
[Federal Register Volume 80, Number 3 (Tuesday, January 6, 2015)]
[Notices]
[Pages 553-561]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-30892]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73954; File No. SR-FINRA-2014-037]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change to FINRA Rules 
0190 (Effective Date of Revocation, Cancellation, Expulsion, Suspension 
or Resignation) and 2040 (Payments to Unregistered Persons) in the 
Consolidated FINRA Rulebook, and Amend FINRA Rule 8311 (Effect of a 
Suspension, Revocation, Cancellation, or Bar)

December 30, 2014.

I. Introduction

    On September 10, 2014, 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 (``Act'' or ``Exchange Act'') \1\ and 
Rule 19b-4 thereunder,\2\ a proposed rule change to streamline 
provisions of NASD Rule 2410 (Net Prices to Persons Not in Investment 
Banking or Securities Business), NASD Rule 2420 (Dealing with Non-
Members), NASD IM-2420-1 (Transactions Between Members and Non-
Members), NASD IM-2420-2 (Continuing Commissions Policy), Incorporated 
NYSE Rule 353 (Rebates and Compensation), Incorporated NYSE Rule 
Interpretation 345(a)(i)/01 (Compensation to Non-Registered Persons) 
and Incorporated NYSE Rule Interpretation 345(a)(i)/02 (Compensation 
Paid for Advisory Solicitations), which would be deleted from the 
current FINRA rulebook. The proposed rule change would also adopt the 
requirements of NASD Rule 1060(b) (Persons Exempt from Registration) 
and Incorporated NYSE Rule Interpretation 345(a)(i)/03 (Compensation to 
Non-Registered Foreign Persons Acting as Finders), as FINRA Rule 
2040(c) (Nonregistered Foreign Finders) in the consolidated FINRA 
rulebook without material change. In addition, the proposed rule change 
would amend FINRA Rule 8311 (Effect of a Suspension, Revocation, 
Cancellation, or Bar), add new Supplementary Material .01 (Remuneration 
Accrued Prior to Effective Date of Sanction or Disqualification), and 
adopt the requirements of NASD IM-2420-1(a) (Non-members of the 
Association), as FINRA Rule 0190 (Effective Date of Revocation, 
Cancellation, Expulsion, Suspension or Resignation).
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on October 1, 2014.\3\ The Commission received seven comment 
letters in response to the Notice of Filing.\4\ On November 10, 2014, 
FINRA extended the time period in which the Commission must approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to approve or disapprove the proposed 
rule change to December 30, 2014.\5\ On December 23,

[[Page 554]]

2014, FINRA filed a letter responding to these comments.\6\
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    \3\ Exchange Act Release No. 73210 (Sept. 25, 2014), 79 FR 59322 
(Oct. 1, 2014) (Notice of Filing of a Proposed Rule Change to Adopt 
FINRA Rules 0190 (Effective Date of Revocation, Cancellation, 
Expulsion, Suspension or Resignation) and 2040 (Payments to 
Unregistered Persons) in the Consolidated FINRA Rulebook, and Amend 
FINRA Rule 8311 (Effect of a Suspension, Revocation, Cancellation, 
or Bar)) (``Notice of Filing''). The comment period closed on 
October 22, 2014.
    \4\ William A. Jacobson, Clinical Professor of Law, Cornell Law 
School, and Director, Cornell Securities Law Clinic (Oct. 17, 2014) 
(``Cornell''); Peter J. Chepucavage, Esq., GC Plexus Consulting 
Group (Oct. 21, 2014) (``Plexus''); William Beatty, President, North 
American Securities Administrators Association and Washington 
Securities Commissioner (Oct. 22, 2014) (``NASAA''); Howard Spindel, 
Senior Managing Director, and Cassondra E. Joseph, Managing 
Director, Integrated Management Solutions USA LLC (Oct. 22, 2014) 
(``IMS''); Paul J. Tolley, Senior Vice President, Chief Compliance 
Officer, Commonwealth Financial Network (Oct. 22, 2014) 
(``Commonwealth''); Kevin Zambrowicz, Associate General Counsel & 
Managing Director, Securities Industry and Financial Markets 
Association (Oct. 22, 2014) (``SIFMA''); and Catherine T. Dixon, 
Chair, Federal Regulation of Securities Committee, Business Law 
Section, American Bar Association (Nov. 5, 2014) (``ABA'').
    \5\ Letter from Kosha K. Dalal, Associate Vice President and 
Associate General Counsel, FINRA to Katherine England, Assistant 
Director, Division of Trading and Markets, Securities and Exchange 
Commission, dated Nov. 10, 2014.
    \6\ Letter from Kosha K. Dalal, Associate Vice President and 
Associate General Counsel, FINRA to Brent J. Fields, Secretary, 
Securities and Exchange Commission, dated Dec. 23, 2014 (``FINRA 
Response'').
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    This order approves the proposed rule change.

II. Description of the Proposed Rule

    As part of the process of developing a new consolidated rulebook 
(``Consolidated FINRA Rulebook''),\7\ FINRA is proposing to adopt FINRA 
Rule 2040 (Payments to Unregistered Persons) regarding the payment of 
transaction-based compensation by members to unregistered persons, and 
Supplementary Material .01 (Reasonable Support for Determination of 
Compliance with Section 15(a) of the Exchange Act). The proposed rule 
change would streamline provisions of NASD Rule 2410 (Net Prices to 
Persons Not in Investment Banking or Securities Business), NASD Rule 
2420 (Dealing with Non-Members), NASD IM-2420-1 (Transactions Between 
Members and Non-Members), NASD IM-2420-2 (Continuing Commissions 
Policy), NYSE Rule 353 (Rebates and Compensation), NYSE Rule 
Interpretation 345(a)(i)/01 (Compensation to Non-Registered Persons) 
and NYSE Rule Interpretation 345(a)(i)/02 (Compensation Paid for 
Advisory Solicitations), which would be deleted from the current FINRA 
rulebook. The proposed rule change also would adopt the requirements of 
NASD Rule 1060(b) (Persons Exempt from Registration) and NYSE Rule 
Interpretation 345(a)(i)/03 (Compensation to Non-Registered Foreign 
Persons Acting as Finders), as FINRA Rule 2040(c) (Nonregistered 
Foreign Finders) in the Consolidated FINRA Rulebook without material 
change. In addition, the proposed rule change would amend FINRA Rule 
8311 (Effect of a Suspension, Revocation, Cancellation, or Bar), add 
new Supplementary Material .01 (Remuneration Accrued Prior to Effective 
Date of Sanction or Disqualification), and adopt the requirements of 
NASD IM-2420-1(a) (Non-members of the Association), as FINRA Rule 0190 
(Effective Date of Revocation, Cancellation, Expulsion, Suspension or 
Resignation).
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    \7\ The current FINRA rulebook consists of (1) FINRA Rules; (2) 
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated 
NYSE Rules''). 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). For convenience, the 
Incorporated NYSE Rules are referred to as the NYSE Rules.
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A. Background

