
[Federal Register Volume 76, Number 22 (Wednesday, February 2, 2011)]
[Notices]
[Pages 5850-5856]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2292]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63784; File No. SR-FINRA-2010-052]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change Adopting FINRA 
Rules Regarding Books and Records in the Consolidated FINRA Rulebook

January 27, 2011.

I. Introduction

    On October 20, 2010, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change adopting FINRA rules regarding 
books and records in the consolidated FINRA Rulebook. The proposed rule 
change was published for comment in the Federal Register on November 1, 
2010.\3\ The Commission received three comments on the proposed rule 
change.\4\ On January 13, 2011, FINRA responded to the comments.\5\ 
This order approves the proposed rule change.
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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. 63181 (October 26, 
2010), 75 FR 67155 (November 1, 2010).
    \4\ See Letter from Holly H. Smith and Susan S. Krawczyk, 
Sutherland Asbill & Brennan LLP, for the Committee of Annuity 
Insurers, to Elizabeth M. Murphy, Secretary, SEC, dated November 22, 
2010 (``CAI''); Letter from William A. Jacobson, Associate Clinical 
Professor of Law and Director, the Cornell Securities Law Clinic, 
Cornell University Law School, to Elizabeth M. Murphy, Secretary, 
SEC, dated November 22, 2010 (``Cornell''); and Letter from Melissa 
MacGregor, Managing Director and Associate General Counsel, the 
Securities Industry and Financial Markets Association, to Elizabeth 
M. Murphy, Secretary, SEC, dated November 23, 2010 (``SIFMA''). 
(Available at http://www.sec.gov/comments/sr-finra-2010-052/finra2010052.shtml).
    \5\ See Letter from Afshin Atabaki, FINRA, to Elizabeth M. 
Murphy, Secretary, SEC, dated January 13, 2011 (``Response to 
Comments'').
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II. Description of Proposed Rule Change

    FINRA is proposing to adopt certain paragraphs, as specified below, 
of NASD Rule 3110 (Books and Records), subject to certain amendments, 
as FINRA Rules in the consolidated FINRA rulebook and to adopt 
Incorporated NYSE Rule Interpretations 410/01 (Pre-Time Stamping) and 
410/02 (Allocations of Block Orders), subject to certain amendments, as 
FINRA Rules in the consolidated FINRA rulebook.
    The proposed rule change would delete NASD IM-3110 (Customer 
Account Information) and Incorporated NYSE Rule 410 (Records of 
Orders). In addition, the proposed rule change would delete 
Incorporated NYSE Rule 440 (Books and Records), with the exception of 
Incorporated NYSE Rules 440.10 (Periodic Security Counts, 
Verifications, Comparisons, etc.) and 440.20 (Identification of 
Suspense Accounts and Assignment of Responsibility for General Ledger 
Accounts) and NYSE Rule Interpretation 440.20/01 (Suspense Accounts).
    The proposed rule change would renumber NASD Rule 3110(a) 
(Requirements) as FINRA Rule 4511 (General Requirements), NASD Rule 
3110(c) (Customer Account Information) as FINRA Rule 4512 (Customer 
Account Information), NASD Rules 3110(d) (Record of Written Complaints) 
and 3110(e) (``Complaint'' Defined) as FINRA Rule 4513 (Records of 
Written Customer Complaints), NASD Rule 3110(f) (Requirements When 
Using Predispute Arbitration Agreements for Customers Accounts) as 
FINRA Rule 2268 (Requirements When Using Predispute Arbitration 
Agreements for Customer Accounts), NASD Rule 3110(g) (Negotiable 
Instruments Drawn From A Customer's Account) as FINRA Rule 4514 
(Authorization Records for Negotiable Instruments Drawn From a 
Customer's Account), NASD Rule 3110(h) (Order Audit Trail System Record 
Keeping Requirements) as paragraph (a)(4) of FINRA Rule 7440 (Recording 
of Order Information) and NASD Rule 3110(j) (Changes in Account Name or 
Designation) as FINRA Rule 4515 (Approval and Documentation of Changes 
in Account Name or Designation) in the consolidated FINRA rulebook. The 
proposed rule change also would renumber NYSE Rule Interpretation 410/
01 as FINRA Rule 5340 (Pre-Time Stamping) and NYSE Rule Interpretation 
410/02 as FINRA Rule 4515.01 (Allocations of Orders Made by Investment 
Advisers).

