[Federal Register Volume 75, Number 197 (Wednesday, October 13, 2010)]
[Notices]
[Pages 62911-62913]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-25623]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63044; File No. SR-FINRA-2010-042]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment No. 1, Relating to FINRA Rule 4160 (Verification of Assets)
October 5, 2010.
I. Introduction
On August 4, 2010, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change that provides that a member, when
notified by FINRA, may not continue to custody or retain record
ownership of assets, at a non-member financial institution, which, upon
FINRA staff's request, fails promptly to provide FINRA with written
verification of assets maintained by the member at such financial
institutions. The proposed rule change was published for comment in the
Federal Register on August 11, 2010.\3\ The Commission received one
comment on the proposed rule change.\4\ On October 1, 2010, FINRA
responded to the comments and filed Amendment No. 1 to the proposed
rule change.\5\ The Commission is publishing this notice and order to
solicit comments on Amendment No. 1 and to approve the proposed rule
change, as modified by Amendment No. 1, on an accelerated basis.
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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. 62655 (August 5,
2010), 75 FR 48731 (August 11, 2010).
\4\ See Letter from Howard Spindel, Senior Managing Director,
and Cassondra E. Joseph, Managing Director, Integrated Management
Solutions USA LLC, dated August 30, 2010 (``IMS letter'').
\5\ See Amendment No. 1 dated October 1, 2010 (``Amendment No.
1''). The text of Amendment No. 1 is available on FINRA's Web site
at http://www.finra.org, at the principal office of FINRA, and on
the Commission's Web site, http://www.sec.gov/rules/sro.shtml.
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II. Description of Proposed Rule Change, as Modified by Amendment No. 1
FINRA has proposed to adopt FINRA Rule 4160 (Verification of
Assets). The proposed rule provides that a member, when notified by
FINRA, may not continue to custody or retain record ownership of
assets, at a non-member financial institution, which, upon FINRA
staff's request, fails promptly to provide FINRA with written
verification of assets maintained by the member at such financial
institution. The proposed rule change also would add a supplementary
material section to the new rule.
FINRA proposes new paragraph (b) in its Amendment No. 1. Paragraph
(b)(1) expressly excludes from the rule proprietary assets of members
that are treated as non-allowable assets pursuant to Rule 15c3-1 under
the Act. Paragraph (b)(2) provides that the rule would not apply in
instances where FINRA determines that there is no other available
independent custody or record ownership of the assets. Amendment No. 1
would also designate the original rule text as paragraph (a). Finally,
the Supplementary Material remains unchanged by Amendment No. 1.
The text of the proposed rule change, as modified by Amendment No.
1, is below. Proposed new language is underlined.
* * * * *
4000. FINANCIAL AND OPERATIONAL RULES
4100. FINANCIAL CONDITION
* * * * *
4160. Verification of Assets
(a) A member, when notified by FINRA, may not continue to custody
or retain record ownership of assets, whether such assets are
proprietary or
[[Page 62912]]
customer assets, at a financial institution that is not a member of
FINRA, which, upon FINRA staff's request, fails promptly to provide
FINRA with written verification of assets maintained by the member at
such financial institution.
(b) The Rule shall not apply:
(1) to proprietary assets of members that are treated as non-
allowable assets under SEA Rule 15c3-1; or
(2) in instances where FINRA determines that there is no
independent custody or record ownership of the assets.
Supplementary Material:
.01 Asset Transfers. Any member required to transfer its
proprietary and/or customer assets pursuant to this Rule shall effect
such transfer within a reasonable period of time.
.02 Member Obligations Under SEA Rule 15c3-3. Nothing in this Rule
shall be construed as altering in any manner a member's obligations
under SEA Rule 15c3-3.
* * * * *
III. Summary of Comment Letters and FINRA's Response
The Commission received one comment to the proposed rule change.\6\
The commenter opposed the proposal and asserted that the harm
outweighed any benefit of the proposed rule. Specifically, the
commenter indicated that certain assets are hard to verify and that the
proposed rule failed to differentiate among different types of
assets.\7\ The commenter suggested, among other things, that FINRA not
apply the rule to proprietary assets that are not allowable for net
capital purposes. The commenter further raised concerns that the
proposed rule would create an unwarranted burden on members, because it
fails to address instances where a particular asset cannot be relocated
from its country of origin or readily moved to another financial
institution.\8\ Additionally, the commenter asserted that the rule
``indirectly extends the extraterritorial application of the U.S.
securities laws,'' and that compliance with the rule may violate
foreign law. Finally, the commenter believed that instead of adopting
the proposed rule, FINRA should look at other asset verification
options and suggested the alternatives of conducting a study regarding
the necessity of the proposed rule or establishing a separate bureau
that would verify customers' statements against the books and records
of their broker-dealers.\9\
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\6\ IMS letter.
