[Federal Register Volume 75, Number 136 (Friday, July 16, 2010)]
[Notices]
[Pages 41562-41564]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-17356]
[[Page 41562]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62482; File No. SR-FINRA-2010-024]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change To Adopt FINRA
Rule 4210 (Margin Requirements), FINRA Rule 4220 (Daily Record of
Required Margin) and FINRA Rule 4230 (Required Submissions for Requests
for Extensions of Time Under Regulation T and SEC Rule 15c3-3) in the
Consolidated FINRA Rulebook
July 12, 2010.
I. Introduction
On May 14, 2010, Financial Industry Regulatory Authority, Inc.
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc.
(``NASD'')) filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt FINRA Rule 4210 (Margin Requirements),
FINRA Rule 4220 (Daily Record of Required Margin) and FINRA Rule 4230
(Required Submissions for Requests for Extensions of Time under
Regulation T and SEC Rule 15c3-3) as part of the process of developing
a consolidated FINRA rulebook. The proposed rule change was published
for comment in the Federal Register on June 8, 2010.\3\ The Commission
received no comments on the proposal. 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. 62205 (June 2,
2010), 75 FR 32519 (June 8, 2010).
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II. Description of the Proposal
As part of the process of developing a new consolidated rulebook
(``Consolidated FINRA Rulebook''),\4\ FINRA proposes to adopt (1) NASD
Rules 2520, 2521, 2522, and IM-2522 regarding margin requirements, (2)
NASD Rule 3160 regarding extension of time requests under Regulation T
and SEC Rule 15c3-3, and (3) Incorporated NYSE Rule 432(a) regarding
daily record of margin requirements as FINRA rules in the Consolidated
FINRA Rulebook, subject to certain amendments, and to delete
Incorporated NYSE Rule 431 (Margin Requirements), Incorporated NYSE
Rule 431 Interpretations,\5\ Incorporated NYSE Rule 432(b) and
Incorporated NYSE Rule 434 (Required Submissions of Requests for
Extension of Time for Customers). The proposed rule change would (1)
consolidate and renumber NASD Rules 2520, 2521, 2522 and IM-2522 as
FINRA Rule 4210 (Margin Requirements), (2) renumber NASD Rule 3160 as
FINRA Rule 4230 (Required Submissions for Requests for Extensions of
Time Under Regulation T and SEC Rule 15c3-3), and (3) renumber
Incorporated NYSE Rule 432(a) as FINRA Rule 4220 (Daily Record of
Required Margin) in the Consolidated FINRA Rulebook.
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\4\ 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 FINRA Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
\5\ See supra note 4.
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Margin Requirements--NASD Rules 2520, 2521, 2522, and IM-2522 and
Incorporated NYSE Rule 431
FINRA proposes to adopt the margin requirements set forth in NASD
Rules 2520 through 2522 and IM-2522 as FINRA Rule 4210, subject to
certain amendments, discussed below and to delete Incorporated NYSE
Rule 431 (Margin Requirements). The proposed amendments, among other
things, reflect certain requirements in Incorporated NYSE Rule 431.
NASD Rule 2520 (Margin Requirements) and Incorporated NYSE Rule
431, which are almost identical, prescribe requirements governing the
extension of credit by members that offer margin accounts to customers,
as generally permitted in accordance with Regulation T of the Board of
Governors of the Federal Reserve System (``Regulation T'').\6\ These
rules promulgate the margin requirements that determine the amount of
collateral customers are expected to maintain in their margin accounts,
including strategy-based margin accounts and portfolio margin accounts.
Maintenance margin requirements for equity, fixed income, warrants and
option securities also are established under these rules.
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\6\ See Regulation T, 12 CFR 220.4.
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Rule Structure
FINRA proposes to combine NASD Rules 2520, 2521, 2522 and IM-2522
into the single consolidated margin rule, FINRA Rule 4210. In addition,
FINRA proposes to re-structure the rule to improve its organization and
make it easier to read. First, FINRA proposes to incorporate NASD Rule
2521 (Margin--Exemption for Certain Members) as FINRA Rule 4210(h),
which provides that any member for which another self-regulatory
organization acts as the designated examining authority is exempt from
FINRA Rule 4210. Second, FINRA proposes to incorporate NASD Rule 2522
(Definitions Related to Options, Currency Warrants, Currency Index
Warrants and Stock Index Warrant Transactions) as FINRA Rule
4210(f)(2)(A), which contains definitions regarding margining options,
currency warrants, currency index warrants and stock index warrant
transactions.\7\ In so doing, FINRA proposes to delete extraneous
definitions and retain only those definitions that are pertinent to the
new rule. Third, FINRA proposes to combine the margin provisions
regarding currency warrants, currency index warrants and stock index
warrants from NASD Rule 2520(f)(10) together with similar sections in
paragraph (f)(2) of FINRA Rule 4210. All margin provisions regarding
such warrants were combined in a single section in corresponding
Incorporated NYSE Rule 431(f)(2), and FINRA proposes to follow this
model. FINRA believes combining all provisions in a single section
regarding such warrants will make the rule easier to read. Finally,
FINRA proposes to incorporate NASD IM-2522 (Computation of Elapsed
Days) as Supplementary Material to FINRA Rule 4210, which provides
illustrations on how to calculate the number of elapsed days for
accrued interest on Treasury bonds or notes.