A. Background

1. Purpose
    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\6\ FINRA is proposing to adopt NASD 
Rules 3110(a), 3110(c), 3110(d) and (e), 3110(f), 3110(g), 3110(h) and 
3110(j) as FINRA Rules 4511, 4512, 4513, 2268, 4514, 7440(a)(4) and 
4515, respectively, in the Consolidated FINRA Rulebook, with certain 
changes as described below.\7\ FINRA also is proposing to adopt 
Incorporated NYSE Rule Interpretations 410/01 and 410/02 as FINRA Rules 
5340 and 4515.01,\8\ respectively, in the Consolidated FINRA 
Rulebook.\9\ FINRA is proposing to delete NASD IM-3110 and NYSE Rules 
410 and 440, provided, however, NYSE Rules 440.10 and 440.20 and NYSE 
Rule Interpretation 440.20/01 are being addressed as part of a separate 
proposal.\10\
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    \6\ The current FINRA rulebook consists of (1) FINRA Rules; (2) 
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated 
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules 
are referred to as the ``Transitional Rulebook''). While the NASD 
Rules generally apply to all FINRA members, the Incorporated NYSE 
Rules apply only to those members of FINRA that are also members of 
the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA 
members, unless such rules have a more limited application by their 
terms. For more information about the rulebook consolidation 
process, see Information Notice, March 12, 2008 (Rulebook 
Consolidation Process).
    \7\ NASD Rule 3110(b) (Marking of Customer Order Tickets) 
requires that members indicate on the order ticket for each 
transaction in a non-exchange-listed security the name of each 
dealer contacted and the quotations received to determine the best 
inter-dealer market as required by NASD Rule 2320(g) (commonly 
referred to as the ``Three Quote Rule''), unless the member can 
establish and document its reliance on the exclusions to the Three 
Quote Rule. FINRA is proposing to replace NASD Rule 3110(b) with a 
more general documentation requirement in the supplementary material 
to proposed FINRA Rule 5310. See Regulatory Notice 08-80 (December 
2008) (Proposed FINRA Rule Addressing Best Execution). NASD Rule 
3110(i) (Holding of Customer Mail) specifies the circumstances under 
which members may hold mail for a customer. FINRA is proposing that 
NASD Rule 3110(i) be rewritten as a standalone rule and relocated to 
the supervision section of the Consolidated FINRA Rulebook. See 
Regulatory Notice 08-24 (May 2008) (Proposed Consolidated FINRA 
Rules Governing Supervision and Supervisory Controls).
    \8\ For convenience, the Incorporated NYSE Rules are referred to 
as the NYSE Rules.
    \9\ NYSE Rule Interpretation 410(a)(ii)(5)/01 was deleted as 
part of a prior rule change. See Securities Exchange Act Release No. 
61473 (February 2, 2010), 75 FR 6422 (February 9, 2010) (Order 
Approving File No. SR-FINRA-2009-087).
    \10\ See Regulatory Notice 09-03 (January 2009) (Proposed 
Consolidated FINRA Rules Governing Financial Responsibility and 
Operational Requirements).
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    Current NASD Rules and NYSE Rules require members to make and 
preserve

[[Page 5851]]

