[Federal Register Volume 75, Number 159 (Wednesday, August 18, 2010)]
[Notices]
[Pages 51147-51148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20365]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62702; File No. SR-FINRA-2010-026]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving the Proposed Rule Change To Adopt
FINRA Rule 5121 (Public Offerings of Securities With Conflicts of
Interest) in the Consolidated FINRA Rulebook
August 12, 2010.
I. Introduction
The Financial Industry Regulatory Authority, Inc. (``FINRA'') (f/k/
a National Association of Securities Dealers, Inc. (``NASD'')) filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
on May 20, 2010, pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposal to adopt FINRA Rule 5121 (Public Offerings of Securities With
Conflicts of Interest) (``Rule'') in the Consolidated FINRA Rulebook.
This proposal was published for comment in the Federal Register on June
4, 2010.\3\ The Commission received one comment on the proposal,\4\ and
a letter from FINRA responding to the comment letter.\5\ This order
approves this proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Exchange Act Release No. 62199 (June 1, 2010), 75 FR 31825
(June 4, 2010) (SR-FINRA-2010-026).
\4\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Jeffrey W. Rubin, Chair, Committee on Federal Regulation of
Securities, American Bar Association dated June 22, 2010 (``ABA
letter'').
\5\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Stan Macel, Assistant General Counsel, FINRA, dated July 23,
2010 (``FINRA Response Letter'').
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II. Description of the Proposed Rule Change
As part of the process of developing a new consolidated rulebook
(``Consolidated FINRA Rulebook''),\6\ FINRA proposed to adopt NASD Rule
2720 (Public Offerings of Securities With Conflicts of Interest)
without material change as FINRA Rule 5121 in the Consolidated FINRA
Rulebook.
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\6\ The current FINRA rulebook consists of (1) FINRA Rules; (2)
NASD Rules; and (3) rules incorporated from NYSE (``Incorporated
NYSE Rules'') (together, the NASD Rules and Incorporated NYSE Rules
are referred to as the ``Transitional Rulebook''). While the NASD
Rules generally apply to all FINRA members, the Incorporated NYSE
Rules apply only to those members of FINRA that are also members of
the NYSE (``Dual Members''). The FINRA Rules apply to all FINRA
members, unless such rules have a more limited application by their
terms. For more information about the rulebook consolidation
process, see Information Notice, March 12, 2008 (Rulebook
Consolidation Process).
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NASD Rule 2720 governs public offerings of securities in which a
member with a conflict of interest participates. The rule generally
prohibits a member with a ``conflict of interest,'' as defined in the
rule,\7\ from participating in a public offering, unless certain other
requirements are met.\8\
[[Page 51148]]
There is no comparable Incorporated NYSE Rule.
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\7\ As defined in NASD Rule 2720(f)(5), a conflict of interest
exists, if at the time of a member's participation in an entity's
public offering, any of the following four conditions applies: (1)
The securities are to be issued by the member; (2) the issuer
controls, is controlled by or is under common control with the
member or the member's associated persons; (3) at least five percent
of the net offering proceeds, not including underwriting
compensation, are intended to be (i) used to reduce or retire the
balance of a loan or credit facility extended by the member, its
affiliates and its associated persons, in the aggregate; or (ii)
otherwise directed to the member, its affiliates and associated
persons, in the aggregate; or (4) if, as a result of the public
offering and any transactions contemplated at the time of the public
offering (i) the member will be an affiliate of the issuer; (ii) the
member will become publicly owned; or (iii) the issuer will become a
member or form a broker-dealer subsidiary. NASD Rule 2720 defines
several terms for purposes of the rule, including ``entity,''
``control,'' and ``common control.''
\8\ The rule requires prominent disclosure of the nature of the
conflict, and in certain circumstances, the participation of a
qualified independent underwriter. Members also must comply with
certain net capital, discretionary accounts and filing requirements,
as applicable.
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On June 15, 2009, the SEC approved a proposed rule change to
modernize NASD Rule 2720 (the ``2009 Rule Change'').\9\ The 2009 Rule
Change became effective on September 14, 2009.\10\
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\9\ See Securities Exchange Act Release No. 60113 (June 15,
2009), 74 FR 29255 (June 19, 2009) (File No. SR-FINRA-2007-009).
\10\ See Regulatory Notice 09-49 (SEC Approves Amendments to
Modernize and Simplify NASD Rule 2720 Relating to Public Offerings
in Which a Member Firm With a Conflict of Interest Participates)
(August 2009).
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The proposed rule change would adopt NASD Rule 2720 without
material change as FINRA Rule 5121 in the Consolidated FINRA Rulebook.
The proposal would make minor changes to the Rule to reflect the new
terminology conventions of the Consolidated FINRA Rulebook.
III. Comment Letters
The Commission received one comment letter in response to the
proposed rule change.\11\ The Commission also received FINRA's response
to comments.\12\ While the commenter had no objection to the proposal
itself to move NASD Rule 2720 without material change into the
Consolidated FINRA Rulebook, the commenter did offer a number of
comments about the substance of the Rule. The specific comments from
this letter, as well as FINRA's response, are discussed in detail
below.
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\11\ See ABA Letter.
\12\ See FINRA Response Letter.
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The commenter suggested that FINRA clarify what ``participation in
a public offering'' means for purposes of the Rule and suggested an
alternative definition. FINRA responded that ``participation in a
public offering'' for purposes of the Rule are already widely
understood and that the alternative definition suggested by the
commenter would be an inappropriate narrowing of the Rule.
The commenter also suggested that FINRA clarify what ``primarily
responsible for managing the public offering'' means for purposes of
the Rule and suggested an alternative for the term. FINRA asserted that
the commenter's alternative would inappropriately narrow the
application of the Rule and that the Rule as written provided FINRA
flexibility to keep pace with developments in the underwriting process
while also acknowledging the varied roles its members play currently.
The commenter also offered an alternative to the experience
standard necessary to qualify as a ``qualified independent
underwriter'' under the Rule. FINRA recognized the issue raised by the
commenter and stated their intention to take a more comprehensive
review of the matter. FINRA also pointed out that they have exemptive
authority in extreme circumstances where the standard may unnecessarily
limit the availability of a qualified independent underwriter.
The commenter also suggested that FINRA clarify that the definition
of ``affiliate'' used in the Rule only applies to the Rule. FINRA did
not agree with this change and stated the thrust of this comment was
directed at rules beyond the rule proposal.
Lastly, the commenter suggested that FINRA amend the definition of
``entity'' used in the Rule to except financing instrument-backed
securities from being considered an ``entity'' for purposes of the
Rule. FINRA points out that these securities were purposefully not
included in the exceptions to the definition of ``entity.''
IV. Discussion and Findings
After careful review of the proposed rule change, the comment, and
FINRA's response to the comment, the Commission finds that the proposed
rule change is consistent with the requirements of the Act, and the
rules and regulations thereunder that are applicable to a national
securities association.\13\ In particular, the Commission 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 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 that the Rule continues regulation that protects investors in
offerings where the member has a conflict of interest. The Commission
also notes that FINRA is adopting NASD Rule 2720 into the Consolidated
FINRA Rulebook as FINRA Rule 5121 without material change.
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\13\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\14\ 15 U.S.C. 78o-3(b)(6).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (File No. SR-FINRA-2010-026) be,
and hereby is, approved.
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\15\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-20365 Filed 8-17-10; 8:45 am]
BILLING CODE 8010-01-P