
[Federal Register Volume 76, Number 138 (Tuesday, July 19, 2011)]
[Notices]
[Pages 42755-42757]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-18091]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64884; File No. SR-FINRA-2011-033]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Adopt FINRA Rule 0180 (Application of Rules to 
Security-Based Swaps)

July 14, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on July 8, 2011, Financial Industry Regulatory 
Authority, Inc. (``FINRA'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been substantially 
prepared by FINRA. FINRA has designated the proposed rule change as 
constituting a ``non-controversial'' rule change under paragraph (f)(6) 
of Rule 19b-4 under the Act,\3\ which renders the proposal effective 
upon receipt of this filing by the Commission. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt FINRA Rule 0180 (Application of Rules 
to Security-Based Swaps). The proposed rule change would, with certain 
exceptions, temporarily limit the application of FINRA rules with 
respect to security-based swaps.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

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

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    On July 21, 2010, President Obama signed into law the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (the ``Dodd-Frank 
Act''),\4\ Title VII of which established a comprehensive new 
regulatory framework for swaps and security-based swaps. The new 
legislation was intended among other things to enhance the authority of 
regulators to implement new rules designed to reduce risk, increase 
transparency, and promote market integrity with respect to such 
products. Generally, the Dodd-Frank Act provides that the Commodity 
Futures Trading Commission (``CFTC'') will regulate ``swaps'' and the 
SEC will regulate ``security-based swaps.'' \5\ The Dodd-Frank Act 
contemplates certain self-regulatory organization responsibilities in 
this area as well.\6\
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    \4\ Pub. L. No. 111-203, 124 Stat. 1376 (2010).
    \5\ The terms ``swap'' and ``security-based swap'' are defined 
in Sections 721 and 761 of the Dodd-Frank Act. The Commission and 
the CFTC jointly have proposed to further define these terms. See 
Securities Exchange Act Release No. 64372 (Apr. 29, 2011), 76 FR 
29818 (May 23, 2011) (Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping); Securities Exchange 
Act Release No. 63452 (Dec. 7, 2010), 75 FR 80174 (Dec. 21, 2010) 
(Further Definition of ``Swap Dealer,'' ``Security-Based Swap 
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap 
Participant'' and ``Eligible Contract Participant'').
    \6\ See, e.g., Sections 712 and 763 of the Dodd-Frank Act.
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    Title VII of the Dodd-Frank Act generally becomes effective on July 
16, 2011 (360 days after the enactment of the Dodd-Frank Act, i.e. the 
``Effective Date''), unless a provision requires a rulemaking.\7\ The 
Commission has recently taken a number of actions in furtherance of 
Title VII, including the issuance of a release to provide guidance in 
connection with the effectiveness of Exchange Act provisions related to 
security-based swaps added by subtitle B of Title VII (which generally 
creates, and relates to, the regulatory regime for security-based 
swaps), and to provide temporary exemptions in connection with certain 
of those provisions.\8\ In addition, the Commission has recently acted 
to address a change to an existing definition in the Act resulting from 
the effectiveness of the Title VII amendments.\9\ Specifically, as of 
the July 16 Effective Date, the Act's definition of ``security'' will 
expressly encompass security-based swaps.\10\ In making this change, 
Congress intended for security-based swaps to be treated as securities 
under the Act and the underlying rules and regulations. Nonetheless, 
this expansion of the general scope of the Act raises certain complex 
issues of interpretation, including issues as to the application of 
those provisions to registered broker-dealers. Absent additional time 
to analyze those issues, and to consider whether to provide 
interpretive or operational guidance, these changes may lead to 
unnecessary market uncertainty.
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    \7\ The Dodd-Frank Act provides that if a Title VII provision 
requires a rulemaking, the provision will go into effect ``not less 
than'' 60 days after the publication of the related final rule or on 
July 16, 2011, whichever is later. See Sections 754 and 774 of the 
Dodd-Frank Act.
    \8\ See, e.g., Securities Exchange Act Release No. 64678 (June 
15, 2011), 76 FR 36287 (June 22, 2011) (Compliance Dates Release).
    \9\ See Securities Exchange Act Release No. 64795 (July 1, 2011) 
(Order Granting Temporary Exemptions) (the ``Exemptive Release'').
    \10\ See Exchange Act Section 3(a)(10) (15 U.S.C. 78c(a)(10)), 
as revised by Section 761 of the Dodd-Frank Act.
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    FINRA notes that the Act's definition of ``security'' has similar 
implications for numerous provisions under FINRA rules.\11\ FINRA notes 
that, pending the final implementation of new rules and guidance that 
would provide greater regulatory clarity in relation to security-based 
swap activities, it is in the public interest to propose a rule that 
would provide relief from certain FINRA requirements so as to help 
avoid undue market disruptions resulting from the change to the 
definition of ``security''