certain books and records to evidence compliance with federal 
securities laws and FINRA and SEC rules, as well as to enable FINRA and 
SEC staffs to conduct effective examinations. Based in large part on 
the current rules, the proposed rule change would rewrite the FINRA 
books and records rules with three goals in view:
     To streamline the rules to make them as clear as possible;
     To group the requirements along similar subject matter 
lines to make finding them a more intuitive process and to provide 
members with a better understanding of the regulatory scheme; and
     To eliminate those requirements contained in the current 
rules that have become obsolete or otherwise duplicative.
2. Proposed Amendments
    FINRA proposes the following amendments to the books and records 
rules.
a. General Requirements (Proposed FINRA Rule 4511)
    Currently, there are two general recordkeeping rules in effect 
under NASD Rules and NYSE Rules. NASD Rule 3110(a) requires each member 
to make and preserve books, accounts, records, memoranda, and 
correspondence in conformity with all applicable laws, rules, 
regulations and statements of policy promulgated thereunder, with 
FINRA's Rules, and as prescribed by Exchange Act Rule 17a-3. NASD Rule 
3110(a) further states that the record keeping format, medium, and 
retention period shall comply with Exchange Act Rule 17a-4. NYSE Rule 
440 also sets forth the general obligation of members to make and 
preserve books and records.\11\
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    \11\ In addition, NYSE Rules 440.10 and 440.20 and NYSE Rule 
Interpretation 440.20/01 set forth financial and operational 
recordkeeping requirements for which there are no equivalent NASD 
Rules.
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    NYSE Rule 410 is a separate NYSE recordkeeping rule for which there 
is no comparable NASD Rule.\12\ NYSE Rule 410, in main part, requires 
members to make and preserve specific records for every order received 
(either orally or in writing) and every order entered into the NYSE's 
Off-Hours Trading Facility.\13\ NYSE Rule 410 also permits the NYSE to 
waive the rule's recordkeeping requirements under exceptional 
circumstances upon written request.
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    \12\ Previously, NYSE Rule 410 applied only to orders 
transmitted or carried to the NYSE Trading Floor (``Floor''), but 
was amended in 2004 to apply to all orders sent to any marketplace, 
not just those carried or transmitted to the Floor. See NYSE 
Information Memo 04-38 (July 26, 2004) (Amendments to NYSE Rules 
342, 401, 408 and 410 Relating to Supervision and Internal 
Controls).
    \13\ The ``Off-Hours Trading Facility'' is the NYSE facility 
that permits members to effect securities transactions on the NYSE 
pursuant to the NYSE Rule 900 Series. See NYSE Rule 900(e)(v).
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    FINRA Rule 4511 streamlines, and replaces, the language of NASD 
Rule 3110(a) to clarify that members are obligated to make and preserve 
books and records as required under the FINRA rules, the Exchange Act 
and the applicable Exchange Act rules.\14\ Additionally, the proposed 
rule requires members to preserve for a period of at least six years 
those FINRA books and records for which there is no specified retention 
period under the FINRA Rules or applicable Exchange Act rules. The 
proposed rule also clarifies that members are required to preserve the 
books and records required to be made pursuant to the FINRA Rules in a 
format and media that complies with Exchange Act Rule 17a-4.
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    \14\ As proposed in Regulatory Notice 08-25 (discussed in Item 5 
of this filing), FINRA Rule 4511 would have required members to make 
and preserve books and records as required under FINRA rules, 
Section 17(a) of the Exchange Act and the applicable associated 
Exchange Act rules; however, FINRA has modified proposed FINRA Rule 
4511 to eliminate the specific reference to Section 17(a) of the Act 
given that certain Exchange Act recordkeeping requirements are 
located outside of Section 17(a).
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    FINRA proposes to delete the general recordkeeping provisions of 
NYSE Rule 440 because its provisions are substantially similar to FINRA 
Rule 4511. As noted above, NYSE Rules 440.10 and 440.20 and NYSE Rule 
Interpretation 440.20/01 are being addressed as part of a separate 
proposal.\15\
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    \15\ See supra note 10.
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    In addition, the proposed rule change would delete NYSE Rules 
410(a)(1)-(3) and (b) as the provisions' requirements are largely 
duplicative of the Exchange Act requirements that are incorporated by 
reference into FINRA Rule 4511\16\ or, in some instances, are directed 
at orders on an exchange facility. FINRA Rule 7440 (Recording of Order 
Information) also mandates requirements that are substantially similar 
to those in Exchange Act Rules 17a-3 and 17a-4 for members that must 
report order information via FINRA's Order Audit Trail System 
(``OATS'') for over-the-counter (``OTC'') and Nasdaq equity 
securities.\17\
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    \16\ See generally 17 CFR 240. 17a-3(a)(6)-(a)(8).
    \17\ The FINRA Rule 7400 Series (Order Audit Trail System) 
requires members to capture, record, and report via OATS specific 
data elements related to the handling or execution of orders in OTC 
and Nasdaq equity securities, including recording all times of these 
events in hours, minutes, and seconds, and to synchronize their 
business clocks. FINRA is proposing to extend the recording and 
reporting requirements in the OATS rules to include all NMS stocks. 
See Securities Exchange Act Release No. 62739 (August 18, 2010), 75 
FR 52380 (August 25, 2010) (Notice of Filing of SR-FINRA-2010-044).
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b. Customer Account Information (Proposed FINRA Rule 4512)
    NASD Rule 3110(c)(1) requires that members maintain certain 
information relating to customer accounts, including, among other 
things, the signature of the registered representative introducing the 
account and signature of the member, partner, officer or manager who 
accepts the account. FINRA proposes to simplify this provision by 
instead requiring members to maintain the name of the associated 
person, if any, responsible for the account. As discussed in more 
detail below, the proposed rule change would require that where a 
member designates multiple individuals as being responsible for an 
account, the member maintain each of their names and a record 
indicating the scope of their responsibilities with respect to the 
account. The proposed rule change also would clarify that members 
maintain the signature of the partner, officer or manager denoting that 
the account has been accepted in accordance with the member's policies 
and procedures for acceptance of accounts.
    NASD Rule 3110(c)(3) requires that for discretionary accounts, in 
addition to the requirements set forth in NASD Rules 3110(c)(1) and 
(2), members must: Obtain the signature of each person authorized to 
exercise discretion in the account; record the date such discretion is 
granted; and, in connection with exempted securities (other than 
municipals), record the age or approximate age of the customer. FINRA 
proposes to simplify and clarify NASD Rule 3110(c)(3) in the following 
ways:
     Consistent with the Exchange Act requirements,\18\ the 
rule would be amended to require members to maintain a record of the 
dated signature of each named, natural person authorized to exercise 
discretion in the account;
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    \18\ See 17 CFR 240.17a-3(a)(17)(ii).
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     The proposed rule change would delete the requirement to 
record the date discretion was granted \19\ and the requirement to 
record the age or

