[Federal Register Volume 75, Number 207 (Wednesday, October 27, 2010)]
[Notices]
[Pages 66173-66176]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-27145]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63150; File No. SR-FINRA-2009-058]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule
Change and Order Granting Accelerated Approval of Proposed Rule Change,
as Modified by Amendment No. 1, To Adopt FINRA Rule 2232 (Customer
Confirmations) in the Consolidated FINRA Rulebook and To Delete NASD
Rule 2230, NASD IM-2110-6 and Incorporated NYSE Rule 409(f)
October 21, 2010.
I. Introduction
On August 24, 2009, 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''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and
Rule 19b-4 thereunder,\2\ a proposed rule change to adopt FINRA Rule
2232 (Customer Confirmations) in the
[[Page 66174]]
consolidated FINRA rulebook and to delete NASD Rule 2230, NASD IM-2110-
6 and Incorporated NYSE Rule 409(f). The proposed rule change was
published for comment in the Federal Register on September 21, 2009.\3\
The Commission received three comments in response to the proposed rule
change.\4\ On September 16, 2010, FINRA responded to the comments \5\
and filed Amendment No. 1 to the proposed rule change.\6\ 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. 60669 (September 14,
2009), 74 FR 48107 (September 21, 2009) (``Notice'').
\4\ See letter from Tamara K. Salmon, Senior Associate Counsel,
Investment Company Institute (``ICI''), dated October 9, 2010 (``ICI
Letter''); letter from Jonathan Feigelson, Senior Vice President,
General Counsel, TIAA-CREF, dated October 13, 2009 (``TIAA-CREF
Letter''); and letter from Clifford E. Kirsch and Susan S. Krawcyzk,
Sutherland Asbill & Brennan on behalf of the Committee of Annuity
Insurers (``CAI''), dated October 13, 2009 (``CAI Letter'').
\5\ See letter from Adam H. Arkel, Assistant General Counsel,
FINRA, dated September 16, 2010 (``FINRA's Response'').
\6\ See Amendment No. 1 dated September 16, 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 Internet Web site (http://sec.gov/rules/sro.shtml).
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II. Description of the Proposed Rule Change
As part of the process of developing a new Consolidated FINRA
Rulebook,\7\ FINRA proposed to adopt a new, consolidated customer
confirmation rule by adopting FINRA Rule 2232 (Customer Confirmations)
and deleting NASD Rule 2230, NASD IM-2110-6 and NYSE Rule 409(f).\8\
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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'') (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
member firms, 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).
\8\ For convenience, the Incorporated NYSE Rules are referred to
as the ``NYSE Rules.''
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A. Background
NASD and NYSE rules set forth certain basic requirements with
respect to confirmations of transactions with customers.\9\
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\9\ The proposed rule change addresses basic customer
confirmation requirements. FINRA rules separately set forth
confirmation requirements that are specific to certain types of
financial products, such as the requirements set forth in FINRA Rule
2360 (adopted as part of FINRA's set of consolidated rules
addressing index warrants, options and security futures). See
Securities Exchange Act Release No. 58932 (November 12, 2008), 73 FR
69696 (November 19, 2008) (Approval Order).
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1. NASD Rule 2230
NASD Rule 2230 provides that a member, at or before the completion
of each transaction \10\ with a customer shall, give or send to the
customer written notification (i.e., confirmation) disclosing: (a)
Whether the member is acting as a broker for the customer, as a dealer
for its own account, as a broker for some other person, or as a broker
for both the customer and some other person; and (b) in any case in
which the member is acting as a broker for the customer or for both the
customer and some other person, either the name of the person from whom
the security was purchased or to whom it was sold for the customer and
the date and time when the transaction took place or the fact that such
information will be furnished upon the request of the customer, and the
source and amount of any commission or other remuneration received or
to be received by the member in connection with the transaction.
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\10\ Exchange Act Rule 10b-10(d)(2) states that the term
``completion of the transaction'' has the meaning set forth in
Exchange Act Rule 15c1-1. The Rule 15c1-1 definition of ``completion
of the transaction'' depends on whether the customer is purchasing
or selling the security, the time when payment is made and the
status of the custody/delivery of the security.
