written complaint 
reportable under proposed Rule 4530(a)(1)(B) by a person other than a 
broker or dealer, with whom the member has sought to engage in 
securities activities.\26\
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    \23\ See proposed FINRA Rule 4530.05.
    \24\ See proposed FINRA Rule 4530.07.
    \25\ Proposed FINRA Rule 4530(a)(1)(B) is identical to NASD Rule 
3070(a)(2) and requires a member to report to FINRA if the member or 
an associated person of the member is the subject of any written 
customer complaint involving allegations of theft or 
misappropriation of funds or securities or of forgery.
    \26\ See proposed FINRA Rule 4530.08.
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K. Deletion of Certain Incorporated NYSE Provisions

    FINRA proposes to delete paragraphs (a) through (d) of Incorporated 
NYSE Rule 351 and NYSE Rules 351.10 and 351.13 because these provisions 
are substantially similar to, otherwise incorporated in, or rendered 
obsolete by proposed FINRA Rule 4530, or addressed by other rules.\27\
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    \27\ See Notice, supra note 3, 75 FR at 47866.
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III. Summary of Comments and FINRA's Response

    The Commission received seven comment letters to the proposed rule 
change.\28\ FINRA responded to the comments and modified the proposed 
rule change in Amendments No. 1 and 2.
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    \28\ See supra, note 4.
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A. Reporting of Insurance-Related External Findings Under Proposed 
FINRA Rule 4530(a)(1)(A)

    FINRA Rule 4350(a)(1)(A) requires members to report, among other 
things, external findings of violations of insurance-related laws, 
rules, or regulations. One commenter believes that the requirement to 
report insurance-related external findings is unwarranted, burdensome, 
and outside the scope of FINRA's authority.\29\ The commenter argues 
that reportable external findings should be limited to those that 
derive from a transaction with a customer.\30\ FINRA responds that 
current NASD Rule 3070(a)(1) requires a member to report external 
findings relating to violations of any rule or standard of conduct of 
any governmental agency, SRO, or financial business or professional 
organization.\31\ Therefore, members are currently required to report 
external findings related to insurance matters and the proposed rule 
simply continues this requirement and is consistent with other 
provisions of FINRA's rules.\32\ Finally, FINRA states that this 
information is relevant because it assists FINRA in identifying members 
and associated persons that may pose a regulatory risk.\33\
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    \29\ See State Farm Letter.
    \30\ Id.
    \31\ See Amendment No. 1 at 7.
    \32\ Id. FINRA points to NASD Rule 3070(a)(3) and NYSE Rule 
351(a)(3) (requiring reporting where a firm or an associated person 
is named as a defendant or respondent in any proceeding brought by a 
regulatory or self-regulatory body alleging the violation of any 
insurance laws, rules or regulations), NASD Rule 3070(a)(4) and NYSE 
Rule 351(a)(4) (requiring reporting where a firm or an associated 
person is disciplined by any insurance regulatory or self-regulatory 
body, is denied membership or continued membership in any such self-
regulatory body, or is barred from becoming associated with any 
member of any such self-regulatory body), and NASD Rule 3070(a)(6) 
and NYSE Rule 351(a)(6) (requiring reporting where a firm or an 
associated person is a director, controlling stockholder, partner, 
officer, sole proprietor, or an associated person of an insurance 
company that was suspended, expelled or had its registration denied 
or revoked).
    \33\ Id.
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    In response to a comment that FINRA should provide additional 
guidance regarding what members should identify and report pursuant to 
proposed FINRA Rule 4530(a)(1)(A),\34\ FINRA notes that proposed 
Supplementary Material .02, which states that FINRA Rule 4530(a)(1)(A) 
is limited to situations where there has been a finding of violative 
conduct by an external body, such as a court, domestic or foreign 
regulatory body, SRO or business or professional organization.\35\
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    \34\ See NSCP Letter.
    \35\ See Amendment No. 1 at 7-8.
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B. Civil Litigation or Arbitration and Other Claims for Damages Under 
Proposed FINRA Rule 4350(a)(1)(G)