[[Page 5852]]

approximate age of the customer in connection with exempted securities; 
\20\
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    \19\ Pursuant to NASD Rule 2510 (Discretionary Accounts), 
members would still be required to obtain the customer's prior 
written authorization. As part of the proposed changes to NASD Rule 
2510, FINRA is proposing to require members to obtain the customer's 
dated prior written authorization. See Regulatory Notice 09-63 
(November 2009) (Proposed Consolidated FINRA Rule Governing 
Discretionary Accounts and Transactions).
    \20\ This would be a conforming revision. The requirement that 
for discretionary accounts generally members must record the age or 
approximate age of the customer was eliminated effective in 1991. 
See Notice to Members 90-52 (August 1990) (SEC Approval of 
Amendments to Article III, Sections 2 and 21 (c) of the Rules of 
Fair Practice Re: Customer Account Information).
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     The rule would be amended to provide that its requirements 
do not apply to investment discretion granted by a customer as to the 
price at which or the time to execute an order given by the customer 
for the purchase or sale of a definite dollar amount or quantity of a 
specified security; and
     The proposed rule change would clarify that nothing in the 
rule shall be construed as allowing members to maintain discretionary 
accounts or exercise discretion in such accounts except to the extent 
permitted under the federal securities laws.
    In addition, as discussed in more detail below, the proposed rule 
change would require that members obtain a ``manual'' dated signature 
of each named, natural person authorized to exercise discretion in the 
account.
    NASD Rule 3110(c)(4) sets forth the definition of ``institutional 
account'' for purposes of NASD Rule 3110 as well as for NASD Rules 2310 
(Recommendations to Customers (Suitability)) and 2510. FINRA proposes 
to amend this definition of ``institutional account'' to delete the 
cross-references to NASD Rules 2310 and 2510 because these rules 
already include cross-references to this definition.
    FINRA also proposes to amend NASD Rule 3110(c) to provide that with 
respect to accounts opened pursuant to prior NASD Rules (e.g., the 
January 1991 cut-off specified in NASD Rule 3110(c)), members will be 
permitted to continue maintaining the information required by those 
prior NASD Rules until such time as they update the account information 
in the course of their routine and customary business or as required by 
other applicable laws or rules.
    In addition, the proposed rule change would add supplementary 
material to:
     Clarify that required customer account records are subject 
to a six-year retention period;
     Remind members that they may be subject to additional 
recordkeeping requirements under the Exchange Act (e.g., Exchange Act 
Rule 17a-3(a)(17));
     Remind members of their obligation to comply with the 
requirements of FINRA Rule 2070 (Transactions Involving FINRA 
Employees); \21\ and
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    \21\ FINRA Rule 2070 plays a vital role in helping FINRA monitor 
whether employees are abiding by trading restrictions imposed by the 
FINRA Code of Conduct.
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     Provide general explanations of the terms ``maintain'' and 
``preserve'' for purposes of Rule 4512 only.
    The proposed rule change would renumber NASD Rule 3110(c) as FINRA 
Rule 4512. The remaining provisions of NASD Rule 3110(c) would be 
incorporated into FINRA Rule 4512 without material change.
    NASD IM-3110 includes cross-references to the requirements of 
certain other rules that may apply to customer accounts (such as 
Exchange Act Rules 15g-1 through 15g-9), and it includes a historical 
reference relating to accounts opened prior to January 1991. FINRA 
proposes to delete NASD IM-3110 because certain provisions are 
redundant and others are outdated.
c. Records of Written Customer Complaints (Proposed FINRA Rule 4513)
    NASD Rule 3110(d) addresses a member's obligation to preserve 
records of written customer complaints at each office of supervisory 
jurisdiction (``OSJ''). NASD Rule 3110(e) defines the term 
``complaint.'' Because the definition of ``complaint'' in NASD Rule 
3110(e) relates directly to the requirements of NASD Rule 3110(d), 
FINRA proposes to merge the two provisions into one rule for 
simplification. The proposed rule change would renumber NASD Rules 
3110(d) and (e) as FINRA Rule 4513.
    The proposed rule change also would clarify that the obligation to 
keep customer complaint records in each OSJ applies only to complaints 
that relate to that office, including complaints that relate to 
activities supervised from that office and would provide that members 
may maintain the required records at the OSJ or make them promptly 
available at such office upon FINRA's request.
    Currently, members are required to preserve customer complaint 
records for a period of at least three years.\22\ To take into account 
FINRA's four-year routine examination cycle for certain members, the 
proposed rule change would require that members preserve the customer 
complaint records for a period of at least four years.
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    \22\ See 17 CFR 240.17a-3(a)(18); 17 CFR 240.17a-4(b)(4).
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    d. Requirements When Using Predispute Arbitration Agreements for 
Customer Accounts (Proposed FINRA Rule 2268)
    To ensure that customers are advised about what they are agreeing 
to when they sign predispute arbitration agreements, NASD Rule 3110(f) 
requires, among other things, that such agreements contain certain 
highlighted disclosures. FINRA proposes to incorporate the requirements 
of the rule with minor changes into the Consolidated FINRA Rulebook. 
Specifically, FINRA proposes to update the disclosure language to 
reflect amendments to FINRA Rule 12904 requiring arbitrators to provide 
an explained decision to the parties in eligible cases \23\ if there is 
a joint request by all parties at least 20 days before the first 
scheduled hearing date.\24\
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    \23\ Pursuant to FINRA Rule 12904(g)(6), the requirement does 
not apply to simplified cases decided without a hearing under FINRA 
Rule 12800 or to default cases conducted under FINRA Rule 12801.
    \24\ See Securities Exchange Act Release No. 59358 (February 4, 
2009), 74 FR 6928 (February 11, 2009) (Order Approving File No. SR-
FINRA-2008-051).
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    The proposed rule change would renumber NASD Rule 3110(f) as FINRA 
Rule 2268 and would move it to the disclosure section of the 
Consolidated FINRA Rulebook as a standalone rule.
e. Authorization Records for Negotiable Instruments Drawn From a 
Customer's Account (Proposed FINRA Rule 4514)
    NASD Rule 3110(g) provides that members shall not obtain from a 
customer or submit for payment a check, draft or other form of 
negotiable paper drawn on the customer's checking, savings, share or 
similar account, without that person's express written authorization, 
which may include the customer's signature on the negotiable 
instrument. The rule requires members to maintain the required written 
authorization (other than a copy of a negotiable instrument signed by 
the customer) for a period of three years. FINRA proposes to amend this 
provision to clarify that where the required authorization is separate 
from the negotiable instrument, members must preserve the authorization 
for a period of three years following the date it expires. The proposed 
rule change would renumber NASD Rule 3110(g) as FINRA Rule 4514.
f. OATS Recordkeeping Requirements (Proposed FINRA Rule 7440(a)(4))
    NASD Rule 3110(h) sets forth the OATS recordkeeping requirements 
for members that are ``Reporting Members,'' as defined in the OATS 
rules, for orders received or executed at their trading departments. 
FINRA proposes to relocate this recordkeeping provision without 
material change into the OATS rules. The proposed rule change would 
renumber NASD Rule 3110(h) as paragraph (a)(4) of FINRA Rule 7440.