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\7\ In this regard, FINRA proposes to adopt the model of
Incorporated NYSE Rule 431 of consolidating relevant definitions
into FINRA Rule 4210.
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Net Capital Calculations
FINRA proposes in several instances in FINRA Rule 4210 \8\ to
specify that the member should reference SEC Rule 15c3-1 and, if
applicable, FINRA Rule 4110 (Capital Compliance) when calculating net
capital, charges against net capital and haircut requirements. Members
that may be subject to greater net capital requirements pursuant to
FINRA Rule 4110 would need to ensure they are in compliance with both
the SEC and FINRA net capital provisions in calculating net capital and
its impact on margin calculations. In addition,
[[Page 41563]]
consistent with the corresponding Incorporated NYSE Rule 431
requirements, FINRA proposes to provide in FINRA Rule 4210(e)(5)(A) and
(B) (regarding specialists' and market makers' accounts), (e)(6)(A)
(regarding broker-dealer accounts) and (e)(6)(B)(i)c. (regarding joint
back office arrangements) that when computing charges against net
capital for transactions in securities covered by FINRA Rule
4210(e)(2)(F) (regarding transactions with exempt accounts involving
certain ``good faith'' securities) and FINRA Rule 4210(e)(2)(G)
(regarding transactions with exempt accounts involving highly rated
foreign sovereign debt securities and investment grade debt
securities), absent a greater haircut requirement that may have been
imposed on such securities pursuant to FINRA Rule 4110(a), the
respective requirements of those paragraphs may be used, rather than
the haircut requirements of SEC Rule 15c3-1.
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\8\ See, e.g., FINRA Rule 4210(e)(2)(D), (e)(2)(F), (e)(2)(G),
(e)(4), (e)(5) and (e)(6). Incorporated NYSE Rule 431 referenced
NYSE's net capital rules in these same sections, and FINRA proposes
to follow this model.
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Joint Accounts Exemption
FINRA proposes to integrate Incorporated NYSE Rule 431
Supplementary Material .10 into FINRA Rule 4210(e)(3) regarding joint
accounts in which the carrying member or a partner or stockholder
therein has an interest. The provision permits a member to seek an
exemption under the FINRA Rule 9600 Series if the account is confined
exclusively to transactions and positions in exempted securities.
Additional Requirements on Control and Restricted Securities and
Relationship to FINRA Rule 4120 (Regulatory Notification and Business
Curtailment)
FINRA proposes to adopt provisions from Incorporated NYSE Rule 431
pertaining to deductions from net capital on control and restricted
securities, which are not contained in NASD Rule 2520.\9\ These
provisions, which would be set forth in FINRA Rule 4210(e)(8)(C)(ii),
(iii) and (v), require that a member make deductions from its net
capital if it extends credit over specified thresholds, discussed
below, on control and restricted securities, and it must take such
deductions into account when determining if it has reached any of the
financial triggers specified in FINRA Rule 4120.\10\ The proposed rule
change also would make conforming amendments to FINRA Rule
4120(a)(1)(F) and (c)(1)(F) (Regulatory Notification and Business
Curtailment) to clarify that a member must take into account the
special deductions from net capital set forth in FINRA Rule
4210(e)(8)(C) in determining its status under FINRA Rule 4120.
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\9\ See Incorporated NYSE Rule 431(e)(8)(C)(ii), (iii) and (v).
\10\ FINRA Rule 4120 is based on Incorporated NYSE Rules 325 and
326, which were referenced in Incorporated NYSE Rule
431(e)(8)(C)(ii), (iii) and (v).