    NASD Rule 1060(b) (Persons Exempt from Registration), NASD Rule 
2410 (Net Prices to Persons Not in Investment Banking or Securities 
Business), NASD Rule 2420 (Dealing with Non-Members), NASD IM-2420-1 
(Transactions Between Members and Non-Members), and NASD IM-2420-2 
(Continuing Commissions Policy) (collectively, the ``NASD Non-Member 
Rules'') govern payments by members to unregistered persons. The NASD 
Non-Member Rules (other than NASD Rule 1060(b)) were developed in an 
era when a registered broker-dealer could engage in an over-the-counter 
securities business and elect not to be a member of a registered 
securities association.\8\ An original purpose of the NASD Non-Member 
Rules was to encourage non-members to become members by generally 
prohibiting members from providing commissions or discounts/concessions 
to non-members.\9\ Since the adoption of the NASD Non-Member Rules, the 
laws governing broker-dealers have changed, and today virtually all 
broker-dealers doing business with the public are FINRA members.\10\
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    \8\ See Maloney Act of 1938, Pub. L. 75-719, 52 Stat. 1070, 
which added Section 15A of the Exchange Act to provide for the 
establishment of national securities associations with authority, 
subject to SEC review, to supervise the over-the-counter securities 
market and promulgate rules governing voluntary membership of 
broker-dealers.
    \9\ Section 15A(e)(1) of the Exchange Act states that ``[t]he 
rules of a registered securities association may provide that no 
member thereof shall deal with any nonmember professional (as 
defined in paragraph (2) of this subsection) except at the same 
prices, for the same commissions or fees, and on the same terms and 
conditions as are by such member accorded to the general public.'' 
Section 15A(e)(2) of the Exchange Act defines ``nonmember 
professional'' as ``(A) with respect to transactions in securities 
other than municipal securities, any registered broker or dealer who 
is not a member of a registered securities association, except such 
a broker or dealer who deals exclusively in commercial paper, 
bankers' acceptances, and commercial bills, and (B) with respect to 
transactions in municipal securities, any municipal securities 
dealer (other than a bank or division or department of a bank) who 
is not a member of any registered securities association and any 
municipal securities broker who is not a member of any such 
association.'' The legislative reports from Congress on this 
provision state that exclusion from membership would in effect be a 
form of economic sanction on such non-members. See S. Rep. No. 1455 
and H. R. Rep. No 2307, 75th Cong., 3rd Sess. (1938).
    \10\ Section 15(b)(8) of the Exchange Act provides that ``[i]t 
shall be unlawful for any registered broker or dealer to effect any 
transaction in, or induce or attempt to induce the purchase or sale 
of, any security (other than commercial paper, bankers' acceptances, 
or commercial bills), unless such broker or dealer is a member of a 
securities association registered pursuant to Section 15A of this 
title or effects transactions in securities solely on a national 
securities exchange of which it is a member.''
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    As a result, FINRA generally has interpreted the provisions of the 
NASD Non-Member Rules, through interpretive letters and other guidance, 
to prohibit the payment of commissions or fees derived from a 
securities transaction to any non-member that may be acting as an 
unregistered broker-dealer. Section 15(a)(1) of the Exchange Act 
generally requires any broker-dealer effecting transactions in 
securities to be registered with the SEC. FINRA has refrained from 
providing interpretive guidance on whether a person is acting as an 
unregistered broker-dealer, as the authority to interpret Section 15(a) 
of the Exchange Act rests with the SEC. Registration as a broker-dealer 
provides a framework of rules to regulate the conduct of persons who 
receive transaction-based compensation, the receipt of which can create 
potential incentives for abusive sales practices. SEC guidance states 
that receipt of securities transaction-based compensation is an 
indication that a person is engaged in the securities business and that 
such person generally should be registered as a broker-dealer.

B. Proposed FINRA Rule 2040

    FINRA is proposing to adopt new FINRA Rule 2040 (Payments to 
Unregistered Persons), which eliminates the current NASD Non-Member 
Rules and related NYSE Non-Member Rules (discussed further below) and 
replaces them with a more straightforward rule. The proposed rule 
expressly aligns with Section 15(a) of the Exchange Act and its related 
guidance to determine whether registration as a broker-dealer is 
required for certain persons to receive transaction-related 
compensation. As further discussed in Item II.C. below, the proposed 
rule change was published for comment in Regulatory Notice 09-69.\11\ 
FINRA received seven comment letters. A significant number of the 
commenters expressed concern regarding the potential regulatory burden 
of obtaining SEC no-action letters to determine whether particular 
activities would require registration of persons as broker-dealers 
under Section 15(a) of the Exchange Act, and the proposed deletion of 
NASD Rule 1060(b) and NYSE Rule Interpretation 345(a)(i)/03 relating to 
payments to foreign finders. In an effort to respond to these concerns, 
FINRA is proposing to adopt Supplementary Material .01

[[Page 555]]