[[Page 5853]]

g. Approval and Documentation of Changes in Account Name or Designation 
(Proposed FINRA Rule 4515)
    NASD Rule 3110(j) requires that, before a customer order is 
executed, the account name or designation must be placed upon the 
memorandum for each transaction.\25\ The rule also addresses the 
approval and documentation procedures for changes in such account name 
or designation.
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    \25\ See also 17 CFR 240.17a-3(a)(6).
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    As discussed in more detail below, FINRA proposes to amend this 
provision to clarify that with respect to any change in account name or 
designation that takes place prior to execution of the trade, the 
essential facts the principal relied on in approving such change must 
be documented in writing prior to execution. The proposed rule change 
would renumber NASD Rule 3110(j) as FINRA Rule 4515. NYSE Rules 410 and 
410.10 also include provisions regarding approval and documentation of 
changes in account name or designation. FINRA proposes to delete the 
corresponding provisions in NYSE Rules 410 and 410.10 because these 
provisions are substantially similar to FINRA Rule 4515. As stated 
earlier, FINRA also proposes to delete the recordkeeping provisions of 
NYSE Rule 410.
    NYSE Rule Interpretation 410/02 outlines an exception to the order 
entry requirements of NYSE Rule 410 by permitting a member to accept 
block orders and allowing investment advisers to make allocations on 
such orders to customers (i.e., allocations among sub-accounts), 
provided that the member obtains specific account designations or 
customer names for the order records by the end of the business day. 
The proposed rule change would transfer NYSE Rule Interpretation 410/02 
as FINRA Rule 4515.01, with certain changes as described below.
    FINRA proposes to amend the provision so that the exception applies 
not only to block orders, but to all orders submitted by an investment 
adviser on behalf of multiple customers. Additionally, members have 
indicated that in some cases they are unable to obtain the required 
information by the end of the business day on which the order is 
executed. Therefore, as a clerical accommodation to members, FINRA 
proposes to amend the provision and give members until noon of the next 
business day following the trading session to obtain the required 
information. The proposal also clarifies that the exception only 
applies where there is more than one customer for any particular order. 
Further, the current exception only applies to investment advisers that 
are either registered under the Investment Advisers Act or subject to 
state regulation pursuant to Section 203A of the Investment Advisers 
Act. To cover all investment advisers, FINRA proposes to expand the 
category of investment advisers subject to the exception to also 
include investment advisers that qualify for an exception from the 
Investment Advisers Act's registration requirements pursuant to Section 
203(b) of the Investment Advisers Act. FINRA also proposes to clarify 
that the exception does not apply to accounts handled by registered 
representatives who otherwise exercise discretionary authority over 
accounts pursuant to NASD Rule 2510.
    Moreover, FINRA proposes to explicitly state that nothing in the 
rule or supplementary material may be construed as allowing a member 
knowingly to facilitate the allocation of orders from investment 
advisers in a manner other than in compliance with both (i) the 
investment adviser's intent at the time of trade execution to allocate 
shares on a percentage basis to the participating accounts and (ii) the 
investment adviser's fiduciary duty with respect to allocations for 
such participating accounts, including but not limited to allocations 
based on the performance of a transaction between the time of execution 
and the time of allocation.
h. Pre-Time Stamping (Proposed FINRA Rule 5340)
    NYSE Rule Interpretation 410/01 notes that pre-time stamping of 
order tickets in connection with block positioning is contrary to NYSE 
Rule 410. The proposed rule change would adopt this NYSE Rule 
Interpretation as FINRA Rule 5340 without material change, except for 
replacing the reference to NYSE Rule 410 with FINRA Rule 4511. FINRA 
believes that retaining this requirement is appropriate as it expressly 
prohibits violative conduct for which there are no direct NASD rule 
equivalents. FINRA Rule 5340 would be new to legacy NASD-only members.
    FINRA will announce the implementation date of the proposed rule 
change in a Regulatory Notice to be published no later than 90 days 
following Commission approval. The implementation date will be no later 
than 240 days following publication of the Regulatory Notice announcing 
Commission approval.