[[Page 42756]]

under the Act. In its Exemptive Release, the Commission determined that 
it is appropriate to provide market participants with additional time 
to consider the potential impact on their businesses and the 
interpretive questions raised, and to provide the Commission with any 
related requests for guidance or relief, along with the underlying 
analysis.
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    \11\ 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).
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    In its Exemptive Release, the Commission noted that the relief it 
is granting is targeted and does not include, for instance, relief from 
the Act's antifraud and anti-manipulation provisions. FINRA notes that 
proposed new FINRA Rule 0180 is similarly targeted. Specifically, 
proposed FINRA Rule 0180(a) provides that FINRA rules shall not apply 
to members' activities and positions with respect to security-based 
swaps, except for: FINRA Rule 2010 (standards of commercial honor and 
principles of trade); FINRA Rule 2020 (use of manipulative, deceptive 
or other fraudulent devices); FINRA Rule 3310 (anti-money laundering 
program); and FINRA Rule 4240 (margin requirements for credit default 
swaps). Paragraph (b) of the proposed rule provides that the following 
rules apply to members' activities and positions with respect to 
security-based swaps only to the extent they would have applied as of 
July 15, 2011: NASD Rule 3110 (books and records) and all successor 
FINRA Rules to such NASD Rule; \12\ the FINRA Rule 4500 Series (books, 
records and reports); and the FINRA Rule 4100 Series (financial 
condition). Paragraph (c) provides that the following rules apply as 
necessary to effectuate members' compliance with paragraphs (a) and (b) 
of the rule: the FINRA Rule 0100 Series (general standards); the NASD 
Rule 1000 Series (membership, registration and qualification 
requirements) and all successor FINRA Rules to such NASD Rule Series; 
the FINRA Rule 1000 and 1100 Series (member application); NASD Rules 
3010 (supervision) and 3012 (supervisory control system) and IM-3010-1 
(standards for reasonable review) and all successor FINRA Rules to such 
NASD Rules and Interpretive Material; FINRA Rule 3130 (annual 
certification of compliance and supervisory processes); the FINRA Rule 
8000 Series (investigations and sanctions); and the FINRA Rule 9000 
Series (code of procedure). Paragraph (d) of the proposed rule provides 
that the rule will expire on January 17, 2012. Lastly, proposed FINRA 
Rule 0180.01 provides that, for purposes of the rule, ``security-based 
swap'' shall be as defined pursuant to Exchange Act Section 
3(a)(68)\13\ and the rules and guidance of the SEC or its staff.
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    \12\ The SEC recently approved the adoption of certain 
consolidated FINRA rules governing books and records, which will 
become effective on December 5, 2011. See Regulatory Notice 11-19 
(April 2011).
    \13\ 15 U.S.C. 78c(a)(68).
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    FINRA notes that, though the proposed rule change suspends on a 
temporary basis certain member conduct rules that may otherwise apply 
to members' activities and positions with respect to security-based 
swaps, conduct of a serious nature that would call into question the 
principles underlying such rules may be addressed by FINRA under FINRA 
Rules 2010 and 2020.
    FINRA has filed the proposed rule change for immediate 
effectiveness and has requested that the SEC waive the requirement that 
the proposed rule change not become operative for 30 days after the 
date of the filing, such that FINRA can implement the proposed rule 
change immediately. The implementation date of the proposed rule change 
will be July 8, 2011. The proposed rule change will expire by its terms 
on January 17, 2012. FINRA will amend the expiration date of the 
proposed rule in subsequent filings as necessary such that the 
expiration date will be coterminous with the termination of relevant 
provisions of the SEC's Exemptive Release, as defined herein.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\14\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change would 
further the purposes of the Act because, consistent with the goals set 
forth by the Commission when it issued the Exemptive Release, the 
proposed rule change will help to avoid undue market disruption 
resulting from the change to the definition of ``security'' under the 
Act.
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    \14\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-
4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. FINRA has fulfilled this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \17\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\18\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest.
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    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ 17 CFR 240.19b-4(f)(6)(iii).
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    FINRA has requested that the Commission waive the 30-day operative 
delay so that the proposal may become operative upon filing. The 
Commission hereby grants that request. The proposed rule is consistent 
with the goals set forth by the Commission when it issued the Exemptive 
Release and will help avoid undue market interruption resulting from 
the change to the definition of ``security'' under the Act. Therefore, 
the Commission believes it is consistent with the protection of 
investors and the public interest to waive the 30-day delay and 
designates the proposal as operative upon filing.\19\
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    \19\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of

[[Page 42757]]

investors, or otherwise in furtherance of the purposes of the Act. If 
the Commission takes such action, the Commission shall institute 
proceedings to determine whether the proposed rule should be approved 
or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2011-033 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-2011-033. 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 Web site 
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 filing also will be 
available for inspection and copying at the principal office of FINRA. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions.
    You should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-FINRA-2011-033 
and should be submitted on or before August 9, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Cathy H. Ahn,
Deputy Secretary.
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    \20\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2011-18091 Filed 7-18-11; 8:45 am]
BILLING CODE 8011-01-P