(Reasonable Support for Determination of Compliance with Section 15(a) 
of the Exchange Act) to proposed FINRA Rule 2040 to provide guidance to 
members regarding the manner in which they can reasonably support a 
determination that an unregistered person is not required to be 
registered under Section 15(a) of the Exchange Act by reason of 
receiving payments from the member and the activities related thereto. 
FINRA is also proposing to retain NASD Rule 1060(b) and NYSE Rule 
Interpretation 345(a)(i)/03 relating to foreign finders as proposed 
FINRA Rule 2040(c). The proposed rule sets forth the following 
requirements:
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    \11\ See Regulatory Notice 09-69 (December 2009).
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     Payments to Unregistered Persons
    FINRA is proposing to adopt new FINRA Rule 2040(a), which prohibits 
members or associated persons from, directly or indirectly, paying any 
compensation, fees, concessions, discounts, commissions or other 
allowances to:
    (1) Any person that is not registered as a broker-dealer under 
Section 15(a) of the Exchange Act but, by reason of receipt of any such 
payments and the activities related thereto, is required to be so 
registered under applicable federal securities laws and Exchange Act 
rules and regulations; or
    (2) any appropriately registered associated person, unless such 
payment complies with all applicable federal securities laws, FINRA 
rules and Exchange Act rules and regulations.
    The proposed change would make the rule consistent with FINRA staff 
interpretations under NASD Rule 2420 and SEC rules and regulations 
under Section 15(a) of the Exchange Act.\12\ Under the proposal, 
persons would look to SEC rules and regulations to determine whether 
the activities in question require registration as a broker-dealer 
under Section 15(a) of the Exchange Act. Persons may also rely on 
related published guidance issued by the SEC or its staff in the form 
of releases, no-action letters or interpretations. The proposal would 
align the rule with SEC staff guidance that states that receipt of 
securities transaction-based compensation is an indication that a 
person is engaged in the securities business and that such person 
generally should be registered as a broker-dealer. The proposed change 
also prohibits payments to appropriately registered associated persons 
unless such payments comply with applicable federal securities laws, 
FINRA rules and Exchange Act rules and regulations.
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    \12\ See FINRA Interpretative Letters issued under NASD Rule 
2420: Letter to Richard Schultz, Triad Securities Corp., dated 
December 28, 2007; Letter to Jonathan K. Lagemann, Esq., Law Offices 
of Jonathan Kord Lagemann, dated June 27, 2001; Letter to Jay Adams 
Knight, Esq., Musick, Peeler & Garrett LLP, dated March 8, 2001; and 
Letter to Michael R. Miller, Esq., Kunkel Miller & Hament, dated May 
31, 2000 (available at http://www.finra.org/Industry/Regulation/Guidance/InterpretiveLetters/ConductRules/index.htm).
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    FINRA is proposing to adopt Supplementary Material .01 (Reasonable 
Support for Determination of Compliance with Section 15(a) of the 
Exchange Act) to proposed FINRA Rule 2040 to provide guidance to 
members. In applying the proposed rule, FINRA will expect members to 
determine that their proposed activities would not require the 
recipient of the payments to register as a broker-dealer and to 
reasonably support such determination. Members that are uncertain as to 
whether an unregistered person may be required to be registered under 
Section 15(a) of the Exchange Act by reason of receiving payments from 
the member and the activities related thereto can derive support for 
their determination by, among other things, (1) reasonably relying on 
previously published releases, no-action letters or interpretations 
from the Commission or Commission staff that apply to their facts and 
circumstances; (2) seeking a no-action letter from the Commission 
staff; or (3) obtaining a legal opinion from independent, reputable 
U.S. licensed counsel knowledgeable in the area. The member's 
determination must be reasonable under the circumstances and should be 
reviewed periodically if payments to the unregistered person are 
ongoing in nature. In addition, a member must maintain books and 
records that reflect the member's determination.
     Retiring Representatives
    FINRA is also proposing to adopt new FINRA Rule 2040(b), which 
codifies existing FINRA staff guidance on the payment by members of 
continuing commissions to retiring registered representatives.\13\ The 
proposal permits members to pay continuing commissions to retiring 
registered representatives of the member, after they cease to be 
associated with the member, that are derived from accounts held for 
continuing customers of the retiring registered representative 
regardless of whether customer funds or securities are added to the 
accounts during the period of retirement, provided that: (1) A bona 
fide contract between the member and the retiring registered 
representative providing for the payments was entered into in good 
faith while the person was a registered representative of the member 
and such contract, among other things, prohibits the retiring 
registered representative from soliciting new business, opening new 
accounts or servicing the accounts generating the continuing commission 
payments; and (2) the arrangement complies with applicable federal 
securities laws and SEA rules and regulations.
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    \13\ See FINRA Interpretative Letters issued under NASD IM-2420-
2: Letter to Name Not Public, dated November 27, 2012; Letter to Ted 
A. Troutman, Esquire, Muir & Troutman, dated February 4, 2002; 
Letter to Joe Tully, Commonwealth Financial Network, dated August 9, 
2001; and Letter to Peter D. Koffer, Esq, Twenty-First Securities 
Corporation, dated January 21, 2000 (available at http://www.finra.org/Industry/Regulation/Guidance/InterpretiveLetters/ConductRules/index.htm).
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    The proposal defines the term ``retiring registered 
representative'' to mean an individual who retires from a member 
(including as a result of a total disability) and leaves the securities 
industry.\14\ In the case of death of the retiring registered 
representative, the retiring registered representative's beneficiary 
designated in the written contract or the retiring registered 
representative's estate if no beneficiary is so designated may be the 
beneficiary of the respective member's agreement with the deceased 
representative.
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    \14\ See SEC No-Action Letter to the Securities Industry and 
Financial Markets Association, 2008 SEC No-Act. LEXIS 695, November 
20, 2008. The letter provides that ``[t]he retiring representative 
must sever association with the Firm and with any municipal 
securities dealer, government securities dealer, investment adviser 
or investment company affiliates (except as may be required to 
maintain any licenses or registrations required by any state) and, 
is not permitted to be associated with any other broker, dealer, 
municipal securities dealer, government securities dealer, 
investment adviser or investment company, during the term of his or 
her agreement. The retiring representative also may not be 
associated with any bank, insurance company or insurance agency 
(affiliated with the Firm or otherwise) during the term of his or 
her agreement if the retiring representative's activities relate to 
effecting transactions in securities.'' See also SEC No-Action 
Letter to Amy Lee, Chief Compliance Officer, Co-CEO, Packerland 
Brokerage Services, 2013 SEC No-Act. LEXIS 237, March 18, 2013.
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    FINRA believes this proposal is consistent with staff guidance on 
the payment of compensation to retiring representatives.\15\
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    \15\ See supra note 14.
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     Nonregistered Foreign Finders
    In light of comments raised in response to Regulatory Notice 09-69, 
FINRA is proposing to transfer NASD Rule 1060(b) (Persons Exempt from 
Registration) and NYSE Rule Interpretation 345(a)(i)/03 (Compensation 
to Non-Registered Foreign Persons Acting as Finders) with minor 
technical changes into the Consolidated FINRA Rulebook as FINRA Rule 
2040(c).\16\ As approved by the SEC in 1993 and 1995, respectively, 
NYSE Rule Interpretation 345(a)(i)/03 and NASD Rule 1060(b) are largely

[[Page 556]]