III. Summary of Comment Letters and FINRA's Response

    The proposed rule change was published for comment in the Federal 
Register on November 1, 2010, and the comment period closed on November 
22, 2010. The Commission received three comment letters in response to 
the proposing release: The CAI Letter, the Cornell letter, and the 
SIFMA letter.\26\
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    \26\ See supra, note 4.
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A. Requirements When Using Predispute Arbitration Agreements for 
Customer Accounts (Proposed FINRA Rule 2268)

    One commenter requested that FINRA confirm that the proposed 
disclosure language applies to predispute arbitration agreements 
entered into after the effective date of FINRA Rule 2268.\27\ In its 
Response to Comments, FINRA confirmed that the requirement will apply 
prospectively to predispute arbitration agreements entered into on or 
after the effective date of FINRA Rule 2268.
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    \27\ CAI.
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B. General Requirements (Proposed Rule 4511)

    FINRA noted in its filing with the Commission that its proposed 
rule would require members to preserve for a period of at least six 
years those FINRA books and records for which there is no other 
specified retention period under the FINRA rules or applicable Exchange 
Act rules. One commenter noted that this requirement is too vague.\28\ 
Another commenter requested that the proposed rule provide a start date 
for the six-year retention period.\29\ In its Response to Comments, 
FINRA noted that this six-year retention period is a default retention 
period for FINRA rules that require members to preserve certain books 
and records but do not specify a retention period, and where there is 
no retention period specified under Exchange Act rules.
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    \28\ SIFMA.
    \29\ CAI.
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C. Customer Accounts Information (Proposed FINRA Rule 4512)

    One commenter requests that FINRA provide guidance regarding the 
use of ``electronic'' signatures to satisfy any FINRA signature 
requirements relating to a member's book and records.\30\ In its 
Response to Comments, FINRA found this comment to be outside of the 
scope of the proposed rule change and directed the commenter to review 
the various Commission and self-regulatory

[[Page 5854]]

organization guidance available. This same commenter also requested 
clarification on the scope of FINRA Rule 4512(a)(3).\31\ In its 
Response to Comments, FINRA clarified that the provision applies to all 
discretionary accounts. FINRA further stated that it would address the 
requirements applicable to other types of accounts in which a person is 
authorized by a customer to act on the customer's behalf in the context 
of the proposed changes to NASD Rule 2510 (Discretionary Accounts).\32\
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    \30\ SIFMA.
    \31\ SIFMA.
    \32\ See Regulatory Notice 09-63 (November 2009) (Proposed 
Consolidated FINRA Rule Governing Discretionary Accounts and 
Transactions).
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    One commenter inquired about the customer age component of Rule 
4512(a)(1)(B).\33\ Under proposed FINRA Rule 4512(a)(1)(B) members are 
required to maintain certain information about their customers, 
including, ``whether the customer is of legal age.'' One commenter 
suggests that members should instead collect and retain a customer's 
date of birth.\34\ In its Response to Comments, FINRA disagreed and 
specified that its rule requires members to maintain information 
establishing that the customer is of legal age to engage in 
transactions with the member.
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    \33\ SIFMA.
    \34\ SIFMA.
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    FINRA Rule 4512(a)(1)(C) requires members to maintain the name of 
the associated person, if any, responsible for the account. One 
commenter requested that the register representative signature 
requirement currently used in NASD Rule 3110(c)(1)(C) be retained in 
the new consolidated FINRA rulebook.\35\ In its Response to Comments, 
FINRA reaffirmed that it believes it is ``sufficient for a member to 
maintain the name of the associated person (if any) responsible for the 
account together with the signature of the partner, officer, or manager 
denoting that the account has been accepted in accordance with the 
member's policies and procedures for acceptance of accounts.'' 
Regarding this same rule section, one commenter asked for clarification 
that commission sharing on a customer account or sharing responsibility 
does not necessarily determine whether an individual is engaged in 
activities whereby the individual becomes ``responsible'' for the 
account.\36\ In its Response to Comments, FINRA clarified that for 
purposes of this rule, responsibility is determined on the scope of the 
individual's activities with respect to the account.
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    \35\ Cornell.
    \36\ CAI.
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    Finally, with respect to FINRA Rule 4512, one commenter believes 
that the requirement to update account information for accounts that 
were opened prior to FINRA Rule 4512 is burdensome.\37\ In its Response 
to Comments, FINRA disagreed, noting that this new requirement promotes 
greater consistency and uniformity with regards to account record 
information.
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    \37\ CAI.
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D. Records of Written Customer Complaints (Proposed FINRA Rule 4513)