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When NASD Rule 2230 was adopted in 1939 \11\ its requirements
essentially duplicated those set forth in Exchange Act Rule 15c1-4 as
originally adopted by the Commission. The primary difference between
the two rules was that the scope of Rule 15c1-4 was restricted to over-
the-counter transactions while the NASD rule by its terms extended to
all member transactions with customers.\12\ In 1977, the Commission
rescinded Rule 15c1-4 and adopted Exchange Act Rule 10b-10, indicating
that it would apply ``regardless of the manner in which a broker-dealer
conducts its business or the marketplace where transactions are
effected.'' \13\ Since then, the Commission has amended Rule 10b-10
several times.\14\
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\11\ NASD Rule 2230, formerly designated as Section 12 of the
NASD Rules of Fair Practice, was adopted as part of FINRA's original
rulebook. See Certificate of Incorporation and By-Laws, Rules of
Fair Practice and Code of Procedure for Handling Trade Practice
Complaints of National Association of Securities Dealers, Inc.
(August 8, 1939).
\12\ See Securities Exchange Act Release No. 1330 (August 4,
1937).
\13\ See Securities Exchange Act Release No. 13508 (May 5, 1977)
(Securities Confirmations: Final Rule).
\14\ See, e.g., Securities Exchange Act Release No. 19687 (April
18, 1983), 48 FR 17583 (April 25, 1983) (Securities Confirmations:
Final Rule Amendments) (requiring, among things, disclosure to
investors of certain yield and call feature information in
connection with transactions in debt securities); Securities
Exchange Act Release No. 34962 (November 10, 1994), 59 FR 59612
(November 17, 1994) (Confirmation of Transactions: Final Rule
Amendments) (generally requiring, among other things, disclosure if
a debt security is not rated by a nationally recognized statistical
rating organization, disclosure if a broker-dealer is not a member
of the Securities Investor Protection Corporation, and disclosure
with respect to the availability of information with respect to
transactions in collateralized debt securities); Securities Exchange
Act Release No. 46471 (September 6, 2002), 67 FR 58302 (September
13, 2002) (Confirmation Requirements for Transactions of Security
Futures Products Effected in Futures Accounts: Final Rule
Amendments) (adopting, among others, requirements regarding
transactions in securities futures products); Securities Exchange
Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005)
(Regulation NMS: Final Rules and Amendments) (making conforming
amendments to Rule 10b-10 in connection with the adoption of
Regulation NMS).
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2. NASD IM-2110-6
NASD IM-2110-6 requires that any member providing a customer
confirmation pursuant to Exchange Act Rule 10b-10 in connection with
any transaction in callable common stock \15\ must disclose on the
confirmation that the security is callable common stock and that a
customer may contact the member for more information concerning the
security.
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\15\ Callable common stock is stock that is subject to being
called away from a shareholder, either by the issuer or by a third
party.
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When IM-2110-6 was adopted in 2000, FINRA noted that an investor
purchasing callable common stock is subject to unique risks not
typically associated with ownership of common stock, even when such
stock is called away at a premium.\16\ FINRA also stated that the
ability of an issuer's common stock to be called away from a
shareholder generally is a material fact to an investor. Accordingly,
in adopting the IM, FINRA stated that high standards of commercial
honor and just and equitable principles of trade would require members
to provide the disclosures as set forth in the IM. FINRA further
emphasized that the disclosure of the call feature on the confirmation
in no way relieves a member of its obligation to consider the callable
nature of the security when complying with any applicable suitability
obligations.
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\16\ See Securities Exchange Act Release No. 42761 (May 5,
2000), 65 FR 30459 (May 11, 2000) (Approval Order). See also NASD
Notice to Members 00-33 (May 2000) (Callable Common Stock).
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[[Page 66175]]
3. NYSE Rule 409(f)
NYSE Rule 409(f) requires that confirmation of all transactions in
securities admitted to dealings on the NYSE--whether over-the-counter
or on an exchange--sent by members or member organizations to their
customers, must clearly set forth with a suitable legend the settlement
date of each transaction. The rule provides that this requirement also
applies to confirmations or reports from an organization to a
correspondent, but does not apply to reports made by floor brokers to
the member organization from which the orders were received. The rule
further contains a general cross-reference instructing members to refer
to Exchange Act Rule 10b-10.