    Proposed Rule 4530(a)(1)(G) requires that members report any 
``insurance'' civil litigation or arbitration that is ``financial-
related.'' Three commenters opined that the term ``financial-related'' 
is ambiguous and needs greater clarification.\36\ In response, FINRA 
amended its proposal to add Supplementary Material .09, which defines 
the term ``financial-related'' to mean ``related to the provision of 
financial services.'' \37\
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    \36\ See CAI Letter, NSCP Letter and State Farm Letter.
    \37\ See proposed FINRA Rule 4530.09.
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    Two commenters believe that the reporting of insurance-related 
civil litigation and arbitration should be limited to insurance 
products that are securities.\38\ FINRA clarifies that the proposed 
rule would exclude civil litigation and arbitration related to certain 
insurance products, such as traditional auto and health insurance, but 
would include civil litigation and arbitration involving non-securities 
insurance products related to the provision of financial services.\39\ 
FINRA does not believe that the proposed rule should be limited to 
insurance products that are securities.\40\
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    \38\ See CAI Letter and NSCP Letter.
    \39\ See Amendment No. 1 at 8.
    \40\ Id.
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    As initially proposed, proposed Rule 4530(a)(1)(G) required the 
reporting of claims for damages by customers that were ``financial or 
transactional in nature.'' \41\ Two commenters requested further 
clarification to effectively identify and report insurance matters 
relevant to FINRA.\42\ In response to these comments, FINRA revised the 
language of proposed Rule 4530(a)(1)(G) to require reporting of any 
claim for damages that relates to the provision of financial services 
or relates to a financial transaction.\43\
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    \41\ See Notice, supra note 3, 75 FR at 47864.
    \42\ See NSCP Letter and State Farm Letter.
    \43\ See proposed FINRA Rule 4350(a)(1)(G), as modified by 
Amendment No. 1.
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C. Reporting of Internal Conclusions Under Proposed FINRA Rule 4530(b)

    Proposed FINRA Rule 4350(b) requires members to report to FINRA 
certain internal conclusions of violative conduct.\44\ As initially 
proposed, Supplementary Material .01 stated that FINRA Rule 4530(b) 
would not require a member to report an isolated violation by the 
member or an associated person of the member that could be reasonably 
viewed as a ministerial violation that did not result in customer harm 
and was remedied promptly upon discovery.\45\
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    \44\ See proposed FINRA Rule 4350(b).
    \45\ See Notice, supra note 3, 75 FR at 47865.
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    Four commenters argued that the provisions of proposed FINRA Rules 
4530(b) and Supplementary Material .01 are unduly burdensome, overly 
broad and costly,\46\ and two requested elimination of the reporting 
requirement.\47\ In response, FINRA notes that NYSE Rule 351(a)(1) 
requires firms to report internal conclusions of violative conduct and 
that FINRA's examination programs use this information as part of their 
assessment processes and risk-based analyses.\48\
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    \46\ See CAI Letter, Commonwealth Letter and NSCP Letter.
    \47\ See CAI Letter and State Farm Letter.
    \48\ See Amendment No. 1 at 10.
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    All commenters believe that the requirements of proposed FINRA Rule 
4530(b) and the language in Supplementary Material .01 are vague and 
that FINRA should clarify and provide examples of what internal 
conclusions are required to be reported.\49\ Some of these commenters 
suggest that FINRA should adopt the reporting standard and interpretive 
guidance set forth in NYSE Information

[[Page 69512]]