identical provisions and provide that members and persons associated 
with a member may pay transaction-related compensation to nonregistered 
foreign finders, based upon the business of customers such persons 
direct to members, subject to identified conditions. FINRA is proposing 
non-substantive, technical changes to the proposed rule text to make it 
easier to read. Specifically, proposed FINRA Rule 2040(c) would provide 
that a member may pay to a nonregistered foreign finder (the 
``finder'') transaction-related compensation based upon the business of 
customers the finder directs to the member if the following conditions 
are met (``foreign finders exception''):
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    \16\ See supra note 11.
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    (1) The member has assured itself that the finder who will receive 
the compensation is not required to register in the United States as a 
broker-dealer nor is subject to a disqualification as defined in 
Article III, Section 4 of FINRA's By-Laws, and has further assured 
itself that the compensation arrangement does not violate applicable 
foreign law;
    (2) The finder is a foreign national (not a U.S. citizen) or 
foreign entity domiciled abroad;
    (3) the customers are foreign nationals (not U.S. citizens) or 
foreign entities domiciled abroad transacting business in either 
foreign or U.S. securities;
    (4) customers receive a descriptive document, similar to that 
required by Rule 206(4)-3(b) of the Investment Advisers Act of 1940 
(``Investment Advisers Act''), that discloses what compensation is 
being paid to finders;
    (5) customers provide written acknowledgment to the member of the 
existence of the compensation arrangement and such acknowledgment is 
retained and made available for inspection by FINRA;
    (6) records reflecting payments to finders are maintained on the 
member's books, and actual agreements between the member and the finder 
are available for inspection by FINRA; and
    (7) the confirmation of each transaction indicates that a referral 
or finders fee is being paid pursuant to an agreement.
    The rule provides that if all the conditions set forth in the rule 
are satisfied, members can pay transaction-related compensation to 
nonregistered foreign finders based on the business of non-U.S. 
customers that finders refer to members. Specifically, the rule permits 
compensation to ``be made on an ongoing basis and tied to such 
variables as the level of business generated or assets under control, 
notwithstanding the fact that the foreign finders' sole involvement 
would be the initial referral to a member.'' \17\ The SEC Foreign 
Finders Approval Order states that ``[t]he provision was intended to 
give members the opportunity to enhance their competitive position in 
foreign countries where new accounts are frequently opened on a 
referral basis with ongoing compensation for such referral.'' \18\
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    \17\ See Securities Exchange Act Release No. 32431 (June 8, 
1993), 58 FR 33128 (June 15, 1993) (Order Approving File No. SR-
NYSE-92-33 Relating to an Interpretation to NYSE Rule 345 
(Employees--Registration, Approval, Records)) (``SEC Approval Order 
of NYSE Rule 345 Interpretation''). See also Securities Exchange Act 
Release No. 35361 (February 13, 1995), 60 FR 9417 (February 17, 
1995) (Order Approving File No. SR-NASD-94-51) (``SEC Foreign 
Finders Approval Order'').
    \18\ See supra note 13.
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    Proposed FINRA Rule 2040(c) would have the same scope as the 
current rule and continue to allow ongoing transaction-based payments 
to nonregistered foreign finders under the limited circumstances set 
forth in the current rule. As in the current rule, ``[w]hile the 
foreign finders' sole involvement would be the initial referral to a 
member or member organization [of non-U.S. customers to the firm], 
compensation could be made on an ongoing basis and tied to such 
variables as the level of business generated or assets under control. 
All accounts referred by such foreign finders would be carried on the 
books of the member.'' \19\ Similar to NASD Rule 1060(b), any 
activities beyond the initial referral of non-U.S. customers and 
payment of transaction-based compensation for any such activities would 
not be within the permissible scope of the foreign finders exception as 
set forth in proposed FINRA Rule 2040(c). Based solely on its 
activities in compliance with proposed FINRA Rule 2040(c), the foreign 
finder would not be considered an associated person of the member. 
However, unless otherwise permitted by the federal securities laws or 
FINRA rules, a person who receives commissions or other transaction-
based compensation in connection with securities transactions generally 
has to be a registered broker-dealer or an appropriately registered 
associated person of a broker-dealer who is supervised by a broker-
dealer. Members that engage foreign finders would be required to have 
reasonable procedures that appropriately address the limited scope of 
activities permissible under such arrangements.\20\
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    \19\ See Securities Exchange Act Release No. 34941 (November 4, 
1994), 59 FR 56102 (November 10, 1994) (Notice of Filing of File No. 
SR-NASD-94-51). See also SEC Approval Order of NYSE Rule 345 
Interpretation.
    \20\ See SEC Foreign Finders Approval Order. FINRA notes that 
the scope of permissible activities and associated regulatory 
requirements differ between foreign finders and foreign associates, 
who are registered persons of the member. See also NASD Rule 1100 
(Foreign Associates).
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C. Amendments to FINRA Rule 8311

     FINRA Rule 8311
    FINRA is proposing amendments to FINRA Rule 8311 to eliminate 
duplicative provisions in NASD IM-2420-2 and to clarify the scope of 
the rule on payments by members to persons subject to suspension, 
revocation, cancellation, bar (each a ``sanction'') or other 
disqualification. The proposed rule provides that if a person is 
subject to a sanction or other disqualification, a member may not allow 
such person to be associated with it in any capacity that is 
inconsistent with the sanction imposed or disqualified status, 
including a clerical or ministerial capacity. The proposed rule further 
provides that a member may not pay or credit to any person subject to a 
sanction or disqualification, during the period of the sanction or 
disqualification or any period thereafter, any salary, commission, 
profit, or any other remuneration that the person might accrue, not 
just earn, during the period of the sanction or disqualification. 
However, a member may make payments or credits to a person subject to a 
sanction that are consistent with the scope of activities permitted 
under the sanction where the sanction solely limits an associated 
person from conducting specified activities (such as a suspension from 
acting in a principal capacity) or to a disqualified person that has 
been approved (or is otherwise permitted pursuant to FINRA rules and 
the federal securities laws) to associate with a member.
    Specifically, the proposal clarifies that:
    (1) Other disqualifications, not just suspensions, revocations, 
cancellations or bars, are subject to the rule (and the rule is not 
limited to orders issued by FINRA or the SEC);
    (2) a member may not allow a person subject to a sanction or 
disqualification to ``be'' associated with such member in any capacity 
that is inconsistent with the sanction imposed or disqualified status, 
including a clerical or ministerial capacity, not simply ``remain'' 
associated as provided in the current rule;
    (3) a member may not pay any remuneration to a person subject to a 
sanction or disqualification, not just payments that result directly or 
indirectly from any securities transaction; and

[[Page 557]]

    (4) the rule applies to any salary, commission, profit or 
remuneration that the associated person might ``accrue,'' not just 
``earn'' during the period of a sanction or disqualification, not just 
suspension.
    FINRA is also proposing to add a new paragraph to the rule that 
would expressly permit a member to pay to any person subject to a 
sanction or disqualification any remuneration pursuant to an insurance 
or medical plan, indemnity agreement relating to legal fees, or as 
required by an arbitration award or court judgment. FINRA believes that 
these exceptions strike the correct balance by permitting certain key 
payments.
     Proposed Supplementary Material .01
    In addition, FINRA is proposing to add new Supplementary Material 
.01 (Remuneration Accrued Prior to Effective Date of Sanction or 
Disqualification) that relates to commissions accrued by a person prior 
to the effective date of a sanction or disqualification. The proposed 
supplementary material would permit a member to pay a person that is 
subject to a sanction or disqualification remuneration that the member 
can evidence accrued to the person prior to the effective date of the 
sanction or disqualification. However, a member may not pay any 
remuneration that accrued to the person that relates to or results from 
the activity giving rise to the sanction or disqualification, and any 
such payment or credit must comply with applicable federal securities 
laws. FINRA believes that adopting this new provision is necessary to 
address questions by the industry on a member's ability to pay 
commissions and other remuneration that was accrued by the person prior 
to a sanction or disqualification going into effect. FINRA also 
believes the supplementary material, together with the proposed 
amendments discussed above, clarify that a member may not pay trail 
commissions to a person that may accrue during the period of the 
sanction or disqualification; rather, the member can only make such 
payments where the member can evidence that they accrued to the person 
prior to the effective date of the sanction or disqualification.