    Two commenters requested that FINRA maintain its current three-year 
retention period for customer complaint records, rather than the 
proposed four-year retention period.\38\ One commenter further 
explained that, ``[e]xtending the retention period to four (4) years 
for customer complaint records increases compliance costs for all 
member firms without regard to the inspection cycles for the majority 
of firms, and overlooks the fact that all firms, regardless of 
inspection cycle, report customer complaints directly to FINRA.'' In 
its Response to Comments, FINRA noted that its four-year retention 
period better accommodates its four-year routine examination cycle for 
certain members. One commenter also suggested that the phrase ``written 
customer complaints'' in the proposed rule was not sufficiently clear 
and recommended that the definition of a ``customer complaint'' 
expressly include only a ``written grievance.'' \39\ In its Response to 
Comments, FINRA stated that it believes that the scope of the proposed 
rule and the definition of ``customer complaint'' are both appropriate 
and sufficiently clear.\40\
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    \38\ CAI and SIFMA.
    \39\ SIFMA.
    \40\ Response to Comments.
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E. Allocations of Orders Made by Investment Advisers (Proposed FINRA 
Rule 4515.01)

    One commenter was concerned with the scope of Rule 4515.01 and 
asked whether this provision required the broker-dealers to make a 
legal determination regarding an adviser's fiduciary duty. In its 
Response to Comments, FINRA noted that, in this case, ``the `knowingly 
facilitate' standard means the broker-dealer may not act recklessly or 
with knowledge in facilitating an investment adviser's breach of its 
fiduciary duty to clients, and compliance with that standard turns on 
the facts and circumstances.''

F. Other Comment

    Finally, one commenter requested that FINRA specifically state that 
the proposed rule requirements, ``apply only to records generated after 
the effective date of the proposal.'' \41\ In its Response to Comments, 
FINRA responded to the request by specifying that the requirements, 
``will apply prospectively on or after the effective date of the 
proposed rule change.''
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    \41\ SIFMA.
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IV. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change, 
the comments received, and FINRA's Response to Comments and finds that 
the proposed rule change is consistent with the requirements of the 
Exchange Act, and the rules and regulations thereunder that are 
applicable to a national securities association.\42\ In particular, the 
Commission finds that the proposal is consistent with Section 15A(b)(6) 
of the Act,\43\ which requires, among other things, that the rules of a 
national securities association be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, remove impediments to and perfect the mechanism of 
a free and open market and a national market system, and, in general, 
protect investors and the public interest.
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    \42\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \43\ 15 U.S.C. 78o-3(b)(6).
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    Proposed FINRA Rule 4511 would streamline and replace the language 
of current NASD Rule 3110(a), as well as eliminate NYSE Rule 410 and 
subparagraphs (a)(1)-(3) and (b) of NYSE Rule 440.\44\ Further, in 
cases where there is no specified retention period under FINRA rules or 
applicable Exchange Act rules, the proposed rule would require members 
to preserve such records for a period of six years. The Commission 
notes that one commenter stated that the six-year default retention 
period was too vague,\45\ and another commenter requested clarification 
regarding the start date for the default six-year retention period.\46\ 
FINRA adequately responded to these concerns in its Response to 
Comments. The Commission believes this proposed change would be 
beneficial insofar as it would consolidate in one rule the obligations 
of FINRA members to make

[[Page 5855]]

