[Federal Register Volume 75, Number 37 (Thursday, February 25, 2010)]
[Notices]
[Pages 8772-8774]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-3775]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61537; File No. SR-FINRA-2009-095]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change To Adopt FINRA
Rule 3240 (Borrowing From or Lending to Customers) in the Consolidated
FINRA Rulebook
February 18, 2010.
I. Introduction
On December 31, 2009, 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 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt NASD Rule 2370 (Borrowing From or Lending
to Customers) as FINRA Rule 3240 (Borrowing From or Lending to
Customers) in the Consolidated FINRA Rulebook \3\ with certain changes
and to delete Incorporated NYSE Rules 352(e) (Limitations on Borrowing
From or Lending to Customers), (f) (Loan Procedures) and (g). The
proposed rule change would also add a Supplementary Material section
regarding record retention requirements to proposed FINRA Rule 3240.
The proposed rule change was published for comment in the Federal
Register on January 12, 2010.\4\ The Commission received no
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comments on the proposed rule change. 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\ 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).
\4\ See Securities Exchange Act Release No. 61302 (January 6,
2010), 75 FR 1672 (January 12, 2010).
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II. Description of the Proposed Rule Change
FINRA proposed adopting NASD Rule 2370 as FINRA Rule 3240 in the
Consolidated FINRA Rulebook with certain changes as described below.
FINRA also proposed deleting Incorporated NYSE Rules 352(e) through (g)
\5\ from the Transitional Rulebook.\6\ Further, the proposed rule
change would also add a Supplementary Material section regarding record
retention requirements to proposed FINRA Rule 3240.
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\5\ For convenience, the Incorporated NYSE Rules are referred to
as the NYSE Rules.
\6\ NYSE Rules 352(a) through (d) were deleted as part of a
prior rule change. See Securities Exchange Act Release No. 60701
(September 21, 2009), 74 FR 49425 (September 28, 2009) (Order
Approving File No. SR-FINRA-2009-014).
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A. Background
The purpose of NASD Rule 2370 is to give FINRA member broker-
dealers the opportunity to evaluate the appropriateness of particular
lending arrangements between their registered persons and customers, to
the extent permitted by the member, and the potential for conflicts of
interests between both the registered person and his or her customer
and the registered person and the member with which he or she is
associated.
To that end, NASD Rule 2370 prohibits registered persons from
borrowing money from or lending money to their customers (collectively
referred to as ``lending arrangements'') unless certain conditions are
met. Specifically, under Rule 2370, no registered person may borrow
money from or lend money to his or her customer unless the firm has
written procedures allowing such lending arrangements and (1) the
customer is a member of the registered person's immediate family; \7\
(2) the customer is in the business of lending money; (3) the customer
and the registered person are both registered persons of the same firm;
(4) the lending arrangement is based on a personal relationship outside
of the broker-customer relationship; or (5) the lending arrangement is
based on a business relationship outside of the broker-customer
relationship. In addition, with the exception of lending arrangements
between immediate family members and lending arrangements between
registered persons and customers in the business of lending money,
FINRA members are required to pre-approve in writing the other lending
arrangements described above.
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\7\ NASD Rule 2370 defines the term ``immediate family'' to
include parents, grandparents, mother-in-law or father-in-law,
husband or wife, brother or sister, brother-in-law or sister-in-law,
son-in-law or daughter-in-law, children, grandchildren, cousin, aunt
or uncle, or niece or nephew, and any other person whom the
registered person supports, directly or indirectly, to a material
extent.
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With respect to lending arrangements between immediate family
members, a FINRA member's written procedures may indicate that the
member permits such lending arrangements and that registered persons
need not notify the member or receive member approval for such lending
arrangements.
For lending arrangements between registered persons and customers
in the business of lending money, a member's written procedures may
indicate that registered persons are not required to notify the member
or receive member approval for such lending arrangements, provided that
such lending arrangements have been made on commercial terms that the
customer generally makes available to members of the general public who
are similarly situated as to need, purpose and creditworthiness.\8\
Further, the member need not investigate such lending arrangements, but
may rely on the registered person's representation that the terms of
the loan meet these standards.
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\8\ The fact that a registered person can negotiate a better
rate or terms for a loan that is not the product of the broker-
customer relationship would not vitiate the idea that the loan
occurred on terms generally offered to the public. See Notice to
Members 04-14 (March 2004).
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It is important to note that members can choose to permit
registered persons to borrow money from or lend money to their
customers consistent with the requirements of the rule or prohibit the
practice in whole or in part.
NYSE Rules 352(e) through (g) also govern lending arrangements
between registered persons and their customers. These provisions are
substantially similar to the provisions of NASD Rule 2370, with one
exception. NYSE Rule 352(f) provides an exception from the pre-approval
requirements of the rule for loans totaling $100 or less between
registered persons of the same firm.
B. Proposal
FINRA proposed adopting NASD Rule 2370 as FINRA Rule 3240 in the
Consolidated FINRA Rulebook, subject to the following changes. FINRA
proposed amending paragraph (a) (Permissible Lending Arrangements;
Conditions) of the rule to indicate more explicitly that such
arrangements are subject to the procedural requirements set forth in
paragraph (b) (Notification and Approval) of the rule. FINRA also
proposed amending paragraph (a)(2)(B) of the rule regarding permissible
lending arrangements between registered persons and customers in the
business of lending money to indicate more explicitly that such
customers must be acting in the course of such business.
Further, FINRA proposed amending paragraph (b)(1) of the rule to
require expressly that registered persons notify their member firms of
the lending arrangements that require member pre-approval (FINRA
proposed this change for purposes of consistency with paragraphs (b)(2)
and (3) of the rule, which provide that a registered person is not
required either to notify the member or receive member approval for
certain specified lending arrangements) and to clarify that any
modifications to such lending arrangements (including any extension of
the duration of such arrangements) are also subject to notification and
member pre-approval.
In addition, FINRA proposed amending the definition of ``immediate
family'' in paragraph (c) (Definition of Immediate Family) of the rule
to replace the reference that the term ``includes'' the enumerated
persons to reflect that the term ``means'' such persons. Finally, FINRA
proposed adding Supplementary Material .01 (Record Retention) requiring
that members preserve the written pre-approval required by the rule for
at least three years after the date that the lending arrangement has
terminated or for at least three years after the registered person's
association with the member has terminated. FINRA proposed deleting
NYSE Rules 352(e) through (g) as the provisions of the NYSE rules are
substantially similar to NASD Rule 2370.
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 180 days following Commission approval.
III. Discussion and Findings
After a careful review of the proposal, the Commission finds that
the proposed rule change is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder applicable to
FINRA.\9\ In particular, the Commission finds that the proposed rule
change is consistent with Section
[[Page 8774]]
15A(b)(6) of the Exchange Act,\10\ which requires, among other things,
that FINRA's rules be designed to prevent fraud and manipulative
practices and to promote just and equitable principles of trade and, in
general, to protect investors and the public interest. The Commission
believes that the proposed rule change is reasonably designed to
achieve these ends by providing FINRA member broker-dealers the
opportunity to evaluate the appropriateness of certain lending
arrangements between their registered persons and others, to the extent
permitted by a FINRA member broker-dealer, and the potential that these
lending arrangements could create certain conflicts of interest.
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\9\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\10\ 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
Exchange Act,\11\ that the proposed rule change (SR-FINRA-2009-095) be,
and hereby is, approved.
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\11\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-3775 Filed 2-24-10; 8:45 am]
BILLING CODE 8011-01-P