\7\ Id.
\8\ Id.
\9\ Id.
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FINRA filed Amendment No. 1 and responded to the comments.
Amendment No. 1 specifically addresses the commenter's suggestion that
the rule should not apply to proprietary assets of members that are not
allowable for net capital purposes. Accordingly, FINRA is proposing new
paragraph (b)(1) of the rule, which would expressly exclude from the
rule proprietary assets of members that are treated as non-allowable
assets pursuant to Rule 15c3-1 of the Act. Moreover, in response to the
commenter's concerns regarding the application of the proposed rule to
assets that cannot be relocated to another financial institution, such
as many limited partnership or hedge fund investments, FINRA is
proposing new paragraph (b)(2) of the rule, which provides that the
rule would not apply in instances where FINRA determines that there is
no independent custody or record ownership of the assets.
IV. Discussion and Commission Findings
After carefully considering the proposal, as modified by Amendment
No. 1, the comments, and FINRA's response, 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.\10\ In particular, the Commission
finds that the proposal is consistent with Section 6(b)(5) of the
Act,\11\ which requires, among other things, that the rules of an
exchange be designed to promote just and equitable principles of trade,
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, protect investors
and the public interest. The proposed rule change is consistent with
FINRA's statutory obligations under the Act to protect investors and
the public interest because it would enhance FINRA's ability to verify
assets at a financial institution which is not a member of FINRA.
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\10\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
\11\ 15 U.S.C. 78f(b)(5).
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The Commission believes that FINRA adequately addressed the
concerns raised by the commenter. The rule language in Amendment No. 1
specifically excludes proprietary assets that are not allowable for net
capital purposes. It also adequately addresses the commenter's concerns
regarding the application of the proposed rule to assets that cannot be
relocated to another financial institution, by adding paragraph (b)(2)
of the rule clarifies that the rule would not apply in instances where
FINRA determines that there is no other independent custody or record
ownership of the assets. The Commission believes the proposed rule, as
modified by Amendment No. 1, further strengthens FINRA's ability to
effectively detect fraud and protect investors.
V. Accelerated Approval
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act \12\ for approving the proposed rule change, as modified by
Amendment No. 1 thereto, prior to the 30th day after publication of
Amendment No. 1 in the Federal Register. The changes proposed in
Amendment No. 1 respond to specific concerns raised by the commenter
and do not raise novel regulatory concerns. In particular, Amendment
No. 1 further clarifies the scope of the asset verification rule, which
serves to protect the capital structure of members and to safeguard the
custody of customer assets.
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\12\ 15 U.S.C. 78s(b)(2).
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Accordingly, the Commission finds that good cause exists to approve
the proposal, as modified by Amendment No. 1, on an accelerated basis.
VI. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether Amendment No. 1
to the proposed rule change is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-FINRA-2010-042 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090. All submissions should refer to File Number
SR-FINRA-2010-042. This file number should be included on the subject
line if e-mail is used. To help the Commission process
[[Page 62913]]
and review your comments more efficiently, please use only one method.
The Commission will post all comments on the Commission's Internet Web
site (http://www.sec.gov/rules/sro.shtml). Copies of the submission,
all subsequent amendments, all written statements with respect to the
proposed rule change that are filed with the Commission, and all
written communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for Web site viewing and printing in the Commission's Public
Reference Room, 100 F Street, NE., Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. Copies of such
filing also will be available for inspection and copying at the
principal office of FINRA. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions.
You should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-FINRA-2010-042
and should be submitted on or before November 3, 2010.
VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-FINRA-2010-042), as modified
by Amendment No. 1, be, and hereby is, approved on an accelerated
basis.
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\13\ 15 U.S.C. 78(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-25623 Filed 10-12-10; 8:45 am]
BILLING CODE 8011-01-P