and preserve certain books and records. In so doing, the proposed rule 
would clarify the obligations of FINRA members and promote compliance 
by virtue of such greater clarity.
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    \44\ See supra Part II.A.2.a.
    \45\ SIFMA.
    \46\ CAI.
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    Proposed FINRA Rule 4512 would, among other things, simplify the 
customer account information requirements in NASD Rule 3110(c)(1) and 
simplify and clarify certain requirements set forth in NASD Rule 
3110(c)(3) with respect to discretionary accounts. As noted above, 
proposed FINRA Rule 4512 would also provide that with respect to 
accounts opened prior to January 1991, members will be permitted to 
continue maintaining the information required by the prior NASD rules 
in effect at that time until such time as the member updates the 
account information in the course of their routine and customary 
business or as otherwise required by law or rules.\47\ The proposed 
rule would also eliminate certain redundant cross-references.
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    \47\ See supra Part II.A.2.b.
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    FINRA received a number of comments on this aspect of the proposed 
rule change,\48\ and the Commission believes that FINRA has adequately 
responded to such comments in its Response to Comment.\49\ Further, the 
Commission believes that the proposed changes in FINRA Rule 4512 would 
update, clarify, and streamline existing rule requirements regarding 
customer account information. The Commission believes that such changes 
will be helpful to FINRA members, as well as assist FINRA in fulfilling 
its responsibilities as an SRO under the Act.
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    \48\ SIFMA, CAI, Cornell.
    \49\ Response to Comments.
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    As noted above, proposed FINRA Rule 4513 would merge existing 
requirements in NASD Rules 3110(d) and 3110(e), clarify that the 
obligation to keep customer complaint records in each OSJ applies only 
to complaints that relate to that office and provide that members may 
maintain the required records at the OSJ or make them promptly 
available at such office upon FINRA's request.\50\ Finally, the 
proposed rule change would require that members preserve customer 
complaints be preserved for at least four years to take into account 
FINRA's four-year routine examination cycle.
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    \50\ See supra Part II.A.2.c.
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    Two commenters recommended maintaining the current three-year 
retention period for customer complaint records,\51\ and one of these 
commenters suggested the use of the term ``written customer 
complaints'' in the proposed rule is not sufficiently clear.\52\ The 
Commission believes that FINRA adequately responded to these concerns 
in its Response to Comments. The Commission also believes that the 
changes relating to the definition of the term ``complaint'' in NASD 
Rules 3110(d) and 3110(e), and the elucidation regarding the obligation 
to keep customer complaint records, are helpful changes that will 
clarify FINRA's rulebook and promote compliance by FINRA members. 
Similarly, preserving customer complaint records for four years will 
promote FINRA's ability to supervise its members for compliance with 
the federal securities laws and FINRA's rules.
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    \51\ SIFMA and CAI.
    \52\ SIFMA.
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    As noted above, FINRA is also proposing to incorporate NASD Rule 
3110(f), relating to predispute arbitration agreements, into the 
Consolidated FINRA Rulebook as FINRA Rule 2268, with some additional 
changes to reflect amendments to FINRA Rule 12904.\53\ One commenter 
requested that FINRA confirm that the proposed disclosure language will 
only apply to predispute arbitration agreements entered into after the 
effective date of FINRA Rule 2268.\54\ In its Response to Comments, 
FINRA provided such confirmation.\55\ Consistent with other changes 
FINRA is proposing, the Commission believes FINRA Rule 2268 will update 
and clarify the FINRA rulebook and that such changes will promote 
greater compliance by FINRA members and assist FINRA in discharging its 
duties as an SRO.
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    \53\ See supra Part II.A.2.d.
    \54\ CAI.
    \55\ Response to Comments.
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    FINRA also proposes to relocate the OATS recordkeeping requirement 
for members that are ``Reporting Members'' (as defined in the OATS 
rules) from NASD Rule 3110(h) to paragraph (a)(4) of FINRA Rule 
7440.\56\ The Commission believes that this aspect of the proposed rule 
change is reasonable given that it is logical to include an OATS 
recordkeeping requirement in the OATS rules.
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    \56\ See supra Part II.A.2.f.
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    FINRA also proposes to amend NASD Rule 3110(j) to clarify that with 
respect to any change in account name or designation that takes place 
prior to execution of the trade, the essential facts the principal 
relied upon in approaching such change must be documented in writing 
prior to execution.\57\ This modified provision would be designated as 
FINRA Rule 4515. FINRA also is proposing to delete corresponding 
provisions in NYSE Rules 410 and 410.10, because these provisions are 
largely duplicative of proposed FINRA Rule 4515. FINRA would transfer 
NYSE Rule Interpretation 410/02 as FINRA Rule 4515.01, with certain 
modifications as described above in more detail.\58\
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    \57\ See supra Part II.A.2.g.
    \58\ Id.
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    The Commission believes that the changes in proposed FINRA Rule 
4515 relating to clarifying the change in account name or designation 
prior to trade execution are consistent with the protection of 
investors because the proposed rule provides that any such changes will 
be documented in writing, an important safeguard. Further, as stated 
previously with respect to other changes eliminating duplicative or 
overlapping provisions, the elimination of NYSE Rules 410 and 410.10 
should provide a clearer, more streamlined, and simplified rulebook 
that will promote greater compliance by FINRA members and help FINRA 
discharge its responsibilities as an SRO.\59\ The Commission also notes 
that with respect to the rule change adopting NYSE Rule Interpretation 
410/02 as FINRA Rule 4515.01, FINRA has explicitly stated that nothing 
in the rule or supplementary material may be construed as allowing a 
member knowingly to facilitate the allocation of orders from investment 
advisers in a manner other than in compliance with both (i) the 
investment adviser's intent at the time of the trade execution to 
allocate shares on a percentage basis to the participating accounts; 
and (ii) the investment adviser's fiduciary duty with respect to 
allocations for such participating accounts, including but not limited 
to allocations based on the performance of a transaction between the 
time of execution and the time of allocation.
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    \59\ See supra Part II.A.2.g.
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    NYSE Rule Interpretation 410/01 notes that pre-time stamping of 
order tickets in connection with block positioning is contrary to NYSE 
Rule 410. FINRA proposes incorporating NYSE Rule Interpretation 410/01 
as FINRA Rule 5340 without substantive changes. FINRA has stated, and 
the Commission agrees, that retaining this requirement is appropriate 
because it expressly prohibits violative conduct for which there are no 
direct NASD rule equivalents.\60\
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    \60\ See supra Part II.A.2.h.

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[[Page 5856]]

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\61\ that the proposed rule change (SR-FINRA-2010-052) be, and 
hereby is, approved.
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    \61\ 15 U.S.C. 78(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\62\
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    \62\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-2292 Filed 2-1-11; 8:45 am]
BILLING CODE 8011-01-P