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Day Trading
FINRA proposes to adopt Supplementary Material .30 and .60 from
Incorporated NYSE Rule 431 regarding day trading in proposed FINRA Rule
4210(f)(8)(B). FINRA proposes to integrate Supplementary Material .60
from Incorporated NYSE Rule 431 in FINRA Rule 4210(f)(8)(B)(iii) to
provide that the day-trading buying power for non-equity securities may
be computed using the applicable special maintenance margin
requirements pursuant to other provisions of the margin rule. In
addition, FINRA proposes to adopt Supplementary Material .30 from
Incorporated NYSE Rule 431 as FINRA Rule 4210(f)(8)(B)(iv)b. to provide
that in the event that the member at which a customer seeks to open an
account or resume day trading in an existing account, knows or has a
reasonable basis to believe that the customer will engage in pattern
day trading, then the minimum equity required ($25,000) must be
deposited in the account prior to commencement of day trading. FINRA
also proposes to relocate paragraph (f)(8)(C) of NASD Rule 2520 into
FINRA Rule 4210(f)(8)(B)(iii) that specifies that day trading
deficiencies must be met within five business days of the trade date.
Portfolio Margining
FINRA proposes to amend FINRA Rule 4210(g)(5) to highlight to
members that portfolio margin-eligible participants, in addition to
being required to be approved to engage in uncovered short option
contracts pursuant to FINRA Rule 2360, must be approved to engage in
security futures transactions pursuant to FINRA Rule 2370.
Conforming Amendments
FINRA proposes to add the terms ``approved market maker,'' ``market
maker'' and ``market making'' to FINRA Rule 4210(f)(10)(F) to conform
to rule changes made by the NYSE.\11\ FINRA also proposes amending the
definitions of the same terms used in FINRA Rule 4210(e)(5)(A) and
(f)(10)(E) for consistency purposes.
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\11\ See Securities Exchange Act Release No. 59077 (December 10,
2008), 73 FR 76691 (December 17, 2008) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change by New York Stock
Exchange LLC Amending Exchange Rule 104T to Make a Technical
Amendment to Delete Language Relating to Orders Received by NYSE
Systems and DMM Yielding; Clarifying the Duration of the Provisions
of Rule 104T; Making Technical Amendments to Rule 98 and Rule 123E
to Update Rule References for DMM Net Capital Requirements;
Rescinding Paragraph (g) of Rule 123; and Making Conforming Changes
to Certain Exchange Rules to Replace the Term ``Specialist'' with
``DMM''; File No. SR-NYSE-2008-127).
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Clarifying and Technical Amendments
Finally, FINRA proposes to make several technical changes to the
margin rule text to update terminology and similar clarifications.
First, FINRA proposes to add definitions to FINRA Rule 4210(f)(2)(A)
regarding ``listed'' and ``OTC'' options and employ such terms
throughout FINRA Rule 4210(f)(2). FINRA is not proposing any
substantive changes to the margin requirements for listed or over-the-
counter options; rather, the proposed rule change would make the rule
easier to read by creating such definitions and using the terms
consistently throughout the rule text.
Second, in proposed FINRA Rule 4210(f)(2)(I)(iv), FINRA proposes
several clarifications to terminology where no margin may be required
if the specified options or warrants are carried ``short'' in the
account of a customer, against an escrow agreement, and either are held
in the account at the time the options or warrants are written, or
received in the account promptly thereafter. The proposed rule change
would clarify that with respect to such options or warrants, an escrow
agreement is used, in a form satisfactory to FINRA, issued by a third
party custodian bank or trust company, and in compliance with the
requirements of Rule 610 of The Options Clearing Corporation. The
corresponding provisions in Incorporated NYSE Rule 431 \12\ used the
terms ``letter of guarantee'' and ``escrow receipt'' while NASD Rule
2520 used the term ``letter of guarantee.'' While in this context such
terms generally were used interchangeably, FINRA proposes to use the
term ``escrow agreement'' to eliminate any potential confusion.\13\ The
proposed rule change also would replace the term ``guarantor'' with the
term ``custodian'' to more accurately reflect the third party's role.
In addition, the proposed rule change would revise the definition of
what constitutes a qualified security by eliminating the reference to
the list of Over-the-Counter Margin Stocks published by the Board of
Governors of the Federal Reserve
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System as the Federal Reserve no longer publishes such a list.
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\12\ See Incorporated NYSE Rule 431(f)(2)(H)(iv).
\13\ Such approach also is consistent with the CBOE rules. See
CBOE Rule 12.3(d).
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Third, the proposed rule change would insert the term ``aggregate''
before exercise price throughout proposed FINRA Rule 4210(f)(2)(H) and
(f)(2)(N) to clarify a calculation must be made in the strategies and
spreads that are noted (i.e., offsets, reverse conversions, butterfly
spread, etc.). Finally, the proposed rule change would make various
non-substantive changes to reflect the formatting, presentation and
style conventions used in the Consolidated FINRA Rulebook.