D. Adoption of New General Standard--FINRA Rule 0190

    In addition, FINRA is proposing to adopt a new general standard, 
proposed FINRA Rule 0190 (Effective Date of Revocation, Cancellation, 
Expulsion, Suspension or Resignation), that is based largely on 
provisions of NASD IM-2420-1(a) and would provide that a member will be 
treated as a non-member of FINRA from the effective date of any order 
or notice from FINRA or the SEC issuing a revocation, cancellation, 
expulsion or suspension of its membership. In the case of suspension, a 
member will be automatically reinstated to membership in FINRA at the 
termination of the suspension period.

E. NASD and NYSE Rules To Be Deleted

    FINRA proposes to eliminate the following NASD and NYSE Rules and 
related interpretations because FINRA believes that proposed FINRA Rule 
2040 simplifies and clarifies the meaning of such rules consistent with 
Section 15(a) of the Exchange Act. Specifically, NASD Rule 2410, NASD 
Rule 2420, NASD IM-2420-1, NASD IM-2420-2, NYSE Rule 353, NYSE Rule 
Interpretation 345(a)(i)/01 and NYSE Rule Interpretation 345(a)(i)/02 
will be consolidated into proposed FINRA Rule 2040, providing members 
with one concise rule that outlines the applicable requirements for 
payments to non-members.
     NASD Rule 2410
    NASD Rule 2410 (Net Prices to Persons Not in Investment Banking and 
Securities Business) prohibits payments or concessions by members to 
``any person not actually engaged in the investment banking or 
securities business.''
     NASD Rule 2420
    NASD Rule 2420 (Dealing with Non-Members) generally prohibits 
members from dealing with, or making payments to, non-member broker-
dealers, except at the same prices, fees or concessions offered to the 
general public. NASD Rule 2420(b) specifically prohibits members from 
joining any non-member broker-dealer syndicate or group in connection 
with the sale of securities. NASD Rule 2420(c) provides that members 
may pay concessions and fees to a non-member broker or dealer in a 
foreign country who is not eligible for membership, provided the member 
obtains an agreement from such foreign broker or dealer in making sales 
of securities within the United States that such foreign broker or 
dealer will act in accordance with the general requirements of the rule 
to prohibit the payment of concessions or discounts to non-members that 
are not allowed to the general public. NASD Rule 2420(d) provides 
restrictions on payments by or to persons that have been suspended or 
expelled.
     NASD IM-2420-1
    NASD IM-2420-1 (Transactions between Members and Non-Members) 
provides certain exemptions from the general prohibition on 
arrangements with non-members set forth in NASD Rule 2420. For example, 
the rule provides exemptions for arrangements with certain non-members 
relating to transactions in ``exempted securities,'' or transactions on 
a national securities exchange. The rule further clarifies that a firm 
that is suspended or expelled from FINRA membership, or whose 
registration is revoked by the SEC, is to be considered a non-member 
for purposes of the rule.
     NASD IM-2420-2
    NASD IM-2420-2 (Continuing Commissions Policy) allows members to 
pay continuing commissions to former registered representatives after 
they cease to be employed by a member, if, among other things, a bona 
fide contract between the member and the registered representative 
calling for the payments was entered into in good faith while the 
person was a registered representative of the employing member. The 
rule states that such contracts cannot permit the solicitation of new 
business or the opening of new accounts by persons who are not 
registered, and must conform with all applicable laws and regulations. 
The rule also provides that NASD Rule 2830(c) (Investment Company 
Securities, Conditions for Discounts to Dealers) should not be 
interpreted to require a sales agreement for a dealer to receive 
commissions on direct payments by clients or automatic dividend 
reinvestments. The rule further contains a prohibition on the payment 
of any kind by a member to any person who is not eligible for FINRA 
membership or eligible to be associated with a member because of any 
disqualification, such as revocation, expulsion or suspension that is 
still in effect. The rule recognizes the validity of contracts entered 
into in good faith to allow retired representatives to receive 
continuing compensation on their accounts or to designate a widow or 
other beneficiary; however, the rule states that members are not 
required to enter into such contracts and FINRA will not specify the 
terms of such contracts.
     NYSE Rule 353
    NYSE Rule 353 (Rebates and Compensation) prohibits a member, 
principal executive, registered representative or officer from, 
directly or indirectly, rebating to any person any part of the 
compensation he receives from the solicitation of orders for the 
purchase or sale of securities or other similar instruments for the 
accounts of customers of the member, or pay such compensation, or any 
part thereof, as a bonus, commission, fee or other consideration for 
business sought or procured for him or for any other

[[Page 558]]

member. NYSE Rule 353(b) further provides that a member, principal 
executive, registered representative or officer cannot be compensated 
for business done by or through his employer after the termination of 
his employment except as may be permitted by the NYSE.
     NYSE Rule Interpretations 345(a)(i)/01 and/02
    NYSE Rule Interpretation 345(a)(i)/01 (Compensation to Non-
Registered Persons) prohibits a member from paying to nonregistered 
persons compensation based upon the business of customers they direct 
to the member if such compensation is, among other things, formulated 
as a direct percentage of commissions generated and is other than on an 
isolated basis.
    NYSE Rule Interpretation 345(a)(i)/02 (Compensation Paid for 
Advisory Solicitations) provides that a member that is also registered 
with the SEC as an investment adviser may enter into arrangements that 
comply with Rule 206(4)-3 (Cash Payments for Client Solicitations) of 
the Investment Advisers Act.

III. Description of Comments on the Proposal and FINRA's Response

    As noted above, the Commission received seven comment letters in 
response to the Notice of Filing.\21\ Four commenters generally 
supported FINRA's efforts to consolidate and streamline rules relating 
to payments to unregistered persons.\22\ Several commenters suggested 
changes to the proposed rules, which are discussed further below.
---------------------------------------------------------------------------

    \21\ See note 4, supra.
    \22\ SIFMA, NASAA, Cornell and ABA.
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A. Proposed FINRA Rule 2040(a) and the Focus on Receipt of Transaction 
Based Compensation

    One commenter stated that it supports proposed Rule 2040(a) but 
seeks clarity on proposed Supplementary Material .01 (Reasonable 
Support for Determination of Compliance with Section 15(a) of the 
Exchange Act), which is discussed in detail in Section III.D. 
below.\23\ One commenter expressed concern that, without a clear 
regulatory framework in place, the receipt of transaction-based 
compensation will lead to abusive practices.\24\ As such, the commenter 
believed that registration should be required for individuals that 
receive transaction-based compensation because ``such registration is 
integral to the regulation of firms and individuals . . . and 
exceptions to this principle should be rare, and when implemented they 
should be highly prescriptive.'' \25\
---------------------------------------------------------------------------

    \23\ SIFMA.
    \24\ NASAA.
    \25\ Id.
---------------------------------------------------------------------------

    One commenter disagreed with FINRA's focus on the ``receipt of 
transaction-based compensation'' as the main factor for determining 
whether registration as a broker-dealer is required.\26\ The commenter 
specifically cited recent case law pointing to other factors.\27\ The 
commenter stated that FINRA should consider all of the relevant factors 
before FINRA and the SEC adopt any new rule by which a firm can 
determine whether a person must register in accordance with Section 
15(a) of the Exchange Act.\28\ The commenter suggested that FINRA 
either withdraw the proposed rule change or make substantial 
modifications to it to address these concerns.\29\
---------------------------------------------------------------------------