B. Proposal
As discussed in the Notice, the proposed rule change would delete
current NASD Rule 2230 from the FINRA rulebook and replace it with
proposed FINRA Rule 2232, which would streamline and combine basic
customer confirmation requirements in the NASD and NYSE Rules.
Specifically:
Proposed FINRA Rule 2232 would provide that confirmations
must be given or sent to customers in conformity with the requirements
of Exchange Act Rule 10b-10. FINRA believes that incorporating by
reference the requirements of Rule 10b-10, as opposed to replicating
Rule 10b-10's detailed requirements in FINRA's rule, would make the
proposed rule clear and serve the interests of regulatory efficiency.
The proposed rule change would delete NASD IM-2110-6 from
the FINRA rulebook and transfer its requirements to proposed FINRA Rule
2232. Proposed FINRA Rule 2232 would expand the coverage of those
requirements to make clear that the requirement to disclose that the
security is callable (and that further information is available from
the member) applies to any callable equity security,\17\ not just
callable common stock. As stated in the Notice, FINRA believes that,
from the standpoint of investor protection, this change is necessary to
ensure that the rule covers, for instance, callable preferred
stock.\18\
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\17\ Exchange Act Section 3(a)(11) defines the term ``equity
security'' to include, among others, ``any stock or similar
security.''
\18\ As noted by FINRA in the Notice, Exchange Act Rule 10b-
10(a)(4) requires that, in the case of any transaction in a debt
security subject to redemption before maturity, the confirmation
must include a statement to the effect that the debt security may be
redeemed in whole or in part before maturity, that such a redemption
could affect the yield represented and that additional information
is available upon request.
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The proposed rule would include the requirement in NYSE
Rule 409(f) to disclose the settlement date of the transaction, with
two changes. First, consistent with FINRA's investor protection
mission, the requirement to disclose the settlement date of the
transaction would include all transactions in securities, not just
NYSE-listed securities. Second, because the proposed rule would address
customer confirmations, the elements of the NYSE rule addressing
member-to-member communications would, consistent with the parameters
of Exchange Act Rule 10b-10, be deleted.
FINRA 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 240 days following Commission approval.
III. Summary of Comment Letters and FINRA's Response
The Commission received three comments on the proposed rule
change,\19\ all of which objected to the settlement disclosure
requirement of the proposed rule, particularly with respect to mutual
fund and variable annuity transactions. Among the reasons cited for the
objections were differences in calculating settlement dates for mutual
fund purchases through a broker-dealer versus those purchased through a
mutual fund's underwriter.\20\ Another commenter was of the view that
variable annuity transactions were not a ``good fit'' because they do
not settle like other securities transactions.\21\ One commenter also
objected to the potential costs associated with reprogramming and
testing automated confirmation systems to include settlement date
information.\22\ This commenter also made a number of procedural
objections.\23\ One commenter urged FINRA to revise the proposed rule
to relieve broker-dealers from having to disclose the settlement date
when that date is the same as the trade date, or considering the
settlement date requirement to be satisfied if the trade date on the
confirmation is the same as the settlement date.\24\ Another commenter
indicated that there should be a two-year implementation timetable if
the rule change is adopted as proposed.\25\
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\19\ See supra note 4.
\20\ See ICI Letter.
\21\ See CAI Letter. This commenter further indicated that
variable annuity transactions require the purchase or surrender of
an insurance policy and as such, could not settle the way that other
securities transactions settle.
\22\ See TIAA-CREF Letter. In particular, this commenter stated
that requiring the inclusion of the settlement date in customer
confirmations would cost about $11 to 15 million dollars.
\23\ See TIAA-CREF Letter. In addition, this commenter objected
to FINRA not opening the proposal to comment by FINRA members and
generally expressed its view that the proposal was inconsistent with
the requirements of Exchange Act Rule 19b-4.
\24\ See ICI Letter.
\25\ See TIAA-CREF Letter.
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In its response, FINRA clarified that it intended the settlement
date provisions to apply only to transactions in traditional equity
securities, whether traded on an exchange or over-the-counter where,
according to FINRA, the disclosure of settlement date serves the
purposes of investor protection.\26\ FINRA filed Amendment No. 1 to
clarify this intent by limiting the settlement date provisions of the
proposed rule to transactions in: (1) Any NMS stock as defined in Rule
600 of Regulation NMS; \27\ and (2) any equity security subject to the
reporting requirements of the FINRA Rule 6600 series, other than direct
participation programs as defined in FINRA Rule 6642. FINRA stated that
it also made other minor changes to the proposed rule in the interest
of clarity.