Daily Record of Margin Requirements--Incorporated NYSE Rule 432(a)
FINRA proposes to adopt Incorporated NYSE Rule 432(a) (Daily Record
of Required Margin) as FINRA Rule 4220 in substantially the form it
exists today. Incorporated NYSE Rule 432(a) sets forth the requirements
for daily recordkeeping of initial and maintenance margin calls that
are issued pursuant to Regulation T and the margin rules. There is no
corresponding NASD rule. FINRA believes that this is an important
requirement to heighten FINRA's ability to monitor members' margin call
practices. In addition, Incorporated NYSE Rule 432(b) prohibits a
member from allowing a customer to make a practice of satisfying
initial margin calls by the liquidation of securities. However, this
provision is substantially similar to the provision in proposed FINRA
Rule 4210(f)(7), except that the proposed FINRA rule provision does not
contain the exception for omnibus accounts. Accordingly, FINRA proposes
to eliminate Incorporated NYSE Rule 432(b) and modify paragraph (f)(7)
of FINRA Rule 4210 to add that the prohibition on liquidations shall
not apply to any account carried on an omnibus basis as prescribed by
Regulation T.
Required Submissions of Requests for Extension of Time Under Regulation
T and SEC Rule 15c3-3--NASD Rule 3160 and Incorporated NYSE Rule 434
FINRA proposes to adopt NASD Rule 3160 (Extensions of Time Under
Regulation T and SEC Rule 15c3-3) as FINRA Rule 4230 with one
modification discussed below and delete the substantively similar
Incorporated NYSE Rule 434 (Required Submission of Requests for
Extensions of Time for Customers). NASD Rule 3160 and Incorporated NYSE
Rule 434 set forth requirements governing members' requests for
extensions of time, as permitted in accordance with Regulation T and
SEC Rule 15c3-3(n). These rules provide that when FINRA is the
designated examining authority for a member, requests for extensions of
time must be submitted to FINRA for approval, in a format FINRA
requires. In addition, NASD Rule 3160 requires each clearing member
that submits extensions of time on behalf of broker-dealers for which
it clears to submit a monthly report to FINRA that indicates overall
ratios of requested extensions of time to total transactions that have
exceeded a percentage specified by FINRA.\14\ FINRA monitors the number
of Regulation T and SEC Rule 15c3-3 extension requests for each firm to
determine whether to impose prohibitions on further extensions of
time.\15\
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\14\ See Notice to Members 06-62 (November 2006). FINRA would
retain the reporting threshold specified in Notice to Members 06-62
of requiring a report for all introducing or correspondent firms
that have overall ratios of requests for extensions of time to total
transactions for the month that exceed 2%. In the event FINRA
adjusts the reporting threshold, or the limitation threshold stated
in note 15 below, it would advise members of the new parameters in a
Regulatory Notice.
\15\ See supra note 14. FINRA will continue to prohibit further
extension of time requests for (1) introducing or correspondent
firms that exceed a 3% ratio of the number of extension of time
requests to total transactions for the month and (2) clearing firms
that exceed a 1% ratio of extension of time requests to total
transactions.
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FINRA proposes to add a provision to proposed FINRA Rule 4230 to
clarify that for the months when no broker-dealer for which a clearing
member clears exceeds the extension of time ratio criteria (i.e., 2%),
the clearing member must submit a report indicating such. FINRA had
previously requested such submissions but believes the submissions are
essential to ensure FINRA has a complete and accurate understanding of
correspondent firm extension requests.
As stated in the notice, FINRA represented that it 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 180 days
following Commission approval.
III. Commission Findings
After careful consideration of the proposal, the Commission finds
that the proposed rule change is consistent with the requirements of
the Act and the rules and regulations thereunder applicable to a
national securities association.\16\ In particular, the Commission
finds that the proposal is consistent with Section 15A(b)(6) of the
Act,\17\ which requires, among other things, that FINRA's rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and, in general, to
protect investors and the public interest. The Commission believes the
proposed rule change will further the purposes of the Act by, among
other things, clarifying and streamlining the margin requirements
applicable to its members, as well as rules addressing extension of
time requests under Regulation T and Commission Rule 15c3-3 and daily
record of required margin. The Commission therefore believes that it is
appropriate and consistent with the Act for FINRA to adopt FINRA Rule
4210 (Margin Requirements), FINRA Rule 4220 (Daily Record of Required
Margin) and FINRA Rule 4230 (Required Submissions for Requests for
Extensions of Time under Regulation T and SEC Rule 15c3-3) in the
Consolidated FINRA Rulebook.
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\16\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\17\ 15 U.S.C. 78o-3(b)(6).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-FINRA-2010-024) be, and
hereby is, approved.
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\18\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-17356 Filed 7-15-10; 8:45 am]
BILLING CODE 8010-01-P