    \26\ Commonwealth.
    \27\ Id. (citing SEC v. Kramer, 778 F. Supp. 2nd 1320 (M.D. Fla. 
2011) and SEC v. John J. Bravata, et al., Civil Action No. 09-cv-
12950 (E.D. Mich.) (Lawson, J.).
    \28\ Commonwealth.
    \29\ Id.
---------------------------------------------------------------------------

    FINRA disagrees that the proposed rule focuses only on the receipt 
of transaction-based compensation as the determinative factor for who 
is required to register as a broker-dealer under the Exchange Act.\30\ 
FINRA states that while the proposed rule change does specifically 
include ``receipt of any such payments,'' as a factor, the proposed 
text also expressly includes ``and the activities related thereto.'' 
\31\ FINRA recognizes that SEC guidance in this area provides that 
certain activities may be deemed (alone or in combination) to confer 
``broker'' status,\32\ and the receipt of transaction-based 
compensation coupled with these activities may trigger the requirement 
to register as a broker-dealer under the Exchange Act.\33\ FINRA 
believes the proposed rule change is consistent with current SEC rules 
and guidance.\34\
---------------------------------------------------------------------------

    \30\ FINRA Response at 4.
    \31\ Id.
    \32\ See Paul Anka, SEC No-Action Letter (available July 24, 
1991). See also Muni Auction Inc., SEC No-Action Letter (available 
March 13, 2000) and Bond Globe, Inc., SEC No-Action Letter 
(available February 6, 2001).
    \33\ FINRA Response at 4.
    \34\ Id.
---------------------------------------------------------------------------

B. Proposed FINRA Rule 2040(b)--Retiring Representatives

    Three commenters supported FINRA's proposed creation of a concise 
regulatory framework regarding the payment of continuing commissions to 
retiring registered representatives by member firms and noted that the 
proposed rule effectively consolidates existing guidance.\35\ In 
contrast, one commenter stated that the proposal should be more 
explicit on the restrictions surrounding continuing compensation that 
can be paid to retired representatives.\36\ The commenter noted that 
FINRA makes reference to and asserts a similarity between its current 
proposal and the prior SEC no-action letter issued to SIFMA on the 
topic, but NASAA believed that the staff guidance contains a more 
detailed discussion of the topic.\37\ While the proposed rule does not 
expressly list each condition set forth in prior SEC no-action letters, 
FINRA believes that the proposed rule change incorporates the prior 
guidance issued by the SEC staff by expressly requiring that any 
proposed arrangement with a retiring representative must comply with 
federal securities laws and Exchange Act rules and regulations.\38\
---------------------------------------------------------------------------

    \35\ SIFMA, ABA and IMS.
    \36\ NASAA.
    \37\ Id.
    \38\ FINRA Response at 4.
---------------------------------------------------------------------------

C. Proposed FINRA Rule 2040(c)--Non Registered Foreign Finders

1. Support for Retaining NASD Rule 1060(b)
    In Regulatory Notice 09-69, FINRA had initially proposed to delete 
NASD Rule 1060(b) because it believed the activity should be governed 
by the general requirements of proposed FINRA Rule 2040(a). However, 
based on the comments received in response to Regulatory Notice 09-69, 
FINRA proposed to transfer NASD Rule 1060(b) unchanged into the 
consolidated FINRA rulebook. One commenter largely supported the 
proposed rule change, but seeks clarification of certain language.\39\ 
Three commenters expressed concern that FINRA missed the opportunity to 
provide much needed clarity in the area of foreign finders and the 
compensation they can be paid.\40\ One commenter expressed concern that 
proposed Rule 2040(c) and Supplementary Material .01 ``create overly 
broad and vaguely defined safe havens for nonregistered individuals 
that receive payments related to securities transactions.'' \41\
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    \39\ SIFMA.
    \40\ IMS, Plexus and Commonwealth.
    \41\ Cornell.
---------------------------------------------------------------------------

2. Clarification That Foreign Finder Under Rule 2040(c) Is Not a 
``Person Associated With a Member''
    One commenter urged FINRA to clarify that a foreign finder is not a 
``person associated with a member,'' as that term is defined under the 
FINRA

[[Page 559]]

By-Laws.\42\ The commenter expressed concern that by relocating this 
provision, which is currently contained in NASD Rule 1060(b) to new 
FINRA Rule 2040, FINRA may not have fully incorporated existing 
guidance and may have ``changed the character of the provision from a 
registration `safe harbor' to a prescriptive rule that sets forth the 
only permissible basis on which transaction-based compensation may be 
paid to a foreign finder.'' \43\
---------------------------------------------------------------------------

    \42\ ABA.
    \43\ Id.
---------------------------------------------------------------------------

3. Proposed Changes to Rule Text
    One commenter recommended that proposed Rule 2040(c)(1) be amended 
to eliminate the use of a subjective ``assurance'' standard by revising 
the language to read: ``the finder who will receive the compensation is 
not required to register in the United States as a broker dealer nor is 
subject to disqualification as defined in Article III, Section 4 of 
FINRA's By-Laws, and the compensation arrangement does not violate 
applicable foreign law.'' \44\ The commenter stated that the 
``assurance'' standard is unacceptably subjective because it depends on 
a specific member's knowledge, resources, and discretion and 
institutional investment firms may be able to hire outside counsel to 
determine whether a given transaction would violate foreign law, 
whereas a smaller firm may perform its own research and (incorrectly) 
conclude that the same transaction does not violate foreign law.\45\
---------------------------------------------------------------------------

    \44\ Cornell.
    \45\ Id.
---------------------------------------------------------------------------

    One commenter suggested that proposed Rule 2040(c)(2) and (3) 
should be amended to permit members to focus on the residency, instead 
of the citizenship, of customers as this provides a ``brighter and more 
enforceable line for all concerned and that the Commission has 
recognized residency as a better policy guide for the proper 
application of the broker-dealer registration requirements, except in 
very limited circumstances.'' \46\ The commenter believed that the 
requirements in the proposed rule change that finders not be U.S. 
citizens and customers be foreign nationals (not U.S. citizens) impose 
an undue burden.\47\
---------------------------------------------------------------------------

    \46\ ABA.
    \47\ Id.
---------------------------------------------------------------------------

    One commenter stated that the conditions a firm must satisfy to 
rely on proposed Rule 2040(c) (e.g., determining whether the finder is 
not required to register as a U.S. broker-dealer and not subject to a 
disqualification under FINRA's By-Laws, the compensation arrangement 
does not violate applicable foreign law, etc.) will increase compliance 
costs for firms, particularly when outside counsel has to be 
retained.\48\ In addition, the commenter noted that the additional 
disclosure requirements and recordkeeping requirements would be costly 
for firms, especially for small firms.\49\
---------------------------------------------------------------------------