Memorandum 06-11.\50\ In response to these comments, FINRA noted that 
it continues to believe the standard set forth in NYSE Information 
Memorandum 06-11 is too narrow \51\ but amended Supplementary Material 
.01 to further clarify what internal conclusions of violative conduct 
FINRA expects a member to report.\52\
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    \49\ See CAI Letter, Commonwealth Letter, FSI Letter, NSCP 
Letter, PFS Letter, SIFMA Letter and FSI Letter.
    \50\ See CAI Letter, Commonwealth Letter, FSI Letter and PFS 
Letter.
    \51\ Id. at 15.
    \52\ See proposed FINRA Rule 4350.01, as modified by Amendment 
No. 1.
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    Two commenters believe that the term ``concluded'' is vague.\53\ 
FINRA responds that a firm is free to determine the persons responsible 
for concluding that a violation has occurred. FINRA stated that a firm 
cannot defend against a failure to report such conduct by asserting 
that the conduct was of a nature that did not merit consideration by a 
person of seniority.\54\ In addition, FINRA notes that if someone 
within a firm reaches a conclusion of violation, but upon review, 
senior management reaches a different conclusion, a firm could rely on 
senior management's determination, provided it is reasonable.\55\
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    \53\ See NSCP Letter and State Farm Letter.
    \54\ See Amendment No. 1 at 11.
    \55\ See Amendment No. 1 at 11-12.
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    A number of commenters took issue with the requirement to report 
violative conduct pursuant to proposed FINRA Rule 4350(b) if a member 
``reasonably should have concluded'' a violation occurred, arguing it 
will create uncertainty, result in inconsistent application, and could 
be used in hindsight by FINRA to pursue a firm if FINRA concludes 
after-the-fact that the firm should have reported.\56\ In response, 
FINRA clarifies that if a reasonable person would have concluded that a 
violation occurred, then the matter is reportable, and if a reasonable 
person would not have concluded that a violation occurred, then the 
matter is not reportable; FINRA will rely on a firm's good-faith 
reasonable determination.\57\
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    \56\ See CAI Letter, Commonwealth Letter, FSI Letter, NSCP 
Letter and SIFMA Letter.
    \57\ See Amendment No. 1 at 13.
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    Numerous commenters expressed concern that FINRA's statement that 
the existence of internal audit findings creates a strong presumption 
that a matter is reportable \58\ could undermine the internal audit 
process at member firms.\59\ Similarly, commenters believe FINRA's 
statement \60\ that matters subject to a firm's internal review 
processes as required under other FINRA rules are subject to being 
reported as internal conclusions under proposed FINRA Rule 4530(b) 
could be problematic.\61\ One commenter believes this could result in 
firms diluting their internal control findings.\62\ Two commenters 
point out that this runs counter to previous guidance by NASD that it 
would not use the reports and review processes contemplated by NASD 
Rules 3012 and 3013 as a roadmap for disciplinary action against 
firms.\63\ FINRA responds that the reporting obligation under proposed 
FINRA Rule 4350(b) and the internal review processes set forth under 
other rules (e.g., FINRA Rule 3130) are mutually exclusive and that, 
while internal review processes may inform a member's determination 
that a violation occurred, they do not by themselves lead to the 
conclusion that a matter is reportable under proposed FINRA Rule 
4350(b).\64\ FINRA notes that it would not view a discussion in an 
internal audit report regarding the need for enhanced controls in a 
particular area alone as determinative of a reportable violation under 
proposed FINRA Rule 4350(b).\65\ FINRA also clarifies that, rather than 
creating a strong presumption, an internal audit finding would serve 
only as one factor, among others, that a firm should consider in 
determining whether violative conduct occurred.\66\ Furthermore, FINRA 
has stated that it believes that the goals of customer protection and 
market integrity necessitate the reporting of such conduct to 
FINRA.\67\
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    \58\ See Notice, supra note 3, 75 FR at 47867.
    \59\ See Commonwealth Letter, NSCP Letter and SIFMA Letter.
    \60\ See Notice, supra note 3, 75 FR at 47867.
    \61\ See CAI Letter, Commonwealth Letter and SIFMA Letter.
    \62\ See SIFMA Letter.
    \63\ See CAI Letter and Commonwealth Letter.
    \64\ See Amendment No. 1 at 14-15.
    \65\ See Amendment No. 1 at 15.
    \66\ Id.
    \67\ See Notice, supra note 3, 75 FR at 47867.
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D. Customer Complaints

    Proposed FINRA Rule 4530(d) requires members to submit monthly 
reports to FINRA regarding written customer complaints received by the 
member. A member would not be required to report written complaints 
relating to non-securities products, if such complaints are not from 
customers that the member has engaged, or has sought to engage, in 
securities activities.\68\ If a member has engaged, or has sought to 
engage, in securities activities with a person, then any written 
complaint from that person is reportable, regardless of whether it 
relates to non-securities products.\69\ One commenter stated that it 
would be difficult to determine with whom a firm has ``sought to 
engage'' in securities activities, and also expressed concern regarding 
the potential number of non-securities related complaints it would have 
to report in connection with customers it ``sought to engage'' in 
securities activities.\70\ In response, FINRA notes that the definition 
of ``customer'' under NASD Rule 3070(c) includes persons with whom a 
member has ``sought to engage'' in securities activities and, 
therefore, firms should currently have procedures to identify whether a 
person submitting a written complaint is someone that the firm has 
sought to engage in securities activities. In addition, FINRA amended 
proposed Supplementary Material .08 to clarify circumstances under 
which a member would be required to report, pursuant to proposed FINRA 
Rules 4530(d) and 4530(a)(1)(B), complaints from persons with whom the 
member has engaged in securities activities versus persons with whom 
the member has sought to engage in securities activities.\71\
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    \68\ See Notice, supra note 3, 75 FR at 47868. Proposed 
Supplementary Material .08 defines ``customer'' as any person, other 
than a broker or dealer, with whom a member has engaged, or has 
sought to engage, in securities activities. This definition is 
identical to the definition of ``customer'' contained in NASD Rule 
3070(c).
    \69\ Id.
    \70\ See State Farm Letter.
    \71\ See proposed FINRA Rule 4530.08, as modified by Amendment 
No. 1.
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E. Duplicative Reporting

    Three commenters believe that FINRA should completely eliminate 
duplicative reporting requirements under proposed FINRA Rule 4530(e) 
and Forms U4, U5 and BD.\72\ FINRA responds that it will work toward 
this goal and that proposed FINRA Rule 4530(e) will eliminate 
duplicative reporting of information disclosed on the Form U5.\73\
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    \72\ See CAI Letter, FSI Letter and SIFMA Letter.
    \73\ See Amendment No. 1 at 18.
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F. Former Associated Persons