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\26\ See FINRA's Response.
\27\ See 17 CFR 242.600.
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FINRA also noted that with respect to considering the
implementation costs of a proposed rule filing, in a self-regulatory
organization rulemaking, the appropriate standard, as stated in Section
15A(b)(9) of the Exchange Act, is that the rules do not impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.\28\ Moreover, FINRA tailors its
proposed rule changes as narrowly as possible to achieve the intended
and necessary regulatory benefit. As stated in Item 4 of the proposed
rule change, FINRA does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. FINRA also noted
that, as required under Section 19(b)(1) of the Exchange Act,\29\ it
submitted to the Commission a concise general statement of the basis
and purpose of the proposed rule.\30\
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\28\ This statement was confirmed in a telephone conversation
with Adam Arkel of FINRA on October 19, 2010.
\29\ 15 U.S.C. 78s(b)(1).
\30\ See supra note 28.
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IV. Discussion and Commission Finding
After carefully considering the proposal, as amended by Amendment
No. 1, the comments, and FINRA's
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Response, the Commission finds that the proposed rule change is
consistent with the requirements of the Exchange Act, and the rules and
regulations thereunder that are applicable to national securities
associations.\31\ In particular, the Commission believes the proposed
rule change is consistent with the provisions of Section 15A(b)(6) of
the Exchange Act,\32\ which requires, among other things, that FINRA
rules must be designed to prevent fraudulent and manipulative acts and
practices, promote just and equitable principles of trade, and in
general, to protect investors and the public interest. The proposed
rule change is consistent with FINRA's obligations under the Exchange
Act to protect investors and the public interest because the proposed
rule streamlines the rules governing broker-dealers' confirmation
requirements by cross-referencing Exchange Act Rule 10b-10 while
maintaining the additional disclosure requirements of NASD IM-2110-6
(i.e., relating to callable securities) and extending the additional
NYSE Rule 409(f) requirements (i.e., relating to settlement date) to a
broader range of equity securities.
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\31\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 17c(f).
\32\ 15 U.S.C. 78o-3(b)(6).
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The Commission believes that FINRA has adequately addressed the
concerns raised by commenters with respect to the application of the
settlement date provisions to mutual fund and variable annuity
transactions. In particular, Amendment No. 1 limits the settlement date
disclosure requirement to Regulation NMS stock and over-the-counter
equity securities subject to the FINRA Rule 6600 series. We also
believe that the proposed rule is consistent with the public interest
and the protection of investors because information regarding the
callable status of a security is generally a material fact for
investors. Indeed, callable securities can subject investors to
additional reinvestment risk because investors may have less attractive
alternatives for reinvesting the proceeds if the issuer calls the
security earlier than the investor's intended sell date, even when the
security is called away at a premium. In addition, the disclosure of
settlement date on a confirmation is important for investors because
many of the rights and benefits associated with the beneficial
ownership of a security do not confer until settlement date.\33\
Finally, we note that the Exchange Act does not require a cost/benefit
analysis with respect to proposed self-regulatory organization rules
that are filed with, and approved by, the Commission.
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\33\ For example, an investor may not be eligible for dividend
payments if the ex-dividend date falls between the transaction date
and the settlement date.
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V. Accelerated Approval
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Exchange Act,\34\ for approving the proposed rule change, as
modified by Amendment No. 1, 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 commenters. In
particular, Amendment No. 1 will limit the application of the
settlement date provisions to transactions in Regulation NMS securities
and to over-the-counter equity securities subject to the reporting
requirements of the FINRA Rule 6600 series, other than direct
participation programs as defined in FINRA Rule 6642.
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\34\ 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 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-2009-058 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-2009-058. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549, on official business days between
the hours of 10 a.m. and 3 p.m. Copies of such filings 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-2009-058
and should be submitted on or before November 17, 2010.
VII. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Exchange Act,\35\ that the proposed rule change (SR-FINRA-2009-058), as
modified by Amendment No. 1, be, and hereby is, approved on an
accelerated basis.
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\35\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-27145 Filed 10-26-10; 8:45 am]
BILLING CODE 8011-01-P