    \48\ IMS.
    \49\ Id.
---------------------------------------------------------------------------

3. Scope of Foreign Finders Proposal Is Not Comprehensive
    Two commenters expressed concern that the scope of the proposed 
rule change appears to be too restrictive.\50\ Both commenters stated 
that as a result of language in the Proposing Release that proposed 
Rule 2040(c) permits compensation when the foreign finder's sole 
involvement is the initial referral to the member, any activities 
beyond the initial referral of non-U.S. customers and payment of 
transaction-based compensation for any such activities ``would not be 
within the permissible scope of the foreign finders exception as set 
forth in proposed FINRA Rule 2040(c).'' \51\
---------------------------------------------------------------------------

    \50\ SIFMA and ABA.
    \51\ Id.
---------------------------------------------------------------------------

    One commenter stated that the Existing Nonregistered Foreign Finder 
Rules include NASD Rule 1060(b) and NYSE Rule Interpretation 345(a)(i)/
03 as a safe harbor, not as an exclusive means of compliance with the 
Existing Nonregistered Foreign Finder Rules, and requested that the 
proposed rule language be clarified with the use of the phrase ``unless 
otherwise permitted by the federal securities laws or FINRA rules,'' 
because there may be other permissible activities, beyond the initial 
referral, that would be within the permissible scope of the foreign 
finders exception.\52\ One commenter recommended that FINRA clarify the 
proposed rule text to permit the payment of compensation to foreign 
finders so long as the activities of the foreign finder are otherwise 
permitted.\53\ The commenter also argued that the inclusion of the word 
``sole'' in the Proposing Release is unnecessarily restrictive and 
anti-competitive.\54\
---------------------------------------------------------------------------

    \52\ SIFMA.
    \53\ ABA.
    \54\ Id.
---------------------------------------------------------------------------

    One commenter requested additional guidance to assist in the 
implementation and operation of proposed Rule 2040(c).\55\ 
Specifically, the commenter noted that proposed Rule 2040(c)(4) 
requires that ``customers receive a descriptive document, similar to 
that required by Rule 206(4)-3(b) of the Investment Advisers Act, that 
discloses what compensation is being paid to finders.'' \56\ The 
commenter stated that investment advisers must disclose the additional 
amount that will be charged to the investment advisory fee (normally 
expressed as a percent of assets under management) and the differential 
attributable to the finder arrangement and, in general, the nature of 
fees between an investment adviser and its clients differ from the 
nature of fees between a broker-dealer and its customers.\57\ 
Therefore, the commenter believed that it would be useful to have 
examples of how the condition would operate.\58\
---------------------------------------------------------------------------

    \55\ SIFMA.
    \56\ Id.
    \57\ Id.
    \58\ Id.
---------------------------------------------------------------------------

    One commenter believed that the proposed rule would provide the SEC 
with an opportunity to provide clarity in the area of finders and, 
moreover, argued that allowing FINRA to adopt the SEC's standard is not 
efficient.\59\ The commenter expressed concern about the certain staff 
guidance, in particular the Paul Anka SEC no-action letter, which it 
argued narrowed the issue to whether a transaction fee is paid.\60\ The 
commenter further stated that the industry believes it is safe to pay 
fixed fees to employees or finder/consultants and urged the Commission 
to provide clarity on the Paul Anka letter and the transaction fee 
test.\61\
---------------------------------------------------------------------------

    \59\ Plexus.
    \60\ Id.
    \61\ Id.
---------------------------------------------------------------------------

4. FINRA Response
    FINRA responds that it has proposed to transfer NASD Rule 1060(b) 
unchanged into the consolidated rulebook in response to comments it 
received on Regulatory Notice 09-69.\62\ FINRA states that the proposed 
rule change does not seek to address all circumstances under which 
payments may be made by U.S. broker dealers to foreign finders.\63\ In 
addition, the proposed rule carries over a narrow safe harbor that 
permits a firm to pay on-going compensation to a foreign finder under 
the conditions set forth in the provision.\64\ FINRA recognizes that 
the proposed rule change does not address all open issues with respect 
to the payment of transaction-based compensation to foreign finders, 
but believes that this type of comprehensive rulemaking or guidance is 
outside the

[[Page 560]]

scope of this proposal.\65\ To the extent that additional interpretive 
issues remain, FINRA plans to work with SEC staff on issuing related 
guidance, as appropriate.\66\
---------------------------------------------------------------------------

    \62\ FINRA Response at 7.
    \63\ Id.
    \64\ Id.
    \65\ Id.
    \66\ Id.
---------------------------------------------------------------------------

    FINRA declines to amend the proposed rule text or provide examples 
as suggested by the commenters as it is not proposing to make any 
substantive changes to the provision.\67\ FINRA does not intend to 
change the meaning or scope of the proposed provision or its related 
guidance by relocating the provision from the Series 1000 rules of the 
NASD rulebook to the Series 2000 rules of the FINRA rulebook. Similar 
to NASD Rule 1060(b) and NYSE Rule Interpretation 345(a)(i)/03, 
proposed Rule 2040(c) is not intended to be the only means by which a 
member may pay compensation to a foreign finder. FINRA states that 
members may rely on other applicable federal securities laws and 
regulations where the activities of a foreign finder go beyond the 
scope permitted by the proposed rule (e.g., the initial referral of a 
customer to the member).\68\
---------------------------------------------------------------------------

    \67\ FINRA Response at 8.
    \68\ Id.
---------------------------------------------------------------------------

    FINRA also reiterates that, as stated in the Proposing Release, 
based solely on its activities in compliance with proposed FINRA Rule 
2040(c), the foreign finder would not be considered an associated 
person of the member.\69\ Further, FINRA believes the word ``solely'' 
is critical and that any activities by the foreign finder beyond the 
initial referral of the customer would no longer allow a firm to rely 
on the ``safe harbor'' established by the proposed rule and may require 
registration under Section 15(a) of the Exchange Act or result in 
association with the member under the FINRA By-Laws.\70\ Therefore, 
FINRA maintains that the inclusion of this restriction is not new and 
has always been understood to be part of the provision.
---------------------------------------------------------------------------

    \69\ Id.
    \70\ Id.
---------------------------------------------------------------------------

D. Proposed FINRA Rule Supplementary Material .01 (Reasonable Support 
for Determination of Compliance With Section 15(a) of the Exchange Act)