    Two commenters argued that the requirement to report certain events 
related to former associated persons would be unduly burdensome and 
recommend that the requirement be amended to conform to the record 
retention requirements of Rule 17a-4 of the Act \74\ and the reporting 
period for formerly associated persons be capped at three years.\75\ In 
response, FINRA revised proposed Supplementary Material .07 to state 
that a firm is not required to report information with respect to a 
former associated person where, based on its records or information 
available through Web CRD,

[[Page 69513]]

the member cannot determine whether the person was an associated 
person.\76\
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    \74\ 17 CFR 240.17a-4.
    \75\ See CAI Letter and FSI Letter.
    \76\ See proposed FINRA Rule 4530.07, as modified by Amendments 
No. 1 and 2, which applies only if a firm has kept its records in 
accordance with Rule 17a-4(e)(1) of the Act.
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G. Other Comments

    One commenter urges the Commission to reject the rule and require 
FINRA to provide a detailed analysis to support its claim that the 
proposed rule will advance customer protection and market integrity 
without placing an undue burden on firms.\77\ FINRA responds that the 
proposed rule change would enhance FINRA's ability to detect and 
investigate violative conduct.
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    \77\ See PFS Letter.
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    One commenter argues that the current dollar thresholds in the rule 
that trigger a reporting obligation are too low and outdated.\78\ While 
FINRA does not address this comment in Amendment No. 1, FINRA 
previously responded that it believes the current dollar thresholds in 
proposed FINRA Rule 4350 continue to be consistent with the purposes of 
the rule, and that the $ 15,000 reporting threshold for an associated 
person is consistent with the Forms U4 and U5 current reporting 
thresholds.\79\
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    \78\ See FSI Letter.
    \79\ See Notice, supra note 3, 75 FR at 47867.
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    Two commenters argue that FINRA does not have the jurisdiction to 
require firms to report information required under the proposed rule, 
such as matters relating to insurance laws and commodities laws.\80\ As 
discussed above, FINRA notes that the requirement to report insurance 
matters is consistent with other provisions of the current rules and 
that this information is relevant to FINRA's programs as it assists 
FINRA in identifying members and associated persons that may pose a 
regulatory risk.\81\
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    \80\ See CAI Letter and FSI Letter.
    \81\ See supra notes 32-33 and accompanying text.
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IV. Discussion and Commission Findings

    After carefully reviewing the proposed rule change, the comment 
letters, and FINRA's response, 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.\82\ In particular, the Commission finds that 
the proposed rule change is consistent with Section 15A(b)(6) of the 
Act,\83\ which requires, among other things, that FINRA's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest. The proposed rule change is consistent with FINRA's statutory 
obligations under the Act to protect investors and the public interest 
because it would enhance FINRA's ability to detect and investigate 
violative conduct and to identify members and associated persons of 
member firms that may pose a regulatory risk. The proposed rule change 
streamlines the rules governing reporting requirements in NASD Rule 
3070 and Incorporated NYSE Rule 351 while maintaining the disclosure 
requirements in Incorporated NYSE Rule 351(a)(1) relating to internal 
conclusions.
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    \82\ In approving this proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \83\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the changes made in Amendments No. 1 
and 2 should provide greater clarity to members regarding when a 
reporting requirement arises pursuant to proposed FINRA Rule 4350 and 
the types of external findings, internal conclusions and customer 
complaints that must be reported. The Commission believes the proposed 
rule further strengthens FINRA's ability to effectively detect 
violative conduct by members and associated persons and protect 
investors. Further, as the proposed rule change consolidates the NYSE 
and NASD reporting requirement rules into one rule in the Consolidated 
FINRA Rulebook, it should simplify reporting requirements for broker-
dealers and their associated persons.

V. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\84\ for approving the proposed rule change, as amended, prior 
to the 30th day after publication of Amendments No. 1 and 2 in the 
Federal Register. The changes proposed in Amendments No. 1 and 2 
respond to specific concerns raised by commenters and do not raise 
additional issues. The rule change should enhance FINRA's ability to 
oversee the conduct of its members and their associated persons, which 
should further investor protection and the public interest. 
Accordingly, the Commission finds that good cause exists to approve the 
proposal, as modified by Amendments No. 1 and 2, on an accelerated 
basis.
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    \84\ 15 U.S.C. 78s(b)(2).
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VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether Amendments No. 1 
and 2 to the proposed rule change are 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-2010-039 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-2010-034. 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 website 
viewing and printing 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 filings 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-2010-034 
and should be submitted on or before December 3, 2010.

[[Page 69514]]

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\85\ that the proposed rule change (SR-FINRA-2010-034), as modified 
by Amendments No. 1 and 2, be, and hereby is, approved on an 
accelerated basis.
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    \85\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\86\
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    \86\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-28444 Filed 11-10-10; 8:45 am]
BILLING CODE 8011-01-P