1. Requests To Clarify Scope and Terms
    Four commenters had concern with the scope and requirements of 
proposed Supplementary Material .01.\71\ Specifically, these commenters 
expressed concern with the third prong of the proposed rule that allows 
a firm to obtain a ``legal opinion'' from independent and reputable 
U.S. licensed counsel.\72\ The commenters stated that seeking SEC no-
action letters or opinions of ``outside'' ``reputable'' and 
``knowledgeable'' counsel will be burdensome and costly, especially for 
small firms. One commenter argued that, among other burdens, the 
proposal would mean that in-house counsel is automatically disqualified 
from rendering such an opinion, even if that counsel is prepared and 
qualified, by reputation and knowledge, to issue an objective 
opinion.\73\ One commenter urged FINRA to provide greater flexibility 
in the range of measures that a member firm may rely on to ``reasonably 
support'' its determination and suggested that proposed Rule 2040(a)(3) 
be amended to provide that a member firm support its determination 
based on ``advice of knowledgeable outside counsel'' and make clear 
that the enumerated bases for determining that the necessary 
``reasonable support'' exists are not exclusive.\74\
---------------------------------------------------------------------------

    \71\ See ABA, SIFMA, IMS and Cornell.
    \72\ Id.
    \73\ IMS.
    \74\ ABA.
---------------------------------------------------------------------------

    One commenter stated that determining whether counsel is 
``reputable'' or ``knowledgeable in the area'' depends on the market in 
which he or she practices and the member's discretion and requested 
clarification as to whether ``area'' refers to geography or legal 
practice.\75\ One commenter stated that the concepts of ``reputable'' 
and ``knowledgeable'' are subjective and the costs of implementing 
``these mandates are likely prohibitive and disproportionate to any 
economic benefit the firm might receive.'' \76\ One commenter requested 
further guidance to illustrate the standard ``reasonable under the 
circumstances'' as well as guidance on the expected frequency of the 
periodic review.\77\
---------------------------------------------------------------------------

    \75\ Cornell.
    \76\ IMS.
    \77\ SIFMA.
---------------------------------------------------------------------------

2. Other Comments
    Three commenters believed that FINRA should provide greater clarity 
on when and under what circumstances payments to unregistered foreign 
finders are permitted.\78\ One commenter objected to the proposed rule 
arguing that, instead of providing clarity, FINRA has imposed five 
additional conditions by proposing Supplementary Material .01.\79\ The 
commenter further argued that FINRA did not address the impact of the 
proposed rule change on several activities that may be exempt from 
broker-dealer registration through SEC or FINRA guidance.\80\
---------------------------------------------------------------------------

    \78\ IMS, Commonwealth, and Plexus.
    \79\ IMS.
    \80\ Id.
---------------------------------------------------------------------------

    One commenter asserted that the addition of this Supplementary 
Material .01 mitigates some of the concerns previously raised by them 
in response to Regulatory Notice 09-69, but they remain concerned with 
the complex issues surrounding the compensation of unregistered persons 
that they stated is largely unaddressed by the current proposal.\81\
---------------------------------------------------------------------------

    \81\ NASAA.
---------------------------------------------------------------------------

    One commenter stated that the ``reasonable reliance'' standard in 
Supplementary Material .01 depends almost entirely on the judgment of 
broker-dealers that have a financial incentive to interpret materials 
broadly.\82\ Further, the commenter stated that although the 
Supplementary Material is intended to mitigate the burden of 
determining whether Section 15(a) requires registration, the 
uncertainty of a ``reasonable reliance'' standard invites a much 
costlier alternative: private dispute resolution, administrative 
hearings, or litigation.\83\
---------------------------------------------------------------------------

    \82\ Cornell.
    \83\ Id.
---------------------------------------------------------------------------

3. FINRA's Response
    FINRA states that it is proposing to adopt Supplementary Material 
.01 because it recognizes the potential costs and burdens of obtaining 
a firm-specific, no-action letter from the SEC.\84\ The proposed 
supplementary material is intended to clarify that firms may rely on 
other means to demonstrate compliance and provides firms with the 
flexibility to rely on other options that may be less costly and time 
consuming.\85\
---------------------------------------------------------------------------

    \84\ FINRA Response at 9.
    \85\ FINRA Response at 9-10.
---------------------------------------------------------------------------

    FINRA does not intend proposed Supplementary Material .01 to be an 
exhaustive list by which firms can make a reasonable determination.\86\ 
FINRA states that a legal opinion from independent, reputable U.S. 
licensed counsel knowledgeable in the area is not the only means 
available to firms. FINRA notes that firms may continue to rely on the 
advice of in-house counsel or foreign counsel under prong 1 that 
permits a firm to make a determination by ``reasonably relying on 
previously published releases, no-action letters or interpretations 
from the Commission or Commission staff that apply to its facts and 
circumstances.'' \87\
---------------------------------------------------------------------------

    \86\ FINRA Response at 10.
    \87\ Id.
---------------------------------------------------------------------------

    FINRA declines to define how frequently a firm must review its 
determination under the proposed rule

[[Page 561]]

because the review must be reasonable based on the nature and scope of 
the activity in question and therefore requires a factual review. FINRA 
believes, however, that an annual review for on-going payments 
generally would be reasonable, absent evidence of activities by the 
recipient of the payments that raise red flags.\88\
---------------------------------------------------------------------------

    \88\ Id.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    The Commission has carefully considered the proposal, the comments 
received, and FINRA's responses to the comments. Based on its review of 
the record, the Commission finds that the proposal is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities association.\89\
---------------------------------------------------------------------------

    \89\ In approving the proposal, as amended, the Commission has 
considered the impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    In particular, the Commission finds that the proposed rule change 
is consistent with the provisions of Section 15A(b)(6) of the Act, 
which requires, among other things, that FINRA's rules be designed to 
prevent fraudulent and manipulative acts and practices; promote just 
and equitable principles of trade; and, in general, protect investors 
and the public interest.\90\
---------------------------------------------------------------------------

    \90\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The proposed rule change will clarify and streamline several NASD 
and NYSE rules relating to payments to unregistered persons for 
adoption as FINRA Rules in the new Consolidated FINRA Rulebook. 
Specifically, proposed FINRA Rule 2040(a) aligns with Section 15(a) of 
the Exchange Act and its related guidance to determine whether 
registration as a broker-dealer is required for certain persons to 
receive transaction-related compensation; proposed FINRA Rule 2040(b) 
codifies existing FINRA guidance on the payment by members of 
continuing commissions to retiring registered representatives 
consistent with the Commission's guidance in this area; and proposed 
FINRA Rule 2040(c) adopts the foreign finders provisions of NASD Rule 
1060(b) and NYSE Rule Interpretation 345(a)(i)/03 with technical 
changes. The amendments to FINRA Rule 8311 eliminate duplicate 
provisions in NASD IM-2420-2 and clarify the scope of the rule on 
payments by members to persons subject to sanctions. Commenters' 
suggestions that the SEC (or FINRA) provide additional guidance on 
``finders'' are outside the scope of this rule filing, and thus outside 
the scope of this order.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\91\ that the proposed rule change (SR-FINRA-2014-037) be, and 
hereby is, approved.
---------------------------------------------------------------------------

    \91\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\92\
---------------------------------------------------------------------------

    \92\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2014-30892 Filed 1-5-15; 8:45 am]
BILLING CODE 8011-01-P


